Real Estate Rebound vs. Economy’s ‘Pause’
By OCInSite Site Admin | July 17, 2012 12:39 PM
In the past several months, meetings of the Federal Reserve Board have been fairly mundane with regard to substantial news. However, with the pause upon us and the crisis in Europe not abating despite a bailout of Spain’s banks, there is renewed focus on what the Fed might have up its sleeve. The timing of the Fed meeting is very interesting because it starts two days after Greece’s elections, which have turned into a referendum on their continued participation in the European Union and standing by previously announced austerity measures. As we mentioned last week, there is little the Fed can do substantively because rates are already at record lows—but they can affect confidence with whatever actions they choose and confidence is very important. And we are not just talking about our nation. This is a worldwide pause, and central banks around the world must act.
Meanwhile, data on real estate sales and construction to be released shortly should be very interesting. For the first time in a long time, real estate is not a drag on the economy. On the contrary, for the first time in years real estate is in a position to provide stimulus to the economy in the shadow of this current slow patch. Thus far this year the real estate market is growing approximately 10 percent year-over-year. We need this continuous growth to lift the real estate market out of its long-term slump and to start pulling its own weight within the economy.
When people purchase homes, they contract with moving companies, purchase furniture and undertake renovations. Millions of Americans are also refinancing and this should provide further stimulus as payments are lowered and this frees up money to increase consumer spending. However, a high percentage of these refinances are actually going toward shortening the terms of the loans. This trend is great for the long-term health of the economy as Americans pay down debt and increase the equity in their homes, yet it lowers economic stimulation in the short term.
New Freddie Mac data show that just under 33 percent of U.S. households that refinanced home loans from January through March of this year did so to shorten the maturity of their loans - 50 percent higher than the 10-year average. In taking advantage of record low interest rates in this way, homeowners are paying off their homes sooner but reducing the stimulating effects of the refinancing boom. Freddie Mac chief economist Frank Nothaft remarks, “Many households are willing to take on slightly higher monthly repayments, if it means paying off their home sooner.” Source: Financial Times
With corporate profits increasing, commercial real estate brokers, developers, architects, and other industry insiders believe their fortunes will take a turn for the better during the latter half of this year, reports the Urban Land Institute. According to the think tank’s poll, market participants expect rising values for all segments. Apartments are expected to lead the charge, while the positive signs in U.S. based manufacturing are expected to boost warehouse distribution centers. Though hotels placed third, the sector had the biggest gain overall in the annual survey as corporate and individual travel grew.
The growth in commercial property values is projected to be greatest in Boston and San Francisco. Buyer interest is especially intense in industrial properties where job gains, demand from renters and rising rents are expected, such as in Austin, Texas, and Silicon Valley.
However, the forecast is gloomy for the nation’s capital, where survey participants worry federal budget cuts could curb demand for offices and other real estate. Source: Los Angeles Times
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