Slide1: California, Real Estate, And Economic Activity Bill Watkins July, 2006


Outline: Outline United States California Real Estate


Principles of Economics: Principles of Economics


Slide4: Ry Cooder says: “All the money in the world is spent on feeling good.”


“You can’t always get what you want.”: “You can’t always get what you want.” Mick Says:


“The future is uncertain, and death is always near.”: “The future is uncertain, and death is always near.” Jim Morrison Says:


Slide7: “Behind every silver lining, there is a dark cloud.” Ry Cooder says:


Slide8: David Ricardo 1772 - 1823 The Theory of Comparative Advantage More trade is better Who cares about a trade deficit


United States’Economic Topics: United States’ Economic Topics


Slide10: World GDP Growth 0.0 1.0 2.0 3.0 4.0 5.0 6.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006


“The United States’ economy has shown remarkable resiliency. It is all about Productivity, International Trade, Wealth, and a Service Economy.”: “The United States’ economy has shown remarkable resiliency. It is all about Productivity, International Trade, Wealth, and a Service Economy.” Bill Says:


Slide12: Real Consumption per Capita United States 2002 $000s


Slide13: United States Unemployment Rate The Unemployment Rate has been below 4.6 % only 10.5 % of the time since June 1969.


How High Are Home Prices?: How High Are Home Prices?


Slide16: Existing Single-Family Median Home Prices divided by U.S. Wealth 0.0 20.0 40.0 60.0 80.0 100.0 120.0 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 Index 1968=100


How High Are Oil Prices?: How High Are Oil Prices?


Slide18: Oil Prices in Relation to Wealth 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Index: 1966=100


“Homes are cheap and so is oil.”: “Homes are cheap and so is oil.” Bill Says:


What About Interest Rates?: What About Interest Rates?


Slide21: Real 10-Year Bond Rate percent


What About Inflation?: What About Inflation?


Fed TighteningInverted Yield CurvesandRecessions: Fed Tightening Inverted Yield Curves and Recessions


Slide25: February 2006 4.54% 4.69% 4.68% 4.67% 4.64% 4.57% 4.56% 4.57% 4.73% 3-mo 6-mo 1-yr 2-yr 3-yr 5-yr 7-yr 10-yr 20-yr United States Treasury Bond Yield Curve


“If the Fed’s overly-aggressive interest rate increases cause a recession, it will probably be in 2007, and it will be mild.”: “If the Fed’s overly-aggressive interest rate increases cause a recession, it will probably be in 2007, and it will be mild.” Bill Says:


There are Other Risks: There are Other Risks Geopolitical Risks Oil Supply Interruptions


What About the Federal Deficit?: What About the Federal Deficit?


What about consumer debt?: What about consumer debt?


Slide30: Delinquency Rates All Banks, SA 0 1 2 3 4 5 6 7 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 percent C&I Loans Credit Cards


Is Job GrowthThe Proper Metric?: Is Job Growth The Proper Metric?


Slide32: Real Gross Domestic Product Growth United States


Slide33: Unemployment Rate United States


Slide34: Real Gross Domestic Product per Capita Growth United States 2.8% 1.3% 2.5% 3.3% 3.0% 3.3% 2.6% -0.3% 0.6% 1.7% 3.0% 2.3% 1.9% 1.4% 1.7% 1994 1996 1998 2000 2002 2004 2006 2008


Slide35: Real Consumption Expenditures per Capita Growth United States


Slide36: If Things Are So Good, Why Do So Many Feel So Bad?


“Part of it is the media.”: “Part of it is the media.” Bill Says:


Uncertainty Is The Problem :: Uncertainty Is The Problem : War Security Job Tenure Competition New Competitors New Technology Pace of Change Lack of Control


Tomorrow’s Winners: Tomorrow’s Winners Updated Human Capital Creative Risk Taking


Houses and Bubbles: Houses and Bubbles


Slide41: Will home prices collapse and cause the end of the civilization?


Slide42: Bill Says: “They mean that house prices will fall, and that fall will cause a decline in consumer spending.”


Slide43: Chuck Maxey* Says: “Not to worry. American society is superficial and materialistic.” “Consumers will continue to spend.” *Dean, CLU School of Business


Slide44: Ten Most Affordable Communities in America National Association of Home Builders


Slide45: Housing Affordability United States 45% 50% 55% 60% 65% 1990 1992 1994 1996 1998 2000 2002 2004


California’s Economy: California’s Economy


Slide47: Keith Says: “Its only rock and roll.”


Slide49: Unemployment Rate California


Slide50: Real Gross State Product Growth California


Slide51: Real Gross State Product per Capita Growth California


Slide52: Real Retail Sales per Capita Growth California


California Impact of a FED-Induced Recession: California Impact of a FED-Induced Recession Less immediate than the past recession Gradual Milder than the past recession Strong home prices


California Has Some Issues:: California Has Some Issues: High Costs High Uncertainty Dysfunctional State Government Terrible System of Financing Local Government


California’s Assets Fit Today’s World:: California’s Assets Fit Today’s World: Climate Population Higher Education System Location


Two Californias: Two Californias


Slide57: Coastal California


Slide58: Ten Least Rapidly Growing Counties in California (2000-2004)


Slide59: Everywhere Else


Slide60: Ten Most Rapidly Growing Counties in California (2000-2004)


Four Major Migrations: Four Major Migrations Baby Boomers Generation X Hispanic Tradable Goods Producers


Demographic Trends: Demographic Trends Growing Growing Old Growing Rich


Slide63: Change in Age Distributions for California and U.S. 2000 to 2005 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 0-4 5-9 10- 14 15- 17 18- 20 21- 24 25- 34 35- 44 45- 49 50- 54 55- 59 60- 64 65- 74 75- up percent California United States


Slide64: Age Change Comparison: South Coast vs United States


Slide65: California versus U.S. Income Distribution Change 2000 to 2005


Slide66: Income Distribution Change: South Coast vs United States South Coast United States (2000 – 2005)


Slide67: California Population


Slide68: California Population Growth (People)


Slide69: California Population Growth Rate


Real EstateTopics: Real Estate Topics


Slide71: Ten Least Affordable Communities in America National Association of Home Builders


Slide72: Nominal Median Home Price California


Slide73: Real Median Home Price Growth California


Slide74: Are California Home Prices In a Bubble?


Why Do Home Prices KeepGoing Up?: Why Do Home Prices Keep Going Up? Coastal California is not a local market Demographics Wealth accumulation Interest rates Taxes Demand Side


Why Do Home Prices KeepGoing Up?: Why Do Home Prices Keep Going Up? Limited numbers Delay Uncertainty Fees Property rights Supply Side


Slide77: Housing Unit Permits per 1,000 people California


Slide89: Thank you. Visit us at www.ucsb-efp.com