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2006 Real Estate Market Forecast

2006 Real Estate Market Forecast. Leslie Appleton-Young Vice President and Chief Economist. Economic Conditions. Recent Economic Headlines. US jobs up 243,000 in February; revised gains of 170,000 in January and 145,000 in December Strong but not booming Rebound in wages

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2006 Real Estate Market Forecast

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  1. 2006 Real Estate Market Forecast Leslie Appleton-Young Vice President and Chief Economist

  2. Economic Conditions

  3. Recent Economic Headlines • US jobs up 243,000 in February; revised gains of 170,000 in January and 145,000 in December • Strong but not booming • Rebound in wages • Expect benchmark Fed Funds rate to go from 4.5% to 5.0% • Strong productivity gains • Softer housing sector

  4. Gross Domestic Product • 2004: 4.2% 2005 3.5% 2006 3.5% ANNUAL PERCENT CHANGE, CHAIN-TYPE (2000) $

  5. Gross Domestic Product • 2005 Q4: +1.1% QUARTERLY PERCENT CHANGE, ANNUAL RATE

  6. Employment Growth, California vs. U.S. YEAR TO YEAR % CHANGE

  7. Nonfarm Employment By Region SOURCE: CA Employment Development Division

  8. Consumer Confidence Index • January 2006: 106.3 INDEX, 100=1985

  9. Consumer Spending • 2005 Q4 1.1% QUARTERLY PERCENT CHANGE

  10. U.S. Sales and Median Price ANNUAL RATE

  11. Mortgage Origination Refinance vs. Purchase ORIGINATION (BIL $) 30-YR FIXED RATE MORTGAGE SOURCE: Mortgage Bankers Association

  12. The “Wealth” Effect • Higher real estate values converted into cash through: Trading “down”; Cash-out refi’s; Home equity loans • Housing “money” created (Source: Federal Reserve Board): • Year Money % Disposable Income • 2000 $204 B 2.8% • 2001 $262B 3.5% • 2002 $398 B 5.1% • 2003 $439 B 5.4% • 2004 $599 B 6.9% • In other words, this borrowing has fueled consumer spending and it will slow as housing price gains moderate.

  13. Longer Tenure in Home? • Homeowners may stay in their current homes longer because they have: • Cashed out and spent their trade-up equity • Concerned about “property tax shock” • Love their low-rate mortgage • But don’t forget that “Boomers” are inheriting wealth from their parents and are interested in real estate for: • Kids • Parents • Retirement/Investment

  14. Consumer Price Index • January 2006: All Items 4.0% Y-T-Y; Core 2.1% Y-T-Y PERCENT CHANGE FROM A YEAR AGO, 100=1982-1984

  15. Fed Funds and Mortgage Rates • 2000-2006: 15 Fed increases since June 2004 SOURCE: Federal Home Loan Mortgage Corp.

  16. Mortgage Rates SOURCE: FHLMC

  17. Treasury Yield Curve

  18. Why are Rates so Low? Greenspan: It’s a “Conundrum” • Deflationary Structural Forces • Global Competition: Wal-Mart Effect • Increased consumer Awareness: Internet Effect • Productivity gains/Greater efficiency • Global Labor force – off-shoring • Foreign Central Banks and Pension funds holding more $’s

  19. ARMs as a Percent of All MortgagesWhy isn’t this lower? Source: Federal Housing Finance Board Source: Federal Housing Finance Board

  20. New Loan Products and Risk • Types of instruments • Zero down-payment • Interest-only • Stated income • Option-ARM’s • Concerns • Ability to absorb rate adjustments • Slower equity growth ahead

  21. National Economy • Economic growth in 2006 a moderate 3.5% • The “Goldilocks Economy”? • Accompanied by … • Modest job growth – solid but not outstanding • Inflation in check – Fed Priority • Continued strength in Business Investment • Consumer Spending flat • Growing Fiscal Stimulus: Katrina • Strong Housing Market slightly off 2005 peak

  22. California Real Estate Market

  23. California’s Housing Cycles and Membership1970-2006 THOUSANDS

  24. Sales of Existing Detached Homes and Pacific West Consumer Confidence • California, January 2006 Sales: 500,474 Units, Down 24.1% Y-T-D, Down 24.1% Y-T-Y UNITS INDEX SOURCE: California Association of REALTORS®; The Conference Board

  25. Median Price of Existing Detached Homes • California, January 2006: $551,300, Up 13.8% Y-T-Y SOURCE: California Association of REALTORS®

  26. Unsold Inventory Index • California, January 2006: 6.0 Months MONTHS Average Since 1/88: 6.4 months SOURCE: California Association of REALTORS®

  27. Median Time on the Market • California Single-Family Homes, January 2006: 48.5 days DAYS ON MARKET SOURCE: California Association of REALTORS®

  28. California’s Million-Dollar Home Sales Increased 47% in 2005 YEAR Source: DataQuick Information Systems NUMBER OF HOMES

  29. Why are Home Prices Rising? Econ 101 • Strong Demand • Low Mortgage Rates • Demographics: Baby Boomers • Flight from alternative investment choices • Speculation? • Restricted Supply • Constraints on new construction • Low inventory of homes for sale

  30. Is There a Housing Bubble? Yes Virginia, there is a bubble – a bubble in the number of articles about the housing bubble.

  31. BUBBLE? NO! SOFT LANDING? YES

  32. What is a Bubble?NASDAQ 1987-2005 MONTHLY AVERAGE

  33. Median Price, Annual Percentage Change • California vs. U.S. ANNUAL PERCENTAGE CHANGE

  34. California Median Price 1970-2005 • Annual Percentage Change ANNUAL PERCENTAGE CHANGE

  35. Southern California Region

  36. Nonfarm Employment SOURCE: California Economic Development Dept.

  37. Nonfarm Employment • Los Angeles County, January 2006: Up 1.3% Y-T-Y Y-T-Y PERCENT CHANGE SOURCE: CA Employment Development Division

  38. Taxable Sales • Los Angeles County ANNUAL PERCENT CHANGE SOURCE: CA State Board of Equalization

  39. Sales of Existing Detached Homes and Pacific West Consumer Confidence • Southern California January 2006 Sales: 8,823 Units, Down 19.5% Y-T-D, Down 19.5% Y-T-Y UNITS INDEX SOURCE: California Association of REALTORS®; The Conference Board

  40. Sales of Existing Detached Homes SOURCE: California Association of REALTORS®

  41. Home Sales in Southern California Regions SOURCE: California Association of REALTORS®

  42. Median Price of Existing Detached Homes • Southern California, January 2006: $531,043 Up 12.2%% Y-T-Y SOURCE: California Association of REALTORS®

  43. Median Price of Existing Detached Homes • Southern California Regions SOURCE: California Association of REALTORS®

  44. Orange County

  45. Sales of Existing Detached Homes and Pacific West Consumer Confidence • Orange County, January 2006: 1,195 Units, Down 24.2% Y-T-D, Down 24.2% Y-T-Y UNITS INDEX SOURCE: California Association of REALTORS®; The Conference Board

  46. Median Price of Existing Detached Homes • Orange County, January 2006: $699,070, Up 10.2% Y-T-Y SOURCE: California Association of REALTORS®

  47. Unsold Inventory Index • Orange County, January 2006: 8.9 Months MONTHS SOURCE: California Association of REALTORS®

  48. Median Time on the Market • Orange County - Single-Family Homes, 2005 Q4: 37.3 days SOURCE: California Association of REALTORS®

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