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Thursday, Mar 28, 2024
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Modest Economic Recovery to Impact Local Housing Market, Analyst Says

While there is plenty of evidence that the national economy is turning around, the recovery will be modest at best, and take years before growth rates approximate those seen before the Great Recession, says Wells Fargo senior economist Scott Anderson.

“It will be a moderate and modest recovery by historical standards,” Anderson said during an interview before his March 31 presentation to the Colliers International Roundtable in La Jolla.

The major impediment to generating real growth continues to be much higher unemployment rates both nationally and statewide, he said. The February national adjusted jobless rate was 9.7 percent, while California’s adjusted unemployment rate for the same month was 12.5 percent. San Diego’s rate was 10.6 percent.

Those rates could get worse by the middle of this year before they begin to decrease later this year at the earliest since many employers continue to be skittish about expanding their staffs. Anderson says San Diego’s jobless rate could climb above 11 percent, while the state’s adjusted rate could rise above 13 percent before leveling off.

“Nationally, we’re forecasting adding about 200,000 jobs a month over the next 12 months,” he said.

That sounds terrific given the millions of jobs that have been lost since the recession took hold in 2008, but a far cry from average monthly increases that ranged from about 250,000 to 400,000 before the recession, Anderson said.

Looking back to nine past recessions, Anderson said for the first year after a recession, the average increase in the nation’s gross domestic product was 5.8 percent. For 2010, Anderson forecasted the nation’s GDP will rise by only 2.5 percent to 3 percent.

Accurate Prediction

The puncturing of the housing bubble about two years ago led to the worst economic times since the Great Depression, but don’t blame Anderson for not warning bad times were on the way.

Anderson was recently named as one of the top 10 economists in the nation by USA Today for accurately forecasting the recession in 2008. Not only did plenty of data signal that the housing market was far too overheated and due for a collapse, there was a lot of anecdotal evidence that the rapid run-up in real estate values wasn’t sustainable, he said.

Anderson recalled making presentations at several Realtor events in which he saw agents driving Lamborghinis and Ferraris. Some who said they lost most of their savings in the dot-com bust told him they were now millionaires because of the skyrocketing real estate values while they had owned many properties, he said.

“We saw the bubble as unsustainable,” Anderson said. “The home price-to-rent ratio was just off the charts.”

About two years ago, Anderson forecast that the bubble would burst, sending housing values plummeting by at least 30 percent in many areas. “It turned out that we were a little too optimistic there,” he said, alluding to home price declines of more than 50 percent in some areas of California.

While home values have stabilized in many areas, the jobless rate, and the subsequent defaulting on mortgages by many homeowners, continues to hold back any sustained increase, he said.

“We’re still facing bad winds from the destruction of asset values both in residential and commercial real estate,” Anderson said.

Obstacles to Appreciation

Home foreclosures and delinquencies on mortgages continue to hamper any significant appreciation in prices, although statewide values have risen by about 20 percent from the bottom in late 2008, he said.

Although he doesn’t see another big drop in the overall economy, Anderson says the risk of a double dip in home values remains as mortgage interest rates, now at historic lows, begin to rise.

The decision by the Federal Reserve Bank to stop buying mortgage-backed securities combined with the ending of the federal homebuyers’ tax credit could hurt a gradual rise in values, he said.

“San Diego could be at risk,” he said. “I wouldn’t be surprised if it gave up half of the gains that we had last year.”

At least on the new-home construction front, things are finally beginning to thaw, with pockets of new homes being built. There’s even some speculative residential construction happening in some parts of the state, he said.

Anderson forecast a 36 percent rise in new-housing construction nationally, but that number is deceiving because new construction basically was frozen last year.

While consumer confidence has been rising slightly in recent months, Anderson says some of the drivers are temporary. Consumers haven’t purchased any big-ticket items in a long time, but they’ve had to replace certain items such as home computers, he said.

“The vast majority of consumers are hobbled by high debt levels … and we still think that there’s more work to go in terms of repairing their credit,” Anderson said.

Small-Business Credit Constraints

Adding to the shaky recovery is a much tougher credit climate for many borrowers, especially small businesses, which are the main source for creating new jobs.

A recent survey by Wells Fargo of its small-business customers found more than one-third reporting difficulties in obtaining credit. More telling is that during the next year, some 40 percent say they’ll have a tougher time securing financing.

“Credit conditions aren’t back to normal, and in fact, could tighten even further,” Anderson said.

Despite these obvious impediments, Anderson says the economy is clearly mending, but will take much longer to return to some level of consistency.

According to the January job data, new jobs were created in several areas besides the stable segments of health and education. There were gains in wholesale and retail trade, and in some other servicing segments, he said.

The overall jobs picture for San Diego appears to be in better shape relative to other parts of California because of the stability of the region’s defense spending, Anderson said.

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