This is the FAY DELAYED, seventh installment of the LEIPLINE. Our focus each quarter is on the four variables for which we collect data and the implications of those data for the Jacksonville MSA overall. Since many of the data change for at least one month after we first report them, we have decided to wait until at least the middle of the following quarter to report each quarter's implications. However, Fay delayed our report further than we would have preferred. Since the local CPI is the most significant variable that we analyze we will start with it.
The 2008.2 Jacksonville CPI
The change in the local CPI during the second quarter of 2008 was negative for the only quarter since we have been collecting data (back in December 2001). The aggregate effect through June produced a quarterly decrease of just over 0.44%, with the annualized equivalent inflation rate falling by almost 1.8%. During the second quarter the national CPI jumped up by just over 2% so the net differential was even bigger. The local numbers were once again driven by fuel prices and housing prices, but during the second quarter housing prices fell while gasoline continued its climb. Several other categories revealed big jumps as well, including used car prices, apparel, and food. Fuel prices, including both gasoline and fuel oil, grew dramatically during the quarter continuing the exodus of financial resources to commodities in search of profits. We recognize that this trend has reversed itself in both July and preliminary August data, hopefully meaning that downward pressures on prices will continue. However, July as the transition month showed gasoline and oil price increases at major levels.
The outlook for the rest of the second quarter of 2008 relative to inflation is hopefully positive. If oil prices continue to diminish (despite attempts by speculators to promote higher prices due to hurricanes in the gulf) the feedback effects on other products should follow suit. However, producers have been let loose in recent months to pass on higher costs in a way they have not been for several years, so pass-through pricing may continue for a few months. However, there are signs that the US and other world economies are slowing which should drive price increases lower during the rest of the year. We believe that the oil and gasoline bubble is bursting, and thus, price increases should be mitigated in the same universal process that generated the pervasive increases in the last year and one half. The recent increase in the value of the dollar is likely assisting in driving commodity speculation down, bringing loanable funds back into the standard credit markets to stimulate GDP. The concern is that we will encounter recessionary outcomes until the price changes work through world markets
Unemployment rates in Jacksonville during 2008.2 continued their rise towards the national rate, such that local unemployment actually slightly exceeded the national level in July. Specifically, the unemployment rate is now 5.7 percent in the Jacksonville MSA, higher than any time in the last 7 years. LEIP only seasonally adjusts the unemployment rate (we do not calculate it), but doing so provides valuable short term insight into the changes from month to month. For example, the unadjusted unemployment rate in July was 6.3%, but after seasonal adjustment it was equivalent to 5.7. Inspection of the employment versus labor force data suggests that the rise has been a combination of rising employment with growth in the civilian labor force of a significantly larger amount. Thus, the influx of new workers into the labor force has outstripped the local economy's ability to absorb them. We suspected marginal increases in the second quarter in our last report, but the increase was more substantial. Unfortunately, when the summer influx of high school and college students diminishes in August and September, we still anticipate rising unemployment due to the slowing economy.
Leading Indicator (LEI)
The LEIP leading indicator has been perfectly symmetric so far this year going up one month and down the next. However, the magnitudes of the changes suggest a decline overall through July, with an almost 2.7% decline in the second quarter. Consumer confidence has fallen to the lowest level in twenty years and initial claims for unemployment insurance have risen in recent months. Building permits are way off from historical norms, which will eventually help reduce the housing glut, but it means less economic activity and state tax revenue for the foreseeable future. Local headquarter stocks have held their own, but the local presence stocks have plummeted as financial firms have lost considerable value. If the economy continues its signals of weakness, it does not bode well for the LEI, which in turn, does not bode well for the rest of 2008.
Stock Price Index
The local stock index was mixed in the second quarter of 2008 as well. The local presence stocks stabilized at very low levels while the local headquarters stocks recovered somewhat through July. While the DOW continues to remain below its peak, the local stocks seem to be reflecting the declining demand for U.S. stocks more generally. Local headquarters stocks were virtually on par with the DOW in the second quarter.
The Bottom Line
Overall, 2008.2 was the second consecutive weak quarter for Jacksonville and the nation in regards to the data LEIP collects or has access to in a consistent format. Retail sales slowed some more, unemployment rose, and inflation fell, but due to weakness in the economy not strength. The LEI fell overall, but not in May. The outlook for Jacksonville is not strong for the latter part of 2008. However, there are positive signs for 2009. Housing seems to be gaining with increasing sales of homes and condos with stabilizing prices. If fuel prices continue their decline back towards more reasonable levels, and this spurs a return of investment dollars to the financial markets, 2009 may not be as weak locally and nationally as the end of this year seems to be heading towards. Therefore, we forecast continued weakness until the November election, with the potential for worsening of the economy thereafter, but a slow recovery in 2009 unless hurricanes intervene negatively, causing higher gasoline prices, or positively in a perverse sense, by causing destruction that requires rebuilding that will stimulate housing and building material demand.
Rents, Home Prices, and Supply and Demand for Housing in Jacksonville
It is not a stretch to suggest that the last five years have been the most tumultuous in history in the Jacksonville housing market. The combination of the localized Super Bowl speculation and the global real estate market booms in 2003 through 2006, followed by the sub-prime and credit crunch bust provides a backdrop for assessing the roles of supply and demand in determining housing selling prices and rental prices in a fluctuating market. The boom began with cheap interest rates and banks that were willing to initiate high-risk mortgages in a market driven by the 2005 Super Bowl speculative rush and a major population influx into the Jacksonville MSA. The housing bubble burst when the riskier mortgages failed when balloon payments came due, causing banks to lose billions and the country to teeter on the edge of a recession. Meanwhile, rental prices and units rented have also fluctuated wildly, due to the turmoil in the sales market and new construction of rental units and condos.
Since sales and rental markets on the surface seem relatively independent, there are two different ways to assess the relationships in the housing data. First, is there a statistical relationship between housing prices and houses sold? Second is there a similar relationship between rent paid and rented units? The first question can be answered quickly. There is no significant linear relationship between house sales and housing prices over the five year period. In early 2003, demand for housing was high and the supply was limited, which resulted in a higher sales price. In the last 2 years the construction boom led to an increased supply; however the demand for housing went down dramatically after mid 2006. Thus, it is likely that the supply and demand for houses for sale fluctuated too wildly to infer a dominance of supply over demand or vice versa over the 2003-08 time period.
Answering the second question, we can see a trend in the rented units and the rental price (see the graph below). From a statistical standpoint, a relationship between rented units and rental price is observed. The F-test suggests that the model regressing rental price on rented units is significant at the 99% level, with 57% of the variation in price explained by the average units rented. Finally the correlation coefficient indicates that there is a strong positive association between units rented and the rent price. The supply of units available for rent stayed relatively fixed over the last 5 years, ostensibly because the cost of renting and owning remained about the same. In the last two years due to rising interest rates, the demand for rental property increased and thus demand shifted away from the purchase market. The raw data show this as 163 units were rented monthly on average in 2003, compared to 496 units rented in 2008 (which is an increase of 204%).
But is that all we can conclude from these data? By taking all the available data into consideration, there is another way of explaining the price of rental units. Since a simple bivariate model only explains 57% of the variation in rental prices, the rest is explained by unknown factors. If one includes the average housing sales price and the amount of units sold to predict the rental price the model improves markedly. Seventy-six percent of the variation in rental price is explained this way.
The implications of this better model suggest that as the number of rented units goes up, so does the rental price (reflecting the shifts in demand along a relatively fixed supply curve). This is already what we concluded before. As the price of houses sold goes up, so does the rental price. This implies that potential purchasers shift to rental markets when housing prices escalate, thus, people would rather rent, shifting demand for rental units outward, and the rental price goes up. The results of this latter model also suggest that as the number of units sold goes up, so does the rental price. This likely implies that the housing sales boom corresponded to an influx of population that bolstered rental market demand as well, or given that housing prices were escalating so significantly, many lower income families could not afford to buy and thus had no choice but to rent.
So what can we conclude from all of this? While the market for housing in Jacksonville has fluctuated considerably over the last five years, the fundamentals of supply and demand can effectively explain the movements. During the early 2003 through mid 2006 period, housing demand grew dramatically relative to supply and so housing prices rose faster than ever before. Since mid 2006, demand has faltered while supply has continued to grow, consequently prices have fallen over $40,000 at the mean in the last two years. Because this can be inferred, there is no clear expansion path for the entire time period. However, rental markets have revealed relatively stable supply with growing demand, mapping out escalating rental prices over the entire five year period. The most recent data suggest that this is the time to buy a house while prices are down, availability is sizable, and the future recommends recovery in housing prices, but also because rental prices are up and growing.