Thornberg: Economic Picture is Bright

COSTA MESA, CA—Fundamentals point to a robust 2015 for both US and California economies as well as real estate, said Dr. Christopher Thornberg, founding partner of Beacon Economics during an IREM Orange County luncheon and showcase at the Westin South Coast Plaza here yesterday. GlobeSt.com and a ballroom full of industry executives listened to Thornberg give a presentation that focused on economic forecasting, regional economics, labor markets, economic policy and real estate analysis for past and the current year.

While last year many CRE experts worried about all of these issues, Thornberg took a positive view, which bore out: “We have the strongest economy now that we've had in the last 10 years,” he said. “This year, people are a lot happier, and the last three quarters were on fire with economic growth.”

A total of 3% annual growth and expanding credit, coupled with incomes beginning to rise this year, are indicators that the economy is well into its recovery, Thornberg pointed out. Interest rates have come down despite the end of quantitative easing, gas prices are low, and we're experiencing the best spurt of spending growth since the recession ended.

He also pointed out that while Black Friday sales were down and retail sales were down a bit in December, these aren't necessarily negative indicators. “Black Friday may have been down because consumers are more confident and don't feel the need to stand on line to save 20% on a PlayStation. Retail sales were exceptionally strong in November, so the fact that they were down slightly in December” is no reason to panic, he said.

Employment is an important metric, so consider that three million jobs were added to the US economy last year, many in the manufacturing realm, said Thornberg. Wages were still flat, but they are starting to rise, and the unemployment rate continues to fall. In addition, there are “pockets of tech where things are starting to hop” throughout the country.

Also, consumers are starting to add credit, which indicates that they can afford to borrow because they know they'll be able to pay it back, said Thornberg. “There's no worry on the consumer-debt front. The average student graduates college with $36,000 of debt. That's about the cost of a Camry.” And lower oil prices—which look to last for quite some time, since “the $100 barrel is gone, and it's not coming back”—will save the country $320 billion in the course of a year, he said.

On the real estate side, Thornberg said the mortgage market is starting to turn around—“not the big boys, but the mid-major lenders, who are lending and picking up other banks.” Residential real estate has experienced two waves of recovery, the first being from institutional capital and the second—which is just beginning—from “retail” buyers or owners/occupiers. While Americans lost $8 trillion in housing during the recession, it is starting to come back, with home prices up but still affordable. The average home costs 30% of a buyer's income, said Thornberg. This is all positive for commercial real estate as well.

While it still has its challenges, California's economy is doing much better than the failure some—although not Thornberg—predicted in 2009 and 2010. We still have the top industries, best weather, best wine and best views of any state in the nation, and a huge number of people consider it paradise. Revisions for the state's employment growth continue to trend up, construction is up and California's diversified economies are doing well all over the state. While we are adding low-paying jobs faster than high-paying jobs, the high-paying jobs we are adding are the highest of the high. Thornberg quoted San Jose's average wage as $93,000.

For Thornberg, the much-talked-about California drought isn't a reality. “We don't have a drought. A drought is a lack of water with economic consequences. We don't have those.” He points out that agricultural production is at an all-time high, and no one is suffering from lack of water. The problem is, “we use our water horribly.”

A much bigger problem in California is the lack of housing—bigger even than taxes, said Thornberg. Housing drives other industries and other parts of commercial real estate, so getting back on track with it is key to our success.