John M. Lee: Real Estate Economic Forecast

I have spent the last few months attending various economic conferences to catch up on what the leading economists are forecasting about the real estate industry. The foremost topic on everyone's mind is whether or not we have a real estate bubble and whether or not real estate prices will tumble like the stock market.

We all know that the general economy has not been doing too well. The unemployment rate is about six percent, a fairly high number by historical standards. It seems like major companies are announcing massive layoffs each and every quarter, which affects everyone, because even if they do not get laid off now, there is no guarantee that it will not happen in the next round.

We appeared to be coming out of the recession last year, but toward the end of the year we slipped back into one.
Currently, we are facing the possibility of a war with Iraq, which can influence our economy and markets. The feds have reduced interest rates a total of 12 times and have succeeded in slowing down the recession, but not eliminating it.

In the past, economists thought that the raising and lowering of interest rates were all that was needed to insure a growing economy without inflation and deflation. This theory has been proven wrong both in Japan, where the interest rate has been hovering around zero for the past 10 years and the Japanese economy has gone nowhere, and the U.S., where, even with low interest rates, our economy has not improved much.

Adjusting our monetary policy had some effect, but not enough. President George Bush has tried to stimulate the economy by adjusting our fiscal policy by passing a tax cut the first year he was in office. It helped, but did not totally eliminate our recession.

Currently, he is working on another tax plan that will put more money in our pockets.
However, because our state is facing such a large deficit, Governor Gray Davis is proposing an increase in state taxes. Unfortunately, what we will get back at the federal level will be taken away at the state level.

How will our economy influence the real estate market? It seems like we have been insulated from the rest of the economic world. Our real estate prices are still way up there and our number of sales increased by about 20-25 percent last year.

Will there be a correction like the stock market? There is actually another industry that also has done extremely well despite our economy. And that is auto sales, also a rather large consumer purchase. What both real estate and the auto industry have in common are low interest rates. With rates at 40 year lows, consumers are finding it very attractive to take advantage of the situation while they last, leading to more real estate and auto sales.

Economists, however, do not believe there is a real estate bubble and cite a number of reasons why.

The buyer's psychology is that real estate always goes up in the long term and history has proven that to be correct time and time again. You cannot lose money if you hold onto San Francisco real estate over any 10-year period.
You can acquire property and use maximum leverage, which means you can take 100 percent of the property's appreciation while investing only 10 percent of the equity.

Buyers are more rational; they have not driven up housing prices as much as stock prices before the stock bubble burst. On the macroeconomic side, there is still a net migration into California. The demographic data suggests that the babies of the baby boomers are approaching their home-buying years, leading to a greater demand than supply.

Building permits are also up, meaning the construction industry believes that housing will still be in demand a few years from now. All these signs suggest that there is no real estate bubble.

Even our Federal Reserve Board Chairman Alan Greenspan testified before Congress, "We have looked at the bubble question and we've concluded that it's most unlikely."

He said the driving forces behind continuing strong home price appreciation are low interest rates, scarce buildable land and strong demand fueled by immigration. His thoughts are in line with those of other leading economists.

The good news is that we are looking at a pretty strong 2003 in the real estate market in term of activity. Pricewise, we will be looking at only a modest increase because our property prices are already high. But that scenario is much better than a real estate bubble.

John M. Lee is one of the top-selling agents at Pacific Union. If you have any real estate questions, call him at (415) 447-6231 or e-mail him at johnlee@isellsf.com.