Meridian was invited by Bank of the West to attend a presentation by Dr. Ken Rosen, the Chairman of the Berkeley Haas Fisher Center for Real Estate and Urban Economics, and an Economics Professor Emeritus at the University of Berkeley. During his presentation, Rosen discussed the various economic changes we are currently enduring, the risk of an impending recession, and what market fundamentals currently look like. In this post, we share a quick breakdown on each topic.
Macroeconomic Policy Change
Dr. Rosen started by outlining the sea of changes in macroeconomic policy that have occurred over the past year. Some of the changes include:
- The Federal Reserve Bank (The Fed) has reduced rates, whereas a year ago at the same time they had been increasing rates.
- The Fed has stopped reducing their balance sheet and started increasing it, thus increasing the supply of money.
- Central banks around the world are cutting rates and, in some cases, having negative rates, which is unheard of.
- The Deficit has breached $1 Trillion.
- Trade wars are causing economic uncertainty.
- China’s economy is slowing, and Hong Kong is tumultuous.
- Manufacturing is flirting with recessionary conditions.
- High end residential housing and condominium prices are starting to decline, some of which are attributed to the 2018 Tax Cut and Jobs Act that limited deductions for mortgage interest and property taxes for higher end homes.
Risk of Recession
Dr. Rosen estimated the probability of a recession at just 50% for 2020, and predicts that when it come it will be mild. The risks on the horizon include:
- Geopolitical issues.
- Impeachment hearings.
- Uncertainty in an election year.
- A severe housing shortage in California.
- Potential split property tax rolls where commercial properties will not have Proposition 13 protection.
- A “venture capital” bubble.
Market fundamentals are solid. According to Rosen:
- Job growth remains positive at over 140,000/month.
- The unemployment rate is at its lowest point in 50 years at 3.5%.
- Wage growth is above inflation at 3.6% given consumers more buying power.
- Consumer confidence remains high, but declined slightly in September, likely because of the uncertainty around the trade wars.
As a commercial real estate developer staying in the know regarding economic trends and predicting for the future is imperative. Huge thank you to Bank of the West for inviting us to participate in this compelling and informative discussion.
Author: John Pollock