Napa County Real Estate: The NotSo Distant Future Pacific UnionWaMu Realtor Coaching Class May 23, 2

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Napa County Real EstateThe Not-So Distant
FuturePacific Union/WaMu Realtor Coaching
ClassMay 23, 2006

• Robert Eyler, Ph.D.
• Chair, Economics Department
• Sonoma State University
• eyler_at_sonoma.edu

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Introduction

• California Real estate market facts
• Prices should fall, at least in rate of growth
• How much? How fast?
• Had to happen at some point
• Interest Rates rising forcing this change
  somewhat
• Market price of homes above fundamental value?
• North Bay Real Estate Market Facts
• Demand Driven, Supply Constrained
• Local employment levels a major factor
• Local income levels (not necessarily wage driven)
• Preferences to own a home (incentives exist)
• Demand both internal and external, especially for
  Napa.
• Is the future here?
• Are we ever going to see real estate prices fall?

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Local Economic Outlook

• Napa County looks good in 2006 through 2007
• Wine and tourism current drivers
• Gas prices rising may slow tourism somewhat, make
  it more localized.
• Construction another major industry
• Tied directly to both residential and commercial
  real estate markets
• Napa County building permits surging (American
  Canyon)
• Does Napa County need more balance?
• Employment a key factor for any economy
• Local labor growth becomes local spending and
  cost of living growth
• Napa has fewer industrial choices than Sonoma or
  Marin Counties
• Is this a bad thing?

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Macro Issues

• Summer 2006 expect higher gas and energy bills
• Gas prices seasonally higher in summer, demand
  driven
• How much of the latest price surge is demand
  driven?
• International demand rising as well
• Local market forces forming themselves
• If massive construction efforts, higher gas
  demand locally.
• Energy Napa County hot in the summer
• PGE bill will rise, depends on how hot it is
• Petroleum-fueled energy generation also increases
  demand
• So What?
• Inflation leads to two major problems for real
  estate
• Higher interest rates from policy and market
  forces and
• Higher wages to cover against inflation means
  lower employment.
• Hence higher prices, lower sales volume

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Macroeconomic Issues (cont.)

• Real Estate Implications and Other Issues
• Federal Reserve policy reacting to perceived
  consumption behavior.
• Consumption unabated, driving inflation
• Federal Reserve behavior hurting real estate
  volume, not price.
• Fewer folks willing to pay the price, revenue
  slowdown
• Price rises slower than quantity falls.
• Commissions slow as well as mortgage demand
• Continued slowdown in volume through at least
  2006 at national and state level.
• Tests the strength of external demand here in
  Napa (and North Bay)
• As the wine industry goes, so does Napa?
• As industry grows, should see more
  employment/real estate demand.
• US economic growth should lead to wine sales
  growth
• Low international value of dollar should fuel
  foreign sales also.
• More forecasts betting on strong overall 2006

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Real Estates Future

• This industrys future in Napa is based on trends
  in
• Construction, commercial and residential
• Forecasted demand in remodeling.
• American Canyon is likely to hit growth
  boundaries at some point.
• Then where?
• Role of Green Building
• Spread throughout region, brinigng the future now
• Local firms do a lot of work in other,
  surrounding counties.
• Wine and Tourism
• Will retirees continue to come here?
• Is that a good thing economically?
• Who will move here from outside?
• More Bay Area exodus?
• Elsewhere?

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Real Estates Future(cont.)

• Need to educate both buyers and sellers (and
  workers)about these ideas.
• Knowledge of when to buy and sell key
• Sometimes buyer or seller cannot control this.
• Agents and Lenders as Educators and Financial
  Managers?
• In the best interest of the client (example of 34
  homes shown from TV)
• Think of commission as analog to wage
• 3.6 x 1,000,000 36,000 100/hour for 360
  hours 9 weeks at 40/hours per week (2.4 same
  logic)
• Should think about real estate like any other
  asset market
• Part of your overall portfolio, are homes
  overvalued?
• Illiquid asset, provide time for thought
• Circumvention of rent
• Tax writeoffs available where not available
  otherwise

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The Forecast in Napa

• Strengths
• Lack of demand should be short-lived
• Wealth continues to immigrate to this area
• Economic growth locally fuels this, also
  aesthetics
• Price growth remains
• When prices begin to drop, the true test begins
• Weaknesses
• High cost of living fueled by housing prices and
  associated costs
• Dependent on exogenous economic factors
• Self-fulfilling inflation
• Solvency of potential and current homeowners a
  problem?
• Signs that leveraging is reversing its field.
• At what point is income generation needed?

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Forecast (cont.)

• Opportunities
• Will Napa engage in mixed-use construction?
• If so, where?
• Alternative (Green) construction and energy
  sources
• Not a liberal thing, a reality thing
• Need to think about those issues now rather than
  be reactive
• Dont think the infinity pool is truly infinite.

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Economic Forecast for Real Estate (cont.)

• Threats
• Zoning and Growth restrictions
• Continued Economic Uncertainty
• Interest Rates Speed and Magnitude
• Yield curve issues
• The snap-back effect LR rates may rise rapidly
• Banking more than anything controls this
• Yield curve, in a sense, the banks income
  statement
• In sum, Napa markets still look good
• Need to plan for changes and how to react

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Conclusions

• Local Real Estate markets do not show signs of
  major contraction.
• CAR report 5 gain in median home price in Sonoma
  and Napa since .
• Number of units fewer, however.
• The key is prices falling and market reaction.
• Real Estate prices somewhat self-fulfilling
• Pay to play no signs of that slowing down
• Napa has dichotomous real estate market
• Geographic, wine country vs. urban
• Retiree vs. worker
• This same bifurcation exists in Sonoma, Marin
  also.

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CREA at SSU

• See this presentation at
• www.sonoma.edu/org/crea/pacunion.ppt