Economic Update

Coming into 2019: A case of Miserabilism

  • Talk of an imminent U.S. recession was a bit overdone
  • Why: Economic expansion has reached 118 months, record is 120 months; Yield  curve inversion
  • The underlying fundamentals of the U.S. economy are generally solid at present GDP up 3.2% in Q1 2019 – stronger than expected
  • 2019: back to a steady pace of 2 to 2.5% growth
  • Inflation still constrained - thus, interest rates still low
  • Still a low chance of recession in next 12 months
  • “Talking” ourselves into a recession seems to be the most realistic way that the U.S.  economy could experience one in the foreseeable future.
But, what’s different this time?

Housing market in 2007

The big 3 imbalances

  • Finance
  • Inexhaustible demand for securitized loans
  • Low quality loans
  • Loosely regulated
  • Housing
  • Overbuilt
  • Highly overvalued
  • Consumer
  • Highly indebted
  • Buyer irrational exuberance

Housing Market in 2019
  • Finance
  • Dodd-Frank
  • Well-capitalized
  • Housing
  • single-family housing starts are roughly 50% below last peak
  • Severely underbuilt, and getting worse
  • Consumer
  • households have de-levered over the past ten years
  • student debt an issue for future consumption but not enough for a recession
  • disposable personal income is up 50% over the past ten years
What’s different in California housing?

Skilled labor shortage more widespread now

IPO floodgate opens – 2019 on pace for record exit value, 77% of tech companies are based in California

1Q is the second-highest recorded capital investment in the last decade

Is the “Uber Effect” going to be as large as the “Facebook Effect”?Median prices in the Bay Area outperform following Facebook IPO

And, sales of homes >$2M jump 84% in San Francisco

But, housing a critical issue:

California needs 3.5 million housing units to close the housing gap

Why is housing availability so important? Spatial misallocation of labor.
Say what?

  • Although labor productivity and labor demand grew most rapidly in New York, San
    Francisco, and San Jose, thanks to a concentration of human capital intensive
    industries like high tech and finance, growth in these three cities had limited benefits
    for the U.S. as a whole
  • Silicon Valley has some of the most productive labor in the globe. But by global urban
    standards, the area is remarkably low density
  • More housing in Silicon Valley is to raise income and welfare of all US workers
  • Possible solutions:
  • For the federal or state government to constrain U.S. municipalities’ ability to set land
    use regulations (SB35)
  • High speed train –bring labor from Central Valley rapidly (London and Tokyo have
    such transportation networks)
Market Update March 2019

>$2M down 28% in Marin but still above 2017

<$@2M declines slowing (down 9%)

Marin March YOY decline slowest second to Alameda

Marin inventory increases but relatively slower – Bay Area trend similar to
red line San Francisco inventory lowest in 5 years – sellers pull listings off
the market - waiting for IPO rush?

Median prices at pre-March 2018 levels

Buyer are competing again but with caution – Share of homes selling
over asking price @ 40% vs 57% last year

John Burns Bay Area Forecast

Closing Thoughts

  • Optimism is fueling the stock market rebound.
  • VC investment continue to fuel our economy and local housing markets.
  • There is a cascade of local IPOs in the pipeline Interest rates still low.
  • Inventory improving but still well below historical averages.
  • Buyers are tepid but aware that the competition is on the rise.
  • Higher end is bouncing back.
  • It will be a good year.

Work With Me

Every client is different, and I strongly believe in understanding your unique needs, and helping you achieve your goals. Because of this commitment, I have distinguished myself by generating 80% of my business from client referrals.