Ted C. Jones, Stewart Title's Chief Economist, Discusses Realities of Economic Recovery

During the Institute for Regional Forecasting's biannual economic and real estate forecast, Ted C. Jones, chief economist, Stewart Title, addressed many people's questions regarding the future of the national and local economies and whether or not the national stimulus plan has really worked and if, indeed, the U.S. economy is really out of a recession.   

The presentation, "History May Not Repeat Itself, But it Certainly Does Rhyme" - Mark Twain, held at the Hyatt Regency Houston Hotel in downtown Houston, provided the newest economic statistics on  the global, national and local economies and included Jones' interpretation of what they all mean, especially to Houstonians and the regional economy.

Jones questioned whether an economic recovery could be realized without adding jobs.  While he does see job growth in the future, he said it would likely be ‘tepid' nationwide in the coming 18 to 24 months.  With statistics and an analysis of trends and econometric models, Jones dissected the current state of affairs of the global, national and local economies.  In contrasting Houston's economic performance in the past decade, Jones noted that while the U.S. lost 1.9 million jobs since September 2000, Houston added 300,000 jobs. 

He indicated that the national economy basically is sputtering on fumes regarding job growth.  He noted that deficit spending at a national level is not sustainable.  The U.S. had $10.7 trillion of national debt (excluding Social Security, Medicare and Medicaid commitments) at the end of 2008 and is projected to grow an additional $10.53 trillion by 2020-and that assumes that there are no new Federal programs, that cap and trade does not pass, and that health care is essentially revenue neutral. 

The national economy remains on life support from government spending.  As the Federal Reserve System heads into a second round of quantitative easing (known as QE2), it shows little progress has been made by the multi-trillion dollar stimulus in the past 21 months.  Just as University of Houston economist Barton Smith stressed the need for an exit plan by both the Federal Reserve Bank and the U.S. government in his economic forecast last May, Jones reiterated that no true recovery can be proclaimed until all of these economies can start growing again without life support.

Perception does not always equal reality, as Jones pointed out, an individual that purchased the median-priced U.S. home in January 1980 and holding until today fared far better than a person buying gold.  While gold increased 95.5 percent (nominal-prior to adjusting for inflation from January 1980 to October 2010), and lost 30 percent in real terms-after adjusting for inflation, housing realized a 238 percent and 22 percent nominal and real rate of return, respectively.  This analysis excludes any transaction costs and also does not consider any of the benefits provided by housing including tax advantages and even the ability to live there.  As Jones said, housing has really been the long-term investment gem in the past 30 years, even after the price decline seen since the 2006-2007 peak. 

"Houston is not an economic island unto itself," Jones said, but the correlation to the national and global economies is less than absolute.  Houston essentially went into a recession (defined in this view as a loss in jobs) nine months later than the country, did not go in as deep and basically is now tracking the U.S.  The Houston housing market continues to outperform the national market.  Unlike the typical U.S. housing market that roller-coastered up and peaked in 2006-2007 before falling off the edge, prices of non-foreclosed properties in Houston have essentially remained flat (or up in some areas) and essentially have not declined, and are basically the same as they were in 2007.  Foreclosures do remain a problem for many Houston homeowners as many of those individuals that unfortunately opted for subprime or Alt-A loans did not have the economic means to maintain mortgage and related payments.  Foreclosed homes in Houston typically are selling for discounts in the 30 percent range per square foot versus non-distressed properties. 

  Houston's commercial real estate is also holding up comparatively well versus the country.  Although property values in Houston commercial real estate are down, in some instances 10 to 15 percent, this is dynamically better than the 25-to-40+ percent decline seen in markets nationwide. 

The national economy has lost 7.75 million jobs since January 2008, and the local economy has shed almost 108,100 jobs.  Unfortunately, these declines are continuing, though at a slower rate. Nationally, September saw 95,000 more jobs lost, and Houston was down 7,000.  Jones reiterated there cannot be a jobless recovery. 

Roadblocks include a continuation of high mortgage delinquencies, the exploding pace of business bankruptcies and bank closures, a consumer that is still overwhelmed with debt and fearful of job security, and a sky-rocketing growth in the national debt. 

On the bright side for Houston, Jones notes the resumed growth in export container shipments through the Port of Houston.    After peaking in 2008 and dropping in early 2009, export shipments have increased and stabilized indicating a bottoming in the manufacturing job and goods market in the country.  While population growth is expected to continue to be positive in the long run, with the Houston Metropolitan statistical Area (MSA) doubling by 2035, job creation will not accelerate at the same rate.  The significant decline in national home prices has already reduced corporate relocations across the country.  In many circumstances, when a company does relocate employees, they are discouraging their employees from buying a home.  Ironically, given depressed home prices and record low interest rates, there may have never been a better time to buy property.

Jones concluded his remarks on the ultimate long-term investment in an economy-and that is education.  He referenced a recent Federal Reserve Bank of Dallas study that found while in 1980 a Texas college graduate made 50 percent more than non-college graduates, that level had risen to 97 percent greater pay in 2008.  The long run ultimate return in Texas will be a highly educated work force. 

The IRF forecasts include several predictions:

  • A robust U.S. recovery will not begin until 2012 at the earliest, although there will be tepid growth in 2011.
  • Houston's recovery will track the nation's lead with an estimated 30,000+ new jobs in 2011. Largest growth will be in the mining (read that as oil and gas), retail and government segments. The local economic environment in 2011 will be much improved, but it won't be until 2012 that employment growth exceeds 50,000 per year again.
  • The election Tuesday may have set the stage for stalemate between the White House and the House of Representatives, so do not be surprised if government goes into shut down modes as negotiation on budgets and spending will likely be intense.
  • As the global and national economic recovery progresses, so will the upward trend resume in oil prices. The recent innovative technology of fracturing shale for natural gas production has set the stage for moderated natural gas prices, foregoing an extremely cold winter.
  • Consumer confidence will be slow to resume, but it will grow rather than decline as it did in 2010.
  • Interest rates will escalate in 2011, driven by a declining value of the U.S. Dollar, increasing cost of oil, a growing global economy and the hangover effects of a cheap money policy.
  • In terms of the housing market, new home sales will be helped by an improving tone to the local economy, but will be hurt by rising interest rates. Good news is that Houston homeowners need not be overly worried because Houston prices will remain relatively static. Homebuilders, on the other hand, are likely to have to wait until 2012 before new home sales will start moving back up to normal levels.