Dissertation: Crystal-Balling, CA-Style. - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on June 29, 2002 at 20:24:02:
Jeff–(CA)--------------
I am impressed with the work you are doing to get accurate information upon which to formulate your view of what is going on in CA.
I wonder if you have any similar statistics for counties other than Placer? Like maybe San Fran or Marin, or, my county, Alameda? I have not done analyses such as you have done, but I would suspect that you will find the ratios even more out of whack here in the San Fran Bay Area.
I work from the assumption that we have to work with a basic economic model and concern ourselves with the supply-demand balance. I have never seen a model of how high residential property prices can go. I have never seen a model, which shows the limitations. However, it certainly would seem that the average person’s income would be related to what they can afford to buy.
Maybe that is why more than one-half of the families in Oakland are renters. They can’t afford to buy. But, the houses are almost all filled up. They are not sitting around empty.
The demand? There are projections for the population of CA to grow mightily over the next 15 to 20 years. And many of those newcomers will not be able to afford to buy a home in Coastal CA. Where then, will they settle? Mainly, apparently in the vast central valley, in which Roseville is located. There may also be pretty high population growth in what I call “The Rim,” which is in the foothill of the Sierras at about 3000-4200 ft elevation. High enough to be cooler in the summer than the valley and above the tule fog in the wintertime. Also, low enough down so that there is not a heavy snowfall burden with which to struggle.
Actually, some of the current residents of higher-priced Coastal CA are the ones who are moving into the less-expensive Central CA areas. Some are people cashing out of their expensive homes and using the money to buy lower-priced homes and investing the rest, or starting a business with some of it. Some are younger people who are renters and cannot afford to buy homes in Coastal CA. So, desiring to own homes, the move over to the lower-priced areas.
When people move out of the Coastal area, that leaving housing units for newcomers. Some of the newcomers are wealthier than the people moving out and so can afford to buy the expensive houses. Some are immigrants who are poor. From what I have observed in Oakland, many of them live very densely in rental properties. Many are younger, unmarried and fill up apartments and houses with several sleeping in one room. And somebody sleeps in virtually every room.
Now, since you are such an analytical person, you might want to study the population projections closely. If you do, I would love to hear your observations on them. I’m sure that the people who do the projecting make some assumptions about the CA economy and the economy of the country and the world overall. Which might be wrong. Maybe there will not be as much growth as they project.
There may be some good statistics available from The Center for the Continuing Study of the California Economy, which is located in Palo Alto. I’m sure they have a website. I remember looking at some of their statistics once.
Supply. For the past 10 years, or perhaps more, there have been fewer housing units built in CA than is needed to provide housing for the new members of our population. My understanding is that this continues and looks like it will do so into the near term future.
If this were so, one would project even more pressure on the existing housing stock and the new units that are being created. Then, we might expect that the prices will continue to go up for the foreseeable future.
I think that the big developers work on the basis of short-term projections of the demand for new units. If they don’t see a lot of sales in two-three years, they will cut back. So, I suppose your local developers are projecting some easing of demand. Do you know if they are starting to build in other areas? Such as Yuba City/Marysville, Chico, Oroville, Redding, Red Bluff? If so, maybe they are projecting more growth in the other areas. From talking to real estate agents in those areas, I know that the demand for housing is intense, especially in the “lower-priced” properties–those under $200K.
But think about this. If there is more demand than the builders project, there will still higher prices, since they don’t build enough to supply all the demand. You may well see increased prices in your area over the next two or three years.
This is my projection: still more appreciation.
How do people pay for their expensive housing? They demand more money from their employers. They spend less money on other things. They move away. Their parents help them out with loans of down payment money. Some of that money comes from refinancing or selling the parental houses, which have huge amounts of equity. Why? Because of the big run up in housing costs, right?
I think that there is one other figure that one may want to study besides the new building and the increased population. That is the median family income, the figure that you find interesting. If professional economists or soothsayers project increased family income, I think that is positive for more expensive houses into the future.
In the past people have said, “The prices can’t go up any more.” And they were wrong. They might not be wrong in the future. I don’t really know. But then, they might well be.
California is attractive for climate, scenery, cultural activities, and a robust, diverse economy, which continues to provide more jobs.
Unless we have a strong recession, I think the population will continue to grow. There is no reason that to believe, as far as I know, that the rate of supply creation will increase. So: higher prices into the foreseeable future.
For some reason, people are always concerned about a “bubble” in real estate prices. When it comes to family homes, it seems to rarely occur. When we have a deep recession, we may find a pause in prices or even a decline. It has happened in the 1970s, the 1980s, and the 1990s–when the recession was the most severe since the 1930s. So I suppose it could happen in the 2000s.
But I am amazed by the strength of the CA economy. Agriculture was dismal in the mid 1980s, and there was the big bust in Silicon Valley around 2000. And still housing prices have gone up. There is a lot of vacancy in commercial and research and development properties in the Silicon Valley, San Fran Peninsula, San Francisco, and here in Oakland. However, there was a recent newspaper article that said that the commercial market, while slow, did not plummet over in Contra Costa County. And, from what I know of the central valley: Sacto, Stockton, Modesto, Merced, there does not seem to be problem with commercial real estate there.
I think you might find it interesting to study the US Labor Department’s projections of which careers or jobs will grow the most in employees over the next couple of decades. I think you will see that CA has a disproportionate share of these industries.
Ok, maybe I am a cock-eyed optimist. And I am sure one can point to negative aspects of the economy in CA. But, I expect that the high-tech industries will grow, and fuel a booming CA for at least several more years, probably 10 or 15, perhaps more. The computer hardware and software people have been hurting for maybe four or five years, if I recall correctly. But, there are signs of increasing demand for their products and services. The biotech field is still chugging along. The 1700s and early 1800s were the years of great discovery in physics, followed by new technologies: trains, automatic looms, telegraph, and phone and electricity.
The late 1800s and early 1900s were the years for chemistry. We have plastics galore, pesticides, and fertilizers, new UltaTide.
Biology has been on the ascendancy–in creative ferment–since about 1950 or 1960. That is when the structure of DNA was first understood. We see continuing huge advances in understanding plants and animals. Now we are getting new genetically-engineered food plants, medicines that make us feel better, live better, work more, and create more. Better pest-control measures.
My view is that in a couple of decades we will look back at the medicine of 1950 to 2000 and be either horrified or laughing uproariously at how primitive it was. I am already doing so.
And, if you look, you will see that CA has a lot of the electronics industry, a lot of the software industry, and a huge proportion of the biotech industry. This augers well for the CA economy for the next 20 years, I would argue.
What technologies will be following on after the biological? I predict the psychological, emotional, human interactions, personal happiness. I think we will see better understandings of how to live a better life. How to interact with people to get more of what we want. Probably better management of government agencies and private businesses. Increased productivity.
Who will be the people that pioneer this new technology? How about those goofballs in Marin County and at Escalon? How about all the soft-brains in the universities and colleges in CA?
Will this be happening in five or ten years? I doubt it. But maybe out 15, 20, years or more. Did you know that the IQ was developed in CA? Lewis Terman at Stanford developed the Stanford-Binet IQ test in the 1920s and 1930s. What if there were to be better measurement of how people fit together into work organizations? There would be better selection of employees, with consequent lower turnover, less cost for training, more productivity. How about if we could reduce mental distress with medicines, chemicals, and ways we interact with people. Could there be more people working harder, being more productive? Might that boost the economy? Of CA, the country, the world?
Well, you asked for my views. Here they are. Any more of your thoughts you would like to share?
I better get going. Got to eat and get out my post cards to try to buy more real estate in Sacramento and the San Fran Bay Area. I want to own more properties to hold for the future. How about you?
Good Investing and Good Investigating***Ron Starr