Thursday, December 06, 2007
Kitsap Real Estate and Economic Conditions in 2008
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 could be headed as it affects your home buying or selling decisions. Almost everything in the current press is pointing towards a bad year. The stock market is down, and investors are fleeing to Treasurys and other safe investments. Real estate markets are down. Unemployment is expected to rise. Investment capital is scarce. Some economists say there is an increased probability of recession. On an optimistic note, the National Association of Realtors recently pointed out that this will be the 5th best year for real estate sales ever, and that 2007 is very similar in many respects to the market in 2002, which was record breaking at that time. All that needs to change are our expectations.
Faced with predictions such as the study by the U.S. Conference of Mayors and the Council for the New American City, which predicts that property values in the US will fall by $1.2 trillion in 2008 and that at least 1.4 million home owners will lose their properties due to foreclosure, some politicians are calling for rate freezes and legislation to relieve homeowners affected by the problem. A group called the Hope Now Alliance, including large banks such as Citigroup, Countrywide Financial, Wells Fargo, and Washington Mutual, has today negotiated an agreement with the Treasury Department. This Alliance represents about 84% of the loan servicing organizations for subprime mortgages. In very general terms, their proposal is to extend the so called teaser rates on subprime loans, which run 7% or 8%, for a period of 5 years - forestalling the reset in rates to the 9.5 to 11% range that is scheduled for $362 billion of subprime mortgages in the coming year.
The coalition will try to create systems to identify those home buyers who could continue to make their payments only if current rates are extended or the maturity date of their mortgages is extended, and to this group the mortgage modifications would be offered. Subprime borrowers who can make their payments after the mortgage resets and those borrowers who can’t make current payments will not be eligible for the proposed revision in terms. Both the Treasury Department and the Alliance reportedly now have the cooperation of the investors holding the securities backed by the mortgages under negotiation. These investors stand to lose income if the terms of the original mortgages are not met - of course they will also lose income if the borrowers default. This agreement reportedly affects “tens of thousands” of home owners, so it would still leave a substantial number of subprime borrowers to fend for themselves. No broader relief, such as a taxpayer bail out, has yet been proposed. Some critics have compared the proposed plan to the course taken in Japan after the meltdown of their real estate market in 1989. Another aspect of the subprime problem has not yet been addressed, namely that a large portion of the borrowers (55% according to a Wall St Journal study) could have qualified for a conventional loan with lower overall costs and lower fees to the lenders.
So all this news sounds bad for next year - we might need a different perspective about our hopes for 2008. A couple weeks ago I heard 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. His presentation was much more upbeat and optimistic than I had expected. What follows are my notes from his presentation sponsored by Viking Bank.
- The real gross domestic product will be subpar - less than the nominal 3% growth that represents an average year for our economy. He said that he does not foresee a recession, but his probability that one will occur is 30% - higher than he predicted last year. He also pointed out that consumer spending has slowed somewhat, trending towards slower growth but not undergoing a sudden collapse. Our Pacific Northwest Region is dependent upon capital goods orders (planes, trucks, software, etc.) to a greater extent than other parts of the country. While capital spending was weak at the start of the year, it is now looking much better. Our economy also depends upon the exports, and with the current weakness in the dollar, he expects that export trade will be strong. He pointed out that emerging markets are growing much faster than the developed economies such as the US, and that they are fueling a large demand for exports. He also predicted that the dollar will continue to fall by another 7 - 9% in value in the coming year, adding more strength to US exports.
- Long term interest rates will increase 1 to 1.5%, which is important to the affordability of real estate. He predicted last year that long term rates would rise, but after rising earlier in the year they have fallen again, in some respects because of the flight to safe investments from stocks as the volatility picked up later in the year. He continues to predict that this long term rate increase will happen (to attract investors to support our debt), and felt that the Fed would cut the Federal Funds Rate one more time in the near term.
- He also is expecting the stock market to continue to perform well, though he declined to make any specific predictions about it. He encouraged participants to have some international stocks in their portfolios - as much as 50%.
- As he predicted last year, he anticipates that energy prices will fall significantly. 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.
- Housing - He expects the housing market to remain weak throughout 2008 and into 2009 before it starts to recover. There is a large excess in inventory (1.25 million units). He said that housing by itself is not enough to bring down the rest of the economy. A weak homebuilding market will have an impact on the Pacific Northwest because of the large wood products industry here. Locally in the Seattle region, construction has not outstripped demand by that much, so the amount of new construction will be only somewhat below normal.
- The reduced number of buyers will be mitigated in the Seattle Tacoma region by strong job growth, which has resulted in strong population growth that is expected to continue in the coming year, though maybe not as strong as the past 2 years. Unemployment in Seattle is currently about 4% - somewhat lower than the national average. Labor markets are very tight.
So...barring impact from other unforeseen circumstances, Bill Conerly sees pretty good economic conditions for the year ahead - except for the real estate market. As a parting note he told the story of a businessman who didn’t expand his well run operation because he foresaw trouble on the economic horizon. Today that person still runs a good business but has been left behind because he didn’t bet on the ability of Americans to innovate and create new opportunities. Don’t be against America - I believe that was his message.
Statistics not compiled or published by NWMLS
