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A Tale of Eleven Decades

August 4, 2009

As we approach the end of the decade, let’s see how the “2000s” are shaping up versus ten prior decades. As Michael Jordan said: “You have to monitor your fundamentals constantly because the only thing that changes will be your attention to them. The fundamentals will never change.

Although His Airness was talking about basketball, perhaps this quote can be rediscovered as the mantra for all business executives, entrepreneurs, politicians, and economists.  During the 2000s, it seemed as if we all forgot to pay attention to a myriad of fundamentals.  For week 9, we went backeleven decades to examine and illustrate just how un-fundamentalour economy has become.

01. Employment Growth for the current decade is now at a dismal +1.2 million.  There is no good news here unless you want to dwell on the fact that at least we have a positive number for the decade.  This is the lowest growth ever…and there’s a good possibility of finishing this decade with negative job growth for the entire decade.  Please scan the first blue-shaded row in the table below and just take a moment for these numbers to soak in.  As we mentioned in week 5, “it’s employment stupid” and jobs must be our NUMBER ONE FUNDAMENTAL.  Without signs of an employment turnaround, everything else will not matter.  If you are interested in our employment and industry forecasts for 2010 and beyond (by geo-submarket), give us a shout.

02. New Home Sales during the 2000s totaled 8.8 million which is slightly below the torrential increase in vacant housing units of 8.9 million.  The great Roman orator Marcus Tullius Cicero once said “Nothing is so unbelievable that oratory cannot make it acceptable.”  If Cicero were alive today he would have made an exception for the real estate market.

03. Population Growth to Household Formation Ratio is currently at 1.38 and well below the long term stabilized benchmark of 2.82 to 3.29.  Translation: Although our population is still growing at significant levels (26 million this decade) we “formed” far more households than what has been consideredsustainable.  Demographers, land planners, and economists argue that our society is trending towards SINKS and DINKS (i.e. single income no kids and dual income no kids) which caused these “persons per household metrics” to trend far below 3.0.  However, is this really going to persist into the 2010s?  With robust growth forecasted for Latino and Asian populations with high propensities to form multiple adult households?  With employment plummeting and causing people to downsize, bundle, and double-up their households in dramatic fashion?  Do we really want to live alone and rely on Twitter as our new primary cultural conduit for relatedness? Or perhaps the fundamentals dictate that during the next decade there might be a re-visioning of nuclear family households,extended family households,communal/familial households, and modularcommunities?  This is one of the most dynamic demographic trend reversals in over 100 years which will have a sea-change impact in whatever business you are (or will be) in.  Analyzing and anticipating this trend on both a local and regional basis will pay nice dividends.

04. Population Growth to Employment Growth Ratio is currently at an unbelievable 21.72 and far above the long term stabilized benchmark of 2.61 to 3.18.  Translation: Population growth has dwarfed employment growth during this decade by adding nearly 22 new citizens for every job created.  What?  This is one more reason we will see the “population to household ratio” reverse course from the steady downward trend that started in the 1950s.

05. Job Growth to Household Formation Ratio is currently at a microscopic 0.06 and far below the long term stabilized benchmark of 1.43 to 1.75.  Translation: This decade will realize the lowest job growth in recorded US history and was unable to support the number of households built and formed.  Enough said.

06. Pop Growth to New Home Sales Ratio is currently 2.97 and well below the long term stabilized benchmark of 3.80 to 4.27. Translation: Although population realized robust growth, the number of new homes sold was much higher than what our population could support.  And as we all know, low interest rates, myopic mortgage banking, avaricious investment bankers, and a public rife with immediate valuation gratificationdrove new home sales far above equilibrium and drove home prices far beyond sanity.

07. Job Growth to New Home Sales Ratio is currently at an anemic 0.14 and currently far below the long term stabilized benchmark of 2.77 to 3.14.  Translation: Let’s beat this dead horse one more time…We will NOT see a sustainable housing recovery if employment does not recover AND trend into healthy territory.  HIINT: The first signal we are looking for is to see this ratio start to realize steady levels above 1.0.  In other words, by generating at least one job for every new home sold is not our recommended benchmark for strong housing demand but rather a phase one hurdle that needs to be leapt over before we can start claiming that our nation’s housing recovery has already started.  This same logic applies to every competitive market area in the USA…and a fundamental you can not afford to ignore.

ELEVEN DECADES OF FUNDAMENTALS