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Napa County Real Estate: An Economic Perspective Washington Mutual, Realtor Coaching Class February 10, 2006

Introduction. Real estate markets in 2006: PredictionsPrices should fallHow much? How fast? Interest Rates should rise, forcing this changeNot the only factor?Positive versus NormativeWhat is: Supply and Demand (no kidding)Interest rates (which affect both S and D) inversely related with demandRetirement homes, second homes, rentals.Somewhat unpredictable, very individualizedWhat should be:Local employment levels Local income levels (not necessarily wage driven)Preferences to own a 9456

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Napa County Real Estate: An Economic Perspective Washington Mutual, Realtor Coaching Class February 10, 2006

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    1. Napa County Real Estate: An Economic Perspective Washington Mutual, Realtor Coaching Class February 10, 2006 Robert Eyler, Ph.D. Chair, Economics Department Sonoma State University eyler@sonoma.edu

    3. Local Economic Outlook Napa County looks marginally good in 2006 Wine and tourism current drivers Construction another major industry Tied directly to both residential and commercial real estate markets Does Napa County need more balance? Services focused on wine and tourism Retail exists with decent breadth Changes to come? Employment a key factor for any economy Local labor becomes local spending and living EDD our source for employment data (Census behind it) Business experiencing difficulty in hiring: why?

    5. Macroeconomic Issues 2006 Gas and energy prices Psychological and real effects. Inflation leads to two major problems for real estate: Higher interest rates from policy and market forces; and Higher wages to cover against inflation means lower employment. Inflation, when demand-driven, good for real estate Home prices follow, driving local inflation, rather than falling victim to it. Growth begets inflation, based on demand If gas price a problem, stop driving(?)

    6. Macroeconomic Issues (cont.) Federal and State budget issues persist Continued Federal deficits fuel higher interest rates, as does FED policy. Continued state deficits exacerbate these problems in California specifically. No industrial leader yet. Some consumer product improvements, no explosion. U.S. auto manufacturers experiencing fierce competition, consolidation Should we expect it, especially in high tech? Yes, but not in 1990s way.

    7. Real Estate’s Role There are two large sectors of this industry: Construction Creates many, manufacturing-like jobs locally High wage, high-skill jobs in many cases. Forecasted demand in remodeling. Role of Green Building? Spread throughout the county Local firms do a lot of work in other, surrounding counties. Where will new homes go?

    8. Real Estate and the Economy (cont.) Agency, Brokerage, and Services About 1% of employment Follows demand for real estate, construction Driver of lending, however, and other services (title, escrow, notary, etc.) Commission-based, large wealth possible Will a contraction in home sales pressure employment in these industries? Possibly: lenders must plan for potential ripple effects

    9. Real Estate and Economy (cont.) Should think about real estate like any other asset market Part of your overall portfolio Illiquid asset, provide time for thought Circumvention of rent Tax writeoffs available where they may not be otherwise Need to educate both buyers and sellers about this. Knowledge of when to buy and sell key Sometimes buyer or seller cannot control this. Need to educate workers about this also Lending flexibility

    10. Economic Forecast for Real Estate Strengths No visible lack of demand Wealth continues to immigrate to this area Economic growth locally fuels this Weaknesses High cost of living fueled by housing prices and associated costs Dependent on exogenous economic factors Self-fulfilling inflation: high starting prices become high final prices CAR: Default Notices rising Sign that leverage reversing its field.

    11. Economic Forecast for Real Estate (cont.) Opportunities: Mixed-use construction most likely the political compromise for zoning and growth limits Alternative (Green) construction and energy sources another Could be a regional leader and help political issues Need to think about those issues now rather than be reactive

    12. Economic Forecast for Real Estate (cont.) Threats Zoning and Growth restrictions Continued Economic Uncertainty Interest Rates: Speed and Magnitude They are rising, how fast, how much and for how long? Yield curve issues Affects financial markets and banking Banking more than anything Yield curve, in a sense, the bank’s income statement

    13. Conclusions Local Real Estate markets do not show signs of major contraction. CAR report 10% gain in median home price in CA. Number of units fewer, however. Real Estate prices somewhat self-fulfilling Napa has dichotomous real estate market Geographic, wine country vs. urban Retiree vs. worker This same bifurcation exists in Sonoma, Marin also.

    14. Conclusions (cont.) Interest Rates now the largest variable to watch: Yield curve issues: banking will be affected Will react to market and policy pressures May drive strategic thinking of businesses Will react to generalized risks, domestic and int’l Must think two or three years in the distance Reality: Endpoint to this cycle is coming, the question is cause and magnitude.

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