December 28, 2018 | Market Trends
  • Macro View – Recession Talks Heat Up

The U.S. economy has been experiencing one of its longest expansions ever and that begs the question, is a recession looming? With the U.S. now in a 9th year of economic expansion, some are questioning what will cause the next recession and when it will happen. Every recession has a trigger and in the 1970’s it was energy price shocks but with the U.S. becoming the world’s largest oil producer, that is not seen as a likely trigger. How about an unsustainable rise in borrowing? Consumer debt has risen about 5% annually over the last few years and while that is fast, it’s not catastrophic. Past recessions were preceded by consumer debt increases of 10% or more. More importantly, the largest part of household debt is home mortgages and those loan balances total about $10 trillion today, or about the same as 10 years ago even though aggregate U.S. home values have increased from $18 trillion to $28 trillion during that same span. That being said, corporate debt has increased substantially over the last decade due to low interest rates and the opportunity for companies to increase profits to shareholders. Corporate bonds outstanding have increased by approximately $2.6 trillion in the U.S. between 2007 and 2017 and many companies with high debt burdens may struggle to pay their bills or be at risk of bankruptcy in coming years. However, consumer confidence is high (despite the lack of housing affordability), given the economy is at or near full employment. Lastly, a recession trigger could be related to policy error and borrowing by foreign countries. For example, Argentina and Turkey, countries who have their own currencies but have borrowed significantly in U.S. dollars, may have difficulty repaying that debt. Both have seen devaluations of their own currency, coupled with high inflation and that could lead to problems. The question then becomes when we may see the economy start to falter. All we can point to are predictions. Some experts predict that recent tax reform will help fuel economic stimulation in 2018 and 2019, before petering out in 2020. Meanwhile, it is expected the Federal Reserve will need to maintain a difficult balancing act as they continue to raise interest rates to keep inflation from getting out of control, right around the same time as tax policy is working to slow the economy. Whatever your own expectation of the economy may be, it is clear to me that the economic expansion we have witnessed since 2009 is unsustainable in the long term. Interest rates are still historically low, banks are accommodating when access to capital or financing is required and the stock market is still near all time highs despite high volatility recently (as of 12/13/15, the Dow Jones was just 8.25% off it’s all time high set October 3, 2018). But all of those realities are subject to change at a moment’s notice. For property owners who have considered exiting the market while asset prices are high and financing is relatively easy to obtain, it is certainly worth talking to an accountant or financial advisor to determine wealth management strategies over the next 5-10 years.

  • Micro View – SLO County Market Activity

Since 2014, inventory of homes on the market in SLO county has declined year over year. Higher sales volume typically occurs each year from March through July, before slowing down during winter months akin with the “bell curve” you may be accustomed to. In the chart below, you can see peak inventory of homes on the market steadily declining over the last 5 years. These figures are substantially down from 2008-2011, when peak inventory ranged from 1,828 to 2,190 homes on the market. Tight inventory may be the new reality for SLO County as homeowners are moving less frequently and many homeowners who refinanced into low interest rate loans over the last few years may be reluctant to move. The number of closed sales countywide is down 4.7% year over year from Nov 2017 to Nov 2018. However, July 2018 saw the highest median sale price on record for single family homes in SLO County at $650,000, which is back down to $620,000 as of November 2018. Not surprisingly, sale price per square foot also peaked in July at $361/sf. Interestingly, sales volume in SLO County is down 13% year over year from $355M in 2017 to $309M in 2018. Long story short – rising interest rates, stock market volatility and the possibility of a global recession trigger will be areas of concern for the real estate market going forward. Note that these figures represent all of SLO County – if you want data on a specific city/area, just let Steve Hopkins (805-458-5506) or Graham Updegrove (805-459-1865) know. 

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