The Economy Simply Can’t be Strong if Housing is Week. I like Arthur Laffer, he of the famed Laffer Curve. During a recent appearance with Ed Schultz on MSNBC, Laffer offered this reasonable rule of thumb – “When you’re in a strange city and need directions, ask at least two people. If they give you the same answer, odds are it’s correct. If you’re really risk averse, ask three people”. Good advice even if you have a smartphone with GPS.

He went on to note that if you really want to find out what’s going on in the economy, the last person you should ask is an economist. “You can always find an economist wiling to tell you what you want to hear. In fact, as any law firm can attest, if you pay an economist enough, that economist will tell you exactly what you want to hear.” I recall Alan Greenspan sharing his similar view with us a few years back when he told us ‘the first rule of economists is that for every economist there is an equal and opposite economist.’

So for you, dear reader, I always try to garner at least three opinions in hopes of providing some balance to the economic worldview of housing. This months headlines include ‘National Housing Market Recovery Making Slow Progress’ from a DS News article citing Freddie Mac indices. But while Freddie was more optimistic, Fannie weighed in with this headline ‘Fannie Mae More Cautious On Housing Outlook. Kids! What are you going to do? Data from Reuters was used to support this headline in RealtorMag stating ‘Economists Grow More Optimistic About Housing’s Outlook’. For my last source, I went directly to Laffer and his recent article ‘Three Signs of a Feeble Economy’, where he asks: ‘How is the economy doing five years after the recession? If you consult data on GDP, employment and housing you can conclude things aren’t going well.’ That about sums up our local market five years after the recession. I suspect if you asked a local audience of business owners and homeowners, most would not be aware the recession ended in June 2009. I did that last month and they aren’t.

Locally our market continues with mixed results as well. Interestingly, though sales were down about 5% from last month, August sales were only 3 units under where they were last August. Does that mean sales are picking up? No, it simply means last August sucked as well. So much for our summer boost!

Prices were up moderately year over year, 10% overall and 2% up from a month ago. That’s not a bad thing as we can sustain an 8% - 10% appreciation rate for quite awhile without worrying about a bubble. But this slow appreciation rate is keeping a lot of move-up buyers on the sidelines because even though they have a little equity in their homes again, it’s not enough to make the leap into their next home. At the same time, first time buyers are declining as a share of the market due to those same rising prices. So it’s a double whammy – too slow to attract move-up buyers but too steep for first timers and investors resulting in a very stagnant appearing market. A glance at the bottom chart on Page 6 shows that since 2011 inventory has dropped from over 2,000 units to just over 500 and now back up to over 2,000. Meanwhile sales have hovered in the 500-600 range the whole time.

I had the opportunity to hear NAR Chief Economist Lawrence Yun address the Hawaii Association of Realtors last week optimistically forecasting a good year in 2015 for resort and 2nd home sales. He also believes we will see a more solid growth year for general residential sales next year.

Well, you know what they say about economists.

SW Market @ A Glance

Southwest California Reporting

Period Current Period

Last Period Year Ago

Change from Last

Period

Change from

Year Ago Existing Home

Sales (SFR Detached)

August 2014 637 670 640 5% 0%

Median Home Price $364,358 $357,189 $331,443 2% 10%

Unsold Inventory Index (SFR Units) 2,078 2,073 1,227 0% 40%

Unsold Inventory Index (Months) 3 4 1.9 25% 37%

Median Time on Market (Days) 71 67 48 6% 31%

Source: CRMLS

August Transaction Value*: Temecula $72,779,666 Lake Elsinore $27,946,185

Murrieta $63,957,477 Wildomar $12,861,480

Menifee $38,660,573 Canyon Lake $12,448,100 * Revenue generated by single family residential transactions for the month.

0

50

100

150

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250

3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14 6/14

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Southwest California Homes Single Family Homes

Unit Sales

$0

$100,000

$200,000

$300,000

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$500,000

$600,000

3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14

Temecula Murrieta Lake Elsinore Menifee Wildomar Canyon Lake

Southwest California Homes Single Family Homes

Median Price

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3/13 6/13 9/13 12/13 3/14

Hemet/San Jacinto 2014 Unit Sales Single Family Residential

Hemet San Jacinto

July Transaction Value:

Hemet $27,808,500 San Jacinto $11,555,301

* Revenue generated by single family residential transactions for the month.

$0

$50,000

$100,000

$150,000

$200,000

$250,000

3/13 6/13 9/13 12/13 3/14

Hemet/San Jacinto 2014 Single Family Residential Median Price

Hemet San Jacinto

August Median Price: 2013 2014 %

Temecula $395,437 $449,257 12%

Murrieta $366,675 $376,220 3%

Menifee $243,260 $272,258 11%

Lake Elsinore $276,605 $288,105 4%

Wildomar $312,483 $321,537 3%

Canyon Lake $396,855 $478,773 27%

Southwest California $ 331,443 $364,358 9%

Hemet $164,357 $194,465 15%

San Jacinto $173,570 $192,588 11%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14 6/14

Southwest California Murrieta Temecula

Southwest California Median Price

0

100

200

300

400

500

600

On Market (Supply)

Pending Closed (Demand) Days on Market Months Supply Absorption rate *

546

142

170

65

3.2

91%

598

155

162

72 3

.7

78%

463

174

143

60

3.2

91%

367

182

142

56

2.6

89%

328

104

97

71 3

.4

71%

171

82

60

69 2

.9

78%

153

21

26

92 5

.9

59%

86 3

5

40

71 2

.2

129%

Murrieta Temecula Hemet Menifee Lake Elsininore San Jacinto Canyon Lake Wildomar * Absorption rate - # of new listings for the month/# of sold listings for the month

August Demand Chart On Market 1 % Pending 2% Closed 3% Days on Market 6% Months Inventory 5% Absorption 2%

Month over Month

0

500

1000

1500

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2500

1/11

2/

11

3/11

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5/11

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14

Inventory Sales

Southwest California Inventory v. Sales

August Market Activity By Sales Type

Standard Sale Bank Owned Short Sale

Active % of MKT Sold

% of MKT Active

% of MKT Sold

% of MKT Active

% of MKT Sold

% of MKT

Temecula 551 92% 146 90% 10 2% 8 5% 28 5% 5 3% Murrieta 499 91% 150 88% 12 2% 11 6% 31 6% 6 4% Wildomar 79 92% 39 98% 2 2% 0 0% 4 5% 0 0%

Lake Elsinore 285 87% 79 81% 9 3% 2 2% 24 7% 12 12% Menifee 319 87% 125 88% 13 4% 6 4% 30 8% 9 6%

Canyon Lake 144 94% 24 43% 2 1% 1 2% 5 3% 0 0% Hemet 403 87% 120 84% 24 5% 11 8% 27 6% 11 8%

San Jacinto 146 85% 51 85% 6 4% 5 8% 15 9% 3 5% Regional Average 2426 89% 734 84% 78 3% 44 5% 164 6% 46 5%

Reflecting the statewide trend, sales of distressed properties in Southwest California reached their lowest level since 2008 with just 10% of sales coming from REO or short sales. Even with overall sales down from a year ago, the share of distressed properties has fallen even faster.

‘National Housing Market Recovery Making Slow Progress’

‘Economists Grow More Optimistic About Housing’s Outlook’.

The country's housing market continued to inch closer to normalcy in June, but the slow rate of progress remains a concern for analysts.

Freddie Mac's Multi-Indicator Market Index (MiMi) rose 0.04 percent from May to June, ending the year's first half at a reading of 73.7, the company reported Wednesday. On a yearly basis, the gauge improved 7.67 percent.

The monthly index tracks housing market stability at the national, state, and metro level, using home purchase applications, payment-to-income ratios, employment, and proportion of on-time mortgage payments as measures of health. As of the June report, Freddie Mac rescaled the MiMi to make it easier to read, though the underlying data was left untouched.

An index value between 80 and 120 is considered stable, with readings outside that range considered too weak or too high to be sustainable. The all-time high for the MiMi was 121.87 in June 2008, while the low was 59.8 in September 2011, when the housing market was at its weakest. The latest reading marks a 23.2 percent rebound from that time.

"As we see the economy slowly normalizing we're starting to see its effects in the housing market as well, albeit very slowly," said Freddie Mac Chief Economist Frank Nothaft. "The good news is the big housing markets, of which some were also the hardest hit, continue to improve."

Nothaft pointed specifically to California, which has recovered 12 percent from this time last year, with all metros seeing improvements.

The strengthening job market has more economists gaining confidence about the direction of the housing market over the next two years, according to a newly released Reuters poll of 29 housing analysts, including investors and economists.

The economists surveyed expect existing-home sales to increase to 5.25 million units in the first three months of 2015. Currently, existing-home sales stand at 5.09 million. In May, the economists surveyed had expected much slower gains at 5.1 million expected in the first quarter of 2015.

What’s more, economists expect home resales to continue to inch up in 2015, reaching 5.29 million by the second quarter of 2015.

The job market is why most of the economists are starting to change their tone about housing’s outlook. For the last six consecutive months in July, employers added more than 200,000 jobs.

"Low mortgage rates and improving labor market dynamics should remain conducive to gradual growth in the housing sector," Gennadiy Goldberg, a strategist at TD Securities, said in a recent note to clients.

The housing analysts surveyed expect mortgage rates to rise more slowly than they originally thought in May. Still, they do expect rises are looming with expectations that the Federal Reserve will slowly begin to increase its benchmark interest rate around the middle of next year. The Fed has held the benchmark interest rate near zero since 2008.

The economists polled expect the 30-year, fixed-rate mortgage to rise to 5.25 percent in 2016. That is a slight drop from the 5.68 percent average they had predicted in the May poll.

Fannie Mae More Cautious On Housing Outlook Fannie Mae economists have downgraded their housing outlook after a weak end to the second quarter, and they say that near-term indicators are suggesting only a minor improvement in the second half of the year.

"The impact on mortgage rates from the market's expectation that the Federal Reserve would soon start tapering their securities purchases, combined to some degree with the weather effect in the first half of 2014, led to very little seasonal growth in housing," says Doug Duncan, Fannie Mae's chief economist. "In the first six months of the year, total sales have run below last year's pace."

Also, Duncan notes that "on the demand side, there appears to be a conservatism among consumers and their willingness to take on big-ticket purchases, such as homes."

Fannie Mae's Economic & Strategic Research Group estimates that 2014 will finish lower in total sales figures than 2013. They're also predicting that "2015, while stronger than 2013 and 2014, will not be the breakout year some are expecting."

Still, there is some hope for a turnaround: Consumers surveyed in Fannie Mae's July National Housing Survey did report being more optimistic about their personal income and expenses. Also, the economy has shown a slight improvement, with upticks in consumer spending and employment, Fannie researchers note.

Arthur Laffer: Three signs of a feeble economy

gross domestic product In this instance, asking how the economy is doing elicits an ugly answer, indeed. Real GDP has grown 2.4 percent over the past year, and current GDP measured at annual rates is some $4.4 trillion below its long-term trend centered at the end of 1999. GDP is the farthest below trend it has been in 64 years. Employment The second inquiry about the economy should be addressed to employment. Once again the answer is grim. Virtually all of the increase in employment since the depths of the Great Recession has been a result of U.S. population growth. In 2000, employment as a share of the adult U.S. population was 64.5 percent; by the recession’s low point, in 2009, the employed share of the adult population had fallen to 58.5 percent. Five years after the recession bottomed out, employment is still at or close to its all-time low – 59 percent of the adult population. The rapid decline in the much-touted unemployment rate has been a result of unemployed people leaving the labor force, not unemployed people getting jobs. Since June 2009, the official end of the recession, the adult population has increased by 12.4 million, or 5.2 percent, far more and far faster than employment, which has increased by 6.3 million people, or 4.5 percent. Housing In case you’re really risk-averse and want to be absolutely certain you’re not overlooking what could be the correct answer about the state of the economy, a third inquiry should address housing. The economy simply cannot be strong if housing is weak. When it comes to housing, there are so many numbers released, so frequently, that housing has become the spinmeisters’ favorite playground. In addition, some housing numbers fell by so much during the housing collapse that even insignificant increases or decreases appear large when measured in percentages. Unfortunately, the answer derived from housing concurs with those provided by GDP and employment. Fixed residential construction stands at about 3.2 percent of GDP and has rebounded only slightly from the depths of the Great Recession. It is down from almost 7 percent of GDP in 2006 and an average of 4.7 percent of GDP over the past 67 years. For every 1,000 U.S. adults, 2.69 are employed in residential construction. That level is down from a 3.43 average over the past 30 years and a high of close to 4.5, just before the onset of the Great Recession. New housing starts are currently at 3.6 per 1,000 adults, down from a 54-year average of 8.5. But here’s the deal closer: Figure 3 shows new home sales per 1,000 adults. Just look at the story this chart tells. The 51-year annual average of new home sales per 1,000 adults is 3.6, and the peak, in July 2005, was 6.14. Today, the number is 1.64 new home sales per 1,000 adults, up from the low, in February 2011, of 1.13.

The words “No recovery” keep jumping off that (housing) chart. When taken in context with both GDP and employment, you have a trifecta of losers, along with back-to-back losers as president.