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November 8, 2005

2006 Real Estate Outlook

From: Dhhreport (WRAD) - Nov 8, 2005

2006 Real Estate Outlook: "The Bubble Myth"

Historical View of Bubbles

* The last nationwide bust of home prices occurred in the late 1930s!
* 86% of the time, the run-ups in city home prices did not end in a bust!
* 62% of the time, regional booms do not end in a regional bust!
* A joint study by both Columbia University and the Wharton School of Business found that the bubble is a myth!
* Since 1970, the median home price in the U.S. has never gone negative!
* California Housing Bust of 1990 - 1996 was caused by a huge decline in aerospace and defense jobs. Southern California lost 750,000 jobs in 3 years!

Forecasts, Interest Rates & Appreciation

* 2004... interest rates did not rise: they actually fell. Real estate went up 10.4% in the U.S. and up 20.9% in California. Northern California prices rose 18%; the Central Valley gained strength at 19.3% and Southern California was up 22.5%. The big winner was Orange County, where real estate went up 24.8%!
* Year to date 2005, rates are lower than a year ago and U.S. housing is up 15.8%. These lower rates added 8.7% to a buyer's purchasing power. California has gone up 18.1%. The big winner this year was the Central Valley, skyrocketing 29.6%. Northern California is up 16%, while Southern California has risen 17.0%. Here in Orange County, resale homes and condos have gone up 16.0% and 20.1%, respectively.
* A local university wrote this past June (regarding their 2006 forecast for real estate): "We understand why this forecast might be met with cat-calls. Our inability to accurately forecast housing prices the past several years does not leave us with a whole lot of credibility".
* What the forecasters should NOT be looking at: - Affordability Index.
* In the past 5 years, California residential equity has gone up by $1 Trillion! In that time, Orange County residential property prices have gone up 118%!
* Today's buyers have equity and, with lower interest rates, their mortgage costs are lower than they were in the early '80s when they represented 30% of household income. Today, mortgage costs only average 17.5% of household income!
* What the forecasters should NOT be looking at: - Rising Interest Rates
* Even if interest rates were to rise, it would not affect most homeowners. Here's what the Mortgage Bankers Association tells us about home loans in America: 35% own their home outright - so no interest rate problem there; 50% have fixed rate loans - many refinancing to lower rates with fewer years; 15% have adjustable rate/ interest - 8% of those being high wealth income earners.
* Therefore: Only 7% of all mortgages are rate sensitive! For housing prices to decline, a majority of households would need to have adjustable rate loans that were exceeding 8.5%!
* This also explains why foreclosures are going through a 9-year decline and are at a record low. The U.S. foreclosure rate is 1.0% - the lowest in 25 years. "Expensive" California is at .17%- the lowest in the nation!

You cannot have a housing bubble when demand exceeds supply!

* Demand for Housing - Current housing boom has lasted 13 to 15 years!
* New home demand is up 143% - with only a 23% increase in supply! Four of the 10 fastest growing areas in the U.S. are located in California. Orange County's housing demand is 15,000 (+) units per year but, in the last 12 months, only 4,159 single family residences and 3,917 condos/apartments were built.
* Nationally, the resulting housing needs will require that an average of 2 million units per year are built, but our record for building is 1.1 million a year!
* We have 100 million acres of land in California, but only 5 million acres can be developed! With 36.8 million residents, California ranks #1 in population in the nation.
* Demand for housing is staying strong, but land available for development is diminishing. Environmental issues restrict or reduce the size of developments, while political- and regulatory-driven supply constraints continue to hamper development of new housing. These issues are creating a state of permanently higher prices!

So Where is the Risk?
The only risk to housing is a big decline in employment!

* The unemployment rate has dropped to 4.9% - the lowest since 2001!
* Eleven percent of all employed workers in the U.S. are employed in California. They produce 12%-15% of the total GDP of the nation. In the past 12 months, California added 223,000 jobs, and today there are over 16.957 million workers in the state!
* In southern California, 95% of companies employ fewer than 50 people! Today's technologies enable companies to become highly productive with fewer people, ending the boom-bust cycle and its massive lay-offs!
* Using World Bank formulas, Orange County would rank as the 34th most powerful country in the world (out of 184) with a gross county income of $160.7 Billion.
* In the state, OC ranks #1 for local jobs in the wholesale trade and ranks #2 for jobs in finance and insurance. OC ranks #2 in southern California, with a job growth rate of 1.6%.
* In the nation, Orange County ranks #8 in manufacturing employment (184,800 jobs). By June of 2005, venture capital investment had more than doubled from all of last year. For the second straight year, OC is ranked #1 in Business Week's "100 Hot Growth Companies." Office vacancies are at a 5 year low - even with all the new buildings coming on line!
* Orange County's unemployment rate is 3.8%, the lowest in the State. For major metro areas in the U.S., Orange County has the 2nd lowest unemployment rate!
* Since only 1% of our sellers move out of this county, it is easy to see why our demand continues to exceed our supply!

The Housing Numbers - Demand vs . Supply - Orange County

Ending Year's Housing Supply Ratios vs. Next Year's Appreciation

Supply Ratios
10.7 weeks


6.2 weeks


2.9 weeks


8.1 weeks


5-6 weeks


Christopher Frago