Sonoma County Real Estate: Some Economic Perspectives Washington Mutual, Realtor Coaching Class Febr

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Sonoma County Real EstateSome Economic
Perspectives Washington Mutual, Realtor
Coaching ClassFebruary 17, 2006

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

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Introduction

• Sonoma County real estate in 2006
• What is
• Interest rates (which affect both S and D)
  inversely related with demand
• Retirement homes, second homes, rentals.
• What should be
• Local employment levels
• Local income levels (not necessarily wage driven)
• Preferences to own a home (incentives exist)
• Yield curve a large issue for banking?
• The income statement for a bank, its foundation

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Local Economic Outlook

• Mixed news not going away
• Fourth year of recovery, as defined by growth
  of US GDP.
• Can we rely on high tech as leader?
• International and domestic uncertainty looming in
  multiple forms.
• Interest Rates and Inflation predicted to rise.
• No kidding, how much and how fast?

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Toby Tyler Leading Indicators

• Weighted average of macroeconomic data for each
  county.
• Leading Indicators tell us where we are headed
• Default Notices Inverse
• Building Permits Positive
• New UI Claims Inverse
• US Leading Index Positive
• Help-Wanted Ads Positive
• Ag Price Index Positive
• As indicator increases, economy moves in bolded
  direction.

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Toby Tyler Coincident Indicators

• Coincident Indicators tell us where we are
• Non-agricultural employment
• Retail Sales
• Personal Income
• Once business and consumers receive positive
  signals, they hire and spend more as a reaction.
• The leading indicator drives the coincident.

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Economic Outlook 2006

• What happens in April (more or less)...
• Gas Prices move up naturally again
• Effects psychological and real.
• Can lead to businesses not hiring.
• Inflation, when demand-driven, good for real
  estate
• Home prices follow, driving local inflation,
  rather than falling victim to it.
• Inflation bad when it affects business decision
  making
• Will there be more jobs and working people
  leaving Sonoma County?
• Will Sonoma County become an extension of Marin?

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2006 (cont.)

• Federal and State budget issues persist
• Continued Federal deficits fuel higher interest
  rates, as does FED policy.
• Continued state deficits exacerbate these
  problems in California specifically.
• No high-tech breakthrough yet.
• Some consumer product improvements, no explosion.
• Should we expect it?
• Yes, but not in 1990s way.

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The Yield Curve

• Banking built on term structure of interest rates
• Borrow at short-term rates
• Lend at long-term rates
• Inherent risk in long-term provides banks profit
  on every dollar deposited and lent
• Yield curve inversion means threat for profit
  inversion for banks
• Increase long-term rates because of market
  pressures.
• Pressure on real estate sales as a result
• Early 1980s Yield curve inversion leads to bank
  failures.
• Threat is credible, Federal Reserve watching
  closely

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Real Estate Outlook 2006

• The Good
• Demand remains for local real estate
• Wealth continues to immigrate to this area
• Economic growth locally fuels this
• Can local residents afford to remain?
• The political compromise for zoning and growth
  limits Green Building
• The Bad
• High cost of living fueled by housing prices and
  associated costs
• Dependent on exogenous economic factors
• Self-fulfilling inflation high starting prices
  become high final prices
• CAR Default Notices rising
• Home Equity Loans slowing down the first sign
• Think of it as a domino effect
• Like any other financial market.

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Real Estate 2006 (cont.)

• The Larger Threats, Long and Short Term
• Zoning and Growth restrictions
• Both horizontal and vertical in Sonoma County
• Process unchanged, long and more costly
• Does it matter?
• Interest Rates Speed and Magnitude
• They are rising, how fast, how much and for how
  long?
• Initially predicted 8 mortgages, 30 year fixed
• Federal Reserve Policy in 2006
• Very dependent on characteristics of inflation

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Conclusions

• Local Real Estate markets show signs of
  contraction, maybe.
• Reports suggest no magnitudes for price
  contraction, just contraction coming.
• Real Estate prices somewhat self-fulfilling
• Once supply expansion not purchased, or demand
  contracts, major cyclic move down is possible.
• Local real estate has been supported by
  controlled supply and high, consistent demand.
• CAR forecast for 10 increase in home prices for
  CA.

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Conclusions (cont.)

• Interest Rates a large variable to watch
• Will react to generalized risks and market
  pressures
• Continued budget deficits that feed the above
• Must think two or three years in the distance
• Homes are an asset, interest rates have same
  effects
• Reality There will be an endpoint to this cycle,
  the question is its cause and magnitude.
• Are real estate agents, brokers, and lenders
  ready?