Highlights from yesterday's Beacon Economics presentation.

Yesterday morning, in an attempt to get out from behind the quiet phones and trickling emails most of us CRE professionals have been experiencing since the downturn, and with the hopes of learning something insightful from somebody really, really smart, I woke up early and headed to the presentation by Chris Thornberg of Beacon Economics: “What’s Next LA? The Road to Economic Recovery 2010."

Here are a few highlights of importance:

Broader Economy

• We have never been here before, ever.  We are moving from a “private bubble” to a “public bubble”.
• Trends are positive, but fundamentals are negative.  Government intervention has prevented fundamentals from properly correcting.
• This year will be good, but 2011 through 2012 could be ugly.
• Chris sees a bit of a jobless recovery, though only $210 billion of the $800 billion stimulus has been spent so far.  There is also a lot of money in the banks.  Most of the $1.5 trillion added to the money supply is in bank reserves. This could lead to inflation when banks start lending.

LA Economy

• The good news for California is its diverse drivers, especially Los Angeles.  California has outgrown the US and Texas for 15 years.
• Los Angeles is the largest manufacturing region in the US.  We’ve had consistent growth over the years, but do not look to this sector for job growth as automation and technology is what has led to job losses, not off-shoring.

Housing

• The last two real estate bubbles saw house pricing flat or down for five years.  Government is driving the price bump.  It is not sustainable.  There are 6 million non-performing mortgages in the US, with 74% of homes in Las Vegas underwater. 
• 27% of homes in LA have negative equity.  We have the highest bank delinquencies ever in history.  The FDIC is like a wolf picking off the sick and lame, although nearly every bank is insolvent on a mark-to-market basis.
• Housing market in LA has not yet turned the corner.  Foreclosures will go back up.  Apartment market has not turned the corner, but now is the time to buy as permits for new construction are down 82% leading to a gap in supply in a couple of years.

Employment

• Incomes are flat to down, and only government transfers are holding things together.
• Unemployment in LA will stay double-digit through 2013, although unemployment peaked in the first quarter of 2010. 
• Actual jobless rate including discouraged workers is probably 20%.

Conclusions

• Best case forecast is two bad years after this year.
• Consumer spending is not sustainable.
• Significant chance of double dip. 

Looking forward to your comments,

TPB