It was my good fortune to catch the elevator in the Wardman with Dr. Lawrence Yun last week. As we strolled to the Omni we exchanged pleasantries – I was greatly looking forward to his Economic Update on Thursday morning. When he noted where I was from he lit up – ‘Oh, I know Riverside County – it’s one of the areas I study to gage the market.’ He proceeded to describe our market as he saw it and was solicitous of stats pertaining to Southwest County. His summary of our area was right on the mark and I was impressed at the detail in his commentary. That he monitors our area – I don’t know if that’s good or bad.
As usual, Dr. Yun’s presentation was well attended and comprehensive – at least I was impressed. Of course I used to enjoy David Lareah too so what do I know. I realize Dr Yun doesn’t have the most sterling reputation for perspicacity but I always find him enjoyable and – if you factor in his advice with that of 3 or 4 other experts you’ll either get somewhat closer to the truth or you’ll get stark raving bull goose looney. So if you take his remarks for what they’re worth, you’ll still come away with a good education from one of the best. After all, you don’t get named one of the nations top 10 economic forecaster by USA Today by being wrong all the time. If you can’t learn something from this man, you can’t learn at all.
Anyway, you can watch a video of his morning meeting here: Mid-year Economic Summit – Dr. Lawrence Yun.
Or if you would like a PPT copy of his slides, check here: Mid-year Economic Summit – Presentation.
But for the condensed version, touching briefly on the highlights and the lowlights as well as the inevitable running commentary from your host – read on:
Dr. Yun began his remarks asking if we are on the cusp of a recovery or are we poised to head even further down as the job market sours. His prognosis? We will see the nationwide jobless rate grow to 10.5% by late this year followed by a generally recovering economy with that recovery stretching over several years. But he warned that the recovery could, COULD, be quite robust. More on that later. Early summer will be the test period. By then a number of factors will occur that will shape the next 12 – 18 months. Things like the sliding labor market, the impact of the commercial real estate market, banks that have money that won’t lend or banks that have no money lending, the potential tsunami of new foreclosures, things like that. But he acknowledged there are lots of moving parts and the outlook is cloudier than ever before. I felt better right away.
Nationwide the level of sales is back to 1998-1998 levels. From a peak of over 7 million units in 2005, sales were under 5 million units in 2008. But as he also pointed out, we have 30 million more people than we did then and that points to a pent-up demand. We also need 1.3 – 1.7 new units every year and the past two years we’ve produced only half that many. Again, the need is there. As you look at the historic trendline and note the sharp spike up from 2004 – 2007, we have dropped back down to what would be considered a normal position on that trendline. Unfortunately just as we spiked up, we are now overshooting downward. This yo-yoing effect is what may produce a very strong recovery, a sling-shot recovery. Any further declines will be the result of over-correction.
Yun also pointed out that prices never really got out of line in several major markets across the country. But as the slump drags on, even those markets are suffering from the perception that their properties are overvalued. He does believe that some states like California have reached a tipping point. Price bottoming is occurring, people know it’s a great time to buy but they don’t feel that feeding frenzy yet. There are several factors that could push the button to get that tipped including:
1) pent-up demand.
2) banks loosening their purse strings to a more normal stricture.
3) the lowest interest rates since Eisenhower was President
4) aging population aquiring 2nd homes
5) the new Baby Boom (did you know the HS graduating class of 2010 will be the LARGEST graduating class ever. Who’s going to be selling them homes in 10 – 15 years.)
6) another 30 million prospects from the BRIC countries (Brazil, Russia, India, China). As the economies of these nations improve they will add 30 million people to their middle class – people whose goal with their newfound wealth is to acquire a vacation home in the United States.
Yun briefly chimed in on the ‘Too Big To Fail’ issue noting that 75% of our assets are owned by just 10 banks. Are they too big? He also opined that sometimes those too big to fail are also too big to govern. Should those 10 banks be broken into smaller, mopre responsive units and should the government do the same thing with Fannie & Freddie? In addition to lending institutions, he specifically noted the economies of California and New York as prime examples of this dichotomy – too big to fail / too big to manage.
He concluded his remarks by noting that that the global economy truly is here to stay. Fiscal Isolationism is no longer possible nor will it produce the results we need. He also stated to ‘Demography is Destiny’, you may dispute some of the particulars or debate the timeframe but the fact is there’s a whole new demographic coming into play and you can call them GenX or Y or whatever but they are the new, improved and supersized Baby Boomers.
Finally he left with words of caution. No matter how the market looks to you at the time – STAY WITHIN YOUR BUDGET.