1
524 Second Ave, Suite 500Seattle, WA 98104
206.442.9200
Real Estate & EconomicTrends and Outlook
John L Scott Real Estate
ANNUAL BUILDER BREAKFAST 2011
October 27, 2011
The Westin, Bellevue, Washington
Presented by:Matthew Gardner
Managing Principal
U.S Economic Outlook
2
% annualized growth rate
GDP Growth Forecast
Source: Gardner Economics LLC Forecast & BEA Historic Data
The Best Scenario is Below Par Growth Through 2012.
We Are On a Knife Edge.
Economic & Real Estate Forecast
October 27, 2011
3
Year-Over Year, the Figures Do Not Look That Bad.
Improving U.S. Job Market?
12-month payroll job changes; in thousands
Source: BLS – Seasonally Adjusted Figures – Data through September 2011
-8,000
-6,000
-4,000
-2,000
0
2,000
4,000
Economic & Real Estate Forecast
October 27, 2011
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
500
600
20
03
- J
an
20
03
- A
pr
20
03
- J
ul
20
03
- O
ct2
00
4 -
Ja
n2
00
4 -
Ap
r2
00
4 -
Ju
l2
00
4 -
Oct
20
05
- J
an
20
05
- A
pr
20
05
- J
ul
20
05
- O
ct2
00
6 -
Ja
n2
00
6 -
Ap
r2
00
6 -
Ju
l2
00
6 -
Oct
20
07
- J
an
20
07
- A
pr
20
07
- J
ul
20
07
- O
ct2
00
8 -
Ja
n2
00
8 -
Ap
r2
00
8 -
Ju
l2
00
8 -
Oct
20
09
- J
an
20
09
- A
pr
20
09
- J
ul
20
09
- O
ct2
01
0 -
Ja
n2
01
0 -
Ap
r2
01
0 -
Ju
l2
01
0 -
Oct
20
11
- J
an
20
11
- A
pr
20
11
- J
ul
100,000 New Jobs per Month Needed to Keep Up with Population Growth.
Avg. 72,000 over Past 5-Months.
But…
Monthly payroll job changes; in thousandsSource: BLS – Seasonally Adjusted Figures – Data through September 2011
Economic & Real Estate Forecast
October 27, 2011
4
Unemployment Has Likely Peaked but Under-Employment Will Keep the Rate Elevated through the End of the Year.
Monthly U.S. Payroll Change
Source: BLS & Gardner Economics – Seasonally Adjusted Figures
Economic & Real Estate Forecast
October 27, 2011
-900
-800
-700
-600
-500
-400
-300
-200
-100
0
100
200
300
400
20
03
- J
an
20
03
- A
pr
20
03
- J
ul
20
03
- O
ct2
00
4 -
Ja
n2
00
4 -
Ap
r2
00
4 -
Ju
l2
00
4 -
Oct
20
05
- J
an
20
05
- A
pr
20
05
- J
ul
20
05
- O
ct2
00
6 -
Ja
n2
00
6 -
Ap
r2
00
6 -
Ju
l2
00
6 -
Oct
20
07
- J
an
20
07
- A
pr
20
07
- J
ul
20
07
- O
ct2
00
8 -
Ja
n2
00
8 -
Ap
r2
00
8 -
Ju
l2
00
8 -
Oct
20
09
- J
an
20
09
- A
pr
20
09
- J
ul
20
09
- O
ct2
01
0 -
Ja
n2
01
0 -
Ap
r2
01
0 -
Ju
l2
01
0 -
Oct
20
11
- J
an
20
11
- A
pr
20
11
- J
ul
The Private Sector Has Been Carrying the Load.
But Uncertainty is Keeping Us From Hiring More!
Private Sector is Showing Job Growth
Monthly payroll job changes; in thousandsSource: BLS – Seasonally Adjusted Figures – Data through September 2011
Economic & Real Estate Forecast
October 27, 2011
5
I am Still Not Seeing a “Double Dip”, but the Odds Are Shortening if Washington (D.C.) Doesn’t Get its Act Together.
Job Market Trough
Source: BLS & Gardner Economics - Current Data through September 2011
Economic & Real Estate Forecast
October 27, 2011
-7.0%
-6.5%
-6.0%
-5.5%
-5.0%
-4.5%
-4.0%
-3.5%
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%
0.5%
1.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48
Perc
ent C
um
ula
tive
Jo
b L
oss
Rel
ativ
e to
Pea
k Em
plo
ymen
t M
on
th
Number of Months After Peak Employment
1974 1981 1990
2001 2008
This Represents Our Credit Card Debt!
The Two Most Important Words in the English Language Are…?
U.S. Revolving Debt
Source: Federal Reserve – Seasonally AdjustedData Through August 2011
Economic & Real Estate Forecast
October 27, 2011
6
Banks Are Offering Credit Again, But Time Will Tell if We Are Buying Goods, Or Just Supporting Ourselves!
Fits with the Argument of Zero Income Growth.
U.S. Revolving Debt
Source: Federal Reserve – Seasonally Adjusted through August 2011
$700
$750
$800
$850
$900
$950
$1,000
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11
In B
illio
ns($
)
Economic & Real Estate Forecast
October 27, 2011
0
20
40
60
80
100
120
140
160
180
200
Jan-
00Ju
l-00
Jan-
01Ju
l-01
Jan-
02Ju
l-02
Jan-
03Ju
l-03
Jan-
04Ju
l-04
Jan-
05Ju
l-05
Jan-
06Ju
l-06
Jan-
07Ju
l-07
Jan-
08Ju
l-08
Jan-
09Ju
l-09
Jan-
10Ju
l-10
Jan-
11Ju
l-11
ConfidencePresent SituationExpectation Index
Europe, Jobs and Stagnant Incomes are All Playing a Part.
This Can’t Get Much Worse, But Will Only Improve if Hiring Returns.
Consumer Confidence
Source: Conference Board – Data through October 2011
Economic & Real Estate Forecast
May 23 2011
7
U.S. Economic Forecast
• Policy Makers Need to Get it Together!
• Inflation Concerns? Yes, but Not Too Bad Yet.
• Chance of a Double Dip Now 50/50.
• Businesses are “Frozen in Place”?
• The P.I.I.G.S. are Still an Issue!
• Where is the Income Growth??
The Puget Sound Economy
8
-120
-100
-80
-60
-40
-20
0
20
40
60
80
2000
- Ja
n
2001
- Ja
n
2002
- Ja
n
2003
- Ja
n
2004
- Ja
n
2005
- Ja
n
2006
- Ja
n
2007
- Ja
n
2008
- Ja
n
2009
- Ja
n
2010
- Ja
n
2011
- Ja
n
Year-Over-Year, the Recovery Appears to Have Momentum
Source: BLS – Seasonally Adjusted – Through September 2011
Seattle’s Employment Situation
12-month payroll job changes; in thousandsEconomic & Real Estate Forecast
October 27, 2011
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
20
03
- J
an
20
03
- J
ul
20
04
- J
an
20
04
- J
ul
20
05
- J
an
20
05
- J
ul
20
06
- J
an
20
06
- J
ul
20
07
- J
an
20
07
- J
ul
20
08
- J
an
20
08
- J
ul
20
09
- J
an
20
09
- J
ul
20
10
- J
an
20
10
- J
ul
20
11
- J
an
20
11
- J
ul
Leisure & Hospitality Job Losses Hurt.
I am Not Holding Too Much By September’s Figures.
Monthly payroll job changes; in thousands
Source: BLS – Seasonally Adjusted Figures – Data through September 2011
Economic & Real Estate Forecast
October 27, 2011
9
-120
-100
-80
-60
-40
-20
0
20
40
60
80
20
00
- J
an
20
00
- J
ul
20
01
- J
an
20
01
- J
ul
20
02
- J
an
20
02
- J
ul
20
03
- J
an
20
03
- J
ul
20
04
- J
an
20
04
- J
ul
20
05
- J
an
20
05
- J
ul
20
06
- J
an
20
06
- J
ul
20
07
- J
an
20
07
- J
ul
20
08
- J
an
20
08
- J
ul
20
09
- J
an
20
09
- J
ul
20
10
- J
an
20
10
- J
ul
20
11
- J
an
20
11
- J
ul
Again, the Private Sector is Driving Our Growth.
Source: BLS – Non-Seasonally Adjusted – Through September 2011
Private Sector Employment
12-month payroll job changes; in thousandsEconomic & Real Estate Forecast
October 27, 2011
-100
-80
-60
-40
-20
0
20
40
200
0 -
Jan
200
0 -
Ju
l2
001
- J
an2
001
- J
ul
200
2 -
Jan
200
2 -
Ju
l2
003
- J
an2
003
- J
ul
200
4 -
Jan
200
4 -
Ju
l2
005
- J
an2
005
- J
ul
200
6 -
Jan
200
6 -
Ju
l2
007
- J
an2
007
- J
ul
200
8 -
Jan
200
8 -
Ju
l2
009
- J
an2
009
- J
ul
201
0 -
Jan
201
0 -
Ju
l2
011
- J
an2
011
- J
ul
As You Can See, Fluctuations in the Labor Market Remain Highly Localized!!!
Detroit’s Employment Situation
Source: BEA – Seasonally Adjusted – Through August 2011
12-month payroll job changes; in thousandsEconomic & Real Estate Forecast
October 27, 2011
10
Local Employment Situation
Source: WA State – Seasonally Adjusted YoY GrowthSept 2010 – Sept. 2011
A Very Different Picture From a Year Ago.
Construction is Still a Weight.
20,800
-2,600
-2,000
-1,600
-1,200
-700
0
400
600
1,300
1,300
2,400
6,900
7,700
10,000
-5,000 0 5,000 10,000 15,000 20,000 25,000
Total Non-Farm
State Government
Construction
Local Government
Leisure & Hospitality
Federal Government
Financial Activities
TWU 1/
Other Services
Other Manufacturing
Information
Education & Health Services
Trade
Aerospace Product and Parts Manufacturing
Professional & Business Services
NET EMPLOYMENT CHANGE BY NAICS CLASSIFICATION
Economic & Real Estate Forecast
October 27, 2011
3
4
5
6
7
8
9
10
11
U.S. Seattle MSA
9.1%
8.6%
Unemployment Rate Still Below the National Average
SOURCE: BEA & Gardner Economics – Seasonally Adjusted Data
The Drop May be Due To People Quitting Their Search for Work.
Economic & Real Estate Forecast
October 27, 2011
11
• Seattle Remains the Best West Coast Location Relative to Potential Growth.
• The 5 B’s Will Still Drive Us.
• Innovation has Hurt Us Before, but Will Help Us This Time.
• We are NOT Protected Against National Effects.
Puget Sound Employment Situation
The Residential Market
12
Source: Gardner Economics
Historic Average is 10-15% -Today it’s 34%.
New Home Price v Existing Home Price
(United States)
Economic & Real Estate Forecast
October 27, 2011
$100,000
$120,000
$140,000
$160,000
$180,000
$200,000
$220,000
$240,000
$260,000
2000
- Ja
n20
00 -
Jul
2001
- Ja
n20
01 -
Jul
2002
- Ja
n20
02 -
Jul
2003
- Ja
n20
03 -
Jul
2004
- Ja
n20
04 -
Jul
2005
- Ja
n20
05 -
Jul
2006
- Ja
n20
06 -
Jul
2007
- Ja
n20
07 -
Jul
2008
- Ja
n20
08 -
Jul
2009
- Ja
n20
09 -
Jul
2010
- Ja
n20
10 -
Jul
2011
- Ja
n20
11 -
Jul
12-Month Moving Average
Source: Gardner Economics
The Spread is Very Different Locally.
Can Make New Construction Compelling.
New Home Price v Existing Home Price
(Seattle MSA)
Economic & Real Estate Forecast
October 27, 2011
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
$450,000
$500,000
$550,000
$600,000
2003
- A
pr20
03 -
Jul
2003
- O
ct20
04 -
Jan
2004
- A
pr20
04 -
Jul
2004
- O
ct20
05 -
Jan
2005
- A
pr20
05 -
Jul
2005
- O
ct20
06 -
Jan
2006
- A
pr20
06 -
Jul
2006
- O
ct20
07 -
Jan
2007
- A
pr20
07 -
Jul
2007
- O
ct20
08 -
Jan
2008
- A
pr20
08 -
Jul
2008
- O
ct20
09 -
Jan
2009
- A
pr20
09 -
Jul
2009
- O
ct20
10 -
Jan
2010
- A
pr20
10 -
Jul
2010
- O
ct20
11 -
Jan
2011
- A
pr20
11 -
Jul
12-Month Moving Average
13
Source: Gardner Economics & Freddie Mac
Ultimately, Mortgage Rates Have to Increase as Economic Growth Stimulates Inflationary Pressures.
30-Year Fixed Mortgage Rates
Forecast
Economic & Real Estate Forecast
October 27, 2011
U.S Typical Net Worth
Source: Federal Reserve Survey of Consumer Finances
2010 data to be published
in 2012 by the Federal
Reserve.
Economic & Real Estate Forecast
October 27 2011
14
Year SeattleSan
FranciscoLos
AngelesSan
Diego MiamiLas
Vegas Phoenix
2000 6.7% 28.6% 10.1% 16.3% 8.9% 5.4% 5.9%
2001 4.6% -4.3% 8.8% 10.0% 12.5% 7.7% 5.3%
2002 3.9% 13.8% 18.0% 19.9% 14.0% 7.1% 4.6%
2003 7.4% 9.0% 20.6% 18.5% 13.3% 17.0% 7.9%
2004 11.4% 19.1% 22.8% 25.1% 22.2% 42.3% 20.4%
2005 17.1% 13.6% 20.7% 6.3% 28.9% 10.6% 42.0%
2006 11.2% -1.2% 1.5% -3.8% 4.7% 0.5% -0.1%
2007 0.5% -10.6% -13.3% -14.6% -17.1% -15.0% -14.8%
2008 -11.8% -29.2% -23.6% -22.9% -26.8% -29.4% -31.2%
2009 -4.4% 9.6% 2.9% 5.4% -6.5% -16.9% -4.0%
2010 -7.9% 4.8% 0.0% 2.7% -9.9% -20.6% -9.2%2011 YoY
-6.1% -5.3% -3.5% -5.5% -4.6% -5.8% -7.7 %
SOURCE: S&P Case Shiller –Non-Seasonally Adjusted - YTD Data through August 2011
Seattle is Slow Returning.
I am NOT a Fan of this Index.
Year to Date, Seattle is down by 1.2 Percent.
Case Shiller Index
Economic & Real Estate Forecast
October 27 2011
Quarterly Lot Sales
0
100
200
300
400
500
600
700
Q1
2010 Q2
2010 Q3
2010 Q4
2010 Q1
2011 Q2
2011 Q3
2011
KingSnohomishPierceThe Overall
Trend Appears to be Positive in Pierce County; Negative in Snohomish, and All Over the Place in King!
SOURCE: Gardner Economics
Economic & Real Estate Forecast
October 27, 2011
15
Quarterly Lot $ Volume
$0
$20,000,000
$40,000,000
$60,000,000
$80,000,000
$100,000,000
$120,000,000
$140,000,000
$160,000,000
Q1 2010Q2 2010Q3 2010Q4 2010Q1 2011Q2 2011Q3 2011
PierceSnohomishKing
Banks Remain Active in Disposing of Inventory but Value Expectations have Risen.
SOURCE: Gardner Economics
Economic & Real Estate Forecast
October 27, 2011
Lot Values - King County(Q3 2011)
Clearly a Relationship Exists Between Permit Fees and Values!
SOURCE: Gardner Economics
$0
$50,000
$100,000
$150,000
$200,000
$250,000
Redm
ond
New
cast
le
Rent
on
Map
le V
alle
y
Kent
Aub
urn/
Fed
Way
Duv
all
Paci
fic
S Se
attle
Economic & Real Estate Forecast
October 27, 2011
16
Lot Values Snohomish County(Q3 2011)
Proximity is Also a Driver Relative to Value.
SOURCE: Gardner Economics
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
Bothell Lynnwood Lake Stevens EverettEconomic & Real Estate Forecast
October 27, 2011
Lot Values Pierce County(Q3 2011)
Pierce County is Trading in a Fairly Narrow Range
SOURCE: Gardner Economics
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
$90,000
Economic & Real Estate Forecast
October 27, 2011
17
SF Permits Over Time(King County)
I See a Potential Lot Shortage on the Horizon.
SOURCE: Gardner Economics
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Economic & Real Estate Forecast
October 27, 2011
SF Permits Over Time(Snohomish County)
Room To Grown Here But We Must Be Wary of Our Reliance on Aerospace.
SOURCE: Gardner Economics
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Economic & Real Estate Forecast
October 27, 2011
18
SF Permits Over Time(Pierce County)
Higher Foreclosure Rates and Limited Job Growth Will Hurt the New Construction Market fort Some Time.
SOURCE: Gardner Economics
0
1,000
2,000
3,000
4,000
5,000
6,000
Economic & Real Estate Forecast
October 27, 2011
SF Permits Over TimeCombined
Still a Fairly Traditional Relationship Between the Three Counties.
SOURCE: Gardner Economics
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000King
Snohomish
Pierce
Economic & Real Estate Forecast
October 27, 2011
19
SF Permits Over TimeCombined
When Demand Returns Will We Be Ready for It?
SOURCE: Gardner Economics
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
Economic & Real Estate Forecast
October 27, 2011
Population GrowthTri-County Area
Although Slower Then Normal, This Lends Credence to the Demand Hypothesis.
SOURCE: Gardner Economics
78,5
40
57,1
92
67,3
13
42,6
38
45,9
68
54,2
18
92,3
29
77,8
25
57,4
91
45,2
97 49,8
53
33,2
92
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
(e)Economic & Real
Estate ForecastOctober 27, 2011
20
54
56
58
60
62
64
66
68
70West
U.S.
Homeownership Rates
SOURCE: Census Bureau
The Homeownership Rate is Reversing Toward it’s Historic Norms.
It May Overshoot and end up at 60%.
Economic & Real Estate Forecast
October 27, 2011
Single Family Transactions
21
Transactions by TypeKing County
2-Years Ago Current Quarter
SOURCE: Gardner Economics
62.7%
4.3%
16.2%
16.8%
Resale (Owner-to-Owner)New (Builder-to-Owner)Foreclosure (Owner-to-Bank)Foreclosure Sale (Bank-to-Owner)
69.9%8.3%
11.0%10.9%
Resale (Owner-to-Owner)
New (Builder-to-Owner)
Foreclosure (Owner-to-Bank)
Foreclosure Sale (Bank-to-Owner)
Transactions by TypeSnohomish County
2-Years Ago Current Quarter
SOURCE: Gardner Economics
44.6%
8.6%
22.7%
24.2%
Resale (Owner-to-Owner)
New (Builder-to-Owner)
Foreclosure (Owner-to-Bank)
Foreclosure Sale (Bank-to-Owner)
58.6%
7.7%
17.8%
15.9%
Resale (Owner-to-Owner)
New (Builder-to-Owner)
Foreclosure (Owner-to-Bank)
Foreclosure Sale (Bank-to-Owner)
22
Transactions by TypePierce County
2-Years Ago Current Quarter
SOURCE: Gardner Economics
50.3%
8.2%
21.4%
20.1%
Resale (Owner-to-Owner)
New (Builder-to-Owner)
Foreclosure (Owner-to-Bank)
Foreclosure Sale (Bank-to-Owner)
41.4%
7.3%
25.7%
25.6%
Resale (Owner-to-Owner) New (Builder-to-Owner)
Foreclosure (Owner-to-Bank) Foreclosure Sale (Bank-to-Owner)
Asset Types
• Transit Oriented Development;• Townhomes;• Single Family Detached;• Condominiums; and• Apartments.
23
Conclusions
• Prices are Bouncing Along the Bottom;
• Financing – Strict, But Available;• Market Likely to Exceed 2010 in
Overall Transactions;• Faster Drop Off in Foreclosures in
2012; and• Positive Price Growth in 2012 (1.9%).
Conclusions
• Fiscal Policies Effect on Real Estate;• The Puget Sound Remains One of the
Top West Coast Cities;• Limited Income Growth will Slow
Home Value Appreciation;• Renters are now Spending 5% more
on Housing Costs than Homeowners.• Recovery Will Be Unequal.
24
© Gardner Economics LLC 2011The Preceding Presentation may not be
Copiedor Distributed without Prior Written
Permission of Gardner Economics LLC
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