A Southern California Perspective

http://www.latimes.com/business/la-fi-ports-20100612,0,2315402.story


Two things happen when you get away from where you are for a while: you get a better perspective on where you're from and you get a new perspective about the place where you temporarily reside. Our time in Southern California gave us a first hand look at the business and consumer markets in a key "sand state".

The volume of trade at the ports of Los Angeles and Long Beach, the busiest American seaport complex, was up sharply for the month of May. For Los Angeles, which ranks first in cargo container traffic, it was the port's second-best May ever! This is the type of economic news that bodes well for continued economic growth. It correlates with the expectations of the Fed and the rationale for Warren Buffet's purchase of the BNSF Railroad system. Buffet, in turn, has observed the increased traffic on his rail system which he sees as reflective of capital investment and demand. This would be in accord also with the economists at IHS Global Insight who feel that retailers have cut their inventories drastically and are reordering because they feel sales are, or will, pick up.

More than 40% of U.S. imported products come thru the ports of Los Angeles/Long Beach which makes the "Southland" an important predictor of what is to come.

OK, great! Now, California is bankrupt because they don't have the tax receipts to support their "got to be first at everything mentality". And, they tax too much (which is why everybody from their retires to Nevada).

And, of course, there is the real estate situation which basically connects with the unemployment situation. Let's start with real estate: the listings in Orange County look to be very brisk at the $500,000 home level and above. This would appear to be the break point for houses that are moving versus houses where there is a glut. Interestingly, the key listing agents for towns like Dana Point, Laguna Beach, Laguna Niguel and Newport Beach use a $500K example to point out that interest rate lows have created the equivalent of a $448K home: "... the reduction of interest has brought the payment equal to buying the ($500K) home for $448K ..." There is a very brisk market in those areas for homes between $500K and $17 plus million. That's a nice neighborhood. But, the majority of people don't live in those houses.

The national data on homes is like politics: all "politics" is "local". So, while there are national "averages", it's where you live that matters. The current Case-Shiller data once again support that the Dallas metropolitan area never went up spectacularly, nor did it drop spectacularly: so far in 2010, home prices in North Texas are up almost 4% from a year ago. During that same period, pre-owned home sales have increased almost 12%. Unfortunately, the Case-Shiller projections are that housing markets will sink again post "first time home buyer tax credit" and other government backed market supplements. So, markets with recent price increases may see small price declines before prices finally stabilize at the end of this year or early in 2011. The Case-Shiller people see this as part of a "double dip" in nationwide residential prices.

The Case-Shiller forecast for 2010/2011 (annual change in median home prices) is:

Nationwide -- Down 3.1% for 2010 and Down 1.1% for 2011

Dallas -- Down 1.8% for 2010 and Up .8% for 2011

Los Angeles -- Down 9.6% for 2010 and Up 2.7% for 2011

Getting back to "California Dreaming", the Southern California housing market we described above is nice but it's not where the average home price sits today. The current U.S. median home price is: $170,300. In addition, it is a pretty much accepted economic principle that the majority of the average U.S. citizen's "net worth" is wrapped up in their home equity. If the majority of U.S. home markets are not coming back quickly, then it is difficult to see where the consumer demand that supports the positive trade figures we referred to at the outset of this post is going to be coming from. This position would be backed up by the latest employment figures where the 411,000 jobs added last month really only included about 41,000 jobs that weren't "Census Temporary".

It's always good to hear that the consensus economic forecasts exclude the possibility of a "double dip" recession but it's difficult to reconcile that with the actual use of that term by the Case-Shiller people as it applies to the U.S. housing market. When you put that with current "employment" figures, it's difficult to see consumer demand coming back anytime soon.

We're about to read Nouriel Roubini's new book, "Crisis Economics", which will help us to define what it is that he watches. Roubini would probably be the first to agree with the perspective we have provided in this post. He would probably add that "consensus economic forecasts" mistake the eye of the storm for the end of a crisis. We would probably agree.