Wednesday, December 20, 2006

Just a random thought on Interest rates, economy, international concerns, etc...

You know, I am beginning to wonder if the Utah real estate market might be gearing up for being the eye of the perfect storm. In a good way. Let me explain:

In the rest of the country, the economy is not as strong as it is in Utah. The real estate boom that the rest of the country enjoyed in the last two years pretty much sidestepped Utah altogether. In other areas, it was fueled by a large school of nationally motivated real estate investors, primarily from California, who were only looking at one factor in making purchase decisions: real property value appreciation. These were "paper-rich" people whose only increase in net-worth was through a massive increase in the value of their own real estate. Nobody was getting paid more at their jobs, nobody was winning the lottery, etc. When this happens, there is no local support for that increase in value - the local wages haven't changed to support the new values, so the locals aren't the ones buying homes, they're essentially locked out.

This, among a couple of other factors, produces a classic real estate bubble. By definition, the bubble is not self-sustainable, and is therefore susceptible to bursting - where the bottom drops out just as fast as it grew in the first place - which means the investors move to other places, like flies.

When investors become successful in areas, lender follow suit, and the whole industry balloons up, supporting this increased activity. If interest rates are a problem, in relation to the Federal Reserve rates, they will simply come up with programs that will allow these investors to be successful regardless. Note here as examples, Option Arm Loans, 100% financing, 2- and 3- year Arms, "Alt-A" lending, etc. Lenders will always to find ways to produce programs that make it possible to acquire the business of these investors. Lenders are in the business of selling money, that's what they do.

So, with all that being said, our little local state-wide economy, with the possible exception of Washington county (the fourth-fastest growing county in the nation, at last count), we have just chugged along. Sure, there are investors here from out-of-state buying homes they never intend to live in, or even hold for more than a year, but on the whole, these people are balanced out with the other members of our community.

Our unemployment rate is among the lowest in the nation, and employers report having difficulty attracting and keeping talented workers. It's so low, it basically is at the point where those who want to work, are doing exactly that. This does things to the housing market as well. When everybody who can, or wants to, is working, they are confident en masse. They are willing to buy homes, move up, or make improvements. This balances the investor pool as well, and makes the entire picture more stable.

So on to the "perfect storm" theory. When an economy is burgeoning, as ours is, and rates are fairly low and stable (5.625% 30 year fixed in Utah right now), and there is relatively low investor activity (because they have been taken out of the game from losses in other unstable markets - like Vegas, Phoenix, etc,), balance comes to the whole, and stability ensues.

Couple that concept with the following thoughts:

1. The economic bounty will likely last well into and through the next 24 months, or longer.
2. While we are on an interest rate upswing, that will only last for about that much longer as well, maybe 36 months or so.
3. Utah is not, and will not be, bothered by the mass of national real estate investors, because they are pretty much out of the game at this point.

This gives me the thought that we may well be insulating ourselves from that rate upswing with a strong local economy, allowing Utah to move through the next 24-36 months without much of a real estate downturn, either in valuation or in market inventory.

I think this is good for us, into the foreseeable future. Our job growth economy will carry Utah through to the next interest-rate downturn, and then we'll have another refi boom, people will be happier with borrowing money, lenders will be happier to sell it, and rates will be driven even further down, default rates will lower, international monetary investors will like the dollar better, because the nation's GDP will be better, and all will be well in happyville.

So, contrast this happy story to this one, in California, where values went through the roof, unsupported by the local economy: here

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