I read as much as I can get my hands on early each year, trying to decipher the future economic changes we are likely to experience in the next 12-24 months and beyond. As unknowable as we all understand the future to be I often wonder why I even try, but every year sure enough I find myself doing it yet again. The one thing I've learned without a doubt?: A lot of smart people feel a lot of different ways about the future of our economy and most of them will be wrong!
With that being said, here is my educated guess at our future market conditions over the coming few years. Please don't hold me to it...
Homeownership rates in CA are at their lowest levels in recent history thanks to high prices and a failure of Gen X/Y incomes to keep up with market prices. Not to mention the real estate collapse in 2008-09 which still has many people terrified of making the leap. This can be read two ways: either this huge portion of our population is going to rent for the majority of their lives or there is a tremendous pent-up demand for starter homes that will only be filled when their incomes rise or the market falls. Interest rates are still near all-time lows so affordability in terms of monthly payments isn't really the issue. In my opinion it's sticker shock, for a young family making $50-80K/year the idea of buying a 'starter' home for $400K+ is pretty daunting regardless of the monthly carrying cost. Not to mention they just watched their Baby Boomer parents get hammered by the real estate collapse right as they were planning for retirement. You can't really blame them for opting to rent instead of buy.
We can't really know when they'll come off the sidelines but the way I view it, we don't have to. What's important from an investing stand point is to know that there are a lot of buyers on the sidelines that will engage if and when prices get to a level they can act upon. I view this as a tremendous buoy to our local market that puts a floor on pricing somewhere above the lows of 2008-2010. For those investing in First Trust Deeds at 70% or less of today's market, as I do, this is a very supportive data point.
However, when it comes to today's real estate market there is probably no factor more important than interest rates. Conventional lenders, saddled up next to the Federal Reserve's discount Window, are able to offer loans at mind-numbingly low interest rates. Additionally, low interest rates mean increased purchasing power. In other words, you can buy more house with less monthly cost. In my view this has been the biggest driver to our market recovery the past few years. In most areas of Southern CA we saw prices bounce upwards of 40-50% from the lows of 2010. This was accomplished without a matching increase in median incomes and most people still unwilling or unable to buy, so in my view it was a bit of a smoke and mirrors game. The fundamentals for that massive jump were not really there, so lately we've seen price appreciation stabilize and flatten in most areas. Personally I believe this is a good thing. If we continued to see the same appreciation of 10%+ per annum we would be setting ourselves up for a repeat of the last market collapse. The market may have some downward cycles in front of itself but barring a large spike in interest rates I hope the 40-50% declines we experienced 6-7 years ago are not in the cards moving forward near-term.
The last factor I'll mention is the strengthening dollar against other foreign currencies. Despite the Feds best efforts to spur meaningful inflation at home, most of the rest of the world's central banks are matching those efforts and winning the war and the dollar is appreciating accordingly. Right or wrong, the rest of the world still believes we are a safe haven and as such they are willing to invest not only in our stock market but also in our Bonds and Treasury Bills which helps drive down interest rates on mortgages. I don't see this trend reversing anytime soon, and a strengthening dollar will hurt the multinational corporations in our stock market that derive a large portion of their profits from selling their products in foreign markets. This is a complicated topic that I'm still trying to hash out but it will undoubtedly affect our stock market and real estate market moving forward so I'd recommend we all keep our eyes open to it as it develops.
2015 predictions if I had to make one:
U.S. Stock Market will underperform.
U.S. Real Estate will also see declines. Most likely this will be less severe than the stock market.
There are so many factors that go into setting market prices, in turn making grand scale predictions a fool's errand of the highest order. I haven't made any mention of oil prices, potential global conflicts, our political turmoil, the imminent retirement of the Boomer Generation, black swan events, etc. All of that being said, in order to plan our investment future and fine-tune our investment philosophy, I feel it is important to have some macro and micro-economic evaluation methods to help guide us. I can only hope this post helps spur some of you to think a little more deeply about what you are investing in and why.
Like the post? Please feel free to 'share' with friends using the button on the bottom right or comment below! If I can be of any help in your journey I'm always an email away: Clint@AAAPrivateMoney.com