I’d like to call this an economic crossfire. On the heels of the Federal Reserve’s vote of confidence in the economy Wednesday, when Fed Chairman Ben Bernanke and his colleagues said that things seem to be “leveling out,” I asked four authorities on the economy and/or real estate to give me some of their thoughts on the economy and the market.
For this crossfire, I tapped: Los Angeles’ reputed economic guru, Jack Kyser; Blake Christian, a long-time business advisor and last year’s chair of the Long Beach Area Chamber of Commerce; and Bruce T. Mulhearn, who heads the large chain of Prudential California Realty offices in and around the Long Beach area with a workforce of over 1,800 agents.
Because television, media and the filmmaking industry are so important to Southern California, I also solicited some thoughts from media expert Paul Bond, west coast business editor of The Hollywood Reporter. And in true Hollywood fashion, Bond uses the “Hot Waitress Index” to examine real estate and the economy in general.
Specifically, I asked the four if they believe we’ve hit the bottom, and if so how a recovery will take shape, as well as what sectors they believe will be the first to start clicking. Most responded positively, though the consensus was colored by some dour remarks about more banking problems, a spate of foreclosures in commercial real estate and ongoing governmental budget issues.
Jack Kyser, chief economist with the Los Angeles Economic Development Corp.
We feel that we are at the bottom of the economic cycle, and that we will see a slow, jobless recovery.
Southern California will lag the nation, due to the on-going state budget crisis and problems in commercial real estate. Financing will also continue to be scarce, although vulture funds are being set up.
As to areas in Southern California, Riverside-San Bernardino will be the laggard. Industrial will probably be the first commercial real estate sector to recover, followed by office and retail. The latter sector still has too much capacity, and some smaller malls could be at risk of being demolished. Hotels will also lag, as there is still some new capacity under way.
For Long Beach, we think there will be a modest recovery in international trade in 2010. However, the fate of the C-17 is still uncertain.
Blake Christian, immediate past chairman of the Long Beach Chamber Board of Directors.
As a CPA I tend to look at the economy a bit more conservatively than others. While there are various statistics such as a drop in the national unemployment rate, increasing equipment, home and car sales in July, I believe these one-month positive statistics do not establish a trend, and the coming months may tell a very different story. This week it was announced that July foreclosure rates jumped again, which does not bode well for a stabilized housing market.
Businesses continue to announce lay-offs and plant closures and the drop in unemployment rates is partly attributable to approximately 400,000 long-term unemployed workers dropping out of the unemployment base since they have given up seeking employment. Also, state and local governments will likely be cutting head count in coming months—adding to the unemployment challenges.
The rise in auto and home sales may be a combination of pent-up demand and the recently enhanced state and federal tax credits/deductions passed as part of the various stimulus packages. Time will tell whether these sales trends continue, but I am less optimistic that the trend will continue into the historically slower Fall and Winter periods for these items.
Our clients tend to be larger privately owned businesses and while they have generally ridden out the economic downturn fairly well, however, the vast majority of business owners are still working off fairly conservative business plans with limited hiring and capital investment, which will likely result in a slow hiring landscape and a slow overall economic recovery.
The real wild card is when the commercial real estate and credit card company fall-out will hit.
There are still significant issues with these two sectors and the impact of the large negative equity in commercial buildings is beginning to ripple through the market in the form of inability to refinance and ultimately mare foreclosures to come. The net impact may be similar to the residential market meltdown we have seen over the past few years—and more pain for banks and other lenders.
In summary, while there are a few bright spots, I do believe there will be more pain before the real recovery.
Bruce T. Mulhearn, founder of Prudential California Realty:
Most would agree this is the worst housing downturn since perhaps the Great Depression. While not present during that cycle, I have been thru four previous downturns so this is “not my first time at the rodeo” as they say. Here are my thoughts given what I am seeing across a wide swath of Southern California real estate. We operate 20 offices, transacting business in four Southland counties. This year we expect to top $1.3 billion in closed business.
Restoring demand to more normal levels will take time since so many owners are in financial distress or trapped in homes worth less than their mortgages. The recession has also dampened both immigration and new household formation. High unemployment, which will likely remain in double digits for the next 18-20 months, at least in Socal, will continue to suppress prices and limit families ability to purchase a home or move up.
Not withstanding the foregoing, we have experienced in virtually all of our markets (at the entry level) tremendous demand. This demand has been by investors who recognize prices are at historic lows, and buyers who in many cases waited out on the sidelines and now believe the timing is right for them to take advantage of both significant price declines and very low interest rates. It is not unusual to have a property listed and within hours or days, 15-50 offers, many “all cash, close in l5 days.” As a result many buyers are frustrated their offers are not being accepted, even when they have overbid the property by $30,000 to $80,000. So as you can see, it is a sellers’ market in those lower price ranges. We keep hearing there is a tidal wave of foreclosed homes yet to come to market. Given the top story in today’s newsrooms was that there was a record number of foreclosures which occurred nationwide last month (up 32% over this same month a year ago, nationally), with California having the dubious distinction of second place, behind sparsely populated Nevada, lots more inventory is coming. When one considers this demand at the entry level, it would appear that the market can absorb this oncoming wave of distressed sales. No doubt this will continue to dampen home values, but I believe we will simply see a bottoming, a flattening out of pricing, not a continuing decline. Of course all values are local…some neighborhoods will be affected more than others. Many of the beach communities, while values haven’t increased, we haven’t seen much in the way of significant declines. There are exceptions, but where buyers are more affluent, demand in many of these enclaves has remained steady.
Most recently our company in the seven months of this year has experienced our volume is up 22% and sides closed is up 74%. What you quickly see is that we are doing a great deal more transactions, but because sales prices have declined so dramatically, the volume is up only slightly. We are not complaining, but believe as home values stabilize, we will see a prolonged period of only modest appreciation.
Our agents have quickly caught on to the quicker turnaround time on mostly positive responses from lenders to discount their loan balances on short sales. Just a year ago neither they nor we knew what were doing. Today the lenders are better staffed and we are better educated. It does make more sense in the majority of cases for a lender to take a discount on his first and sometimes second trust deed loans rather than wait up to eight or nine months for the foreclosure process including holding costs, vandalism and possible trustor bankruptcies.
Overall, nine metro areas nationally have seen prices decline by more than 50% from their peaks, with five of these being here in California, and the rest in Florida, Arizona and Nevada. That is the bad news, but the flip side is people are taking advantage of these price declines and choosing to invest in real estate, recognizing it is a solid long-term investment. As John D. Rockefeller said many years ago, “real estate is not only the best way, but the only way to achieve wealth.”
We hear in the media that companies have largely exhausted their inventories and as a result will start purchasing raw materials and adding shifts of workers putting folks back to work. We hope that this and many other sectors who have pared their ranks will begin to come back to life and thereby give families the confidence to move from the ranks of tenants to homeowners, a proud day for any family.
Paul Bond, west coast business editor of The Hollywood Reporter:
As an entertainment guy my real-estate credentials are suspect. But I know a hot waitress when I see one. And there are lot of hot waitresses in Hollywood nowadays. Even more than usual.
Apparently that’s just about all I need to know to determine that the economy is not recovering quite yet, according to columnist Hugo Lindgren writing in New York Magazine.
Lindgren’s thesis is that the hotter the waitresses, the worse the economy, because when times are good pretty girls have better things to do than serve food to strangers.
When diners are staffed by bald dudes with nose rings, that’s a sign the economy is taking a turn for the better, Lindgren writes.
The Hot Waitress Index sounds perfectly fine to me (as good as any other leading indicator). But before making my prediction of a housing recovery, I figured I’d get confirmation from a couple of sources I’m even more familiar with: television advertising and movie attendance.
As to the former, it stinks. But just about every media mogul I listened to this earnings season said the advertising market appears to at least be stabilizing, and they say that better things are in store for the second half.
So, if I believe the moguls, we’re just in front of a leading indicator (recovering ad market), so that means we’re several months from a coincident indicator (whatever that might be), and several more months away from a lagging indicator, which, if I’m not mistaken, is where a recovery in real estate will reside.
So my advertising indicator seems to match my hotness indicator. One more indicator to go before I can predict with confidence when real estate will recover.
For this, I’ll rely on the vaunted Boxoffice Index. It’s practically taken for granted that people crowd into movie theaters during tough economic times.
Actually, I ran the numbers and it appears the Boxoffice Index has its faults: Sure, during the 2001 recession boxoffice revenue rose to $8.1 billion in the U.S. from $7.5 billion the year prior, but in the 1990-1991 recession boxoffice revenue actually fell.
But this year the boxoffice is so strong—6.7% higher than last year at this time—that it just has to represent something extraordinary. After all, consumers are even turning out in droves to see the clunkers.
So we have weak advertising, strong boxoffice revenue and hot waitresses. Add em’ all up, and I call that confirmation that we’re still a ways away from economic recovery, followed by higher real estate prices.
But I’ve looked at the movie release schedule for the second half of the year and I predict slowing at the boxoffice. And I believe the media moguls are correct when they say advertising will heat up in the second half. And the best-looking barista at the Starbucks near my office quit for a better job outside the food industry.
So taking these recovery signals into account, I’m now in a position to make an intelligent prediction: Real estate won’t hit bottom until May next year.