The Economic Outlook 5th Annual Meyers Research: Housing Market Outlook April 18, 2018 Robert A. Kleinhenz, Ph.D. Economist/Executive Director of Research LLC
Outline U.S. Economy State Economy So Cal/Local Outlook Local Real Estate Conclusion/Looking Ahead 2
Heard in the Headlines Tax Cuts Stimulus to Economy? Long Run Impact? US Labor Market Slowing Sign of Recession? Can US Grow Faster? Housing Affordability Crisis/Housing Shortage? 3
U.S. Economy 4
Vital Signs of the US Economy GDP Growth Rate Labor Market Conditions Inflation Rate 5
GDP 2017: 2.3% --- 2018: 2.5 to 2.8% Gross Domestic Product YTY % Change Contribu)ons to Change in GDP 4 3 2 1 0-1 -2-3 2.3 Sector 2015 2016 2017 Consumer 2.5 1.9 1.9 Investment 0.9-0.3 0.5 Net exports -0.7-0.2-0.2 Government 0.2 0.1 0.0 Total GDP % Chg. 2.9 1.5 2.3* * Does not add up due to rounding 6
Consumer Spending: Flywheel of Economy 8% 6% 4% 2% 0% -2% -4% -6% -8% Real Consumer Spending by Type (Y-o-Y Growth to January 2018) Services Goods Source: Federal Reserve Board of St. Louis 7
Real Disposable Personal Income Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% YTY % Change Source: Federal Reserve Board of St. Louis 8
Lower Saving Rate, Growing Wealth 7% Consumer Savings Rate 700 Real Average Wealth per Household (FOF, Thous.) 6% 600 500 5% 400 300 4% 200 100 3% 2% 0 1990Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 2014Q1 2017Q1 Home Equity Other Net Wealth Source: Federal Reserve Board of St. Louis 9
Credit Card Use Accelerating, but 10% YTY % Change Outstanding Credit Card Balances 5% 0% -5% -10% -15% -20% Source: Federal Reserve Board of St. Louis 10
No Debt Overhang Household Financial Obligation Ratio 19% 18% 18% 17% 17% 16% 16% 15% 15% 14% 1.4 1.3 1.2 1.1 1 0.9 0.8 0.7 0.6 Household Debt to Income Ratio Source: Federal Reserve Board of St. Louis 11
Business Spending Up 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% 2014 2015 2016 2017 Fixed Investment Structures Equipment Intellectual Property 12
International Trade Deficit: Pros/Cons $ Millions (Yr.=2009) 3,010 Ex-Goods Ex-Svcs Im-All 2,510 2,010 1,510 1,010 510-713 -395 Deficit: -619 10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 13
Tax Cuts and Spending Increases Mean 4.000 Deficit (-) or Surplus (+) as % of GDP 2.000 0.000-2.000-4.000-6.000-8.000-10.000-12.000 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 14
Macro-Economy at a Glance Sector CONSUMERS BUS. INVESTMENT GOVERNMENT NET TRADE SUMMARY Outlook Steady solid growth Acceleration, energy drag over Flat/Up Slightly Imports & Exports up, Imports larger NET Negative Domestic Spending Up 15
Full Employment, Slower Job Growth Unemployment Rate Yr-To-Yr % Change in Jobs 18% 2.5 16% 14% 12% 10% 8% 6% 2.0 1.5 1.9 2.1 1.7 1.5 4% 2% 1.0 U-3 U-6 0.5 2014 2015 2016 2017 Source: Federal Reserve Board of St. Louis 16
Plenty of Job Openings, Not Enough Workers 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% JOLT Job Openings Rate in % Sector Level (000s) Rates Feb-17 Feb-18 Feb-17 Feb-18 Total 5,618 6,052 3.7 3.9 Total private 5,118 5,476 4 4.2 Education & Health 1,228 1,173 5.1 4.8 Trade, Transportation & Util. 929 1,148 3.3 4 Professional & Business 917 985 4.3 4.5 Leisure and hospitality 807 792 4.8 4.6 Government 500 575 2.2 2.5 Manufacturing 352 426 2.8 3.3 Financial activities 362 399 4.1 4.5 Other services 259 222 4.3 3.7 Construction 169 196 2.4 2.7 Information 79 114 2.7 4 Mining and logging 16 22 2.4 3 Source: Bureau of Labor Statistics 17
Labor Force Growth Constrains Potential GDP Growth 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Labor Force Growth 67% 66% 65% 64% 63% 62% 61% 60% LF Participation Rate 18
Inflation Historically Low But Rising 5.0 4.0 3.0 2.0 1.0 0.0-1.0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Kyser Center for Economic Research 2012 2013 2014 2015 2016 2017 2018 19
Economic Policy 20
Fiscal Policy & Other Economic Issues Immigration: reforms enable economic growth International Trade: consumers or producers? Infrastructure: $4.5 trillion needed Health Care: spending reform, not insurance reform 21
Need Changes to US Health Care National Health Spending As a Share of GDP Per Capita Healthcare Spending 2015, PPP Adjusted 20% 18% 16% 2.1% / Decade 3.3% / Decade USA $9,402 France $5,428 Norway $7,832 Canada $5,421 14% 12% Switzerland $7,300 Belgium $5,340 10% 8% Sweden $6,285 Australia $4,873 6% 4% Netherlands $6,209 Finland $4,467 2% 0% Germany $6,204 Japan $4,255 1960 1970 1980 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Austria $6,143 UK $3,717 22
Monetary Policy Rock-bottom federal funds rate 2008-2016 Adjusting to labor market, inflation, GDP Market rates less tied to FFR than in the past Yield curve dynamics FFR increases push up short end Balance sheet activities push up long end Liquidity keep long end market rates low 23
Financial Markets 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Fed Funds Rate 10 Year Yield 30 Year Mort Source: Federal Reserve Board of St. Louis 24
Yield Curve US Treasury Securities 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4/13/17 10/13/17 4/13/18 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr Source: Federal Reserve Board of St. Louis 25
The Recent Panic 3.0% 10-Yr. Government Bond Yields 3,000 SP500 2.5% 2,500 2.0% 2,000 1.5% 1,500 1.0% Jan-15 Jan-16 Jan-17 Jan-18 1,000 Jan-15 Jan-16 Jan-17 Jan-18 Source: Organization for Economic Co-operation and Development 26
State Economy 27
CA & US at Full Employment CA & US at Full Employment Unemployment Rate, Seasonally Adjusted 16% 14% 12% 10% 8% 6% 4% 2% 0% CA: 4.3% US: 4.1% CA @ 4.3% Lowest on Record (1976+) Source: California Employment Development Department 28
Unemployment Rate (%, SA) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 Unemployment Rates California Inland Empire Los Angeles Orange County Source: California Employment Development Department 29
Job Gains Across All CA Industries Industry Feb-18 (000s)Change (000s) % Change Total Nonfarm 17,066 384 2.3% Health Care 2,322 76 3.4% Construction 878 74 9.3% Leisure and Hospitality 1,989 56 2.9% Prof Sci and Tech 1,247 35 2.9% Logistics 2,572 29 1.1% Government 640 26 4.3% Admin Support 1,124 26 2.3% Retail Trade 1,707 18 1.1% Education 373 16 4.5% Manufacturing 1,323 11 0.8% Financial Activities 837 8 0.9% Wholesale Trade 726 7 1.0% Other Services 564 3 0.6% Information 533 (2) -0.4% Source: California Employment Development Department 30
CA Among Fastest Growing States 31
Gross Product Q3-17: YTY % Changes -- CA (2.3%) 32
Metro Areas Vary in % Job Gains Stockton MSA RV-SB Fresno MSA San Jose MSA Sacramento MSA Kern County Oakland MSA Sonoma County Orange County San Diego County San Francisco MD Ventura County LA County Year to Year % Chg. (Feb-18) 0% 1% 2% 3% 4% Source: California Employment Development Department 33
Largest Absolute Gains in So Cal MSA Feb-18 YTY Change Jobs (Seasonally Adjusted) LA County 61,000 RV-SB 49,600 San Jose MSA 31,100 Orange County 30,300 San Diego County 27,200 Oakland MSA 25,300 Sacramento MSA 25,100 San Francisco MD 19,900 Fresno MSA 10,600 Stockton-Lodi MSA 8,500 Kern County 5,600 Source: California Employment Development Department 34
The Big Slowdown 4% 3% 2% 1% 0% State and National Job Growth Loca)on 2017 14-15 15-16 16-17 Los Angeles MD 4,441,600 2.2% 2.6% 1.3% Orange County 1,619,000 3.2% 2.6% 2.2% Inland Empire 1,454,700 4.9% 3.6% 3.8% San Diego MSA 1,454,200 2.9% 2.7% 2.1% Oakland MD 1,164,300 3.3% 3.3% 2.4% San Francisco MD 1,117,900 4.9% 4.0% 2.4% San Jose MSA 1,099,200 3.8% 3.1% 2.6% Sacramento MSA 970,200 3.2% 3.4% 2.2% California United States Fresno MSA 345,100 3.7% 3.5% 2.8% Ventura County 304,300 0.9% 1.3% 1.3% Source: California Employment Development Department 35
Millions California Taxable Sales (+4.9% in 2017) $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Source: California Board of Equalization 36
Local Real Estate / Construction 37
CA Existing Home Sales & Median Price 700,000 600,000 500,000 400,000 300,000 200,000 100,000 Sales (SAAR) Median Price 0 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Source: California Association of Realtors 38
So Cal Residential Outlook Price Change Sales Change Feb-17 Jan-18 Feb-18 MTM YTY YTY Los Angeles $470,200 $564,100 $527,280-6.5% 12.1% -3.9% Orange $745,000 $780,000 $805,380 3.3% 8.1% -1.0% Riverside $367,250 $397,250 $396,250-0.3% 7.9% -0.8% San Bernardino $265,000 $277,000 $278,000 0.4% 4.9% -2.0% San Diego $559,950 $590,000 $605,000 2.5% 8.0% -3.9% Ventura $582,500 $660,720 $609,000-7.8% 4.5% -7.1% Source: California Association of Realtors 39
Housing Affordability: % of HHs Affording Median Priced Home State/Region/County Q4-16 Q4-17 Los Angeles 28 25 Orange County 22 21 Riverside County 41 38 San Bernardino County 54 50 San Diego County 27 26 Ventura 33 26 California 31 29 Source: California Association of Realtors 40
Apartment Rents Rising $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 Metro Rents County Wages Rents Share Ventura $57,789 $1,700 35% Los Angeles $63,236 $1,830 35% Santa Barbara $52,911 $1,526 35% Orange $63,849 $1,827 34% Riverside $45,219 $1,293 34% San Bernardino $45,762 $1,293 34% Inland Empire Orange County MD Los Angeles MD San Diego San Diego $60,887 $1,696 33% San Luis Obispo $44,816 $1,147 31% Source: REIS, QCEW 41
State Housing Construction 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Building Permits New Pop / Permits California 4.1 Tulare 4.0 Ventura 6.8 Los Angeles 4.0 Contra Costa 6.6 Fresno 4.0 Sonoma 6.1 San Mateo 3.4 Alameda 5.9 Kern 3.0 Santa Barbara 5.3 Santa Clara 3.0 San Bernardino 5.0 Orange 2.8 Solano 4.6 Placer 2.1 Single Family Multi Family Riverside 4.5 San Francisco 2.1 San Diego 4.2 Sacramento 0.7 Source: CIRB 42
Homeownership Rate Low. Future Course? 70 Homeownership Rate 65 Percentage 60 55 50 45 40 California United States Source: Census Bureau 43
Housing in CA: New NOT Normal Signs of stress: Homeownership rate at lowest in decades Escalating rents Insufficient building despite growing demand Not just about affordable housing Needs at all income levels across owners as well as renters How to Address Chronic Housing Problems Less about making housing affordable to households Really about supply: Construction Aligning construction with actual needs 44
State Legislation May Trigger Changes SB35 On Feb 1, 2018 the state released the list of cities that are behind on their housing goals are thus required to streamline housing approvals under housing bill, SB 35. As it turns out, 97% of CA cities have not met their housing goals. 45
U.S. Outlook Continued US Growth: 2017: 2.3%, 2018: 2.5-2.8% Domestic Spending Will Continue Oil Prices: Steady in $50-65/barrel range Inflation: Low, But Rising Financial Markets: Rates Up, Volatility in Equities Policy Uncertainty 46
CA/Local Outlook Growth constrained by limited labor force growth Leading sectors: Construction, Consumer-serving Sectors, Tourism, Health Care, Def/Aero Housing shortages: owner-occupied and rentals Time to invest in future growth, long-run stability 47
Beacon s work in Housing Beacon Economics Founded in 2007,, an LLC and certified Small Business Enterprise (SBE) with the state of California, is an independent research and consulting firm dedicated to delivering accurate, insightful, and objectively-based economic analysis. Leveraging unique proprietary models, vast databases, and sophisticated data processing, the company specializes in services like industry analysis, workforce analysis, economic policy analysis, economic impact analysis, and real estate market analysis. equips its clients with both the data and insights required to understand the significance of on-the-ground realities and make informed business and policy decisions based on them. Sample Clients: Building Industry Association of Southern California, Inc. California Apartment Association Armbruster Goldsmith & Delvac LLP Long Beach Downtown Development Corporation 48
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