What's Hot and What's Not
Volume 10 Issue 7
July/August 2005
By:
U.S. Senator John Seymour (ret.)
NATIONAL ECONOMY: New jobs continued to grow moderately but steadily during June. 146,000 new jobs were created last month and the unemployment rate dipped to 5%, the lowest since September of 2001 according to the U.S. Department of Labor. Although new job expectations had been for 200,000, the reported numbers were strong enough, and consistent enough, to cause many to begin to refer to our current economic cycle as the "Goldilocks" economy…not too hot and not too cold…but just right. Keeping with the "Goldilocks" analogy, the other good news is that the Big Bad Wolf of inflation is nowhere to be seen. After falling 0.1% in May, the Consumer Price Index (CPI), held steady in June with a 0.1% increase. In the past three months, the core CPI has risen at an annualized rate of just 1.2%. That's compared to 3.3% for the first quarter of this year. Contributing to this "Goldilocks" economy are the American consumers who shop like the Energizer Bunny…they just won't stop. Since consumer spending makes up a whooping two-thirds of our Gross Domestic Product (GDP), those ringing retail cash registers are critical. According to The International Council of Shopping Centers, their initial tally of retail sales for June show an increase of 5.3%, which is better than the forecast of 4.5%. Stores such as Target, Costco, J.C. Penney, Nordstrom's, and Ambercrombie & Fitch were included in the survey. I don't know about you, but I'm a Costco shopper and can't seem to get out of there without spending $300 or more. My wife tells me that we are merely doing our patriotic duty in contributing to a growing economy. Oh yeah! All of retail and food sales were up 1.7% in June according to the U.S. Department of Commerce. Auto sales rose 4.8% in June and that's the biggest increase since May of 2004. General Motors led the way with an incredible 41% increase in their sales compared to a year ago. Of course, their employee price discounts for all customers campaign has now been adopted by all of GM's competitors. The continued strong consumer spending can be found in their general optimism for the economy. The Consumer Confidence Board, who does a mail-in survey of 5,000 households each month, reported that their Consumer Confidence Index rose to 105.8 in June, recording a three-year high. The index reading for May was 103.1. According to the Institute for Supply Management (ISM), June was an outstanding month for the manufacturing sector. Their much-watched manufacturing index rose to 53.8% compared to May's reading of 51.4%. Any index reading above 50% is considered to reflect a growing economy. June was the 25th consecutive month in which there was a reading above 50%. Norbert J. Ore, ISM's Chairman reported that new Orders, production, and backlog of orders were all growing while inventories were contracting. All positive signs for at least the next six months.
THE FED WATCH & MORTGAGE RATES: The Mortgage Bankers Association (MBA) just released their long-term economic forecast including home sales as well as mortgage rates. Their forecast is very optimistic and promises a continuation of the "good times." According to Doug Duncan, Chief Economist for MBA, real GDP growth will average 3.5% in 2005 through 2007. New jobs will be created at an average rate of 180,000 per month and unemployment will dip to 4.9 by the beginning of 2007. Long-term mortgage rates are projected to rise 20 to 30 basis points by the end of this year and another 40 to 50 basis points during 2006, finally reaching 6.25% for a 30-year fixed-rate mortgage in 2007. Existing- home sales will increase by 2% this year and then pull back by about 3% in 2006 and another 2% in 2007. Similarly, new home sales are projected to rise 2% this year and then fall back by 4% in 2006 and another 3% in 2007. Duncan and the MBA don't see any housing "bubble" but do expect home appreciation rates to moderate. Duncan projects a 6.8% appreciation rate for existing-homes and 5.5% for new homes in 2005. That's compared to 9.3% and 13.3% in 2004, respectively. Price gains in 2006 and 2007 are expected to slow further to a more sustainable pace of 4 to 5 percent. On the mortgage banking front, the MBA projects that residential mortgage originations for purchase loans will increase to $1.62 trillion in 2005, edging up to $1.64 trillion in 2006 and $1.68 trillion in 2007. Expectations for refinance loans are that they will decline to $1.12 trillion in 2005, $863 billion in 2006 and $791 billion in 2007. Historically, the MBA's forecasts have been on the "optimistic" side, but certainly not to the extreme. Barring a national or international disaster and/or a too aggressive Federal Reserve, I believe that the MBA may be right on. I hope so.
Federal Reserve Chairman, Alan Greenspan, and his Federal Open Markets Committee (FOMC) raised interest rates for the ninth time in the last 12 months at their meeting on June 30. Now at 3.25%, most FED watchers, including me, expect another 25 basis point "bump" when Greenspan gathers his clan at their next scheduled meeting. Many expect the FEDs to continue with the 25 basis point increases through the remainder of this year and on into early 2006. Expectations are for Greenspan to cease his "measured pace" strategy when he gets the FED Funds rate to 4% - 4.25%. Greenspan ends his service at the Federal Reserve on January 31, 2006. Term limits require his departure. I hope that he doesn't feel compelled to complete his strategy prior to his leaving. In last month's newsletter, I "worried" that Greenspan and his boys had become too aggressive and needed to back off on the rate increases for 60 to 90 days to see what happens. I continue to feel the same. Inflation is nowhere to be found, the "Goldilocks" economy is certainly not red hot and a continuation of the Greenspan strategy risks an economic slowdown combined with rapidly rising mortgage rates…a bad thing for the housing markets. The yield on the 10-year treasury notes, which is the benchmark for mortgage rates has begun to rise. Within the last two weeks it has jumped from 3.92% to 4.24%, and now has fallen back to 4.19%. Also reported in last month's newsletter were several explanations to the Greenspan stated "conundrum" of why, with the FEDs raising short-term rates, that long-term rates have actually fallen. I reported that China and the Asian countries owned roughly 60% of U.S. Treasury notes and were thereby "propping up" our economy by keeping our long-term rates low. Interesting, that just yesterday, China revalued its currency, a very modest increase of 2.1%; however, our 10-year treasury note immediately rose 6 basis points before falling back. The belief is that with the Chinese Yuan buying "less," China will sell our securities and therefore drive the yields on long-term rates. This kind of action, combined with the FEDs continuing rate increases will push long term rates upward. In my opinion, mortgage rates have gotten as low as they're going to get and we can look to a very gradual, hopefully stable, increasing trend.
NATIONAL REAL ESTATE: The National Association of Realtors (NAR) has raised their economic and sales forecast for the third time this year. Originally projecting a 2.5% decline in existing home sales, David Lereah, Chief Economist for NAR, now predicts a 2.8% increase for 2005. Lereah expects 6.97 million units to be sole compared to 6.78 million units in 2004. New home sales should increase by 3.2% to 1.24 million units in 2005. New housing starts should be up by 5% to 2.05 million units, which will be the second highest year on record. The peak was 2.36 million units in 1972. Fairly consistent with the MBA forecast, NAR projects the median-priced existing-home to rise 9.4% this year to $202,600. Lereah projects the unemployment rate to be 5.1% by year end, inflation at 3.1% and personal incomes to rise by 3.2%. NAR's Pending Home Sales Index (PHSI) dipped slightly during the month of May to 124.9. That's down from April's index of 127.5. The PHSI is based on a national sample, representing about 20% of all existing-home sales currently in escrow, and therefore predicts actual closed sales two months hence. Based upon this index, actual sales in July should be slightly off. Regionally, the West reported the PHSI rising 1.6% in May and was up 2.8% compared to May of 2004. All other regions reported a decline in their PHSI. The South slipped 1.2%, the Northeast declined 3.3% and the Midwest fell 5.7%. New home construction closed out the second quarter with a 9.7% increase compared to the same period in 2004. Single-family home construction was down 2.5% during June, but up 9.2% compared to June of 2004. Builder confidence, as recorded by the National Association of Homebuilders (NAHB) and their Housing Market Index (HMI) was down a scant 2 points at 70 this month as compared to a 72 reading in June. According to our good friend, Alan Greenspan, there is "froth" in the housing market. Greenspan cites "froth" as opposed to "housing bubble." Conjecture has been that investors/speculators have been fueling the flames of rapid home price appreciation. Two weeks ago, the Wall Street Journal, in a continuing "housing bubble" story, reported that a recent analysis of 46 million new mortgages showed that investors represented 9.86% of the homebuyers during the first four months of 2005. A company by the name of LoanPerformance, a subsidiary of First American Corporation, provides this data for lenders on a monthly basis. First American is a respected company and I believe their data to be accurate. David Lereah and NAR say that the data of LoanPerformance is also "consistent" with their findings. According to this report, the 9.86% figure compares to 8.67% in 2004 and less than 6% in 2001. The question then becomes, does this level of investor activity lead to a "housing bubble?" I don't think so. When you dig down into the data, and look at the top 10 housing markets where investors represent a significant segment of buyers, you find that most of the markets are legitimate second home or vacation markets. In these markets, the "baby boomers" are buying family vacation properties. Their choice of investment is based upon a better return on their vacation home, than they can get in the stock market or alternative investments and not based upon an intent to "flip" or speculate on the property. The top 10 markets for this activity include Redding, California, 23.71%, Medford-Ashland, Oregon, 22.96%, Pocatello, Idaho, 21.43%, Punta Gorda, Florida, 20.35%, and Panama City, Florida, 19.12%. You would expect that level in recreational areas such as these where homebuyers would be buying their "second" home. Of course, not all the top 10 markets are recreational areas. Visalia, Tulare, Porterville, Fresno and Bakersfield, California are not considered high on my list of vacation areas and they do have a high percentage of investor-buyers, ranging from 18% to 21%. I conclude, from my analysis of the report, that at this point, investor home-buying activity is not contributing to a widespread or significant "housing bubble." With an overall 9.86% of homebuyers being investors and half of that number buying for family vacation home purposes, I don't believe the number of speculators are having any major impact in the market. On the other hand, should our economy stop growing new jobs and mortgage rates jump to 7.5% - 8%, there could be some regional housing markets that would suffer modest price declines. That is why I continue to worry about the FED being too aggressive in raising interest rates. Currently, the slowing home sales pace and cooling rates of appreciation bode well for a "soft landing" in the housing market and no "housing bubble."
SUPREME COURT NOMINATION: President Bush's recent nomination of Judge John Roberts to replace retiring Justice Sandra Day O'Connor is good news for business interests, real estate and private property rights. Judge Roberts, a known conservative is most likely to be in the "mold" of Supreme Court Justices Scalia and Thomas rather than Souter, Kennedy, or even O'Connor. As reported in last month's newsletter, the Supreme Court's 5-4 decision in the New London, Connecticut case was a real blow to private property rights and their sovereignty versus government's power of eminent domain. We can expect that a Justice Roberts will be a strict interpreter of our Constitution and laws as opposed to one who considers the relevancy of today's society and political temperature in rendering their decisions. Barring some scandalous surprise, we can expect Judge Roberts to avoid a Senate filibuster and receive confirmation by October 1st.
CALIFORNIA ECONOMY:
New job growth in the Golden State was somewhat "tepid" during June with 15,600 new hires. It takes about 15,000 new jobs every month to keep up with the growth in our labor market. According to the Employment Development Department (EDD), the unemployment rate rose slightly to 5.4%. That's up from 5.3% in May but down from 6.3% in June of 2004. On the bright side, job gains in the technology sector were up by 4.1%. Professional and business services grew by 3.1% as did the leisure and hospitality industry. Agriculture, our largest industry lost 44,300 jobs; however, that is typical for this time of year. Regionally, Contra Costa County had a 5% unemployment rate for June. El Dorado reported 4.6%, Los Angeles, 5.6%, Marin, 3.9%, Nevada, 4.7%, Orange, 3.9%, Placer, 4.2%, Riverside, 5.2%, Sacramento 4.9%, San Bernardino, 5.3%, San Diego, 4.4%, San Francisco, 5.1%, San Joaquin, 7.5%, san Mateo, 4.5%, Yolo, 5%, and Yuba County reported 8.9%. The Inland Empire continues to lead the state and nation in new job growth; however, it's interesting to note that Sacramento and the Coachella Valley are real bright spots. Sacramento has long left the shadow of being employed primarily by state government and Mathis Air Force Base, and has become a strong contender in the high-tech industry and manufacturing. The Coachella Valley has evolved into a year-round destination and with that have come growing job opportunities beyond tourism and into education, technology, and manufacturing. In both Sacramento and the Coachella Valley, more affordable housing has drawn employers from the Bay Area and southern California urban centers.
However, home prices in these localities have now escalated to such a degree that housing development has once again pushed to the hinterlands of those areas. Development is pushing further east and north in Sacramento and East towards Mecca in the Coachella Valley.
CALIFORNIA REAL ESTATE:
A total of 35,454 new and resale homes were sold in Southern California during June, according to DataQuick Real Estate News. That's a 14.8% increase compared to May and up 2.1% compared to June of 2004. June's sales count was the highest since August of 1988; however, continuing a trend, the rate of appreciation in prices is slowing. The median-price was $465,000 in June. That's up 2% compared to May and up 14.5% from June of 2004. However, it was the lowest price increase since March of 2002. According to John Karevoll, analyst for DataQuick, "It's very likely or very possible that by the end of this year, we'll have price increases between zero and 5 percent." Despite the continuing bellows of "housing bubble," Karevoll doesn't agree and says a "soft landing" is much more likely. With jobs growing, mortgage rates low, foreclosures at a 13-year low, and demand outstripping supply, chances of a bubble bursting is unlikely. Interestingly, seventeen years ago, 12% of Southern California home sales were occurring in the Inland Empire. Today, it's more like 33%. Regionally, June sales were up 2.8% in Los Angeles County compared to June of 2004, up 3.1% in Orange County, down 8.8% in San Diego, up 2.2% in Riverside, up 9.5% in San Bernardino, and up 16.4% in Ventura County. According to the California Association of Realtors (CAR), May home sales in the Bay Area and Sacramento areas were generally up compared to the previous month but down from May of 2004. Specifically, the San Francisco Bay area was up 3.1% from April but down 8.3% from May of 2004. Santa Clara County was off 0.2% from April and down 15% from May of 2004. Sacramento was up 2.1% in May as compared to the previous month, but down 0.6% from May of 2004. The California Building Industry Association (CBIA) continues to project another very strong year for homebuilders with a projected 210,000 new units to be constructed. 2004 housing production was 213,000. According to the USC Lusk Center for Real Estate, the Southern California apartment rental market continues to be very strong with rents rising another 3% to 6% this year. Apartment vacancy rates in Sacramento are running at 6.4% with an average monthly rent of $925.00. Office vacancy rates continue to be on the high side with 14.3% and rents at $20.07 per sq. ft. That's down from $20.75 per sq. ft. one year ago.
This newsletter is published by Orange Coast Title for the benefit of its customers and those of its affiliates, California Title, Advantage Title and Equity Title. Ask your Title Representative for future copies, and while you're at it, give them your next title order…you'll love our "Whatever It Takes" attitude.
DISCLAIMER: The opinions expressed herein are solely those of the author and, are not in any way to be attributed to the employees or management of Orange Coast Title or their affiliates. Comments, criticism and opposing views are welcome at jfseymour@dc.rr.com..
Sources: LA Times, Wall Street Journal, Desert Sun, The California Kiplinger Letter, DataQuick News, NAR, CAR, NAHB, MBA, CBIA, National Mortgage News, OC Register, San Diego Tribune, Sacramento Bee and Barrons.
