REAL ESTATE AND THE ECONOMIC OUTLOOK THROUGH 2013:

Transcription

1 1 1 REAL ESTATE AND THE ECONOMIC OUTLOOK THROUGH 2013: Coping With A Different Kind Of Housing Recovery A Presentation To The Commercial Real Estate Education Summit Monrovia, California July 13, 2012

2 CALIFORNIA'S JOBS IN LINE WITH THE U.S. AVERAGE Annualized Percent Change In Non-Farm Payrolls From 3 Mos. Ago; Seasonally Adjusted, 3-Mo. Moving Avgs. 4.0% 2 3.5% 3.0% CA 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% U.S. 6/12-1.5% Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 California's job growth converged with the national average in the three months to May, after "spiking" well above the U.S. pace early this year. The good news is that overall job growth has masked private-sector gains nearly a percentage point above the national average, supported by the ripple effect of relatively strong growth in high tech and in other key "export" industries (whose sales and earnings are keyed toward markets outside the state) and by a jump in construction-industry employment to double-digit growth (from admittedly a stilldepressed base). Sources: U.S. Labor Department; California Employment

3 5.0% 4.5% 4.0% CALIFORNIA'S KEY "EXPORT" INDUSTRIES IN THEIR USUAL "LOCOMOTOVE" ROLE FOR STATEWIDE JOB GROWTH Year-Ago Percent Change In Non-Farm Payroll Employment "High Tech" 3 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% "Export" Industries, Ex Hi-Tech* Total Non-Farm 0.0% Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 California's "export" industries--those deriving the bulk of their earnings from sales outside the state--continue to provide their usual "locomotive" role in propelling growth through the early and middle stages of an economic growth cycle The state's close integration with the U.S. and global economies make these industries even more critical catalysts for economic recovery (and, for that matter, recessions). The group's "leavening" effect on overall, statewide activity in this cycle has been apparent since last fall's gradual, but steady acceleration * Aerospace, travel and tourism, motion pictures and sound recording. Source: California Employment Development Department

4 CALIFORNIA'S TECH-LED RECOVERY KEEPS THE BAY AREA OUT IN FRONT OF 4 3.5% Yr-Ago % Change In Non-Farm Payrolls; Three-Month Moving Average Data 2.5% 1.5% 0.5% Bay Area Southern California -0.5% -1.5% Central Valley -2.5% -3.5% -4.5% -5.5% Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 California's tech-led recovery has had its greatest impact on the Bay Area, where job growth through May was about a percentage point above those of Southern California and in the Central Valley. Southern California's job growth has been restrained by ongoing declines in government, along with uneven performance by construction, retailing and manufacturing throughout the region. Accelerated growth of Central-Valley employment has been fuelled by agri-business and its ripple effects, along with an easing of the deep slump in construction and government employment. Source: U.S. Department Of Labor

5 50% APARTMENT CONSTRUCTION LIFTED BY THE TILT TOWARD RENTAL HOUSING Ratio, Apartment To Single-Family Housing Starts; 3-Month Moving Averages 5 45% 40% Note: Bars Denote Recession Periods 35% 30% Rolling 20-Yr. Average 25% 20% 15% 10% Dec-99 Jun-01 Dec-02 Jun-04 Dec-05 Jun-07 Dec-08 Jun-10 Dec-11 Housing's "upside down" recovery, centered on strong rental demand at the expense of home ownership, was apparent from multi-family construction's above-average share of total housing starts through the spring. However, the balance may be in the early stage sof tilting back toward the single-family sector, now that construction there is rising, again, in response to improved "fundamentals," including increased optimism on the jobs outlook and recent increases in home prices. That's good news for the economy, because of the greater "ripple" effect of rising single-family activity on household wealth, "refinancing" potential and on "big-ticket" consumer spending. Source: U.S. Commerce Department

6 80% 65% 50% 35% 20% 5% -10% -25% -40% -55% -70% -85% "TIGHT" APARTMENT-MARKET CONDITIONS SLOWLY BEGINNING TO EASE Percent Of Owners Reporting Conditions Tightening Less Percent Reporting Conditions Looser Four-Quarter Moving Average Note: Bars Denote Recession Periods '12Q % Jun-00 Dec-01 Jun-03 Dec-04 Jun-06 Dec-07 Jun-09 Dec-10 Jun-12 Apartment-market vacancies still remain low. Like building sales and financing, however, still-favorable conditions are beginning to "soften" across the board, as home-buying in the single-family sector slowly gets back on its feet. Recent easing has been most noticeable in building transactions and, to a lesser extent, in the availability of equity financing. By contrast, those reporting an improvement in borrowing conditions remains elevated. Source: National Multi Housing Council

7 2.3 AN IMPROVEMENT IN HOUSING'S UNDERLYING NEW SUPPLY-DEMAND BALANCE Housing Starts And Household Formations In Millions Month Change In Households 3/ Rolling 12-Month Average Annual Rate Of Single- Family Housing Starts -0.5 Dec-06 Sep-07 Jun-08 Mar-09 Dec-09 Sep-10 Jun-11 Mar-12 Net increases in housing demand are out-pacing net new supply of single-family homes, now that household formations are staging a bounce more typical of the early stages of an economic recovery. By this year's first quarter, the twelve-month change in the number of households (the economic unit driving demand for homes and most other consumer spending) was rising at quadruple the rate of singlefamily housing starts. The more favorable supply-demand balance will have only a limited impact on bulging (actual and shadow) inventories of unsold homes. However, it is one of several factors setting the stage for the sector's slow turn toward recovery this year Source: U.S. Commerce Department

8 115 THE HOUSING SLUMP LEAVES THE COST OF OWNING UNUSUALLY CHEAP VS. RENTING Ratio, Mortgage Payment On The Median-Priced Home To Rental Costs; 12/89= Avg., = Dec-89 Dec-92 Dec-95 Dec-98 Dec-01 Dec-04 Dec-07 Dec-10 A combination of falling home prices, relatively low mortgage rates and ongoing rent increases have produced a dramatic swing in relative housing costs. The cost of owning a home, relative to the cost of renting, has gone from a twenty-one year high to its lowest level in at least the last thirty years. Sources: U.S. Labor Department; National Association Of Realtors

9 9% SINGLE-FAMILY HOUSING'S LONG ROAD BACK TO RECOVERY Year-Ago Percent Change 25% 9 7% 5% New & Existing Single-Family Home Sales 20% 15% 3% 10% 1% 5% 0% -1% -3% Median Home Re-Sale Price (Right Scale) -5% -10% -5% -15% -7% Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 What strength the economy has been able to muster during this year's growth slowdown has centered increasingly on the hard-pressed housing sector, now enjoying self-sustaining, double-digit increases in new and existing home sales and broad-based increases in the high single digits. Rising home values and sales are important both because of housing's sizable ripple effect on other sectors of the economy and, as the single most important asset class in the household balance sheet, because of its lift to household wealth and spending potential. Sources: National Home Builders' Association Of Realtors -20%

10 CALIFORNIA HOME PRICES "BOTTOMING OUT" ALONG WITH THOSE IN THE REST OF THE U.S. Annualized Percent Change From Three Months Ago; Seasonally Adjusted Data 10% 10 8% 6% 4% 2% 0% -2% -4% -6% California 3- Metro* Average 20 U.S.-Metro Average -8% L.A. Area -10% -12% Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 California has been on the leading edge of the nation's home-price recovery, rebounding from a relatively deep slump and led by incresaes in Bay Area home values. Southern California home-price increases also have been running ahead of the national average, though by a more modest margin, sharing in the lift that the housing recovery is bringing to household wealth and spending, including on homes themselves. * L.A., San Diego, San Francisco Bay Area Source: Case-Shiller Inc., Standard & Poors, Inc.

11 11 THE ECONOMY S POINTS OF LIGHT 11 Rising Home Sales And Prices Falling Gasoline Prices Europe And The Return Of Risk On Investing Wild Cards --Fresh Monetary Stimulus From The Federal Reserve --A Revival Of Emerging-Market Growth?

12 12 HEAD WINDS TO MORE THAN A MODEST, SECOND-HALF GROWTH RECOVERY Reduced Pent-Up Demand In A Maturing Growth Cycle 12 Cost-Driven Earnings Growth Restraining Wage And Job Gains Pre-Election Policy Uncertainties Post-Election Debt-Ceiling Debate, Looming Fiscal Cliff Fall-Out From Added European Debt Crises --Saving-Rate Vulnerability To A Struggling Stock Market; Credit Freeze II?

13 A LESS STABLE BACKDROP FOR INTEREST RATES IN THE SECOND HALF OF 2012? Interest Rates Artificially Low Flight Capital s Ebb And Flow Heightened Policy Uncertainties In The U.S. Quantitative Easing s Unintended Consequences

14 14 HEAD WINDS AGAINST A QUICK RETURN TO MORE SATISFACTORY ECONOMIC GROWTH 14 A Slow Recovery In Bank Lending And In Housing The Pendulum Swings Toward Higher Taxes And Spending Restraint Global Competition s Effect On Pricing Power, Hiring And Wage Increases A Labor-Market Mismatch