Current economic developments in Orange County are making Richard Green nervous about 2019. Green, director of The University of Southern California’s Lusk Center for Real Estate, told attendees at Thursday’s real estate event, “The Lusk Executive Forum – Continuing Orange County’s Economic Leadership: Pathways for the Next Generation,” that high asset values, potential trade war, and the looming prospect of rent control are among the issues giving him pause about the county’s future.
“Asset values are not just high, but extremely high,” Green told the crowd at The Resort at Pelican Hill in Newport Coast, California. “We have the highest ratio of wealth to income ever.” He said the last time the ratio peaked was 2007 and 1999 before that — and we all know what followed those peaks. “Is history repeating itself?”
Price-earnings ratios are also making Green uncomfortable. PE ratios for publicly traded companies are higher now than they were in 1929 and 2008, although they were higher in 1999 before the dot-com bust, he said. Questioning whether stocks are overpriced, he commented, “Things are fleeting for even dominant companies like Amazon, and the possibility of stocks decreasing 25 percent is real.”
Worldwide housing prices are also higher than any point in history, Green said, but the cascading of home prices won’t be what it was 10 years ago because the building sector has been more cautious.
Trade wars are another concern, especially since Americans are notoriously bad at saving compared to residents of many other countries, Green said. Since the region’s economy relies heavily on trade and industrial real estate, a potential trade war with other countries could have a truly negative impact on it. “People who are investing in the U.S.— the Chinese and the Germans — save their money,” Green said. “That money needs to go somewhere. The Germans spend half as much as we do, and they put their money in places they see as growth opportunities, such as the U.S. They sell BMWs to the U.S., which is a problem if there is a trade war.”
Lastly, Green cited rent control as a concern and a “terrible idea” for the region. In rent-controlled areas, “houses are maintained less well, which leads to having less housing and more owner-user landlords. A landlord could make less income than their tenant in a unit.”
Also, rents are going up while renter income is going down. Green said that renters today have less money after rent than they did 25 years ago.
He concluded that 2019 might be a tough year for us, but it will be better than 2008.