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Mark Sprague State Director of Information Capital Mark Sprague State Director of Information Capital www.IndependenceTitle.com

WHAT’S ON THE HORIZON?Mark Sprague, Director of Information Capital

Mark Sprague State Director of Information Capital

What do you think?

Will the market in 2018/19 be

Better? Same? Worse?


US Economic Outlook


Job Growth Remains StrongParticularly in Texas and Austin


National job market is strong enough to support employees quitting for better opportunity.


Education matters! With job openings above pre crisis levels, some cannot find jobs


Wage growth does not reflect strong labor market.


Slow GDP Growth the ‘new normal’?

– Last 7 years growth average 2.1%– 2016 GDP growth 1.5%; 2017 stronger.


Gross Domestic ProductTake Away

– National GDP: +3.3% (Q3 2017)

– Texas GDP: +3.3% (Q3 2017)

• GDP is the total value of everything produced by all the people and companies in the country. It doesn't matter if they are citizens or foreign-owned companies. If they are located within the country's boundaries, the government counts their production as GDP. This also includes everything you and I produce.

• Between 3.5% to 5% is healthy

• GDP is the blood pressure of our nation.


Effect of local employment / GDP on National numbers

(only 13 counties out of 3200+ are doing well comparatively)


2018 U.S. Economic Outlook • The national economy continues to improve through 2018.

• Slower growth economy the ‘new norm’, last 7 years avg. 2.1%; 2016 GDP growth 1.5%; 2017 2.2%. 2Q18 is at 4.1% (.6% Chinese prepurchase of soybeans, pre tariff)

• Federal fund rate continues to improve, raising lending costs.

• Inflation improving. 2017 2%- 2.5%.

• U. S. housing improving, not fully recovered. (not wide spread.)

• Bigger question is can they build affordable where needed?

• Employment better, national, regional and local unemployment rates below 5.0%. However wages are not improving as quickly.

• Looking for a ‘Driver’ for expansion nationally.

• Longer path to a soft landing. Historical economic data suggests that the US is due for a correction, yet most analysts cite a continued strong economic path rater than a nose dive.

• Retail continues to change. Department store deconstruction and obsolescence. Over built. Overall retail maturity end of cycle. Changes in consumer habits; shopping, apparel needs, preferences. Loss of middle class shopping. Retail technology advances.

• Tax Reform – the overhaul has numerous impacts (intended and unintended) on the real estate world.


U.S. Economic challenges and issues

• U.S. economic growth has been low and unequal, relative to historical performance

• Headwinds facing the US economy:• Nation is only about 45% recovered from recession.• Out of top 50 US metros, only 8 have fully recovered. 4 are in

Texas. *(full recovery of GDP, real estate values & employment)• Weak productivity growth. (industrial and manufacturing)• Low unemployment (below 5%)

– Lack of qualified applicants – Falling labor force participation– Lack of wage growth

• US housing improving, not fully recovered• Looking for an ‘economic driver’ for expansion

• Increasing polarized income distribution• Tax Reform 2017


Texas Economic Outlook


Texas & U.S. Economic Growth


Texas Economic Outlook• Texas economy continues to improve in 2018; energy rebounded, healthcare,

business and professional services up. 2019 will be somewhat the same.• Real estate sales (commercial / residential ) last 180+ days are double of what

was expected.• Energy sector downturn impact over; not the negative of 2016.• Texas job growth picked up, outpacing U.S. (not universal• Population expansion continues.• Texas manufacturing and service sector continue to expand.• Construction activity slowing:

– Multi family and single family building have slowed.• Concessions disappeared after Harvey. Beginning to resurface.

– Construction and material costs rose significantly and should continue through 2018.– Shortages for homes under $300K dragged down state total home sales.– Office and Warehouse construction strong,

• Office construction and rent growth should slow as vacancy rate gets closer to natural rate (15 to 19%).

• Texas employment strong; however, Houston much slower job growth from previous 5 years.

• Local growth and regulation issues becoming more pressing, causing strain on value vs. cost of labor and materials.


What to watch?

• Job Growth• Gross Domestic Product• Population Growth• Consumer Confidence• Real Estate• Interest Rates


Job Growth

• The gross number of payroll jobs created in the American economy in the previous month reported by The Bureau of Labor Statistics. – Self employed people are not

included in this number: that includes Realtors!

• As job growth goes so does sales in all channels.


Job Growth

• Unemployment is a phenomenon that occurs when a person who is actively searching for employment is unable to find work.

• The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force.

• 4% unemployment is considered full employment.

Texas Unemployment Compared to Other States


Job GrowthTexas Metro Unemployment


Austin Employment Broad based


Job Growth Take Away

Simply put, job growth equals home sales / rentals.

• 2.5% to 4.0% job growth is healthy!

• 2013 Austin jobs = 38,600Preceding 12 months = 28,200– Downward direction

– 44,000+ tech jobs currently available

39,200 38,000 35,50032,100

28,200

0

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2013 2014 2015 2016 2017

Annual Job Growth

Jobs


Green indicates states with both the highest predicted GDP and Job Rate growth!

Gross Domestic ProductCurrent State of the US Economy


Gross Domestic Product takeaway•GDP economic growth is the measurement of two economic factors, the growth of jobs and the productivity of those employed.

• A rise in real GDP (national, regional or local) effectively means a rise in income, output and total money spent. Economic growth should enable a rise in living standards and greater consumption of goods and services. As a result, economic growth is often seen as the 'holy grail' of macroeconomics.

•A rise in GDP growth can help various macroeconomic objectives:✓Reduced Unemployment ✓Increase attraction for corporate resettlement.✓Reduction in poverty✓Improved public services✓Economic growth will encourage investment as firms seek to benefit from rising demand✓Confidence to invest. Higher growth encourages firms to take risks -innovate and invest in future products and productive capacity.


Population Growth

• Population size is affected by the birth rate, the death rate, immigration rate and the emigration rate.– Immigration is to come into

another country to live permanently.

– Emigration means to leave one's country to live in another.

• Job creation has a multiplying effect on population growth.

(Death Rate + Emigration)-

(Birth Rate + Immigration)=

Population Growth

The rate of population growth means the change of population size in a given unit of time, usually one year.


Population Growth

• Half of the US population lives in the shaded Counties!

National economy 44+% recovered from the recession+ with only 2% of the population participating!

Where Does America Live?


Population Growth Take Away• You either grow or don’t grow. Whether through birth or immigration, or job

creation, continued population growth is necessary for a healthy market.

• Every year, the U.S. Census Bureau releases its latest data on cities and population growth. The reaction is always the same: News outlets, analysts, and economists look at the numbers showing which places gained and which ones shed residents, and use them as instant proxies for a decline, a boom, or a turnaround in cities all over the country.

• Population loss can become a symbol for other things people feel is going wrong in a city, such as rising poverty and unemployment rates, vacant and blighted housing, increased violent crime, the exit of pro sports franchises, etc.

• Age, population trends, and gender do matter in the home buying process. Someone in their early 20s probably can't afford a 3,500-square foot home on 5 acres in Virginia with a stable, and someone in their 80s probably doesn't want it anymore, or may want a cottage out back.


Historical Interest Rates

Historical Rates by Decade FMAC

Year Rate

1970 – 8.26%

1980 – 12.7%

1990 – 8.12%

2000 – 6.29%

http://www.google.com/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=2ahUKEwjGg_bBrZTaAhUxgK0KHdW-BDcQjRx6BAgAEAU&url=http://www.mississauga4sale.com/rates-historic-mortgage-interest-1951.htm&psig=AOvVaw0SeyLdwXZhjPjYkMd58enl&ust=1522509878917061


Consumer Confidence

• A statistical measure of consumers optimism in the state of the economy. It’s used as an overall state of the economy. Monthly survey of 5,000 households.

• A decline in consumer expectations can be a leading indicator of slowing economic activity.

Primary driver of demand in the US Economy. When people are uncertain about the future, they buy less!

Consumer spending is 70% of the GDP


Consumer ConfidenceNational/Regional Consumer Confidence Strong


Consumer Confidence Takeaway

• The baseline for consumer confidence is 100. A healthy index number is somewhere between 90 to 110.

• Consumer confidence retreated in December after reaching a 17-year high in November 2017.

• The decline in confidence was fueled by a somewhat less optimistic outlook for business and job prospects in the coming months. Despite the decline in confidence, consumers’

expectations remain at historically strong levels, suggesting economic growth will continue well into 2018.

• Renewed gains in incomes as well as rising home and equity values have acted to counterbalance the negative impacts from the hurricanes.


Real Estate

Real estate is property comprised of land and the buildings on it.

Real estate can be grouped into three broad categories based on its use: residential, commercial and industrial.


Real Estate

• Rising house prices, generally encourage consumer spending and lead to higher economic growth.

• A sharp drop in house prices adversely affects consumer confidence, construction and leads to lower economic growth.

• Top real estate values are found where there is top employment, strong GDP and strong consumer confidence.

The Real Estate Market Affects the Economy!


Real Estate


Real EstateWith the Independence Title Stats Module you can create your own Residential

Statistics for specific areas or zip codes. For more details contact your Independence Title Business Development Rep.


Ten year appreciation heat map Austin


Real EstateA prime indicator of sales growth is job growth! Without job growth, there are no

home sales. Historically for every 3 jobs there is 1 home start.

• Austin added 33,900 net new jobs, growth of 3.3%, in the 12 months ending in May, making Austin the third fastest growing major metro in the US.

• Housing starts still slower than needed.,• As evidenced by lack of rental concessions,

the market is still tight.• Due to post-Harvey demand, concessions

have disappeared in Austin and other Texas Metros. However, this is temporary and will not continue.

• Labor and material costs were going up 1+% a month before Hurricane Harvey hit. As a result of Harvey, we should began to see these costs appreciate.

Dallas and Houston lead the nation in home starts 1 and 2. Austin and San Antonio are in the top 25 in

home starts.


Austin Office


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Austin DFW Houston San Antonio

Overall Office Rent Rates(Gross Asking Rates)

Source: CoStar and NAI REOC; Real Estate Center at Texas A&M University


Austin Retail


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Retail Rent Rates(Triple-Net Asking Rent Overall)



Austin Multifamily


Austin Industrial


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Industrial Warehouse Rent Rates(Triple-Net Asking Rent Overall)



• 16,088 home start this year.

• 2284 listings on the market.

• 1.3 months of inventory.

• Total shelter 42,719 units available.

• 182,374 total rental units in Austin

– 92.4% occupancy = 13,860 units available + 10,847 units under construction to be completed in next 12 months.

– Total of 24,707 rental units available in the next 12 months.

The Numbers

• Total annual new job creating of 28,000.

• Total annual immigration of 72,800+.

• Total units needed of 10,000+.


Economic Forecast for 2017/2018Where is Austin in the Cycle?


Economic Forecast for 2017/2018

• 2018 proving to be much stronger than 2017!

• Real Estate values maintain.

• Sales have picked up.• What should we pay attention to?

– Unemployment numbers .– Cooling in employment growth.– Lack of corporate relocations.– Slowing of GDP growth.– Tax reform unintended

consequences.


• Texas employment growth between 2.5- 3.0 through 2018.• Slowed in 2016. 2017 saw energy, healthcare, business and professional services improve.• Energy sector downturn impact mostly over. Seems to be stabilizing with WTI per barrel improving.

• More of the same, on multiple fronts, 2018 will be much like 2017. • Real estate sales much better than expected.

• Local growth issues in the four Texas metros becoming more pressing. New codes, approval process, etc. causing delays forcing values up unintentionally.

• Tight inventory in all real estate channels.• Good news for investors, rental concessions disappeared late 2017. 2018 should

maintain that strength.• Labor and materials should increase 15 to 25% in 2018 due to supply and demand.

• Affordability in all metros being challenged.• Repair and remolding constriction explodes.• Consumers staying longer in homes (10 years+) due to all the above.

• Tight labor market across all employment sectors. (lack of qualified applicants a local, regional and national issue.

• One of the reasons why many people feel concerned about the Texas markets is because we’re seeing one of the longest expansive price growth runs in our collective

memories.

Economic Forecast for 2018


• Desirability to live / work in Austin.– This cannot be underplayed. With so many jobs no longer tied to location, the desire to live / work where a ‘better quality of life at a better

value’, makes Austin highly desirable to many.

• Still-favorable affordability, even after a .5 point increase in mortgage rates since the beginning of the year.

• Rates are still low comparatively.• A strong economic backdrop including job and wage growth regionally and locally.

– If you are a tech startup, there are 5 cities the majority of startups come from. Austin is the least expensive by a large margin.– Strong GDP growth. There are 13 counties out of 3,142 counties and county-equivalents in the United States leading the nation with 1% to

3% annual GDP growth. (this type of GDP growth is anemic comparatively.) 3 are in Texas. (however this is still weak historically.)

• Record low resale inventories, putting more of an onus on realtors / builders to satisfy incremental demand from new households.

– Single-family new home production currently stands 20-25% below normalized demand– Cost of materials and labor increasing delta between new and resale.– Next 12 months labor materials to increase 15 to 30+%.– Sellers reluctant to sell. (avg. hold time 12+ years)

• 40%+ percent have 20+%equity in Austin. (where do they move?)– Still a multi bid process in many for sale / buying opportunities.– Therefore price appreciation shows little signs of slowing.

• Multifamily construction and lending has slowed, yet demand is still there.– 60% loan to value max on ADC loans. ( making it harder to find financing.)– Rents aren’t moving up as quickly. (but they are still moving up.)– Occupancy at 87+%.

• Inability of local metros to streamline development process. – However increasing regulations and delays from metros will push costs and values up, not helping affordability. Ultimately pushing

desirability to purchase today due to cost increases.– Increasing land investment by equity groups / multiuse equity and homebuilders that should begin to filter through to increasing community

count over the next several quarters. (they are looking at numerous markets, and Austin is desirable for higher returns.).

• Continued demand for office, retail and warehouse space as evidenced by demand and occupancy numbers.

Why I believe that Austin growth will continue through the rest of 2018 into 2019


• Increased sales of 3-5%+ in Austin / Lakeway area in 2018– Home values will continue to improve. – Commercial will continue to be challenged to keep up with demand, but

more cautious on rent values. – Demand greater than expected.

– 2017 inventories climbed to 5+ month point, but have moved closer to 2.5 months supply (sellers market) in 2018. Caution, certain price points and neighborhoods will be challenged as buyers markets due to values.

– Regional psychology positive, but cautious in 2018.

– Home sales a much better than 2017.

– One of the reasons why many people feel concerned about the Austin and Texas markets is because we’re seeing one of the longest expansive price growth runs in our collective memories.

Where are we headed?2017 Was A Good Year!


There is not a better time to buy!

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