Economy Update

I think that one of my primary duties to my commercial brokerage clients is to give them as true a picture as I can of what’s going on in the real estate marketplace. The newspaper columnists and TV pundits seem to focus on the latest sensational (usually bad) news, and this often distorts our perceptions when we are looking to buy or sell.

As a result, I spend a considerable amount of time doing research on sales statistics, market trends, inventory levels, foreclosure rates and the like. I spend a lot of time getting feedback and insights from other brokers in the field, and dry economic reports have become my light reading material.

So I feel that I have a pretty good idea of what is really going on, locally, regionally and nationally, and I hope that, after reading this, some of you will pitch in and join me in a dialogue. I’d be glad to publish some of your thoughts in future blog articles.

Here’s the way I see it, “traditional economics” no longer works. If it did, interest rates would have started rising in 2006, and the market would have slowed sooner that it did. The slowdown, however, would not have been nearly as steep, nor lasted nearly as long. These changes came about due to both government intervention and lack of government oversight, as evidenced by the deregulation of the banks that created conditions leading to the high-risk mortgage fiasco and its ongoing saga. Additionally, we are more and more a global economy and so totally unforeseen world wide events now directly effect us, e.g. the Greek and Italian debt crises, manipulation of oil prices, various moves by the Fed to manipulate the economy. For an investor, this creates additional variables that have to be considered in making long term decisions.

Based on all of this, my advice to investors is to seriously consider the use of debt leverage. Interest rates are lower than they have been in sixty years, and must eventually rise. Coupled with todays low property prices, there are some truly great opportunities out there. Real estate can now be purchased for 40 - 60 percent of what it would cost to build that same property today. Obviously, no significant levels of new construction will occur while this imbalance exists. This means that either property values on existing real estate will have to rise, or the cost of building materials and labor will have to decline by 30 - 50 percent. Take your pick, but I’m betting on an increase in property values. Especially will this be true for rental property as the demand continues to increase, spurred on by foreclosed owners now becoming tenants and the plain old birth rate which continues to bring new families into the rental market.

Consumer confidence also plays its part. Today, news reaches us in real time, and there is a tendency to react the same way. Remember what happened in October 2008…...everything stopped while we watched the stock market tumble. In the spring of 2011 we had started to see some bright spots and hear some positive economic news. Investors were actually coming back into the market. Then the brouhaha over the debt ceiling hit and it was deja vu all over again. Not unexpectedly, many investors have been sitting on the sidelines due to the uncertainty. I think that a stretch of positive news will bring them back in.

This is vividly demonstrated in the huge swings of the stock market.......one day it's the DJIA is down 300 points because of the European Debt instability, the next Monday it's up 300 points because Holiday Sales were booming!

And the news is becoming more positive. Unemployment claims dropped slightly; home prices rose slightly in the Palm Springs area.. Our local real estate inventory has declined over 50% from three years ago. I have recently observed that any property which comes on the market that is a really good value will have multiple offers within days.

For the first time in my twenty five years of commercial brokerage, I am observing true 6% - 8% cash earnings on rental property. In my opinion, and that of most of my clients, ownership of residential income property currently provides the best overall income in the marketplace.

I invite your comments, even if you disagree with my observations (honest). I hope to hear from you. Let me know what you think.

-- Jeannie