IN THE UPDATE:
- Resolving a Four Year Catch-22: Consumer Confidence Rebounds in 2011
- Trends Impacting Austin Residential Real Estate in 2011
- The Central Texas Outlook
- Central Texas Property Listings
Resolving a Four Year Catch-22:
Consumer Confidence Rebounds in 2011
Among the many amusing George Bush moments, few seemed as comical as the suggestion he made right after 9/11, that we just all needed to “just go shopping or go to Disney World.. or the terrorists will win“.
I’ve been realizing lately how right George actually was with his advice, in a way. The ideal economic response to a disaster (whether it be terrorism or the bursting of a multi-trillion dollar housing bubble) is for individual consumers to keep spending. The worst thing for the economy is when consumers stop spending, instead saving, paying down debts, and going without the fancy new flatscreen TV or shiny new car. The Catch-22 is that what seems good for the individual (lower debt) is not good for the economy.
The reason that consumer spending is vital to a healthy economy is due to the multiplier effect, which states that for every dollar I spend on a new American car, hundreds of people benefit – from the employees of the car dealership to the manufacturers of the windshield wiper blades to the grocery store employees that sell milk and bread to those same employees, and so on. For every one dollar spent on that car, the actual benefit to the economy may be six dollars. But if I send that dollar to Chase to pay down my credit card, it’s not just one dollar taken out of circulation – it’s really six dollars taken out of the economy! Ouch, no wonder Americans’ newfound frugality has left us in the same dumps for four years now.
 Here are a few unscientific reasons that I expect 2011 to be the year we reverse course, strapping on our money belts and lacing up our shopping boots to head for the mall. The increased spending may aggravate your financial planner, and the increased Cinnabon consumption may aggravate your waistline. But if we all start spending even a little bit more next year, we will see increases in value of stocks and bonds, real estate, and your black sheep uncle may finally put down the bottle and find a new job. So why is 2011 is the year?
 1. We’re collectively sick of the doldrums. It could really be that simple. We’ve stared at the depths over the past few years, and the depths have stared back. Yet, we’re still here (most of us), and we’re still breathing. Being human, we still want those shiny new cars and flatscreen TVs. In fact, we’ve stored up four years of under-quenched materialistic desire, and the bough is bound to break sooner than later, spilling out in an orgiastic fugue of consumption unlike any seen before. One can only hope.
2. The activist Federal Reserve. It’s really neat to watch Bernanke and crew try out new and different strategies to stimulate the economy. The latest announcement of a $600B bond buying effort may or may not turn out to work, but it’s definitely a sign that these guys are going to continue to tinker until they get it right. I think it’s a wise move, because I am a hearty believer in the Keynesian wealth effect. As Bernanke explained on 60 Minutes (the World Series of TV journalism, by the way – always fascinating and relevant), the $600B bond buying effort was meant primarily to increase stock prices. Since half of Americans own stock, this increase will make consumers feel richer, and give them reason to stop waiting and go ahead and buy the TV and car this year. In effect, the Fed is gaming the system in order to induce consumers into an irrational behavior that will counterintuitively benefit the economy as a whole. Cool.
3. We can’t blame our leaders any more. First we thought Obama could somehow come into office and wave his magic wand and all of a sudden the economy would be great again. An unrealistic and economically unsophisticated minority blamed him for not doing enough to improve the economy (typical tea-bagger mantra: “damn bailouts!” .. “damn socialists!” – yet TARP was hatched by the Bush Administration and blessed (correctly) by economists that witnessed firsthand how close we were to global meltdown. As November 2nd showed us, Americans are upset and want to give the Republicans another shot at improving the economy. Going forward, no one can blame either party for our situation. Maybe if we stop pointing fingers and realize that it is only ourselves that can pull ourselves out of this mess, then that’s exactly what we’ll have no choice but to do. Watch this happen in 2011.
Trends impacting Austin Residential Real Estate in 2011
1. Interest Rates – though rates are almost certainly likely to rise a little, I expect them to remain near all time lows. The Fed will do its part to keep rates low to stimulate investment, and the continuing slow economy will not put us at risk of inflation. Low rates are always beneficial to real estate values, but…
2. Accessibility of Credit is the larger concern. Banks have hundreds of billions of dollars of lendable proceeds (an all time record), yet the latest news suggests they’re becoming even more conservative with regard to whom they lend. Since one cannot usually buy an expensive asset like real estate without a loan, this tightening of credit does not bode well for increased transaction activity in 2011. That said, if you’re one of the few with sterling credit and good income – and you’re not buying real estate in 2011 – shame on you!
3. Unemployment – though much less of a concern in the Central Texas area, high national unemployment casts a dark pall over the country’s mood. Especially on national news programs, we see how pessimistic people are about the jobs picture. This definitely impacts consumer sentiment in Austin as well, and keeps a curb on new purchases. There’s not much reason to believe that unemployment will ease significantly in 2011.
4. ‘Hot’ Industry Segments – Some sectors of the economy, particularly social networking businesses, are actually having trouble finding enough employees to fill positions. And these are good, high paying positions. Markets like Austin will continue to benefit from wooing firms in these hot industry segments, and real estate values will benefit. Overall, Austin’s continued net positive job growth and desirability for so many will give us a boost over other markets.
5. Distressed Inventory – Supply of distressed inventory is a major factor in real estate values, because home buyers and investors are of course drawn to properties available for significantly less than “retail”. Luckily, Austin has been spared a lot of foreclosure inventory. The latest reports show the inventory levels to be dropping. So though I do see 2011 continuing to sell through a lot of foreclosed inventory, I do not see new foreclosed inventory as having a drastic effect on prices, except in the most outlying suburban areas.
6. Efforts to Reduce Deficit – We have some painful choices ahead of us to reduce the national budget deficit. There are so many different options being considered, that it’s difficult to forecast how these efforts might impact real estate values. Obviously, the elimination of the mortgage interest tax deduction will reduce the incentive to own a home. And any benefit cuts are likely to trigger the wealth effect (negatively), reducing interest in real estate and other major investments.
7. Continuing Focus on Urbanization – In a trend we’ve seen magnified over many years, people continue to move out of suburbs and back into cities. I’ve said for years that investment properties closer to the core downtown and UT Austin areas are the properties most likely to appreciate and stay rented for the long term. The key is to buy far enough out of the expensive areas that property taxes don’t slaughter your returns – but close enough in that you get the benefits of the Central location.
The Central Texas Outlook
2010 showed us a very slight improvement from 2009. I believe 2011 will also be a slight improvement over the previous year.
There is simply not enough positive news on the horizon to imagine values will spike this coming year. Nor do I feel there is enough negative news to tank property values.
I believe the majority of buyers in the market in 2011 will be those that have been the least impacted by the recession, hoping to take advantage of the good deals. Unfortunately, not many people fall into this category.
I believe the vast majority of sellers in the market in 2011 will be banks selling foreclosed inventory, sellers that have owned a long time that due to life’s reasons need to sell, and sellers who own quality property in quality areas who can still get a good price. The majority of sellers that do not have to sell will not. They will wait until the media starts doing reports on the improving market, and they will probably need to wait until 2012 before that begins to happen.
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