Semi-Annual Economic Update

By Christina Suter on Aug 01, 2015 at 09:43 AM in Real Estate Issues

At my FIBI PAsadena meeting I deliver an economic update twice a year. The following is what I covered at the most recent meeting.

I covered the economy and how it relates to real estate and I started with the national real estate market. The question I was looking to answer was, Is now the time to buy into real estate or not? Right now, according to the Case-Shiller index the median home price is about $175,000 and the height in 2007 for the ten-city index was about $225,000 and the 20-city index price was about $220,000 so we're not quite at recovery yet. But the question is, will we ever hit where we were before?

In March 2012, the existing home number was about 1.5 million and now it's about 5.2 million, so we're definitely going up. Month of inventory has to do with, if we're at 6 months of inventory that's a balancing point between supply and demand. What happens when demand is greater than supply or vice versa? Prices change. Right now we're about at 4.5-4.8 months worth of inventory on a national level.   We're at a seller's market, meaning people who have a house on the market will experience their price stabilizing or going up. There is more demand than there are homes available. Pending home sales is a leading indicator, if the are going up, there will still be a strong demand. Pending home sales have been going up consistently since October 2014.

On a national market we're seeing an increase of 4.1% of the actual price of existing homes, which is a 4.1% increase since March of last year. The prices have increased in general 35 months, that's three years worth of price increases. The volume has increased 6% in April, which means we're seeing more sales even though we're seeing a lower amount of inventory. We are at a 9 year high. On the US sales side, we're seeing a relatively strong market performing.

Where I am, in Pasadena, California; average sales price was about  now $550,000 and now it's about $425k which means we haven't hit our previous high, but I don't know if we ever will. The bottom of the market we were looking at a sales prices of $300,000 and now we're about $450,00, so prices have absolutely increased. If you look at the monthly home sales volume, 35,000 across California. If you look at southern CA it's about 20,000. Numbers without comparables mean nothing. The volume, at its peak was 76,000 homes and we're now looking at 35,000 homes. The whole market has taken a step down; the last time we saw 35,000 home sales volume was back in 1996. The lowest volume we've ever seen was in 2008 when it was 20,000. So we are far away from the peak, but we are climbing.

Pending sales are up, volume is love but pending sales is up 10%. But if you go back to 2009 we were seeing 16-100% changes, but we haven't seen that behavior since July 2009. Pending sales at 10% is impressive, but it isn't the exponential growth we saw in 2005-2007.

Prices are only up 4.4% and in the height of the market, back in 2005-2007 we were seeing 25% increases annually. But, everything does suggest that prices should be going up. Using the Bruce Norris affordability index, his magic number is 17%, and he notices that around 17% the real estate market starts to go back down again and currently, we are at 31%.

U.S. Economy

Right now, our GDP was -.2%, it's been up but it has generally been hanging out at about 4-5% max. Generally, what we see is a GDP that fluctuated from 5-15%. The FED promised to raise the interest rates if unemployment fell below 6%, which it has, and if inflation had gone above 2%, which it has not done consistently yet. They announced that come October of this year there's a possibility they will increase interest lending rate, which may mean less purchasing power. We used to have 66% of our population looking for work, but that number is going down and we've replaced more than 9 million jobs, but there are still over 1 million that haven't been replaced.

All numbers as of right now indicate that I can expect sideways movement in the economy. My prediction is that the height of the market will be next summer, so I would buy in, I would do short term investments.