Anchorage Real Estate Economy

Supply and Demand

 

            It’s really Econ. 101, Supply and Demand. It sounds pretty straight forward, but what are the factors that surround this? Let’s take a closer look to extrapolate whether or not we can forecast the future.

            Firstly, let’s identify a few exogenous determinants of real estate demand:

·      Market Size (Population and Employment)

·      Income/Wealth

·      Prices of Substitutes

·      Expectations

Market Size

            Two of the biggest factors that drive market size are population and employment. For instance, the bigger the population, obviously the more land and livable dwellings needed. If this shrinks, just the inverse will happen. Secondly, employment or output will be the second major factor in market size worth mentioning. If unemployment rises dramatically, more homeowners will be in higher rates of default, pushing them out of their houses and into the rental market.

Income / Wealth

            In relation to residential real estate, average GDP, or income will affect the price of homes in relation to goods being kept at a constant price. In laymans terms, if the cost of goods (utilities, groceries, gas, ect.) remain the same, while the income of the average person rises, they will have more available money. In a market with limited amount of homes, land and new construction (Anchorage for instance), average price per square foot of dwelling residence will go up, i.e. the cost of homes will rise in accordance with this. Conversely, if the average GDP of consumers falls, we can expect that the average price per square foot in the residential sector will also fall in a scalable manner.

Price of Substitutes

            In a market with limited available land, substitutes for homeownership often become higher – enter the rental market. Currently, rental prices in Anchorage are at a high. This makes the residential sector also have a higher shift. If substitutes (rents/rentals) are high, this makes owning a home more desirable, thus putting more demand on affordable homes, making inventory scarce and prices high.

Consumer Expectations

            Believe it or not, but in a closed market, consumer expectations can play a major role in the economy. For example, if it were widely thought that the price of gold or copper will go up due to a downshift in mining production (inventory), the price may rise and even effect other goods such as consumer electronics. If time comes to pass and production does not take a downturn, consumers will have paid a premium due to expectations that did not actually come to fruition.

 

Actuality of These Items

           

            If anyone tells you the end is coming, you might not want to believe him or her. No economist has a crystal ball, and people as a whole scarcely, accurately predict shifts in the economy.

            What we do know is that according to the Anchorage Bureau of Labor Statistics, last accurate data we can confirm is that the Anchorage unemployment rate is 5.3% (April 2015). Our population currently boasts just north of 300,000 people. In January of this year, according to the Department of Labor and workforce Development, there are 153,600 residents in anchorage with nonfarm employment (January 2016). Although data.ocala.com suggests there are 197,990 total in the workforce.

            During the great depression in the U.S., the unemployment rate as high as 25%. For us to see unemployment rates that high, we would have to lose around 40,000 jobs…that are a lot.

            We also have a buffer as an economy. If jobs are lost quickly, we can probably see the substitute market decrease, acting as a shield in the real estate economy. This will soften the prices of the residential real estate market, and increase inventory. It is worth noting that inventory, currently, is relatively low compare to a “healthy” market.

 

What We Do Know

            What we do know is that gas and oil is a commodity with limited availability, it will run out. Also we can see that employment from oil and gas impact state funding more greatly than it does consumer spending within the state (http://live.laborstats.alaska.gov/ces/ces.cfm?at=04&a=000020&adj=0#y2001).

            Land in Anchorage will always be scarce. There is just not much more buildable land that is available. This means that the population would have to leave in droves, tens of thousands of people at a time, for us to see a sizeable recession. If that is the case, it will be a momentary shift in the economy (in the grand scale of things). If this does happen, it will be time to buy for sure.

 

 

Wise Words From a Friend

            I had a friend tell me that they investing in the residential real estate market in San Francisco in the early 90’s. His home appreciated almost $30,000 in three years, from $165,000 to $195,000. He thought he had hit the height of the market, and there was talk of another collapse. He sold his home quickly in a hot market and thought to be the wiser.

            Today, if he still had his home, he told me it would have been worth over $500,000. He thought for sure the shift was coming (as many people had told him).

            The advice I give people is, make educated decisions based on your current condition. If it is a good move for you to sell today, sell today. If it is a smart move for your family to buy today, buy today. The mantra of, “We’ll see what the future brings” is that of some one who sits on the sidelines. To invest in your future, you must be proactive and not reactive.

 

 

- James Cash