John L Scott Speech 10.27.11

1

524 Second Ave, Suite 500Seattle, WA 98104

206.442.9200

Real Estate & EconomicTrends and Outlook

John L Scott Real Estate

ANNUAL BUILDER BREAKFAST 2011

October 27, 2011

The Westin, Bellevue, Washington

Presented by:Matthew Gardner

Managing Principal

U.S Economic Outlook

2

% annualized growth rate

GDP Growth Forecast

Source: Gardner Economics LLC Forecast & BEA Historic Data

The Best Scenario is Below Par Growth Through 2012.

We Are On a Knife Edge.

Economic & Real Estate Forecast

October 27, 2011

3

Year-Over Year, the Figures Do Not Look That Bad.

Improving U.S. Job Market?

12-month payroll job changes; in thousands

Source: BLS – Seasonally Adjusted Figures – Data through September 2011

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000


October 27, 2011

-900

-800

-700

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-200

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ul

100,000 New Jobs per Month Needed to Keep Up with Population Growth.

Avg. 72,000 over Past 5-Months.

But…

Monthly payroll job changes; in thousandsSource: BLS – Seasonally Adjusted Figures – Data through September 2011


October 27, 2011

4

Unemployment Has Likely Peaked but Under-Employment Will Keep the Rate Elevated through the End of the Year.

Monthly U.S. Payroll Change

Source: BLS & Gardner Economics – Seasonally Adjusted Figures


October 27, 2011

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

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200

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20

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Oct

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6 -

Oct

20

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The Private Sector Has Been Carrying the Load.

But Uncertainty is Keeping Us From Hiring More!

Private Sector is Showing Job Growth

Monthly payroll job changes; in thousandsSource: BLS – Seasonally Adjusted Figures – Data through September 2011


October 27, 2011

5

I am Still Not Seeing a “Double Dip”, but the Odds Are Shortening if Washington (D.C.) Doesn’t Get its Act Together.

Job Market Trough

Source: BLS & Gardner Economics - Current Data through September 2011


October 27, 2011

-7.0%

-6.5%

-6.0%

-5.5%

-5.0%

-4.5%

-4.0%

-3.5%

-3.0%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Perc

ent C

um

ula

tive

Jo

b L

oss

Rel

ativ

e to

Pea

k Em

plo

ymen

t M

on

th

Number of Months After Peak Employment

1974 1981 1990

2001 2008

This Represents Our Credit Card Debt!

The Two Most Important Words in the English Language Are…?

U.S. Revolving Debt

Source: Federal Reserve – Seasonally AdjustedData Through August 2011


October 27, 2011

6

Banks Are Offering Credit Again, But Time Will Tell if We Are Buying Goods, Or Just Supporting Ourselves!

Fits with the Argument of Zero Income Growth.

U.S. Revolving Debt

Source: Federal Reserve – Seasonally Adjusted through August 2011

$700

$750

$800

$850

$900

$950

$1,000

Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

In B

illio

ns($

)


October 27, 2011

0

20

40

60

80

100

120

140

160

180

200

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

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l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

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l-07

Jan-

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l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11Ju

l-11

ConfidencePresent SituationExpectation Index

Europe, Jobs and Stagnant Incomes are All Playing a Part.

This Can’t Get Much Worse, But Will Only Improve if Hiring Returns.

Consumer Confidence

Source: Conference Board – Data through October 2011


May 23 2011

7

U.S. Economic Forecast

• Policy Makers Need to Get it Together!

• Inflation Concerns? Yes, but Not Too Bad Yet.

• Chance of a Double Dip Now 50/50.

• Businesses are “Frozen in Place”?

• The P.I.I.G.S. are Still an Issue!

• Where is the Income Growth??

The Puget Sound Economy

8

-120

-100

-80

-60

-40

-20

0

20

40

60

80

2000

- Ja

n

2001

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- Ja

n

2009

- Ja

n

2010

- Ja

n

2011

- Ja

n

Year-Over-Year, the Recovery Appears to Have Momentum

Source: BLS – Seasonally Adjusted – Through September 2011

Seattle’s Employment Situation

12-month payroll job changes; in thousandsEconomic & Real Estate Forecast

October 27, 2011

-35

-30

-25

-20

-15

-10

-5

0

5

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15

20

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11

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Leisure & Hospitality Job Losses Hurt.

I am Not Holding Too Much By September’s Figures.

Monthly payroll job changes; in thousands

Source: BLS – Seasonally Adjusted Figures – Data through September 2011


October 27, 2011

9

-120

-100

-80

-60

-40

-20

0

20

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Again, the Private Sector is Driving Our Growth.

Source: BLS – Non-Seasonally Adjusted – Through September 2011

Private Sector Employment


October 27, 2011

-100

-80

-60

-40

-20

0

20

40

200

0 -

Jan

200

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l2

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As You Can See, Fluctuations in the Labor Market Remain Highly Localized!!!

Detroit’s Employment Situation

Source: BEA – Seasonally Adjusted – Through August 2011


October 27, 2011

10

Local Employment Situation

Source: WA State – Seasonally Adjusted YoY GrowthSept 2010 – Sept. 2011

A Very Different Picture From a Year Ago.

Construction is Still a Weight.

20,800

-2,600

-2,000

-1,600

-1,200

-700

0

400

600

1,300

1,300

2,400

6,900

7,700

10,000

-5,000 0 5,000 10,000 15,000 20,000 25,000

Total Non-Farm

State Government

Construction

Local Government

Leisure & Hospitality

Federal Government

Financial Activities

TWU 1/

Other Services

Other Manufacturing

Information

Education & Health Services

Trade

Aerospace Product and Parts Manufacturing

Professional & Business Services

NET EMPLOYMENT CHANGE BY NAICS CLASSIFICATION


October 27, 2011

3

4

5

6

7

8

9

10

11

U.S. Seattle MSA

9.1%

8.6%

Unemployment Rate Still Below the National Average

SOURCE: BEA & Gardner Economics – Seasonally Adjusted Data

The Drop May be Due To People Quitting Their Search for Work.


October 27, 2011

11

• Seattle Remains the Best West Coast Location Relative to Potential Growth.

• The 5 B’s Will Still Drive Us.

• Innovation has Hurt Us Before, but Will Help Us This Time.

• We are NOT Protected Against National Effects.

Puget Sound Employment Situation

The Residential Market

12

Source: Gardner Economics

Historic Average is 10-15% -Today it’s 34%.

New Home Price v Existing Home Price

(United States)


October 27, 2011

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

$260,000

2000

- Ja

n20

00 -

Jul

2001

- Ja

n20

01 -

Jul

2002

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n20

02 -

Jul

2003

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n20

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Jul

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Jul

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Jul

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Jul

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Jul

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Jul

2009

- Ja

n20

09 -

Jul

2010

- Ja

n20

10 -

Jul

2011

- Ja

n20

11 -

Jul

12-Month Moving Average

Source: Gardner Economics

The Spread is Very Different Locally.

Can Make New Construction Compelling.

New Home Price v Existing Home Price

(Seattle MSA)


October 27, 2011

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

2003

- A

pr20

03 -

Jul

2003

- O

ct20

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Jan

2004

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pr20

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Jul

2004

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ct20

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Jan

2005

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Jul

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Jul

2006

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Jul

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Jan

2008

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Jul

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Jan

2009

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Jul

2009

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2010

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pr20

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Jul

2010

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ct20

11 -

Jan

2011

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pr20

11 -

Jul

12-Month Moving Average

13

Source: Gardner Economics & Freddie Mac

Ultimately, Mortgage Rates Have to Increase as Economic Growth Stimulates Inflationary Pressures.

30-Year Fixed Mortgage Rates

Forecast


October 27, 2011

U.S Typical Net Worth

Source: Federal Reserve Survey of Consumer Finances

2010 data to be published

in 2012 by the Federal

Reserve.


October 27 2011

14

Year SeattleSan

FranciscoLos

AngelesSan

Diego MiamiLas

Vegas Phoenix

2000 6.7% 28.6% 10.1% 16.3% 8.9% 5.4% 5.9%

2001 4.6% -4.3% 8.8% 10.0% 12.5% 7.7% 5.3%

2002 3.9% 13.8% 18.0% 19.9% 14.0% 7.1% 4.6%

2003 7.4% 9.0% 20.6% 18.5% 13.3% 17.0% 7.9%

2004 11.4% 19.1% 22.8% 25.1% 22.2% 42.3% 20.4%

2005 17.1% 13.6% 20.7% 6.3% 28.9% 10.6% 42.0%

2006 11.2% -1.2% 1.5% -3.8% 4.7% 0.5% -0.1%

2007 0.5% -10.6% -13.3% -14.6% -17.1% -15.0% -14.8%

2008 -11.8% -29.2% -23.6% -22.9% -26.8% -29.4% -31.2%

2009 -4.4% 9.6% 2.9% 5.4% -6.5% -16.9% -4.0%

2010 -7.9% 4.8% 0.0% 2.7% -9.9% -20.6% -9.2%2011 YoY

-6.1% -5.3% -3.5% -5.5% -4.6% -5.8% -7.7 %

SOURCE: S&P Case Shiller –Non-Seasonally Adjusted - YTD Data through August 2011

Seattle is Slow Returning.

I am NOT a Fan of this Index.

Year to Date, Seattle is down by 1.2 Percent.

Case Shiller Index


October 27 2011

Quarterly Lot Sales

0

100

200

300

400

500

600

700

Q1

2010 Q2

2010 Q3

2010 Q4

2010 Q1

2011 Q2

2011 Q3

2011

KingSnohomishPierceThe Overall

Trend Appears to be Positive in Pierce County; Negative in Snohomish, and All Over the Place in King!

SOURCE: Gardner Economics


October 27, 2011

15

Quarterly Lot $ Volume

$0

$20,000,000

$40,000,000

$60,000,000

$80,000,000

$100,000,000

$120,000,000

$140,000,000

$160,000,000

Q1 2010Q2 2010Q3 2010Q4 2010Q1 2011Q2 2011Q3 2011

PierceSnohomishKing

Banks Remain Active in Disposing of Inventory but Value Expectations have Risen.



October 27, 2011

Lot Values - King County(Q3 2011)

Clearly a Relationship Exists Between Permit Fees and Values!


$0

$50,000

$100,000

$150,000

$200,000

$250,000

Redm

ond

New

cast

le

Rent

on

Map

le V

alle

y

Kent

Aub

urn/

Fed

Way

Duv

all

Paci

fic

S Se

attle


October 27, 2011

16

Lot Values Snohomish County(Q3 2011)

Proximity is Also a Driver Relative to Value.


$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

Bothell Lynnwood Lake Stevens EverettEconomic & Real Estate Forecast

October 27, 2011

Lot Values Pierce County(Q3 2011)

Pierce County is Trading in a Fairly Narrow Range


$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

$90,000


October 27, 2011

17

SF Permits Over Time(King County)

I See a Potential Lot Shortage on the Horizon.


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000


October 27, 2011

SF Permits Over Time(Snohomish County)

Room To Grown Here But We Must Be Wary of Our Reliance on Aerospace.


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


October 27, 2011

18

SF Permits Over Time(Pierce County)

Higher Foreclosure Rates and Limited Job Growth Will Hurt the New Construction Market fort Some Time.


0

1,000

2,000

3,000

4,000

5,000

6,000


October 27, 2011

SF Permits Over TimeCombined

Still a Fairly Traditional Relationship Between the Three Counties.


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000King

Snohomish

Pierce


October 27, 2011

19

SF Permits Over TimeCombined

When Demand Returns Will We Be Ready for It?


0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


October 27, 2011

Population GrowthTri-County Area

Although Slower Then Normal, This Lends Credence to the Demand Hypothesis.


78,5

40

57,1

92

67,3

13

42,6

38

45,9

68

54,2

18

92,3

29

77,8

25

57,4

91

45,2

97 49,8

53

33,2

92

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

(e)Economic & Real

Estate ForecastOctober 27, 2011

20

54

56

58

60

62

64

66

68

70West

U.S.

Homeownership Rates

SOURCE: Census Bureau

The Homeownership Rate is Reversing Toward it’s Historic Norms.

It May Overshoot and end up at 60%.


October 27, 2011

Single Family Transactions

21

Transactions by TypeKing County

2-Years Ago Current Quarter


62.7%

4.3%

16.2%

16.8%

Resale (Owner-to-Owner)New (Builder-to-Owner)Foreclosure (Owner-to-Bank)Foreclosure Sale (Bank-to-Owner)

69.9%8.3%

11.0%10.9%

Resale (Owner-to-Owner)

New (Builder-to-Owner)

Foreclosure (Owner-to-Bank)

Foreclosure Sale (Bank-to-Owner)

Transactions by TypeSnohomish County



44.6%

8.6%

22.7%

24.2%





58.6%

7.7%

17.8%

15.9%





22

Transactions by TypePierce County



50.3%

8.2%

21.4%

20.1%





41.4%

7.3%

25.7%

25.6%

Resale (Owner-to-Owner) New (Builder-to-Owner)

Foreclosure (Owner-to-Bank) Foreclosure Sale (Bank-to-Owner)

Asset Types

• Transit Oriented Development;• Townhomes;• Single Family Detached;• Condominiums; and• Apartments.

23

Conclusions

• Prices are Bouncing Along the Bottom;

• Financing – Strict, But Available;• Market Likely to Exceed 2010 in

Overall Transactions;• Faster Drop Off in Foreclosures in

2012; and• Positive Price Growth in 2012 (1.9%).

Conclusions

• Fiscal Policies Effect on Real Estate;• The Puget Sound Remains One of the

Top West Coast Cities;• Limited Income Growth will Slow

Home Value Appreciation;• Renters are now Spending 5% more

on Housing Costs than Homeowners.• Recovery Will Be Unequal.

24

© Gardner Economics LLC 2011The Preceding Presentation may not be

Copiedor Distributed without Prior Written

Permission of Gardner Economics LLC

Questions?

Real Estate & EconomicTrends and Outlook

www.MasterBuildersInfo.com

Follow My Thoughts!

SeattleEcon

25

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