Bumper Car Economics

by Dr. Ted Jones, Chief Economics, Stewart Title Guaranty

You know where you are going but things keep bumping into you. The constant change in interest rates, job creation and Federal Reserve policies are factors real estate professionals have grown accustomed to expect over the last several years. More recently hurricanes, tornados, terrorism and energy costs have impacted our businesses and as well.

Dr. Ted Jones is Stewart Title Guaranty?s Chief Economist. Jones said we can definitely expect more change in 2006 but the economy may not be as bad as many of us hear described in the media.

One change that we don?t experience every year is the appointment of a new Chairman of the Federal Reserve Board. Alan Greenspan will be retiring after 18 years as the Reserve Chairman in favor of Ben Bernanke. Historically one of the first acts of a new Chairman is to increase interest rates and Jones does not see Bernanke deviating from this trend. Bernanke?s primary objective in raising interest rates is to curtail inflation.

We have enjoyed five years of favorable interest rates and although they may not change significantly we can all expect to pay more for the money we are borrowing. Jones expects mortgage interest rates to surpass the 7 percent level by July of this year. He noted however that the rise in interest rates does not significantly impact the home purchase market until mortgage rates exceed 8 percent.

Inflation is a concern of Dr. Jones. Many household items such as tires, cleaning products and even bank ATM charges are projected to increase in 2006. The real estate market will inflate as well. House appreciation has been modest but stable in Ohio.

"The real estate in your market (Ohio) has increased in value 4.89% in the last twelve months and 22.9% in the last five years", according to Dr. Jones. This steady increase is substantially lower than the 25% increases in the last year in Nevada, Arizona, Hawaii and California. Ohio ranked 48th out of the 50 states in appreciation of houses in the last twelve months. Real estate owners are often envious of other market appreciation until they see the other market in a housing bubble.

Dr. Jones continues to be optimistic about job growth both nationally and locally. Columbus, Ohio contributed 5,100 of the 2 million net new jobs created nationwide in 2005. These new jobs will help fuel the demand for new homes.

However, Jones cautioned not to be too optimistic about the 5,100 jobs added as there were almost 12,000 permits granted for residential homes in 2005. "The increase in supply clearly has outpaced the increase in demand in the last 12 months", says Jones, "markets cannot sustain that trend long-term".

Dr. Jones utilizes an economic model to label real estate markets that favor either the buyer or the seller. Using this model, we see that the Columbus market currently has 6.51 months of real estate in inventory.

Inventories in markets that are less than 8 months are classified as sellers markets while inventories that exceed 12 months are clearly buyers markets.

The aggregate market of houses under $399,999 in Columbus is a seller?s market, the houses from $400,000 to $749,999 are in a neutral market while the houses in excess of $750,000 are in a buyers market. REALTORS® should consider this when you are pricing/marketing.

"There is no national real estate bubble", says Dr. Jones, "just some overheated real estate markets that will either pop or leak air". Denver, Palm Springs, Sarasota Florida are a few examples of some of the markets with real estate bubbles. Each of these markets has maintained consistent trends of adding inventory to the market without increasing the demand. Causes of real estate bubbles include overbuilding, job losses, pyramid schemes with speculative investors and interest rate increases. The Columbus market has been insulated from many of these factors although we are vulnerable to a significant interest rate increase.

In summary . . .

The forecast for 2006 is favorable. However, conservative policy is prudent during changing times.

Agents should start each year with a written plan. Factor in your historical performance as well as projections on anticipated economic changes. But, as we're dealing with bumper car economics, you can expect changes will bump into you throughout the year, so adjust your plan accordingly.