Interesting conference session this morning on the real estate economy.
Quotes of the day from Dr. James Gaines, research economist at Texas A&M University:
"Seventy percent of the economy is dependent on us going out every week and spending 110 percent of what we make - and we've been doing a pretty good job of it."
"It takes a Ph.D to come up with this stuff. The Ph.D's, the Nobel laureates and so forth, the guys who run Wall Street, committed a colossal 'duh.' They forgot about a a thing called risk, that if you make a loan to somebody with a shaky credit rating, a shaky job and shaky employment, you might have trouble somwehre down the line collecting on the loan and somehow all of that got lost in the shuffle."
Gaines told us to watch for a couple of things: a financial bailout of more banks and financial institutions - and also for "an extraordinary bailout of the residential market to limit foreclosures." He didn't offer details, but ran instead into an interesting analysis of home prices:
He said home prices are likely to fall to the level at which they would have risen had there not been a housing boom, which got me to thinking about where that line might be in the capital region. I don't have stats with me, but say the median price in 2000 was $185,000 or so and you inflate that by 3 percent a year. What is that magic number and when do we reach it?
Nationally, he said median values peaked in July 2006 at $230,900 and would have to fall to $187,500 to get back on the normal trend line. That would be a 14 percent decline nationally - and I believe he said we have already fallen 8 percent.
That's the magic number I want to find in Sacramento. Where would we be if there hadn't been such a boom and is that the sustainable level now? Anyone have thoughts on that?
We can also expect, he said, the usual rewriting of rules that follow financial meltdowns: in accounting rules, mortgage rules, capital requirement rules , bankruptcy and Freddie Mac and Fannie Mae rules. Watch, too, in a country where the government is essentially broke, for higher inflation, higher income taxes, higher borrowing costs and higher taxes on capital gains and dividends. He thought taxes on capital gains might jump from 15 percent to 24 percent - which would overnight cut the value of commercial real estate by 10 percent or mnore. Ouch.
None of this especially pleasant, unless you live in Texas, where again Gaines talked about a real estate market holding pretty strong in the face of strong job growth in the high-flying energy market ($4 gas for the rest of us). He said population growth in the Lone Star state is expected to be the biggest thing in the next 25 years since California's post WWII-explosion. Retirees are also flocking to Texas - even from California now - because "you can still buy a house here for under $200,000."
A billboard comes to mind on the interstate near Dallas by Fort Worth builder D.R. Horton Inc., always a leading builder in the Sacramento region:
Prices starting in the $170,000s.
All this excitable talk about growth and adding new equivalents of Dallas-Fort Worth to a state that already has 24 million people reminded me of chat I had Wednesday with a real estate magazine editor who now lives in booming Atlanta, but was raised in struggling Detroit. He offered the theory that when the South fills up with too many people and the highways are all filled - sound familiar, Golden Staters? - that people will look back up toward the Rustbelt, where it's cheaper and quieter and has wonderful old downtown buildings and - and start a new boom.
He didn't know what it portended exactly, but he cited a developer who bought a lovely old high-rise in Detroit for $5 million recently. An idiot or just sensing that someday everyone is going to be tired of the unlivable Sunbelt? Time will answer that one.