Archive for the ‘Economy’ Category
3/7/09 — Time Flies When You’re Having Fun
Sorry it’s been so long since I’ve posted. It’s been a terrifically busy few weeks. I will say this, I haven’t been totally incommunicado — I wrote the March issue of The Greenfield Advisor, which you can read for free by visiting here and clicking on “newsletters”. We use the monthly G/A to summarize our thinking on the real estate economy and to look more in-depth at what’s going on around us.
One of my frequent reads is Dr. Glenn Mueller’s Market Cycle Monitor, published quarterly by the folks at Dividend Capital. It’s based off of a journal article he wrote back in the 1990’s in which he observed that the timing of the investment characteristics of commercial real estate could be analyzed in terms of a cycle through four occupancy/supply quadrants: recession, recovery, expansion, and hypersupply. (After hypersupply, a market declines back into recession as supply outstrips demand.)
From that core thought, Dr. Mueller is able to analyze real estate not only nationally, but also by subsector (apartments, suburban office, limited service hotel, etc.) and by geographic region (about two dozen or so major markets).
In markets at equilibrium, this model works very well. Naturally neither it nor any other model is very good at picking up “shocks” to the system. As a result, his model shifted dramatically from third quarter, 2008, to fourth quarter, 2009, the latter of which was just published in February. Today, of course, the model pretty much lumps everything in “recession.
The important point is, that doesn’t at all invalidate Dr. Mueller’s work. Indeed, his model provides an excellent launch point for investors, as we peel back the layers of the empirical onion to determine which sub-sectors and geographic markets will rebound first, and which will be laggerds as a result of oversupply and under-demand.
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2/12/09 — A night in Portland
Last night, I attended the Portland Chartered Financial Analysts Society’s annual economic briefing. First, a couple of compliments — it was very well done. I’m also a regular at Seattle’s annual briefing, and I personally think Portland’s was a bit better organized. Also, they incorporate attendance by students from Portland State University, and I thought that was a nice touch.
Now for the bad news. The two speakers were very well prepared and made well-organized presentations on why the national economy is what it is… and thus where it’s headed. Timothy Duy is a professor at U. Oregon and Director of the Oregon Economic Forum. Russ Koesterich is Managing Director and Head of Investment Strategy at Barclay’s Global Investments.
Two synopses of their talks. First, I would lump both of these guys into the “glass is half empty” school of thought. Fortunate or unfortunate as the case may be, it appears that most economists today are in that category (as opposed to the “glass is half full” group). You can’t blame them — after too many years of overly-rosy forecasts and excuse-making for cracks in the world’s economic foundation, it’s tough to take an optimisic stand. Indeed, its doubtful that anyone will critize an economic forecaster for under-shooting the recovery or being overly cautious in the middle of the recession. However, it’s the “glass-is-half-full” guys and gals who will help construct the visions and structures that will lead us out of this mess.
But, that’s really not the point. The second major theme of both of these presenters was that our national economy has gone through a structural event. By that, they mean that the economy, following a recovery, will look very different in the future than it did in the past. For one, consumption spending (as a portion of GDP) has been trending upward pretty much constantly since the mid-1950’s. That’s not surprising — the mid-1950’s was the middle of the baby-boom birth cohort. Families were exploding in size and number, along with suburbs, shopping centers, and everything we now think of as our “way of life”. Remember, prior to WW-II, a very large number of Americans lived on farms and consumed what they personally grew or sewed. Today — can you personally name anyone who lives on a farm or sews their own clothes?
Commensurate with this, household savings rates have declined steadly for several decades — from about 12% of disposable income in the early 1980’s, to approximately zero for the past couple of years. We’re seeing early signs that the savings rate is trending back up — only time will tell. However, Barclay’s notes that U.S. consumers have started reducing household debt for the first time since WW-II. New home mortgage borrowing on an annualized basis topped $1.2 Trillion in 2005, butis currently very close to zero.
America is still the thousand-pound-gorilla on the world’s economic stage, and our rapid contraction in spending is being felt severely abroad, particularly in Japan and China. There are a whole lot of other factors, but in general Dr. Duy and Mr. Koesterich would suggest that we’ll see continued contraction in the months ahead. Consumer confidence continues to trend downward, and securities markets will remain highly volatile, although not nearly as bad as in 4Q08. Global trade growth has actually gone negative.
The good news — such that there is some — is that early and aggressive action by the U.S. government suggested that we will not see a U.S. repeat of the Japanese experience of the 1990’s, which was marked by a decade of stagnation, deflation, and year-after-year of economic distress. Money markets are starting to thaw again.
No one is projecting inflation for the near-term, and in fact all signs point to the government being focused on preventing deflation. (For the record, deflation is a heck of a lot harder to fix than inflation).
That’s it for now. See you later!
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2/2/09 — More on the Domino Theory
California is in deep hock. Not only are essential state services (police, for example) going wanting, but they’re now apparantly going to furlough every state employee two days per month. Student aid checks for colleges won’t get mailed out. I can’t imagine this not getting worse before it gets better.
From a real estate development perspective, this has some very long range implications. Except for in-fill and redevelopment, most development requires some public infrastructure — even in cases where the developer is required to pay infrastructure fees or mitigation. A little personal example — about 10 years ago, I was working with a small town in the southeast to get a low-income tax credit housing development put together. EVERYONE was in favor of this. It was a total no-brainer — demand was far in excess of our intended project, the numbers all worked out, etc., etc., etc.
Then we hit the ONE stumbling block. The proposed project, to qualify for various Federal subsidies (necessary to make everything pencil out) would have to tie into the public municipal water system, and proof of this availability would have to go into the application packet. No sweat, I figured, we’ll simply go to the right authorities and get a letter. As it happens, the local municipal water supply system suffered from years of neglect, with leaks and pressure problems. We were sympathetically informed (by a public official who really wanted this project to succeed) that hooking 200 more apartments — or even 100 — to the existing system would cause a catastrophic collapse of the entire system. What would be needed to fix this, we asked? Money, which they didn’t have. (Epilogue — we explored getting some Community Development Block Grant money for the town to get this fixed, and it became quickly clear that we were looking at a very long range problem, well beyond the scope of our abilities to fix.)
That’s what we may have in the very near future in California. Sadly, public infrastructure projects are always the first to go and always the last to return. Admittedly, the White House stimulus bill is infrastructure-oriented, but it’s looking for “shovel-ready” projects. Infrastructure in support of future real estate development rarely meets this criteria.
California’s not alone — it’s just the biggest state, and yes… the only state with a governor who is also a movie star (and married to a Kennedy, to boot). We’re going to see widespread infrastructure issues in coming months.
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And while we’re at it — Builder magazine reports a growing list of major homebuilders who are biting the dust. They estimate that about half of the top firms from the 2005 boom will not make it thru this recession.
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1/30/09 — Stacking the Dominos Back Up
I’m a Member of the Faculty of Valuation of the Royal Institution of Chartered Surveyors, headquartered in Great Britain. The only reason I mention that is they do a great job — much better than their American counterparts — at tracking and reporting information on construction, valuation, etc.
I received a very insightful missive from them this morning about U.S. residential construction. (Please don’t miss the irony here — a Seattle-based real estate economist depends on Londoners to report on U.S. construction trends.) Employment in the residential construction sector has been falling for 18 straight months, with 100,000 jobs lost in December alone. Note that all job losses in the U.S. in November and December totalled about 1-million, so residential construction losses in December accounted for about 10% of the total job losses. As of the end of 2008, housing starts are about as low as they’ve been in the past 40 years, and show no signs of doing anything but getting lower.
The President, Congress, and… well… everyone is committed to getting employment back up. Simply throwing money at the housing sector isn’t even close to being enough. There are a whole series of dominos which have fallen down, and before the residential construction domino can be picked up, all the rest have to be picked up as well. Builders and developers won’t commit to the risk of starting houses without some promise that these homes will be bought. For that to happen, the housing demand equation has to get back up on its feet again. For THAT to happen, buyers have to have some promise that home prices will quit tanking AND they have to have savings for down payments AND the nation needs a healthy lending infrastructure in place.
I tend to be a “glass half full” kinda guy, but clearly the residential construction industry will remain moribund until the employment numbers turn around, until the foreclosure mess gets fixed, and until the banking industry is working and lending again. Here’s the good news — there are glimmers of light at the end of the tunnel. Congress and the White House seem to be speaking with one voice on fixing things and getting people back at work. In general, economists forecast that unemployment will get a little bit worse this year, but not by the sort of huge numbers we saw at the end of 2008. Brace yourself for a round of corporate bankruptcies, but most of those are already discounted by the markets and most of those have already suffered layoffs.
There is a substantial generic demand for housing in the U.S. — our population continues to grow, particularly on the two coasts. Some theorists suggest that over-wrought lending preciptated too much construction (our rate of home ownership briefly touched 70%, and there are theories that this number should be closer to 60%). The prolonged construction nadir will sop up any excess supply in the market. Remember — millions of homes per year are still being bought, even though we’re in a recession. In short, once our economy starts back up out of the recession, the residential construction sector should react quickly.
In the meantime, investors who are bottom-fishing for bargains might consider that the window of opportunity won’t be open forever.
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Busy week — and it’s only Wednesday
On Monday, I spoke on Low Income Housing Tax Credits at the Rainier Club’s Real Estate Roundtable here in Seattle. It was a tag-team event — my co-speaker was Paul Cummings, who heads up Enterprise Community Partners’ Western Region. His portion of the presentation more-or-less summarized how that market works (short answer: affordable housing developers get tax substantial credits which they can either use, sell, or syndicate). My portion was to discuss the state of the market (it stinks really bad because the usual buyers of tax credits are in disarray). We both then summarized the pending legislation to fix things (Congress knows it needs to act, but is loathe to provide more aid to financial institutions. Something will be done very soon, and we hope it’s enough.)
On Tuesday, I attended an economic briefing presented by Jack Albin, chief investment officer of of Harris Private Bank. His talk was mainly centered on securities, and only briefly touched on real estate (and at that, on REITs). He found REITs a bit hard to read, because so much of their current dividend yield is in stock dividends. Fundamentally, though, I thought most of what he said was pretty good.
Then this morning, I woke up to find myself quoted in an above-the-fold article on the lead page of the business section of the Seattle Times. The article concerned the recent release of the Case-Shiller index, which essentially says that residential real estate prices tanked from October to November. I added a couple of caveats to that. While Case-Shiller is an excellent index, and one of only two residential pricing indices which currently “work” (the other being the one from the Office of Federal Housing Enterprise Oversight), the C-S index month-to-month statistics have to be taken with a huge grain of salt. These indices are based on actual sales of homes, and they work wonderfully during “up” markets (I had an article about such repeat-sales indices in the Journal of Housing Research a couple of years ago). However, during periods of market disruption, such as we have now, these pricing indices are skewed downward due to a bias in the data. In short, since the data only reflects actual transactions, it’s generally picking up a huge percentage of distress sales, foreclosure sales, and other sales under duress. My quotes in the article picked that up.
I also pointed out — for local consumption — that the Seattle market is still pretty vibrant compared to the rest of the country. While we’ve had some noteworthy lay-offs (Microsoft’s first layoffs in history), and our other basic employers are troubled, we still have one of the best economies in the world here in the Pacific Northwest. I’d much rather own a home here than in most of the other top-20 cities in the Case Shiller index.
Well, that’s it for today.
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January 20, 2009
I’d planned to start this on January 1, but that didn’t happen. (Actually, January 1, I was in Charleston, SC, at Renaissance Weekend, recovering from the parties the night before.) Given all that, it’s probably not a bad idea to start on the first day of Barack Obama’s presidency.
First, by the way, my congratulations to our new President. I’m available for ambassadorships to smaller, peaceful countries located on or near the tropics with good, indigenous rum and liberal attitudes toward Norte Americanos. Barbados comes to mind. Do we have an embassy in St. Barts?
Seriously, though, as I write this (4:30pm EST), the Dow Jones Industrial Average is closing down 332 points at below 8000. It naturally begs two questions — what impact does all this have on real estate, and what can be done about it?
To the first question, the markets generally realize that the Obama presidency does not imply a quick fix to anything. We’ll be lucky — extremely lucky — if the markets don’t get any worse before they get better. Consensus opinions — and I like the Livingston Survey from the Philadelphia FED — are that 2009 will be a muddled mess and 2010 will be the recovery year.
The biggest problem right now is in the credit markets. The government is simultaneously telling banks to tighten down on credit (so as not to make anymore “liar loans”) and to make more loans. Great. The banks need to find their most credit-worthy clients and give them unlimited lines of credit. It sounds good, but even at zero percent interest, money won’t get borrowed if the transactional costs exceed the returns. Imagine a homebuilder with a great line of credit (none of those exist today, so we have to imagine). If s/he built houses and no one could buy them, then “free” money from the bank is still w-a-y overpriced.
What do we do about it? Our economy is a series of cogs/wheels which interact with one another. If one or a few clog up, then it’s like a very small bird flying into a very big jet engine. (Readers of this blog a dozen years from now will miss the analogy — google USAIR 1549 and see what you get.)
Assuming “google” still means something a dozen years from now.
Anway, what do we do about it? The system really needs some support from the ground-up. The recent $700B or so (I’m losing count) was spent in a top-down effort to shore up the institutional structure. It wasn’t badly spent money, on the contrary. If we hadn’t spent that money, or at least something like it, then we’d be spending several times that in the first quarter of ’09 to re-create a financial system. Now, comes phase two — individual market participants have got to feel some safety and security in their jobs and homes before they’ll become market participants again. The stimulus package being discussed in DC is heartening — it spends a lot of money locally which has the promise of creating jobs, rather than just directly dumping money into consumption. Don’t get me wrong — consumption is good, but only if there is a fundamental jobs-based economy to back it up. We could put everyone on welfare and print enough money for everyone to shop to their hearts content, and our economy would grind to a halt pretty quickly — that’s basically what third-world dictators do with THEIR money. Hyper-inflation and total economic collapse generally follow that sort of strategy.
I think we’re moving in the right direction, but it will be a slow walk rather than a fast sprint.
Is there anything individuals can/should do now? I have a few ideas, but I”ll leave those until tomorrow.
From a small northwestern observatory... 