2007
The
of
Real Estate
presented
by:
Gary
Watts
Real Estate Economist
Sponsored
By:
Indymac Bank
Retail Lending Group
Last Year’s
Forecast
First Quarter:
1. The economy will continue to show positive growth while the Fed continues to stay in the pause mode.
2. The interest rates will continue to remain around 5.78% to 6.25%, with some downward pressure.
3. Number of home sales may actually rise when compared to last year’s decline of 13.4%!
4. The media will have to compare last year’s numbers to this year and things will begin to look good!
5. However, resale appreciation may not rise when compared to the big increase in 2006’s 1st quarter!
♦ GDP grew 0.7% and Fed stayed in the pause mode.
♦ Interest rates stayed around
the 6.15%
♦ OC Home Sales: - 16.1% / Appreciation: -0.50% ♦
Condo Sales: - 22.6% /
Appreciation: - 2.16%
♦
LA Sales drop 14.33% yet homes appreciated: 5.13%
♦ Condo Appreciation: 3.86%
♦ Resale market began to show some strength,
then the sub-prime mess became big news in March.
Second Quarter:
1. The Federal Reserve should begin reducing the Fed rate, and mortgage rates should decline further.
2. Inventory should begin to rise, but at a moderate rate.
3. The media will have to report dramatically increasing home sales when compared to last year.
4. Home prices should continue to rise, and condo prices should begin to appreciate once again.
♦
The
Fed made no rate changes as the economy grew 3.8% ♦
OC Home & Condo Inventories rose to 16,441
♦ OC Home Sales: - 25.50% / Appreciation:
+2.3% ♦ Condo Sales: - 35.8% / Appreciation: - 0.10%
♦ LA Sales drop 30% yet homes appreciated: 6.80% ♦
Condo Appreciation: 5.16%
♦
Sub-Prime problems dominate the media, as well as rising foreclosures
Third
Quarter:
1. The Federal Reserve should see that inflation is moderating and continue to reduce the Fed rate.
2. Home buyers may see 5.5% interest rates by summer, and the sales volume will continue to rise.
3. The media will once again become our friend as they report these new positive numbers.
4. The inventory of homes should once again peak in September.
♦ The Fed finally cuts interest rates by 0.50%! ♦
OC Home & Condo Inventories rise to 17,798.
♦
Home Sales: - 27.05% / Appreciation: +3.15% ♦
Condo Sales: - 29.25% /
Appreciation: - 0.35%
♦
LA Sales drop 23% yet homes appreciated: 7.75%% ♦
Condo Appreciation: 4.60%
♦ Fanny and Freddie to buy 20 billion more of
sub-prime loans – Housing Bills to aid industry.
♦
OC active inventory is comprised of only 6% to 8 % being short-sales or
foreclosed properties.
Fourth Quarter:
1. The Federal Reserve may pause once again, awaiting final year end numbers.
2. Home sales, although declining, should still be above 2006 numbers.
3. Home prices will be up for the year but will be moving slowly in this quarter.
4. Resale homes should rise about 7% while resale condos increase 4% for the entire year.
And this is why I’m predicting that you will have “a little bit of heaven in 2007!”
What to Watch:
1. If the Fed sees things it does not like and raises interest rates – were late in cutting the rate
2. If increases in our housing inventory push the supply past 5.5 months – today, 7.65 months.
3. Un-motivated sellers still entering the market in large numbers – estimated over 50% in MLS.
-1-
Brief History of Real Estate
We are in the 25th month of the current housing downturn. Historically, housing downturns average 27 months so we may be near the end. Although there has been a significant decline in sales volume, home prices have continued to show small amounts of appreciation. With the Fed cutting interest rates, Congress passing bills to aid housing, and more money available for home lending, the financial markets will begin calming down. It may be wise to give our client’s a little historical perspective about real estate cycles.
1970 to 1980:
“The goal of owning a home
seems to be getting beyond the reach of more and more
Americans. The typical new
house today costs about $28,000.” - Business
Week - 1969
♦ In 1972, interest rates were 7%, but these rates would not be seen again for over 24 years.
♦ In 1973, OPEC doubled the price of oil, banks had a run on deposits and, for approximately 8 months,
there were no lenders who were in a position to make loans to any home buyers.
♦ By the late ‘70s, both interest rates and the inflation rate were exceeding double digit numbers.
♦
By the end of the decade,
“The median price of a home
today is approaching $50,000 . . . housing experts
predict price rises in the
future won’t be that great.” – National
Business - 1977
1980-1990
♦ In the early ‘80s, inflation hit 21.5% and home loans were reaching 18%!
♦ A recession was taking place and job losses were increasing – leading to home foreclosures.
♦
In 1984,
“The golden-age of risk free run-ups in home prices is gone.” – Money Magazine – 1985
♦ The savings and loan scandal hit the financial markets but the government bailed them out in 1988.
♦ By the end of the decade, interest rates had decreased to single-digit (9.5%) rates.
♦ From ‘86 to ‘89, California home prices rose 46% and ended the decade with a yearly return of 7.95%!
1990 to 2000:
♦ On Nov.11, 1989 the Berlin Wall came down and, by January of 1990, Congress cut the defense budget.
♦ In a short period of time, a lot of highly-paid workers in defense and manufacturing had lost their jobs.
♦
prices declined 19.33%.
“A home is where the
bad investment is.”
♦
The following year, real estate equity in
♦ In the following 3 years,
and ending the decade with a net gain of 9.35% while OC had a gain of 8.09%.
♦ The median price of a home in
appreciation
for homes in
Source:
Researches by QTVN (regarding interest rates),
-2-
The Media
Today’s various media outlets play up bad economic news more than ever, which leads to misconceptions about economic realty. Our economy is extremely strong, with a 2nd Qtr. growth rate of 3.8%; corporate profits are superb; and personal income is growing more rapidly than spending - thus pushing up the personal savings rate! All the while, the world economy is exploding. However . . .
♦ The media says real estate is going down,
yet August’s prices for single-family homes in
were up 2.0% from last year however, condos under $500,000 fell 5.1% from last year.
♦
♦ The media reports that foreclosures have now exceed the 1996 peak but they to mention that
approximately
100,000 homes and condos have been built in
♦ The media reported 53,942 notices of default for the 2nd Qtr - a near record high. They compare this
figure to the 1st Qtr. of ’96, when 61,541 notices were filed - but fail to mention that 2 million more
homes
have been built in
♦ The media and the financial markets have greatly over-reacted. There are only $70 billion
of loans with late payments, yet the financial markets lost over $1 trillion in value!
The Sub-Prime Market
The media will still report massive delinquencies and huge
foreclosures in the sub-prime market, but those reports will not be accurate
when you compare them to the total mortgage volume in the
It may surprise you to know that until 2003, all sub-prime
lending made up less than 5% of the total loan volume. Since 2004, sub-prime
loans make up 5% of the
● Bear Sterns 3nrdquarter revenue was only $166.1 million due to $900 million in losses
● Lehman Bros. earned $887 million after writing down $700 million.
● Morgan Stanley (holding $5.2 billion in sub-prime loans) made only $1.54 billion
● Goldman Saks earned $2.85 billion after writing down $1.5 billion in loan losses
● Bank of
saw net income rise to $5.76 billion - up from $5.48 billion last year.
Sub-prime loans in
of 2005 through all of 2006, 43% of all
The media, knowing that they are losing viewers and subscribers, are well aware that fear helps to keep people tuned in or continuing to read. So they throw the big number of mortgage delinquencies in the headlines but fail to tell their viewers how few actually go through the entire foreclosure process!
Source: Mortgage Bankers Association, National
Homebuilders Association, Inside Mortgage Finance
-3-
Delinquencies vs. Notices of Default
vs. Foreclosures
Delinquencies: Any missed payment – even if only one month is missed. Here are the 2nd Qtr. findings:
Sub-prime & ARMs Alt.-A Prime Prime Adj. Jumbo Combined
CA. 12.6%
14.20% n/a 1.0% 1.9% n/a 3.25%
♦
The media never asks, “In the
Notices of Default
Notices of Default
are filed when lenders’ loans have been delinquent for a specific period of
time. These loans begin the foreclosure process. The four states of
Sub-prime & ARMs Alt.-A Prime Prime Adj. Jumbo Combined
(♦ experts forecasted 7%)
CA No individual numbers for
In Ca., 21% of loans now delinquent are non-owner occupied loans. The
Foreclosures Occur when the buyer has been unsuccessful in curing the debt, and either a lender or an
investor has acquired the property.
Sub-prime & Alt.-A Prime & Prime Adj. Combined Last Year
CA n/a n/a 2.08% 1.17%
♦
In
their payments current, refinancing, or selling the home and paying off what they owe.
♦ In Orange County, 75% of homeowners in default emerge successfully. Those that do go to foreclosure,
57% are under $500,000 and
92% are under $750,000.
Now you can see why the problem is greatly over-blown and why state-wide home prices have not crumbled. On a final note about foreclosures:
♦ The #1 reason they occurred was due to fraud and speculation!
As of Aug
30th,
default. In
♦ The # 2 reason – unethical lending.
♦ The #3 reason – loss of job.
♦ The #4 reason was due to medical problems.
Source: Mortgage Bankers Association, Federal Reserve, Federal Bureau of Investigation, MLS
-4-
Why The World Changed in 1979!
Baby Boomers’ Impact
Never before in the history of the world has a generation accumulated so much wealth as the baby boomers. The Internal Revenue Service will tell you that from 1945 to 1979, incomes increased at the same rate for all tax brackets. By 1979, the early baby boomers had been in the workplace for over 10 years. They were the most educated generation to ever enter the work force, and they had the skills for our changing world. Their income from 1980 to 2004 exploded!
♦ The top 20% of incomes grew by 59%, while the bottom 20% of incomes grew by a measly 7%!
♦ The top 1% of incomes grew by 200% - earning more than the entire bottom 50% of wage earners!
Last year’s rise in income was a
5-year high, and income rankings in the
♦ The number of taxpayers making more than $100,000 last year, grew by 3.4 million and accounted
for more than two-thirds of the
growth since 2000!
♦ Those making more than $1 million grew by 26% and numbered 303,817 in 2006! These individuals,
who constitute less than a quarter of 1 percent of all taxpayers, reaped almost 47 percent of the total
income gains in 2005. .
♦ The top 85% of the nation’s wealth resides with the richest 15% of Americans; the bottom 50% of
Americans holds only 2.5% of the nation’s wealth.
Over the next decade, there will be a 25% increase in the population over 50 years of age. They have more money than any preceding generation, due to having dual incomes, equity growth, and record inheritances (60% goes to the top 40%)! This age group is spending $2 trillion dollars annually! Last year, 2.1 million boomers turned 60, with 25% planning on not retiring. They found a way to mix leisure with work and are not ready to fully retire – they have money and income and they are still investing in real estate.
They are one of 3 major buying waves, as 75% plan on moving to either the west or the south for warmth. Eighty percent own their own home, with 25% of those owning additional property.
Those Who Own and Those Who Don’t
1. We are the youngest of the home-building nations. History does repeat itself! Every country has gone through a cycle whereby it breaks into two parts: those who own a home and those who don’t.
2. When this happens, rental rates begin to soar. We are in the beginning cycle of this event, as evidenced by the fact that the national rental rate increased 5.3% in the last 12 months. OC rents have risen 6.1% in the past year and 6.5% for LA. Since 2001, the rise in rental rates has easily outpaced inflation.
3. Obviously
this becomes a great benefit to those who own homes and rental properties –
especially when the
4. The
Source: 2004/2006
-5-
Just How Rich Are We . . .
There are 390 billionaires in the
The Federal Reserve reports:
· Consumers have $5 trillion dollars in liquid cash sitting in banks and savings and loans!
· In 2006, households’ net worth rose 7.4% and now exceeds $56.2 trillion dollars!
· Homeowners real estate equity is $10.9 trillion dollars – representing a 59% equity position!
· The value of individual stocks and mutual funds held by individuals grew to $10.4 trillion dollars!
· Other assets held by individuals include:
$ 3.2 trillion in bonds and credit instruments - $1.1 trillion in insurance reserves
$ 6.7 trillion of equity in non-corporate businesses - $11.1 trillion in pension funds
$ 2.5 trillion in 401K’s – plus $10 billion in loose change in homes and cars!
● The rich and super-rich saw their assets surge 11.2% last year, to $37.2 trillion dollars!
(Boeing’s “mobile mansions” are private wide-party jets being customized at $150 million each!)
What Are They Doing With This Wealth?
They or their parents are also in the process of transferring their wealth to their children and grandchildren. These newest home buyers make up the largest group of the 3 buying waves. They are presently 23 to 33 years
of age, and will add 1.2 million new households per year for the next decade! They are purchasing at a median age of 26, yet those purchasing under 25 years of age now represent 14% of the first- time home buyers market.
And let us not forget the wave of buyers that represent the normal buying market. This group is projected to grow at a rate of 1.17 million per year for the next 7 years. They include 1st time home buyers (median age 29) and those purchasing upscale homes (median age 45).
Impact of Immigration
Add to this the immigrants purchasing real estate and you
can see that the
♦ Immigrant children who arrived with their parents in the ‘80s and ‘90s, are now buying homes.
♦ These 2nd generation Americans, if history repeats itself, will out-earn their parents.
♦ As 1st time buyers, they represent 35% of the 1st time resale market.
Immigration of new buyers is largely due to a
♦ Presently, Latinos are the fastest growing
segment of the
♦ Asians will become the fastest growing segment of the U.S housing market over the next decade,
largely
concentrated on the West Coast. By 2015,
♦ The median price of homes purchased by foreigners is $70,000 higher than domestic buyers.
♦ Foreigners buy
♦ The falling dollar makes
♦
♦
Source: 2004/2006 Census, Federal Reserve, Internal Revenue
Service, National Association of Realtors, World Wealth Report
-6-
Why Our Economy Will Continue To Do Well!
The National & California Economy
In the 2nd quarter of 2007, our economy grew at a 4% pace and is likely to produce a 2% to 3% growth rate for the year. Core inflation is down and the trade deficit is down. Since the mid-2005 housing cool-down, we have added over 4 million jobs and incomes have risen 7%, leading to a $1.35 trillion rise in the nation’s income. This is pent-up demand and will fuel the next housing turn-around.
The Fed has pumped tens of billions of dollars into the financial system, sliced interest rates on bank loans and, may cut the Fed Rate for the first time in 4 years. The Chairman has stated that the central bank will act as needed to limit the impacts on the economy. Housing is just too important to the overall economy.
During the past 20 years, global prosperity has created
millions upon millions of wealthy individuals, as well as a billion or so new
members of the middle class. This global development is lifting living
standards around the world. Underpinning this expansion is the integration of
half of the world’s population into the global market economy! These expanding
economies and populations will profoundly affect our economy in a most positive
way and once again, we will grow our way out of this downturn!
Source:
Federal Reserve,
-7-