CURRENT ECONOMIC OUTLOOK

The U.S. dollar has rallied. After losing about 20% of its value against the Euro, it is on its way up. Why? Perhaps because with world order still in disorder, world investors still want the safety of the U.S. In any event the interest rates are still at records lows, and the prognosis is that they will remain there until at least after the presidential elections in November 2004. Remember, George Bush (Senior) lost his bid for re-election because the Fed Reserve refused to lower interest rates in a down economic period. The Feds have a new chairman since then and this mistake will not be repeated by the son Bush. With lower interest rates come also high real estate prices. We have not seen any drop in sale value for residential properties in the Los Angeles area. Indeed, sellers report that prices are still inching higher month after month. National Association of Home Builders Chief Economist David Seiders states: “We are projecting a 3% decline in new home sales for the year as a whole based primarily on anticipated upward movements in mortgage rates as the year progresses. However, if interest rates remain at or near current levels throughout the year, new home sales could equal or even surpass the 2003 record.” Our guess is that the anticipated interest rate increase will not come until 2005. Borrowers seem to believe that interest rates will remain low. They are still borrowing and indeed more than ever. The Market Composite Index of mortgage loan applications, a measure of mortgage loan applications for purchases and refinancings, increased by 2.8% to 878.7 on a seasonally adjusted basis for the week ending Feb. 27 from 854.5 one week earlier, according to a report released today by the Mortgage Bankers Association (MBA). The refinance share of mortgage activity increased to 56.4% of total applications for the week ending Feb. 27 from 55.7% the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 28.8% of total applications for the week ending Feb. 27 compared to 27.1% the previous week, according to the report.

According to a recent economic outlook prepared by the Los Angeles County Economic Development Corporation (LAEDC), some of the best business prospects for Southern California include: tourism, international trade, technology, and aerospace. Some of the worst: health services, apparel industry, and motion picture/ TV production. “The economy of Southern California is on a growth track in 2004, but the state’s poor business environment will limit job growth in the area,” said Jack Kyser, LAEDC chief economist and senior vice president. “Moreover, many of the new jobs created will tend to be in lower wage occupations.”

New home construction in the region will ease back a little from 2003, which in most cases was the strongest performance since 1990. “However, the region’s population continues to grow, so the ‘housing deficit’ will remain a problem,” said Kyser. “There is concern about a housing ‘bubble,’ but interest rates are forecast to increase moderately over the next two years, while the economy will be healthy. This is a much different situation from the early 1990s.” Indeed, the demand or pressure for housing will be unrelenting. This demand will keep apartment unit rental rates high, and even if there is a decrease in single family housing, that decline will not spill over into the rental housing area.

Sales of existing condominiums and cooperatives surged to a new annual record in 2003, while the pace of sales activity in the fourth quarter was the second highest on record, according to a recent NAR report. There was a total of 898,000 existing condo and co-op sales last year, up 9.5% from the previous record of 820,000 units in 2002. The sales pace dropped 5.8% in the fourth quarter to a seasonally adjusted annual rate of 914,000 units from a record 970,000-unit pace in the third quarter. Sales remained 10.3% above the 829,000-unit level of sales activity in the fourth quarter of 2002. Last year marked the eighth consecutive annual record for the condo and co-op market. “The growth of condo sales since 1995 is unprecedented and reflects a new level of demand in the market,” said David Lereah, NAR’s chief economist. “The easing we saw in the fourth quarter was expected after a record spike in the third quarter, but sales remained exceptionally high. There is a tremendous momentum that will be driving the condo market again this year.” In the fourth quarter, the median existing condo/co-op price was $174,700, a 14.9% increase compared to the same period a year ago. For all of 2003, the median existing condo price was $163,800, up 15.2% from a median of $142,200 in 2002.

Can this activity continue? The current attitude of government (both national and state) seems to encourage home ownership. The problem is that there are not enough condos built in the Los Angeles area to satisfy demand. This may lead to more condominium conversions and pressure at the state level to pass laws to allow owners to convert to condominiums without local city interference. According to our own Carl Lambert, there is currently a bill in the state legislature which does just this. It creates a sort of TORCA law for state wide application. If such a bill were to pass, we would see an exponential increase in the price of apartment buildings. Something along the lines of the increases experienced in Santa Monica after TORCA passed. According to C.A.R. (California Association of Realtors) the California median home price in January 2004 is $405,720. That is a state wide figure. The highest home prices are in Santa Barbara at $920,000 and the lowest is in the High Desert at $178,200. Santa Monica’s is closer to $600,000 to $700,000. Now if you took a Santa Monica apartment building and valued it at say $500,000 per unit what would you get? Yes, the answer is “retirement.”