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Report: Long winter giving way to accelerated growth

The U.S. economic fundamentals underpinning the property markets are strong, according to a new macro report by Cassidy Turley chief economist Kevin Thorpe and Rebecca Rockey, economist.

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With the harsh winter behind us, many indicators are revving up again and following the accelerating pattern observed in the latter half of 2013.

The March data revealed huge rebounds in vehicle sales, retail sales, manufacturing output and employment gains, and consensus forecasts show that healthy growth is expected to continue for the rest of 2014, with annual GDP growth still expected to reach three percent.

Housing is one aspect of the economy that has hit a rough patch, due in part to a particularly cold and long winter in addition to a 100 basis point (bps) rise in mortgage rates over the past year.

But steady employment gains should help resolve those issues fairly quickly.

KEVIN THORPE
KEVIN THORPE

The near-zero first quarter GDP growth figure should be ignored — nearly all due to the weather. The U.S. economy is currently as strong as it has ever been in this recovery.

The labor markets continue to make significant progress. The U.S. economy has created over 8.2 million jobs in this recovery, 533,000 over the last past three months.

By the summer of this year, employment will finally be back to its pre-recession peak.

Median household income is growing at an average rate of 3.1 percent in the tightest labor markets in the country (those with unemployment rates below 5%). Over 50 metropolitan areas in the U.S. fall into that category today, and nearly every metro in the U.S. is experiencing a precipitous decline in unemployment. According to Thorpe, housing is one key indicator to watch this spring.

While some housing market indicators slumped during the past few months, almost all trends are positive when looking back a few quarters.

Pages from National_Forecast_Report_May_2014XXXXXXMortgage rates are 100 bps higher than they were a year ago and it’s tempting to blame higher rates for the slowdown in home sales.

But it’s unlikely that the increase in mortgage rates was the primary factor given that rates have risen fairly gradually over the course of an entire year.

Moreover, the 30-year fixed rate mortgage is still historically low, at 4.3% in April, and other metrics show that housing is still affordable by historical standards.

Rather, seasonal patterns and unusual weather are the primary culprits.

Revolving credit has been very slow to recover. Since the first quarter of 2013, revolving credit has only grown by 0.6% (compared to 5.4% for overall consumer credit).
At its height in July 2008, the dollar amount of revolving credit was over $1 trillion; currently, levels of revolving credit are at $854 billion – about 20% less.

There was a wave of serious deleveraging that ended in April 2011, and since then, revolving credit has increased at a rate of only about 0.1% per quarter.

When this type of spending starts to rise — that is, small and

medium-sized discretionary credit card purchases—it will signal that there has been a significant boost in consumer morale — and lenders’ willingness to lend –and we will see its impact in the economic data.

The performance of the commercial real estate market continued to be strong and uneven throughout the first quarter of 2014.

Most trends in each sector continued through the beginning of the year from last quarter, though some will resume once the impact of the unusual weather is finally over.

Apartment and industrial space continued to register large increases in demand, while office and retail continued to lag.

In line with broader economic movements over the past few months, the office sector’s performance slowed during the cold months but warmed up in March.

During the first quarter of this year, office markets absorbed nearly 12 million square feet (msf), a 21% decline in demand from the fourth quarter of 2013 but a 63% increase from the same quarter a year ago. Out of the 80 metros tracked in this survey, 43 (54%) reported stronger net absorption in the first quarter of 2014 compared to a year ago.

Despite the demand gains, U.S. vacancy remained unchanged at 15.4% as 10.5 msf of new office space delivered to the market in the quarter, roughly matching absorption.

The industrial sector continued to register healthy demand numbers in the first quarter of 2014, albeit at a slightly slower pace than the lofty numbers reported in 2013.

New construction is also heating up. First-quarter deliveries totaled 22.75 msf, a 73 percent year-over-year increase, with the South region leading the way.

The multifamily sector continues to be the most upbeat story among commercial properties. With vacancy falling to 4.0%, multifamily vacancy is currently 140 bps below its long term average.

As the sector that is experiencing the slowest recovery, retail struggled to perform over the colder months when spending and sales fell.

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