The National Market, Without the Hype or Doom

The last time Dr. Christopher Thornberg, a former senior economist for the UCLA Anderson Forecast, spoke to an audience made up predominantly of local Realtors at the California Economic Forecast, he was booed and stoned off the stage. Not literally, but it became clear later in the program that other speakers did not agree with Thornberg’s chief assessment: That the Santa Barbara real estate market is no different than any other real estate market.

Not only do we think Santa Barbara is different (meaning somewhat immune to market factors that adversely affect the real estate market), but submarkets within Santa Barbara believe that they are different from Santa Barbara – can you spell Montecito – and there is truth to that.

Think about what does and does not apply to the local market when reading the following excerpts from Dr. David Lereah, senior vice-president of the National Association of Realtors. He addressed the national real estate market at last month’s California Economic Forecast Conference held at Fess Parker’s DoubleTree Resort.

• The demise of the national real estate market has been greatly exaggerated. Yes, it’s gone through contractions, but the fundamentals remain intact.

• 1991 was the first refinance boom in residential real estate. It happened again in 1993. In 1991, 3 million units were sold. In 2006, more than 8 million units were sold. In addition, loans and refinancing increased 10 times from 1991 to 2006.

• Why did all this occur? It was not just low mortgage rates. About 78 million Baby Boomers entered their peak earning in the 1990s. Plus, there was an increase in immigrants.

• Internet use was also a factor. The Internet was thought to cut the number of Realtors in half but the opposite happened. Today, there are 1.4 million Realtors, up from 700,000 in 1995.

• The government went to banks to address the fact that home ownership among blacks and Hispanics was under 50%. Programs were added to assist minorities. Again, combined with low interest rates, the national real estate market soared until 2001.

• September 11 hit and the stock market plunged. People wanted something tangible, something they could touch, and they turned to real estate in the trillions of dollars. So expansion turned into a boom but the media exaggerated the boom. States like Texas and North Carolina did not experience this ‘boom.’

• In 2004, the real estate industry began to stray from fundamentals. Nationally, we were enjoying the real estate boom and there was more wealth in real estate than equities for the first time. Then we did something we did in the stock market; we strayed from the fundamentals. Investors came in: Speculators and flippers. About 40% of all home sales were second homes and the speculators were the majority.

• In 2005, and at the end of 2004, homes got so unaffordable that buyers got into “exotic” adjustable loans, of which the aftereffects are beginning make an impact.

• In Santa Barbara, median sales price versus median income disparity means a lesser portion of the workforce does not live here – a bad sign. This was echoed several times by Mark Schniepp, who labeled it “the fleeing middle class.”

• The country went from expansion-to-boom-to-speculative environment. Something had to give. We learned that we had limits, just like we learned in equities.

• Today we are faced with the remnants of our limits. Lereah believes the industry should stick to the fundamentals: Baby Boomers and their children; immigrants; retirees are living five years longer on average; and mortgage rates are still low and will stay low.

• Speculators went to sidelines – anticipating a crash. Dallas has had an 8% increase in the number of sales and 6% to 8 % increase in the median sales price, yet real estate agents say people are wary of the market due to negative national headline news.

• The nation is in a real estate recession. The forecast is a 1% drop in sales. The appreciation rate in 2006 was 1.1%. The nation has never had a drop in appreciation since the Depression. Real estate is an appreciating asset. Only 25% of the country is experiencing a recession, leaving 75% experiencing expansion.

• It is not a real estate recession due to loss of jobs or the economy. It is about confidence and unaffordable housing. According to Lereah, the U.S. needs better wages and a correction/flattening in prices.

• Mortgage debt should be seen as a percentage of a buyer’s income. About 22% should be good for the country as a whole. In Los Angeles, it is 41%.

• The country as a whole has bottomed out. The 2006 fourth quarter was bottom. In 2007, the country will not have a big expansion and in California it will be worse. However, the recession will be less severe than 1990, which was down 22% while the 1980s were down 32%. Still, the U.S. is off today because the fundamentals remain in place. Interest rates went up 2 percentage points from 1998 to 2000 yet real estate still surged. Even during the 2000 recession, real estate surged.

• What happened in the stock market will not happen to the real estate market. Most people buy houses to live in. Speculators are gone. There is a positive road ahead. 2007 is the last year of ‘contraction.’