Newspapers across the country, as well as micro-bloggers and several industry websites, are reporting mixed economic signals. Articles are reporting market price reductions slowing down or even stabilizing in several areas. Closed sales on existing homes are up in June from May figures, and reductions in inventory are evident across the board. Unemployment figures for July were better than expected; while the Feds attempt to convince the general public that the economy is starting to turn around. Yet other industry insiders are reporting that the real market is still unstable due to the large “shadow” inventory of foreclosure properties held by the nations lenders and service companies. Unemployment in many areas remains in double digits and is unlikely to rebound until early 2011. Furthermore, early results regarding the Feds loan modification efforts (goal of 300,000 loan modifications by the end of December 2009) seem to be generally on target; however, re-foreclosures on these loan modifications are between 25%-60%.
So how does the general public decipher truth from fiction. Well first it would be beneficial to consider who is making the predictions, and determine what might be their motivation in manipulating the facts for their benefit. The Feds and specific industry associations reason for controlling the flow of information, and its interpretation is obvious – they need to sell us on the fact that the economy has bottomed out, is stable and in some market segments actually improving. The agendas of the other prognosticators are not as easily detectable. So what is the current status of the market?
Well, before you draw a conclusion based upon another neophyte economist’s opinions, maybe a pause and consideration of other market forces is in order. Ultimately the economy’s ability to bounce back will be driven by consumers and businesses ability to invest or spend. In order to spend money there must be the ability to make money or continue to borrow (credit line availability). It has been well documented over the past year that credit markets have contracted and/or made more difficult to qualify for new or expansion of credit. So that leaves consumers spending based upon earnings or savings. A watchful eye on unemployment figures thus is critical – for employment and income drives spending and the ability to save. Drilling deeper you might want to look at vertical market fluctuations to determine the present status and future directions. Several vertical markets contain interesting insights for the general California real estate recovery – i.e., the commercial real estate segment, construction activity and new housing permits.
The Wall Street Journal today reports that Southern California’s economy is more reliant on the construction segment than other markets across the Country. In Riverside and San Bernardino counties construction, at its peak four years ago, was the fourth-largest employer. The housing market contributed more than 24 billion dollars in revenue to Southern California in 2008. So construction trends are a significant “pull” in the broader Southern California recovery than what is being reported nationally. The greater Los Angeles area has lost about 90,000 construction jobs recently. The conclusion is that “construction is now literally stopped.” New housing permits in the five-county greater Los Angeles region has dropped 85% from 88,187 in 2005 to a projected 12,990 this year. The drop in housing permits in San Bernardino and Riverside counties is even steeper as it plunged 96% from 45,299 in 2005 to a projected 2,000 this year. The message is that construction is not poised to play its typical role in leading the region of almost 25 million people out of this recession.
So where does that leave Southern California’s economy and housing? There remains a low inventory of existing homes on the market that is keeping home prices relatively stable. The low-end of the market is being supported by first-time homebuyers; while the higher market segments continue to suffer from price reductions and slow turn-over (few qualified buyers buying). The shadow inventory of existing foreclosures, and new foreclosures that will emerge as loan modifications fail and unemployment persists will pose a continued drain over the coming months. When will the market bottom-out will be detectable after the fact, not as it is happening regardless of the countless predictions by market experts (or regardless of our endless desire to know).
How will the market recover, well my guess is that in Southern California broad employment improvements in several market segments will need to occur, along with a viable plan moving forward that encompasses continued lower interest rates; a workable long term plan for loan modifications, short sales and foreclosures; new loan programs that balance the needs of buyers and lenders with reasonable underwriting guidelines that mitigate risk while facilitating market growth; and market equilibrium in supply and demand that allows market prices to increase to a level that pulls more sellers out of a negative equity position without chasing qualified buyers away. As the market shifts there will probably develop several other factors that will impact the market’s recovery, for example Federal, State and local governments investment in the infrastructure, service and technology developments that create new opportunities, foreign investments in local market segments, inflation fears, status of the wars in Afghanistan and Iraq (as well as any other foreign conflicts), large Corporations’ investment in local plants and economies, availability of capital in the higher end real estate market segments, etc. The easy answer is that the market will shift again with a dramatic change in the supply and demand within each micro-market as well as in all the different market segments within each market.
I guess the message is stay tuned … the roller coaster ride of uncertainty continues to be interesting! For more information on the status of the current market and what is available in your market today, please visit www.coastalcommunityhomes.com. In addition if you would like a change of pace from your weekly routine, then enjoy a pause with your morning coffee and visit http://mondaymojo.blogspot.com/. Otherwise, if I can be of service to you or a friend in your real estate pursuits please contact me at jim@peys.net.
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