The Slowdown Cometh
Lately the cable financial talking heads have been saying the national housing market has been slowing down. This observation is true for San Diego. Compared our mini-bubble of 2013, the metrics this year have been disappointing, particularly over the past four months. But does this mean there is a fundamental change in the local residential market underway?
Even though it appears the robust recovery seen in 2013 has stalled, I think this development does not signal meaningful trouble ahead for local real estate. There were many economic factors in 2014 that dampened effective housing demand, not the least was a significant cost increase for fixed-rate mortgages. Because there were no fireworks this year doesn’t mean we have to worry about health of San Diego’s real estate market going forward. 2014 should be seen as a transition year into the new normal.
2013 seen in historical context is not that unusual. The performance of the local real estate market last year was an outlier, a bubblette. While profitable, appreciation rates above twenty percent are not sustainable. The market was oversold after the 2008 crash--shoddy lending practices, job losses, and shrinking incomes led to a tsunami of foreclosures. Surviving owners lost about 40% of their equity. To save the banking system, the Federal Reserve Board needed home prices to increase and resorted to their best tool, low interest rates. Home loans at 3%, a recovery in hiring, and a rising stock market encouraged demand for housing, arresting the free fall in prices around 2010. By the end of 2012, people felt secure enough economically and dove back into the housing market.
Given the events of the past 6 years, I think the housing market in 2014 is the new normal. The market this past six months is not a harbinger of a real estate recession even though it will be years before prices equal the inflation-adjusted prices of 2007. From the point of view of our economic masters, this is not all that bad of an outcome. Further, history suggests this is how this market should behave as many economists argue that the length of complementary housing cycles are identical, suggesting that the current market will continue to modestly soldier on for the next two to four years before a price correction. (the last bull market in homes lasted from 1997 to 2007) The housing recovery will last longer as one should never fight the Fed.
The twists and turns on Wall Street global markets notwithstanding, I am betting the central bank will remain very accommodative at least until the end 2016 or possibly even into 2017. From a macro standpoint, it makes little sense to make money more expensive and discourage demand for goods and services; the specter of Japan’s lost generation looms large.
Since housing lives and dies on interest rates and until there is a fundamental change in real national wage growth, San Diego’s real estate will not fall into a mild recession for the foreseeable future. Even though businesses are expanding and hiring, incomes are stagnant for most Americans. This seems contradictory given that the national unemployment rate has gone from double-digits to less than six percent. The problem is the traditional unemployment measurement, known in econ-speak as U-1, does not tell a complete story. U-6, which takes into account the legions of people underemployed or those who have given up looking for work, remains an ugly number.
U-6 tells the tale of two lost generations, older workers displaced by The Great Recession and those under 25. Neither group is having much luck getting work that will allow them to enter the home market. The presence of these groups keeps wage at or below the rate of inflation. The Fed cannot afford to raise interest rates until the number of college graduates waiting tables starts to decline in a meaningful manner. The Fed’s inflation hawks have be driven out of the aerie
All of this augurs well for existing owners of homes and apartments. To our national credit we have rejected the German model and I suspect there will be a general revolt in the EU shortly. Even though the debt scolds in this country are on the run, low interest rates alone will not remediate the deep structural problems revealed by U-6. Solving those issues is perhaps beyond our national abilities given the current state of political gridlock, national security realities, and the global economy. It is easy to despair given the travails facing us as a nation, but I have hope that we will eventually draw on our collective history of overcoming adversity. In the meantime, San Diego real estate prices and rents will not be going down anytime soon.
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