Caution: There are only my personal opinions....
A couple of industry professionals recently asked me as to where I see things as it relates to economic/real estate recovery since I look at real estate in so many different markets. I figured I'd pass this along and perhaps this will parallel or contrast what you are seeing in your local market, or maybe it will just make you chuckle once or twice, hopefully, at least the latter.
I think we may have turned a corner, only to see that there is a considerable stretch of road in front of us and no finish line with a cheering crowd in sight. Too many critical economic components are not in place that I consider to be crucial indicators of recovery. Wall Street doesn't mean a whole lot to me or to anyone who has lost a job in the past 2 years and still looking for meaningful work. Wall Street represents the top 5% and reflects how they are doing. Yes, it is important for the top 5% to start making money, because once they start making money then they just might decide to start spreading it around to the rest of the population in the form of new jobs, lending money, and pay raises. Lagging along the bottom, assuming we've hit bottom and not landed on a small outcrop on the steep slope of economic despair, is not what I consider recovery. The bleeding may be starting to slow, but we are still bleeding. Healing needs to occur next (true bottom), then rehab/recovery, but the next up-cycle is going to look very different from the last 10-12 year ride. The next up-cycle may look more like the post-WWII economic expansion, slow and controlled. Can a dysfunctional, hyper-consuming, need-it-all-right-now America handle something so unexciting as bridled, steady economic growth?
The key factors I consider to be cause for concern.
Job Losses - yes, the rate has slowed, but we are still losing jobs. Companies are not going to start hiring any time soon because they need to return to a profitability position, then operate for several periods in the "black" to offset the periods of losses to satisfy stockholders. Once investors start seeing dividends/stock price growth, then they may look to increasing overhead once again. Human resource expansion is typically one of the most costly components of overhead, whereas outsourcing short-term projects is much more efficient and less risky, as well as exploring technological alternatives instead of hiring warm-bodies to get things done.
Salaries - most people have not seen an increase, not even COLA, in 2 years, and bonus payouts have been eliminated or substantially reduced in most instances. Bonuses and salary increases are largely responsible for generating discretionary spending as most people have set their lives up according to their original base salary with monthly payments for housing, autos, debt, etc. and use bonus/pay raises to fund the fluff and fun things. Until consumers start making more money again, consumer spending is not going to return any time soon. Home equity funds are virtually nonexistent for most people since home values have retreated to 2004 levels in many markets (not all, but most), and home equity loans were a major source for consumer spending from post-9/11 to 2007.
Real Estate - Most markets have excess inventories and continue to see declining prices in both residential and commercial sectors. Both business owners and residential home buyers are nervous and still don't feel comfortable enough to sign-on for a big real estate/debt-obligation, and they still have concerns about declining values. Leasing activity has not increased significantly which is a major sign of business expansion as it reflects short-term risk-acceptance and confidence.
Government Spending - This is perhaps the scariest component. Unbridled, unmeasured spending of money that we don't have to spend and have no future certainty that we will be able to pay back at some future date. Isn't this the same behavior that got the US private-sector into the mess it is in now? Billion-dollar government programs used to make me nervous, but now a billion seems like pocket change, as every major new program coming out of Washington has a "trillion-something" price-tag on it. Erosion of the debt-laden dollar is serious cause for concern. Once foreign markets recover, they may push US further down the ladder since they will not have the large deficits to overcome, and America will be "for cheap" from a foreign investor perspective. Perhaps WWIII will not be fought with weapons of mass destruction, but with foreign capital in the form of a hostile country take-over by buying out and buying up critical US assets, government and private alike. Globalization may just come full circle and bite us right in the butt because we have put ourselves in such a weakened position. A recent article about Burberry's of London is a perfect example of this. They are considering widespread expansion into US retail centers because of the collapse of retail and that the cost of space is at its lowest levels in years, and US retailers have been critically weakened, making it an easy invasion for the British-based clothier. Oh, oh, better dust off those oil lamps - "1 if by land, 2 if by sea!"
Credit/Interest - Credit markets remain virtually frozen. A new CMBS/MBS/CDO product has still not been developed and market-accepted. There is no place to cycle money. Banks are hoarding money to offset loan losses and fund increased loan-loss reserve requirements as mandated by FDIC. Banks continue to fail. Foreclosures are still at above-normal levels. Credit-card companies are increasing interest rates, by raising "A" rating qualification levels, thus pushing consumers and businesses further into debt as a result on interest-rate increases that are 50% to 100% higher than the previous preferred rates that they were being charged. Interest-earned on savings instruments (CDs/Money Markets/Simple Savings) has been artificially low for quite some time, eliminating another avenue for growing consumer/business wealth.
GDP - Until this indicator starts showing consistent measurable growth, we aren't going to get off the bottom. We can no longer manipulate financial markets by lowering interest rates and creating artificial wealth. This economic recovery is going to require real-growth and true economic expansion. America may have to go back to work, real work, and actually start producing real goods and services once again. The new emerging economy is China - oh yeah, that might be because THEY MAKE EVERYTHING and sell it to everyone! Hmmm, isn't that we used to do???
Bail-Outs: This is anything but true economic recovery/stimulus. This is the equivalent of striking out on your own, falling flat on your face and moving back home to live with your parents. As long as bail-outs are available, we are not in recovery mode, we are still deeply entrenched in rehab and economic coddling. Once we are able to shed the harnesses and training wheels and can go it alone, we will then have a better picture of what the real road to recovery looks like.
The following market ratings are based on real estate and socio-economic factors (employment, crime, quality of life, in/out-migration of businesses/residents). Outlying suburban areas are under-performing in almost every market across the US as they are typically saddled with standing inventories of unfinished/unsold developer-owned units/lots, >10% office vacancy, the widespread shuttering of retail stores on "main street" and in the suburban shopping centers, and closure of satellite office/industrial facilities as a result of corporate contraction. There has been a noticeable shift by businesses/home buyers retreating from the suburbs back to the city core in several markets that offer charismatic city-life. The 30-60 minute commute for many workers is no longer an acceptable way of life due to the lack of suburban-based employment opportunities and the most recent gas-price sting triggering costly commutes. The older metro areas, north-central/northeastern US, have considerably smaller new construction housing inventories due to scarcity of undeveloped land, but many of those cities have a glut of condo conversion units/buildings remaining unsold. The entire state of California is of immediate concern due to the state's budgetary/fiscal insolvency, and if not remedied could have unforeseen disastrous implications never experienced in modern-day U.S. - the largest (population) state and its municipalities gone bankrupt, talk about redefining "fire sale"!
Favorable Markets: Dallas, Denver, New York City, Seattle, Washington D.C.
Cautionary Markets: Albuquerque, Atlanta, Austin, Boston, Chicago, Honolulu, Los Angeles, Portland, Salt Lake City, San Diego, San Francisco
Distressed Markets: Baltimore, Buffalo/Rochester, Cincinnati, Cleveland, Central Valley California (Fresno, Sacramento, Bakersfield - Hwy 99 corridor), Florida, Houston, Indianapolis, Las Vegas, Memphis, Minneapolis/St. Paul, New Orleans, Philadelphia, Phoenix, Pittsburgh, Raleigh/Durham, Saint Louis, Southern Michigan. |
