ECONOMIC SNAPSHOT mid 2016
Economic Update By Elliott Pollack | Elliott D. Pollack & Co.
T
here appears to be a growing concern over how long this recovery will last. Some forecasters have begun suggesting a slowdown or even a recession in 2017. Why? We have seen a range of possible theories, including a claim that the recovery has simply gone on too long compared to past recoveries. Well, recessions don’t just happen and recoveries don’t just die of old age. Rather, they are a result of imbalances that develop in an economy as it ages. And, while imbalances have certainly developed in this expansion (China, inventories/sales ratios, stock market and the dollar), none seem so out of line to suggest a recession is just around the corner. We have certainly seen our fair share of economic shocks in the last several months. These are unpredictable events that affect our economy even though they take place in a different part of the world. Take “Brexit” for example. A relatively obscure British squabble became headline news once everyone noticed their 401k balances dip unexpectedly. Active stock market investors always crave known facts and Britain’s exit from the European Union created the opposite. With uncertainty came volatility and also a flight to safer investments. It also created a mixed bag for U.S. consumers. Along with falling stock prices, we also witnessed lower oil prices and declining mortgage rates. The strengthening of the
dollar hurts U.S. exports but also creates an opportunity for more affordable overseas travel. The Fed also voted not to raise interest rates, signaling weakness in economic conditions. At this stage, it is way too early to say where the markets will be heading as various political maneuvering unfolds. The main point is that the market is an extremely poor predictor of underlying fundamental economic conditions. So far, the disruption in the market due to Brexit is not even as big as other events in the past year like the turmoil caused by reports of China’s slowing economy, their own stock market crash, and plummeting oil prices. These types of shocks create headwinds for an economy still in recovery, but it shouldn’t derail our long term trajectory. And not all slowdowns are like the Great Recession we experienced in 2007. In fact, 2007 was the worst recession since the Great Depression. Most recessions are relatively mild and the imbalances that cause them are quickly corrected. Despite weakness in recent U.S. employment reports during the second quarter of this year, recent economic data is relatively positive. This is good news. If the slowdown in employment turns out to be short lived (and it is trending that way), the likelihood is that the economy will continue to plod along as it has since the recession ended. And, at least at the present time, it appears that if there were a recession, it would be mild. While recessions are often difficult to predict and could be driven by economic shocks, the underlying fundamentals suggest that it is very likely the slow growth we have become accustomed to will continue through 2016. We believe the remainder of 2016 will conclude as a good year for the economy overall and construction in particular. Employment should increase by over 3% in Greater Phoenix. The unemployment rate should continue to decline. We are more optimistic about population flows than just 6 months ago, expecting 2.0% growth this year and 2.1% growth next year. Housing should continue at a strong upward pace. And retail sales, especially auto sales, should be up.
Greater Phoenix Economic Forecast
Source: Elliott D. Pollack & Co., June 2016
POPULATION
RETAIL SALES
2.0% increase in 2016 2.1% increase in 2017
5.0% increase in 2016 5.0% increase in 2017
EMPLOYMENT
SINGLE FAMILY PERMITS
3.4% increase in 2016 3.6% increase in 2017
25% increase in 2016 10% increase in 2017
RESIDENTIAL REAL ESTATE By Michael Orr
SALES PER MONTH
Director of Real Estate Studies at ASU & Principal of The Cromford Report
Greater Phoenix • ARMLS Residential • Measured Monthly
T
he Greater Phoenix housing market started 2016 in a healthy state and has improved since then, at least for sellers of entry level and mid range homes up to $500,000. For the overall market across Greater Phoenix, as of July 2016, the annual price numbers based on ARMLS sales were as follows, compared with July 2015:
➡
Economic Growth Expected to Handle Headwinds
• The annual average price per sq. ft. rose by 5% from $131.05 to $137.53
• The annual average sales price increased 5% from $257,256 to $269,392 • The annual median sales price gained 9% from $200,000 to $217,000
5% 5% 9%
These are all annual averages but because of continued strength in the market, the monthly median sales price has progressed to $230,000 in June this year. These are consistent with a market that favors sellers over buyers, but the situation varies a lot depending on price range and the location and age of the home.
Transaction Type (group) Lender Owned Short Sales Normal
SALES PRICE PER SQUARE FOOT Greater Phoenix • ARMLS Residential
The price range below $250,000 remains short of supply and the number of buyers far exceeds the low number of homes for sale. Appreciation is strongest for these entry-level homes and condition is rarely a constraint. Location can be an issue, but the shortage of homes for sale in the central areas has encouraged more buyers to go looking in outer locations. This has led to much improved markets in locations like Buckeye, Maricopa and “...the majority of Florence. Between $250,000 and $500,000, supply has improved over 2015 and is being replenished quickly by new home builders. New single family home permits in Maricopa and Pinal Counties totaled 7,778 year to date by the end of May. This is an increase of 18% compared to 2015. Mid range demand has increased thanks to historically low interest rates and a mild slackening of lender underwriting conditions. Appreciation is moderate for this price segment, but comfortably exceeds the CPI inflation rate which remains unusually low. There are occasional problems for homes that
the Greater Phoenix housing market is healthier now than it was 12 months ago and the prospect of rising mortgage interest rates has faded....”
have been neglected or in great need of modernization. The luxury market has lost momentum in the last 12 months. The price range between $500,000 and $1,000,000 is still doing reasonably well, with very slight appreciation in prices. Between $1,000,000 and $2,000,000 demand has stayed stable but supply has risen sharply. The excess supply means prices are falling gently in several areas. Above $2 million supply is also up but demand is significantly lower than last year. This means prices are falling quite noticeably in many luxury areas, especially in the more remote locations. Despite the weakness in the luxury sector, the majority of the Greater Phoenix housing market is healthier now than it was 12 months ago and the prospect of rising mortgage interest rates has faded. The millennial generation is now a more significant pool of potential home buyers than the baby boomer generation and this dominance will increase over the coming decade. It is the many differences between Baby Boomer and Millennial lifestyle decisions that are likely to change the nature of the housing market going forward.
Economic Update By Elliott Pollack | Elliott D. Pollack & Co.
T
here appears to be a growing concern over how long this recovery will last. Some forecasters have begun suggesting a slowdown or even a recession in 2017. Why? We have seen a range of possible theories, including a claim that the recovery has simply gone on too long compared to past recoveries. Well, recessions don’t just happen and recoveries don’t just die of old age. Rather, they are a result of imbalances that develop in an economy as it ages. And, while imbalances have certainly developed in this expansion (China, inventories/sales ratios, stock market and the dollar), none seem so out of line to suggest a recession is just around the corner. We have certainly seen our fair share of economic shocks in the last several months. These are unpredictable events that affect our economy even though they take place in a different part of the world. Take “Brexit” for example. A relatively obscure British squabble became headline news once everyone noticed their 401k balances dip unexpectedly. Active stock market investors always crave known facts and Britain’s exit from the European Union created the opposite. With uncertainty came volatility and also a flight to safer investments. It also created a mixed bag for U.S. consumers. Along with falling stock prices, we also witnessed lower oil prices and declining mortgage rates. The strengthening of the
dollar hurts U.S. exports but also creates an opportunity for more affordable overseas travel. The Fed also voted not to raise interest rates, signaling weakness in economic conditions. At this stage, it is way too early to say where the markets will be heading as various political maneuvering unfolds. The main point is that the market is an extremely poor predictor of underlying fundamental economic conditions. So far, the disruption in the market due to Brexit is not even as big as other events in the past year like the turmoil caused by reports of China’s slowing economy, their own stock market crash, and plummeting oil prices. These types of shocks create headwinds for an economy still in recovery, but it shouldn’t derail our long term trajectory. And not all slowdowns are like the Great Recession we experienced in 2007. In fact, 2007 was the worst recession since the Great Depression. Most recessions are relatively mild and the imbalances that cause them are quickly corrected. Despite weakness in recent U.S. employment reports during the second quarter of this year, recent economic data is relatively positive. This is good news. If the slowdown in employment turns out to be short lived (and it is trending that way), the likelihood is that the economy will continue to plod along as it has since the recession ended. And, at least at the present time, it appears that if there were a recession, it would be mild. While recessions are often difficult to predict and could be driven by economic shocks, the underlying fundamentals suggest that it is very likely the slow growth we have become accustomed to will continue through 2016. We believe the remainder of 2016 will conclude as a good year for the economy overall and construction in particular. Employment should increase by over 3% in Greater Phoenix. The unemployment rate should continue to decline. We are more optimistic about population flows than just 6 months ago, expecting 2.0% growth this year and 2.1% growth next year. Housing should continue at a strong upward pace. And retail sales, especially auto sales, should be up.
Greater Phoenix Economic Forecast
Source: Elliott D. Pollack & Co., June 2016
POPULATION
RETAIL SALES
2.0% increase in 2016 2.1% increase in 2017
5.0% increase in 2016 5.0% increase in 2017
EMPLOYMENT
SINGLE FAMILY PERMITS
3.4% increase in 2016 3.6% increase in 2017
25% increase in 2016 10% increase in 2017
RESIDENTIAL REAL ESTATE By Michael Orr
SALES PER MONTH
Director of Real Estate Studies at ASU & Principal of The Cromford Report
Greater Phoenix • ARMLS Residential • Measured Monthly
T
he Greater Phoenix housing market started 2016 in a healthy state and has improved since then, at least for sellers of entry level and mid range homes up to $500,000. For the overall market across Greater Phoenix, as of July 2016, the annual price numbers based on ARMLS sales were as follows, compared with July 2015:
➡
Economic Growth Expected to Handle Headwinds
• The annual average price per sq. ft. rose by 5% from $131.05 to $137.53
• The annual average sales price increased 5% from $257,256 to $269,392 • The annual median sales price gained 9% from $200,000 to $217,000
5% 5% 9%
These are all annual averages but because of continued strength in the market, the monthly median sales price has progressed to $230,000 in June this year. These are consistent with a market that favors sellers over buyers, but the situation varies a lot depending on price range and the location and age of the home.
Transaction Type (group) Lender Owned Short Sales Normal
SALES PRICE PER SQUARE FOOT Greater Phoenix • ARMLS Residential
The price range below $250,000 remains short of supply and the number of buyers far exceeds the low number of homes for sale. Appreciation is strongest for these entry-level homes and condition is rarely a constraint. Location can be an issue, but the shortage of homes for sale in the central areas has encouraged more buyers to go looking in outer locations. This has led to much improved markets in locations like Buckeye, Maricopa and “...the majority of Florence. Between $250,000 and $500,000, supply has improved over 2015 and is being replenished quickly by new home builders. New single family home permits in Maricopa and Pinal Counties totaled 7,778 year to date by the end of May. This is an increase of 18% compared to 2015. Mid range demand has increased thanks to historically low interest rates and a mild slackening of lender underwriting conditions. Appreciation is moderate for this price segment, but comfortably exceeds the CPI inflation rate which remains unusually low. There are occasional problems for homes that
the Greater Phoenix housing market is healthier now than it was 12 months ago and the prospect of rising mortgage interest rates has faded....”
have been neglected or in great need of modernization. The luxury market has lost momentum in the last 12 months. The price range between $500,000 and $1,000,000 is still doing reasonably well, with very slight appreciation in prices. Between $1,000,000 and $2,000,000 demand has stayed stable but supply has risen sharply. The excess supply means prices are falling gently in several areas. Above $2 million supply is also up but demand is significantly lower than last year. This means prices are falling quite noticeably in many luxury areas, especially in the more remote locations. Despite the weakness in the luxury sector, the majority of the Greater Phoenix housing market is healthier now than it was 12 months ago and the prospect of rising mortgage interest rates has faded. The millennial generation is now a more significant pool of potential home buyers than the baby boomer generation and this dominance will increase over the coming decade. It is the many differences between Baby Boomer and Millennial lifestyle decisions that are likely to change the nature of the housing market going forward.
ECONOMIC SNAPSHOT mid 2016