Economic Update

June 16, 2010

Transcript:

Ted Simons: Good evening and welcome to "Horizon." I'm Ted Simons. A slight uptick in retail sales and a recent increase in Phoenix area home prices. What does it all mean to Arizona's economy? And how long are the positive signs likely to last? Joining me to share their views on the state's economic climate are Jay Butler, an ASU real estate professor and ASU economist, Dennis Hoffman. Good to have you both here. Thanks for joining us.

Dennis Hoffman:
Good to be here, Ted.

Ted Simons:
First of all, let's start with the Arizona economy. How we doing out there?

Jay Butler:
Definitely leveling out. No longer sinking, sinking, sinking. There are signs of life, a couple of months of reasonably good news on a retail sales front. The one thing that jumped out at me in the April data is we had furniture and fixtures, we had automobiles up very, very nicely. Finally. I mean, these have been places where this economy has just been battered.

Ted Simons:
So the bigger ticket items, maybe not the biggest ticket items but bigger ticket items are doing well.

Dennis Hoffman:
At least for a month or so. If this continues for the next few months, we can say, hey, this thing has definitely turned. There are little signs of life.

Ted Simons:
Is there a chance for it to continue? We've talked about this on the show before, the idea that people aren't buying, they're not spending like they used to. Is that a curve? Is that a paradigm shift? What's going on here?

Dennis Hoffman:
This is the big challenge, Ted. Absolutely the big challenge. Some of the conventional models, we have to throw them out. If we look at historical norms in terms of purchasing, if we could just get -- if we could just get people to inch up towards those norms, not even achieve the full historical norms, we could inject 10 to 12 billion dollars of transactions into this economy. It would be very, very important. It would be a catalyst for job creation and confidence build.

Ted Simons:
Historical norms in real estate, what are we seeing right now?

Jay Butler:
Same problem. We've never been here before. We don't know -- the events we look at, are they the beginning of things or are they blips? Theres been a lot of preforcloure declining it declined early this year, late last year and then there was a sure of foreclosure activity. It's hard to go back and say this is what it looks like in history, because we haven't been there before. Historically foreclosures were at 3% and we're running right now, with a little better number, at 30%.

Ted Simons:
The slight increase in valley homes, do we make much of that? Is that likely to stay?

Jay Butler:
It's the price increase of what's being sold and beginning to move up the ladder. A lot of the entry level homes because the tax credit got sold, so you're doing a little bit of the moveup. We're seeing a lot of homes being foreclosed on or being sold back into the market by lenders or investors and being sold at somewhat higher prices, so there are some upticks in the price especially in the east valley.

Ted Simons:
Compare the foreclosure market and nonforeclosure market. What's going on there?

Jay Butler:
About 30% of recorded resales are foreclosures. About half of the traditional sales are homes that were foreclosed on and are being sold. The traditional market of the owner occupant buying a home is a small share of the market right now. It's because, you know, underwriting guidelines are high, down payment requirements. Plus, the fact a lot of people bought good homes in the market and they're not ready to move on at this time.

Ted Simons:
Interesting. And the job market I think plays into it, too, doesn't it?

Dennis Hoffman:
Absolutely, Ted. There's a very important linkage between this housing market and the confidence point we discussed a moment ago. It is impossible to base the economy level from the previous year on income alone. It's a wealth driven consumption shock. And if you look at the wealth that was lost in equities and the wealth that was lost in housing, it actually is worse than the Great Depression in terms of wealth loss. That explains some of this consumption depression, if you would, that we've seen in the data. So, Jay's points are very good. If housing can stabilize or even, you know, creep up a little bit or, you know, people can hear that their house price has not deteriorated much over the year, I think it can bolster confidence.

Ted Simons:
But the housing market is so dependent on jobs, is it not?

Jay Butler:
Well, it is. One of the things that is really driving the segment that is not measured real well, is there's a lot of renovation of housing going on. People have decided values are down, we can't sell this, but it's a good home so we're going to fix it up. We're going to go buy new furniture, we're going to remodel, fix it up. A lot of renovations have had -- renovation lending is one of the biggest areas right now. There is a growing sense of confidence. We've got to remember, as much of foreclosures impact, they're only 8% of our inventory the last couple of years. A large number of people are fairly happy in their homes, they just haven't had the confidence to make the improvements. Now they're feeling more confident in their jobs, more confident this is a good place to live.

Dennis Hoffman:
For those that are happy and those that have some equity -- there are some --

Jay Butler:
I'm one of them.

Dennis Hoffman:
I am one also. The home equity credit lines are at a historical low so you can finance these renovations Jay is talking about very, very cheaply.

Jay Butler:
I bought my home in '72 at 36. No matter how bad the market is --

Ted Simons:
I think he's crowing. Let's talk about the job market. What are we seeing out there?

Dennis Hoffman:
A little bit of stability in jobs. Arizona, again, one month does not a trend make. We had a good month of April in terms of the Arizona data. The job gain in Arizona in April compared very, very favorably with the pre-recession trends. I think it beat the ten-year average in terms of prior to the recession.

Ted Simons:
As far as per capita income as well, are we seeing anything definite happening there? Is it basically bumping along?

Dennis Hoffman:
Per capita income, this is a good one. I have a colleague -- my colleague and I, not sure that we trust the BEA's income data and we definitely don't trust the population data right now. Per capita income, you know, it's the quotient of these two things. So it's going to take a couple of years to shake this out. I think logically per capita income is flat to declining in this particular environment. But we have to figure out how many folks are actually still in Arizona.

Ted Simons:
Why is that difficult to figure out?

Dennis Hoffman:
Well, the census came out with some data in December that suggested the pace of in migration in terms of immigration in 2009 was about the same as it was in 2006. Does that make any sense to you, Ted?

Ted Simons:
Does that make any sense for the housing market?

Jay Butler:
No. The way they figure out estimates is they look at new housing units and figure population based on that. Since a lot of those units are vacant, we know a lot of the people aren't here. But in order for the market to grow, you've got to bring people into the market. That's going to be the big question. Will people move here? They'll only move here if they can find jobs. And are jobs better elsewhere? Are they better paying elsewhere?

Dennis Hoffman:
You know, we have some data that suggests -- what we're trying to do is explain the state-to-state movement, not the international migration. But actually the domestic migration because it's been a very important engine of growth in Arizona over the years. Certainly job creation, we're a people magnet because of our jobs, but they tend to move in more healthy economic times. In other words, even if jobs are fairly prevalent in their home states, they'll feel better about moving, they can sell their house, they can migrate. The problem with a deep downturn like this is people hunker down. They freeze. They don't want to move to Arizona, Florida, anywhere. The only place I can find that people are moving to is North Dakota.

Ted Simons:
I've heard about that as well. Interesting story. What, again, does that do to the foreclosure market, to the nonforeclosure market, the house market, the condo market? Are we waiting for everyone else to pick up and move?

Jay Butler:
Basically, yeah. Many of the foreclosure housing market are empties. The name of the deal is deal, whether it's for rent or sales price. Again, we're sort of population is, maybe not what they think it is, probably lower, that has some implications, especially in some areas that have serious housing issues.

Ted Simons:
Give us some ideas.

Jay Butler:
Well your looking at places like marryvale and El Mirage, a lot of the western communities because the infrastructure isn't in the area. On the other hand, some of the older communities in the east valley, Tempe, Gilbert and Chandler because jobs are there, the freeways are there, the schools are there. They're seeing somewhat of an earlier emergence of their housing market than elsewhere.

Ted Simons:
For someone selling their house right now with a sign in the ground or thinking about putting the sign in the ground and they're thinking back, I remember 2006, 2007. I remember the neighbor down the street sold for X. I want to try to get close to that. How long before that house equates to what X sold for?

Jay Butler:
A long time. If you bought a home in the hyper market in 2004, it's going to be quite awhile. Median prices back then were $270,000. We're looking at $140,000. We have a ways to go. That's frustrating a lot of people. Can they get back to the price? That's what their mortgage is based on. Some have simply said we're going to quit looking at the charts. We're just going to live in this thing. Others, strategic defaults, other issues come into play.

Ted Simons:
The idea- Go ahead.

Dennis Hoffman:
I was just going to point out anecdotally. My neighborhood is back to about 2003 prices. I think it's very neighborhood specific, and I would advise that individual to, you know, simply scout the neighborhood and figure out what the market is.

Ted Simons:
The numbers we talked about earlier, relatively positive numbers. Don't know how long they'll last, but they're there. How much is that due to the feds basically propping up the housing market?

Dennis Hoffman:
I think it's very important. I know there's a lot of debate in the profession about this. A lot of that debate is ideological, political, I think. I think logically the injection of money credited into the system was very, very important in attaining stabilization. There are some economists actually that argue we should be doing more. I think state and local governments nationwide are going to be challenged. We've seen that here in Arizona. We've injected some stability into our situation, but we haven't fixed the whole problem clearly. But I think government intervention, especially with respect to the credit policies and low interest rates, have been very, very important in stabilizing this economy. The challenge going forward is backing out. You know, at what pace do we back out? I know there's a lot of arguments politically that we need to be backing out now because of big deficits. From an economic perspective, I have far less problems with our big deficits today than I had with running deficits in 2005 and 2006 and 2004. Doesn't make any sense to me to run big deficits during good times federally. I understand why we have big deficits today. I think they've been very important in stabilizing this economy.

Ted Simons:
As far as the federal programs, propping up the housing industry in particular, but as Dennis mentioned, just the overall economy, how big a factor?

Jay Butler:
It's been a big factor. There were two articles yesterday talking about this issue. Home builders are losing clients, permits are declining we peaked at 900 permits about a year ago. The last infusion of past credit didn't do that much. So there's really concerns. Once you remove the stimulus, the market may disappear on you in this bigger situation, because you got to have the mobility factor. The problem with most of the housing is, for most people they got to sell a home. That's the big issue.

Ted Simons:
We'll stop it right there. Gentlemen, great discussion. Thank you so much for joining us.

Jay Butler:
Thanks, yeah.