Sunday, December 03, 2006
Kitsap Real Estate and Economic Outlook in 2007
Many of you have an interest in doing something with real estate in the coming year and might be interested in an assessment of where our local and national economy might be headed as it affects your home buying or selling decisions. On Friday I attended a presentation by William Conerly, Ph.D., who consults with many companies in our region to help with their economic outlooks. You can find out more about him at Conerly Consulting. What follows are my notes from his presentation sponsored by Viking Bank.
- The real gross domestic product will grow by about 2.2% - this continues to follow the declining trend from 2003 when it peaked at about 3.7% growth. The nominal rate of growth for our economy is about 3%, so what he’s saying is that the economy will continue to expand at a slower rate, but that he does not foresee a recession.
- Long term interest rates will increase 1 to 1.5%, which is important to the afford-ability of real estate. Long term rates have remained stubbornly low despite the steady increase in short term rates caused by increases in the federal funds rate since mid 2004. The long term interest rates are currently lower than short term rates - usually a sign of change in the economy. The increase in long term rates will not be the result of economic change, but instead the result of foreign central banks slowing down their purchase of US dollars. In the ‘90s a number of foreign currencies were destabilized by investor speculation on their currency. Investors would accumulate large quantities and then flood the market, causing the currency to rapidly depreciate. As a hedge against this tactic, a number of foreign central banks have been steadily purchasing stable US dollars so that they have a non depreciating fund to purchase their own currencies if investors speculate as they have done before. This purchase of dollars has done much to fund the US debt in the past few years. This constant demand for dollars without regard to the interest rate is expected to subside as the foreign central banks have accumulated sufficient dollars for their needs. Interest rates will rise to attract new investors to pay for our debt.
- In general, the stock market is expected to do well as investors move from real estate back into stocks.
- Anticipate that energy prices will fall. The increase in oil prices in the past year or so is the first sustained upward movement in inflation adjusted oil prices since 1986, when adjusted prices fell to about $20 per barrel in 2005 dollars after over a decade of substantially higher prices. In this interval there was little incentive for oil companies to pay the costs of new exploration, but since prices have jumped there is much new exploration in progress. This is expected to produce an oversupply that will cause prices to continue to fall from present levels.
- Nationally the number of new housing starts is expected to fall about 35% from its peak in 2006. Since 2002 the number of new housing units has exceeded the population demand of the number of new residents by 50 to 100% annually. Despite this excess of new homes constructed, the inventory of homes has not increased substantially until this year for two reasons - more first time buyers purchased homes and more real estate investors made purchases. In a sense, the low interest rates allowed many first time buyers to purchase ahead of schedule. With rates and prices increasing, purchases by both groups will be substantially reduced in the coming year.
- The reduction in buyers trend will be mitigated in the Puget Sound region by strong job growth, which has resulted in strong population growth that is expected to continue in the coming year. Homebuilding in Seattle is about in line with current demand. Unemployment in Seattle is currently about 4% and in Kitsap County it is about 4.3%. Labor markets are very tight.
- The reduced national residential real estate market will also impact our area through lower demand for wood products. The overall cost of many construction materials is expected to fall in 2007.
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Statistics not compiled or published by NWMLS
