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Real Estate and Economic Outlook, by Dr. Lawrence Yun

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Presentation to CID, NOMAR, CCIM Louisiana Chapter at Loyola University, New Orleans, Louisiana, October 16, 2012

Presentation to CID, NOMAR, CCIM Louisiana Chapter at Loyola University, New Orleans, Louisiana, October 16, 2012

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  • Currently, deal flow remains significantly below the 2007 peak, but sizable transactions have been reported recently, and there has been a year-over-year improvement in transaction volume. In 2010, commercial real estate deal volume rose 124.3 percent year-over-year, to $122.7 billion, compared to $54.7 billion in 2009. Gains were higher for high-quality core assets, especially in the office segment, where sales volume rose 156.6 percent YoY to $41.1 billion in 2010, from $16.0 billion in 2009. The growth has continued so far in 2011, with CRE deal volume rising 69.5 percent YoY in 1Q11 to $30.5 billion. While this improvement is a positive development, it has yet to be sustained for a long enough to confirm 2009 as the bottom for transactions in this cycle. Transaction levels remain below peak, but private investors continue to account for the largest share of the total. The recent increase, however, has been driven by public investors (including REITs) and foreign investors, with both categories surpassing 2009 totals in 2010.

Real Estate and Economic Outlook, by Dr. Lawrence Yun Real Estate and Economic Outlook, by Dr. Lawrence Yun Presentation Transcript

  • Real Estate and Economic Outlook Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS® Presentation to CID, NOMAR, CCIM Louisiana Chapter at Loyola University New Orleans, Louisiana October 16, 2012
  • Existing Home Sales Recovery: Best in 5 years, but only up 8% year-to-date8 In million units7 7.086 6.525 5.024 4.62 4.12 4.34 4.18 4.263210 2005 2006 2007 2008 2009 2010 2011 2012 est.
  • One Reason for Slower Recovery, aside from credit bubble hangover, is the falling mobility rate From 18% to 12% Fraction of Population Who Moved in the Last 12 Months (Any Distance) .2 .18 .16 .14 .12 .1 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year Source: Raven Molloy, Federal Reserve Economist, Current Population Survey.
  • Investors in the Market; and Homebuyers Frustrated Investor Sales In thousands2500200015001000500 0 2005 2006 2007 2008 2009 2010 2011 2012 est. Owner-occupant Sales In thousands600050004000300020001000 0 2005 2006 2007 2008 2009 2010 2011 2012 est
  • New Orleans Housing Statistics• Units Sold … up 14% year-to-date from one year ago• Median Price to $203,100 … up 2%• Days on Market at 95 days (from 102 days one year ago) Source: NVAR
  • Everyone Seeing Low Home Prices Warren Buffet: Buy Low (not Buy High)350300 Phoenix250200 New Orleans150100 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 - Q1 Source: FHFA
  • 0 1 2 3 4 5 -12000 - Jan2000 - Jul2001 - Jan2001 - Jul2002 - Jan2002 - Jul2003 - Jan2003 - Jul2004 - Jan2004 - Jul2005 - Jan2005 - Jul2006 - Jan2006 - Jul2007 - Jan2007 - Jul2008 - Jan % change from one year ago2008 - Jul2009 - Jan2009 - Jul2010 - Jan Investors seeing Rising Rent2010 - Jul because some of it will be passed on to renters)2011 - Jan2011 - Jul (Not deterred by 3.8% Health Care Tax on Rental Income …2012 - Jan
  • 25,000 29,000 31,000 33,000 35,000 39,000 41,000 27,000 37,0001980 - Q11981 - Q31983 - Q11984 - Q31986 - Q11987 - Q31989 - Q11990 - Q31992 - Q11993 - Q31995 - Q11996 - Q31998 - Q1 Rental Households1999 - Q32001 - Q12002 - Q32004 - Q12005 - Q32007 - Q12008 - Q32010 - Q12011 - Q3 Investors also seeing rising # of renters
  • 50,000 55,000 65,000 70,000 75,000 80,000 60,0001980 - Q11981 - Q31983 - Q11984 - Q31986 - Q11987 - Q31989 - Q11990 - Q31992 - Q11993 - Q31995 - Q11996 - Q3 Homeowners1998 - Q11999 - Q32001 - Q12002 - Q32004 - Q1 Homeowners not Rising2005 - Q32007 - Q12008 - Q32010 - Q12011 - Q3
  • 59 60 61 62 64 65 66 67 69 70 63 68 %1965 - Q11967 - Q11969 - Q11971 - Q11973 - Q11975 - Q11977 - Q11979 - Q11981 - Q11983 - Q11985 - Q11987 - Q11989 - Q11991 - Q1 (Lowest in 15 years)1993 - Q11995 - Q11997 - Q11999 - Q12001 - Q12003 - Q12005 - Q1 Homeownership Rate at 65.4%2007 - Q12009 - Q12011 - Q1
  • Visible Housing Inventory(Existing inv. At 8-year low; New inv. at 50-year low)4,500,0004,000,0003,500,0003,000,0002,500,0002,000,0001,500,0001,000,000 500,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan Existing New
  • 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.5 5.0 4.02000 - Q12000 - Q32001 - Q12001 - Q32002 - Q12002 - Q32003 - Q12003 - Q32004 - Q12004 - Q32005 - Q12005 - Q32006 - Q12006 - Q32007 - Q12007 - Q32008 - Q12008 - Q32009 - Q12009 - Q3 million units2010 - Q12010 - Q32011 - Q12011 - Q32012 - Q1 Shadow Inventory … Falling 2014 … 8% (Seriously delinquent mortgage + homes in foreclosure process) 2013 … 15% 2012 … 25% 2011 … 33% 2010 … 33% Market Share Distressed Sales
  • 0% 10% 20% 30% 40% 50% 60%2008 - Oct2008 - Dec2009 - Feb2009 - Apr2009 - Jun2009 - Aug2009 - Oct2009 - Dec2010 - Feb2010 - Apr REO2010 - Jun2010 - Aug2010 - Oct2010 - Dec Short-Sale2011 - Feb2011 - Apr2011 - Jun2011 - Aug2011 - Oct2011 - Dec Distressed Property Sales2012 - Feb2012 - Apr2012 - Jun2012 - Aug
  • 0 2 4 6 8 10 12 14 %2005 - Q12005 - Q22005 - Q32005 - Q42006 - Q12006 - Q22006 - Q32006 - Q42007 - Q12007 - Q22007 - Q32007 - Q4 AZ2008 - Q12008 - Q22008 - Q3 MI2008 - Q42009 - Q12009 - Q2 CA2009 - Q32009 - Q42010 - Q12010 - Q2 in Non-Judicial States2010 - Q32010 - Q42011 - Q1 Foreclosures Rapidly Falling2011 - Q22011 - Q3 Example: Seriously Delinquent Mortgages in AZ, CA , MI2011 - Q42012 - Q12012 - Q2
  • 0 2 4 6 8 10 12 % 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 2006 - Q2 2006 - Q3 2006 - Q4 2007 - Q1 • Vacant property 2007 - Q2 2007 - Q3 2007 - Q4 2008 - Q1 2008 - Q2 CT 2008 - Q3 2008 - Q4 IL 2009 - Q1 2009 - Q2 2009 - Q3 2009 - Q4 2010 - Q1 2010 - Q2 • Missed Mortgages for 6 months or longer 2010 - Q3 2010 - Q4 2011 - Q1 2011 - Q2 2011 - Q3 Example Seriously Delinquent Mortgages in CT and IL 2011 - Q4 2012 - Q1 Foreclosures Clogged in Judicial States 2012 - Q2Should a trigger be set up to foreclose without a court approval?
  • 0 2 4 6 8 10 12 14 %2005 - Q12005 - Q22005 - Q32005 - Q42006 - Q12006 - Q22006 - Q32006 - Q42007 - Q12007 - Q22007 - Q32007 - Q42008 - Q12008 - Q22008 - Q32008 - Q42009 - Q12009 - Q22009 - Q32009 - Q42010 - Q12010 - Q2 Seriously Delinquent Mortgages Shadow in Louisiana2010 - Q32010 - Q42011 - Q12011 - Q22011 - Q32011 - Q42012 - Q12012 - Q2
  • 500 1000 1500 2000 2500 0 2000 - Jan 2000 - Jul 2001 - Jan 2001 - Jul 2002 - JanSource: Census, HUD 2002 - Jul 2003 - Jan 2003 - Jul Thousand units (annualized) 2004 - Jan 2004 - Jul 2005 - Jan multifamily 2005 - Jul 2006 - Jan 2006 - Jul 2007 - Jan 2007 - Jul single-family Housing Starts 2008 - Jan 2008 - Jul 2009 - Jan 2009 - Jul 2010 - Jan 2010 - Jul 2011 - Jan (Well Below 50-year average of 1.5 million each year) 2011 - Jul 2012 - Jan Long-term Average
  • 0 10000 12000 14000 2000 4000 6000 800019801982198419861988199019921994199619982000 Housing Permits2002 New Orleans Metro20042006200820102012
  • Falling Inventory of Homes for Sale 2010 July 2011 July 2012 JulyExisting Homes for Sale 3.41 million 3.15 million 2.40 millionNewly Constructed 210,000 165,000 142,000Homes for Sale“Shadow” Estimate 4.2 million 3.5 million 3.2 million(Seriously DelinquentMortgages and Homes inForeclosure Process)Homeowners waiting ??? ??? Inconsequential Impact• for higher home since most will list prices homes, but with intent• To be freed from Tax also on buying Credit Lock Period
  • Wealth Distribution … Who will get Future Wealth? (Federal Reserve data on median net worth) $300,000 $250,000 $200,000 1998 2001 $150,000 2004 2007 $100,000 2010 $50,000 2014 $0 Renter Owner2014 Forecast by NAR
  • Improving Factors for Sales in 2012 and Beyond: 1. High Affordability and Job Creation 2. Solid stock market recovery from 2008 3. Rising rents and a larger pool of qualified renters 4. Pent-up release of Household Formation • Rising demand for ownership and rentals as young-adults move out of parent’s basement 5. Smart money chasing real estate (i.e., investors) 6. Consumer confidence in buying an appreciating asset
  • 50 70 90 110 130 150 170 190 21019701972197419761978198019821984198619881990199219941996199820002002 Best Affordability Conditions20042006200820102012
  • 1,000 1,500 2,000 2,500 3,000 3,500 500 0 2005 - Jan 2005 - Jun2005 - Nov 2006 - Apr 2006 - Sep 2007 - Feb 2007 - Jul2007 - Dec2008 - May 2008 - Oct2009 - Mar2009 - Aug 2010 - Jan 2010 - Jun2010 - Nov 2011 - Apr 2011 - Sep S&P 500 (Almost 100% from low point) 2012 - Feb NASDAQ (More than 100% increase from low point) S&P 500 NASDAQ
  • Annual Household Formation… Future Rent Pressure? (3 separate Census data) In millionsHousehold Formation leads to increase ownership and renters;Could begin to return to normal of at least 1 million from 2012.
  • Home PricesMetric % change from one year ago CommentNAR + 9.5% Mix of homes impact price … fewer distressed sales recently … Leading DataCase-Shiller +0.5% 30% annualized gains for two straight monthsFHFA + 3.6% Monthly gains in 7 of recent 8 months
  • 75 85 95 105 110 115 70 80 90 100 2007 - Jan 2007 - AprSource: NAR 2007 - Jul 2007 - Oct 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct Homebuyer Tax Credit 2009 - Jan 2009 - Apr 2009 - Jul 2009 - Oct 2010 - Jan 2010 - Apr (Seasonally Adjusted) 2010 - Jul 2010 - Oct 2011 - Jan 2011 - Apr 2011 - July 2011 - Oct 2012 - Jan 2012-Apr 2012 - Jul Monthly Pending Home Sales Index
  • 0.0 10.0 30.0 40.0 50.0 60.0 70.0 20.02008 - Jan2008 - Apr2008 - Jul2008 - Oct2009 - Jan2009 - Apr2009 - Jul2009 - Oct Buyer2010 - Jan2010 - Apr2010 - Jul2010 - Oct Seller Foot Traffic2011 - Jan2011 - Apr2011 - Jul2011 - Oct2012 - Jan2012 - Apr2012 - Jul
  • Banks/Regulators Restricting Credit (Average Credit Scores of Approved Loans) Normal 2009 2010 If NormalFannie 720 761 762 720Freddie 720 757 758 720FHA 650 682 698 660 15% to 20% Higher Sales
  • -200 -100 0 100 200 300 400 500 2001 - Q1 $ billion 2001 - Q3 2002 - Q1 2002 - Q3 2003 - Q1 2003 - Q3 2004 - Q1 2004 - Q3 2005 - Q1 2005 - Q3 2006 - Q1 2006 - Q3 2007 - Q1 2007 - Q3 2008 - Q1 (excluding Federal Reserve) 2008 - Q3 2009 - Q1 2009 - Q3 Financial Industry Profits 2010 - Q1 2010 - Q3 2011 - Q1 2011 - Q3 2012 - Q1
  • Economy Growing, though Slowly(No Fresh Recession because of Housing Recovery) Real GDP Growth Rate4 %3210 2005 2006 2007 2008 2009 2010 2011 2012 2013-1 forecast forecast-2-3-4
  • Payroll Jobs Changes (December to December)3 In millions210 2005 2006 2007 2008 2009 2010 2011 2012 2013-1 forecast forecast-2-3-4-5-6
  • 61 63 64 65 66 67 68 62 %1990 - Jan1991 - Jan1992 - Jan1993 - Jan1994 - Jan1995 - Jan1996 - Jan1997 - Jan1998 - Jan1999 - Jan2000 - Jan2001 - Jan2002 - Jan2003 - Jan2004 - Jan2005 - Jan2006 - Jan2007 - Jan2008 - Jan2009 - Jan2010 - Jan Labor Force Participation Rate2011 - Jan2012 - Jan
  • Louisiana Jobs In thousands20001950190018501800175017001650 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan
  • 1000 1500 2000 2500 0 5001939 -…1942 -…1945 -… In thousands1948 -…1951 -…1954 -…1957 -…1960 -…1963 -…1966 -…1969 -…1972 -…1975 -…1978 -…1981 -…1984 -…1987 -…1990 -… Nonfarm Payroll Jobs1993 -…1996 -…1999 -…2002 -… Louisiana Jobs from 19402005 -…2008 -…2011 -…
  • Consumer Price Inflation (Slightly Above Fed’s preferred 2% core inflation rate) All Items Core %5.004.003.002.001.000.00 2005 2006 2007 2008 2009 2010 2011 2012 2013-1.00 forecast forecast
  • Monetary Policy by Federal Reserve (no change to 2014) Fed Funds 30-year Mortgage %76543210 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 forecast forecast forecast Modestly higher rates could help home sales as banks re-staff mortgage work for home purchase applications and less refinance applications.
  • Huge Federal Budget Deficit … Will Push Up Borrowing Cost (% of GDP) 4 2 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 -2 - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan -4 -6 -8-10-12
  • 10 12 14 16 0 2 4 6 81982 - Aug1983 - Oct1984 - Dec1986 - Feb1987 - Apr1988 - Jun1989 - Aug1990 - Oct1991 - Dec1993 - Feb1994 - Apr1995 - Jun 10-year1996 - Aug1997 - Oct1998 - Dec2000 - Feb2001 - Apr2002 - Jun 3-month2003 - Aug2004 - Oct2005 - Dec2007 - Feb2008 - Apr2009 - Jun2010 - Aug But … Falling Treasury Borrowing Rate2011 - Oct
  • Impact to Deficit• Mortgage Interest Deduction … $90 billion – Not the source of the current budget deficit since MID was present for nearly 100 years• Interest Rates Revert back to historical average … $300 billion in extra interest expense
  • Housing Forecast Summary 2011 2012 2013 History Forecast ForecastExisting Home Sales 4.26 million 4.6 million 5.0 millionNew Home Sales 301,000 385,000 608,000Housing Starts 611,000 775,000 1,150,000Existing Home Price $166,100 $173,900 $182,700GDP Growth +1.8% +2.2% +2.6%Payroll Job Gains +1.7 million +1.5 million +2.3 millionFed Funds Rate 0.1% 0.1% 0.1%30-yr Mortgage 4.7% 3.8% 4.1%
  • Risks to Forecast• Washington Policy – QRM 20% down payment requirement? – Basel 3 … capital rule that punishes private mortgage with low down payment and commercial loans – Trim mortgage interest deduction? – Capital gains tax on home sale? – Fiscal Cliff on January 1, 2013 … if no new compromised budget, then: • Automatic deep cuts to military and domestic spending • Automatic higher taxes • 3% shaved off GDP … Fresh Economic Recession
  • Commercial Real Estate
  • Big Transactions Coming Back $2.5 million property and above Source: Real Capital Analytics, 4Q 2011.13
  • REALTOR® Business Deals (Majority are less than $1 million)
  • Method of Finance
  • Underwriting Standards?
  • Multifamily Fundamentals Completions Net Absorption Vacancy250,000 9.0 8.0200,000 7.0150,000 6.0 5.0100,000 4.0 50,000 3.0 2.0 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1.0-50,000 Source: NAR/REIS 0.0
  • Apartment Deals and Pricing Source: RCA, 4Q 2011.19
  • Office Fundamentals Completions Net Absorption Vacancy 150 20.0Millions 18.0 100 16.0 14.0 50 12.0 0 10.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 8.0 -50 6.0 4.0 -100 2.0 -150 Source: NAR/REIS 0.0
  • Office Deals and Pricing • Source: RCA, 4Q 2011. • Source: RCA, 4Q 2011.15
  • 800 1300 1800 2300 2800 33002000 - Q1 $ billion2000 - Q32001 - Q12001 - Q32002 - Q12002 - Q32003 - Q12003 - Q32004 - Q12004 - Q32005 - Q12005 - Q32006 - Q12006 - Q32007 - Q12007 - Q32008 - Q12008 - Q32009 - Q1 (International Trade always fall during recessions)2009 - Q32010 - Q12010 - Q32011 - Q12011 - Q3 Imports and Exports … Expanding Briskly2012 - Q1
  • Industrial Fundamentals Completions Net Absorption Vacancy 150 14.0Millions 12.0 100 10.0 50 8.0 0 6.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 4.0 -50 2.0 -100 Source: NAR/REIS 0.0
  • Industrial Deals and Pricing Source: RCA, 4Q 2011.17
  • Retail Fundamentals Completions Net Absorption Vacancy 40 14.0Millions 30 12.0 20 10.0 10 8.0 0 6.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10 4.0 -20 2.0 -30 Source: NAR/REIS 0.0
  • Retail Deals and Pricing Source: RCA, 4Q 2011.21
  • Commercial Market ForecastOFFICE 2011 2012 2013 Vacancy Rate 16.6% 16.3% 15.9% Net Absorption (000 sq. ft.) 20,178 31,700 53,000 Completions (000 sq. ft.) 11,659 25,474 37,847 Rent Growth 1.4% 1.7% 2.4%INDUSTRIAL 2011 2012 2013 Vacancy Rate 12.4% 11.9% 11.1% Net Absorption (000 sq. ft.) 61,957 41,249 59,855 Completions (000 sq. ft.) 20,462 26,947 54,881 Rent Growth -0.5% 1.8% 2.3%RETAIL 2011 2012 2013 Vacancy Rate 12.9% 12.2% 11.0% Net Absorption (000 sq. ft.) 1,238 13,547 23,330 Completions (000 sq. ft.) 4,207 12,677 19,878 Rent Growth -0.2% 0.7% 1.4%MULTI-FAMILY 2011 2012 2013 Vacancy Rate 5.4% 4.6% 4.5% Net Absorption (Units) 238,398 126,621 102,687 Completions (Units) 38,014 88,839 93,706 Rent Growth
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