Big picture economics and local real estate Real estate investors group, Nashville August 10, 2009 David A. Penn, Director Business and Economic Research Center Middle Tennessee State University [email protected] 615-904-8571 Short-term Outlook Upside • The national economy is no longer in freefall. • Population growth continues in Middle Tennessee. Murfreesboro experienced the 12th highest rate of population growth in the nation for 2007-08. • Housing construction and home sales are on the rise buoyed by lower prices, low mortgage rates, $8,000 tax credit for first-time buyers, and mending consumer confidence. Home construction and sales bottomed out in January. • Increasing housing activity will generate much needed state and local government revenue. • Inflation is not a problem and probably won’t be an issue for some time. • Consumers can be brought back to spending when the right deal comes along. The cash-for-clunkers program has been hugely successful, and demonstrates that consumers will bite if the deal is attractive. Downside • Double-digit declines in manufacturing employment have hit Tennessee hard. Tennessee is more reliant on manufacturing compared with the average state. • Manufacturing decline particularly gruesome in the rural counties, causing large increases in the unemployment rate. In June, 21 counties experienced unemployment rates of 15% or higher. • Unemployment rate still on the rise; 11.1% for Tennessee, 10.0% in metro areas, 13.8% in rural areas (June 2009). • Unemployment is not expected to peak until next year. Higher unemployment generates a large drag on consumer spending. 12What does ‘recovery’ mean? • If recovery means a return to the status quo before the downturn, then we have a very long way to go. Research Insight estimates that Tennessee’s economy will not experience a full recovery until 2014. • We should consider a more modest definition of recovery: a sustained improvement from last month or last quarter. By this definition, the local economy has begun the process to recovery, but some sectors (housing) will improve even though other indicators (unemployment) are still negative. Going forward • Second quarter 2009 marked the fourth consecutive quarter of falling GDP; first time since the late 1940s. GDP data for this quarter (third quarter) will probably show an increase. • Don’t make year-to-year comparisons (it is too depressing). • Make comparisons with the previous month or previous quarter. • Forget about ‘recovery’; settle for sustained improvement. • The unemployment rate will be the last indicator to improve; don’t look to this indicator to assess the strength of the economy. • Job growth will not occur until employers have confidence that sales will continue to rise. • Jobless recovery is likely; growth of GDP of at least 2.5 percent is needed to bring down the unemployment rate. What will be the shape of recovery? • V – sharp downturn followed by sharp recovery (1983) • U – typical downturn followed by recovery (1991, 2001) • W – short, severe recession followed by weak recovery, leading to another recession (1980, 1982) • Sideways L – long downturn followed by recovery (Japan) • Checkmark - sharp downturn followed by gradual recovery Today’s subjective odds: V 20% W 10% L 20% Checkmark 50%Important National Indicators Monthly change in payroll employment 34ousing and residential real estate depends on growing the number of minus ies). increase) 3 important for the Nashville area, accounting for 58% on to the Nashville area recession has probably caused household size to increase somewhat sed by 2.3% annually 2000-2008, compared with 2.1% population growth. es, the price of housing, rental rates, and the availability of price of land, local regulatory environment, and the availability and cost of credit. eventually return to the long-term trend; this is called the error-correction model. -rket will eventually move up towards the trend as inventory becomes depleted. oots. g growth is usually either above trend or below trend, rarely equal to trend. Long-run considerations • Demand for hhouseholds. • Household growth depends on population growth and household size. • Population growth depends on net natural population increase (birthsdeaths) and in-migration (from other counties, states, or countro Population growth 2000-2008 for the Nashville MSA:  Total growth: 238,944 (18.2% Net natural increase: 80,195 Net in-migration: 138,753 • Domestic: 112,35• Foreign: 26,400 • In-migration has been a veryof total population growth. • Population growth trends are slow to change. In-migraticontinues, despite the large rise in unemployment rates. • Household size has been drifting lower since 2000, now at 2.374 persons per unit (2008). Thesince 2008. • Housing stock increa Short-run considerations • Demand for housing (new or existing) depends on employment and income growth, interest ratlong-term credit. • Sustained increases in the inflation rate can create investor demand for housing, as real estate values typically grow faster than the inflation rate when inflation is rising. We see little indication that inflation will be an issue in the near future.• Supply of housing (new construction) depends on cost of labor and materials, Equilibrium (balancing supply and demand) • Short-term booms (2003-2005) can cause the housing market to grow faster than the long-term trend (this is the bubble). Economists contend that the market will • Short-term busts (like now) are characterized by growth rates lower than the longterm trend. If population growth continues, the ma • The housing market tends to return to trend growth, but almost always overshIn other words, housinNashville Area • Payroll employment continues to plummet, with manufacturing and construction producing double-digit percent losses. • The unemployment rate continues to rise; will likely rise through the remainder of the year. • Housing market is showing signs of life; sales are up and single-family construction appears to be on the mend. • Sustained growth will depend on increasing consumer confidence, income and job growth. Nashville area single-family sales and inventory (seasonally