Dr. Lawrence Yun Economic Forecast Presentation
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Dr. Lawrence Yun Economic Forecast Presentation

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Slide oresentation by National Association of REALTORS Chief Economist Dr. Lawrence Yun to members and friends of the St. Charles County Association of REALTORS

Slide oresentation by National Association of REALTORS Chief Economist Dr. Lawrence Yun to members and friends of the St. Charles County Association of REALTORS

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Dr. Lawrence Yun Economic Forecast Presentation Dr. Lawrence Yun Economic Forecast Presentation Presentation Transcript

  • Economic and Housing Market OUTLOOK Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS® Presentation at St. Louis Association of REALTORS® and St. Charles County Association of REALTORS® February 3, 2012
  • Strange WorldGreat! What the Heck?Best Affordability Conditions No Meaningful Pick-up in Home SalesNational home prices have stabilized for 2 Everyone believes home values have beenyears falling throughout … Why?Lowest newly constructed inventory Housing Starts still DeadHuge Cash Reserves at Banks Cash not circulating into the economyRecord High Profits in Financial Industry in Bank stock prices in the tanks2010 and just as good in 2011Federal Reserve Monetary Stimulus to Regulation to discourage lendingencourage more lendingConsumers work hard to demonstrate Some must pay higher borrowing cost …financial responsibility because they are “jumbo”
  • Strangeness ContinuedGreat! What the Heck?Less risk of a further price decline after 33 More risk-based lending and added feespercent price drop to protect against price declinesFannie and Freddie are making “internal Fannie and Freddie are still reporting netself-sustaining” profits on new mortgages losses because legacy assetsInvestors are seeking bargains Not enough foreclosed properties … on average taking more than a year to reach the marketImproving Job Market Very Low Consumer Confidence
  • Best Affordability Conditions
  • 4,500,000 5,000,000 5,500,000 6,000,000 6,500,000 7,000,000 3,000,000 3,500,000 4,000,000 2008 - Jan2008 - Mar2008 - May Old Data New Data 2008 - Jul 2008 - Sep2008 - Nov 2009 - Jan2009 - Mar2009 - May 2009 - Jul 2009 - Sep2009 - Nov 2010 - Jan2010 - Mar2010 - May Tax Credit Impact 2010 - Jul 2010 - Sep Same Market Characterization2010 - Nov 2011 - Jan2011 - Mar2011 - May 2011 - Jul 2011 - Sep Monthly Existing Home Sales .. Before/After Revision2011 - Nov
  • National Existing Home Sales Measurement• What it is • What it is not – Trend based on MLS sales – Actual sales count from from a benchmarked figure MLSs • Decennial Census implied – Actual sales count as 5.2 million sales in 2000 recorded from property – MLS sales rise 10% then deeds Existing Home Sales is presumed to have risen 10% – But MLS sales may pick up • No changes to MLS data FSBOs and Homebuilder • No changes to local sales sales that normally do not of MLS data counts fall into MLSs
  • Homes Bought How? More People Sought Help From REALTORS® Homebuilder Directly from owner Real estate agent100 90 80 70 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011
  • Example of FSBO Impact to Home Sales Estimate Total Sales MLS Sales FSBO (For-Sale-By- Owner)Year 1 100 80 20Year 2 100 90 10% change 0.0% 12.5% invisible
  • Annual U.S. Existing Home Sales … Flat Line for 4 tough years8,000,0007,000,0006,000,0005,000,0004,000,0003,000,0002,000,0001,000,000 0 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
  • 20-Metro Case-Shiller Price Index… Remarkable Stability from 2009
  • St. Louis Metro vs. Miami Price Index (1990 to 2011) 450 400 350 300 250 200 150 100 50 0Source: Federal Housing Finance Agency
  • St. Louis Area Markets (STL City and 5 surrounding counties)• Home sales – Down in early months and then up in late months of 2011 – Up 3.5% in Dec. 2011 from 12 months ago• Median Price of Transacted Homes – Down 13% in Dec. 2011 from 12 months ago• Median Listing Price – Up 10% in Dec. 2011 from 12 months ago• Source: MORE REALTORS®
  • Other Local Market TrendsPrices Up Prices Down• Bismarck • Atlanta• Boston • Chicago• Buffalo • Las Vegas• San Diego • Miami• San Francisco • Phoenix• Washington, DC • Portland, OR
  • 0 500 1500 2000 2500 1000 30001959 - Jan1961 - Jan1963 - Jan1965 - Jan1967 - Jan1969 - Jan1971 - Jan1973 - Jan1975 - Jan1977 - Jan Housing Starts in thousands1979 - Jan1981 - Jan1983 - Jan1985 - Jan1987 - Jan1989 - Jan1991 - Jan1993 - Jan U.S. Housing Starts1995 - Jan1997 - Jan1999 - Jan2001 - Jan Long-term Average;2003 - Jan2005 - Jan Long-term Requirement2007 - Jan2009 - Jan Lowest since the Second World War… in the past three years2011 - Jan
  • St. Louis Area Housing Permits (4 years of suppression)200001800016000140001200010000 8000 6000 4000 2000 0
  • Existing Home Inventory(Elevated but Falling even as distressed and shadow inventory flows in)
  • -100 0 100 200 300 400 500 6002001 - Q12001 - Q32002 - Q12002 - Q32003 - Q12003 - Q32004 - Q1 $ billions; seasonally adjusted annualized2004 - Q32005 - Q12005 - Q32006 - Q12006 - Q32007 - Q12007 - Q32008 - Q12008 - Q32009 - Q12009 - Q32010 - Q1 Financial Industry Corporate Profits2010 - Q32011 - Q12011 - Q3
  • KBW Bank Stock Index (still down 64% from pre-crisis levels)12010080604020 0 2007 2008 2009 2010 2011
  • 0 1 2 3 4 5 6 7 8 92000 - Jan2000 - Jul2001 - Jan2001 - Jul2002 - Jan2002 - Jul2003 - Jan2003 - Jul2004 - Jan2004 - Jul2005 - Jan2005 - Jul2006 - Jan 30-year Mortgage2006 - Jul2007 - Jan2007 - Jul Federal Reserve2008 - Jan2008 - Jul Loose Monetary Policy2009 - Jan Fed Funds2009 - Jul2010 - Jan2010 - Jul2011 - Jan2011 - Jul2012 - Jan
  • 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
  • Demographics of Recent Buyers 2011 Profile 2010 ProfileMedian Age 43 39Gross Household $80,900 $72,200IncomeHousehold Composition 64% married couples 58% married couples 18% single females 20% single females 10% single males 12% single males 7% unmarried couples 8% unmarried couplesOwn a 2nd Home 19% 14%
  • Loan Limit Changes to 42 States• Now, more People need to take out Jumbo Mortgages• CBO … Lower taxpayer risk if loan limits are raised• America today … Work hard, be financially responsible … then you will get punished ???• Conforming Rate = 3.89%• Jumbo Rate = 4.43%
  • Price Decline Potential?• If prices fall … more underwater homeowners … more default risk• More risk to decline when there is a bubble• Less risk to decline after a crash• Many metrics suggest price decline potential is minimal with more price increase potential• Yet Banks/Regulators have been pursuing … easy lending during bubble and tight lending after crash
  • Home Price vs Rent … Price Change Potential? (index = 100 in 1980)Rent is CPI Primary Rent and Price is NAR median price
  • 0 1 2 3 4 -1 5 %2000 - Jan2000 - Jul2001 - Jan2001 - Jul2002 - Jan2002 - Jul2003 - Jan2003 - Jul2004 - Jan2004 - Jul2005 - Jan2005 - Jul2006 - Jan2006 - Jul2007 - Jan2007 - Jul2008 - Jan CPI Rent is Rising… (% change from 12 month ago) Biggest Weight to CPI2008 - Jul2009 - Jan2009 - Jul2010 - Jan2010 - Jul2011 - Jan2011 - Jul
  • 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 Price vs Construction Cost … Price Change Potential?Price is NAR Single-family median price and Construction Cost is Census Construction Cost Weighted Price Index
  • Home Price to Income Ratio … Price Change Potential ?(Median single-family home price and median household income)
  • Home Value Undervaluation (Recent analysis by The Economist magazine) Metric Magnitude of Over or UndervaluationU.S. Home Prices Home Price vs. Rent 8% undervaluationU.S. Home Prices Home Price vs. Income 22% undervaluationU.K. Home Prices Home Price vs. Rent 28% overvaluationU.K. Home Prices Home Price vs. Income 20% overvaluationIreland Home Prices Home Price vs. Rent 10% overvaluationIreland Home Prices Home Price vs. Income Proper valuation (neither over nor under)
  • Cost Comparisons over 30 yearsItem Price Index Price % Change in 1981 Index in 2011Consumer price index 87.2 226.3 160%Rent index 84.7 254.3 200%Food price index 91.6 229.6 150%Gasoline price index 103.6 308.4 197%College tuition index 75.8 601.3 693%Medical care index 78.6 401.4 410%Monthly mortgage payment on a $598 Same if no 0%median priced home (14% mortgage cash out (free and clear rate) refi ownership)Home Prices (FHFA index) 100 319 219%
  • Fannie/Freddie Future• Disastrous Outcome as government-backed Private Corporation – Perverse incentive to gamble with taxpayers money• Good Outcome as government corporation – Pre-1970s … no problem – Post-2009 … no problem – Government corporations generate enough internal profit for self- sustainability – Assure liquidity on a very simple non-innovative mortgage product (e.g., fixed rate mortgages that meets basic underwriting standards) • Grandparents 30-year mortgage same as Grandchildren’s 30-year mortgage – Need to pursue counter-cyclical policy … less fees in downturn and more fees during boom/bubble – Never trust government to produce innovative products
  • Fannie and Freddie Performance Mortgage Default after 18 monthsFannie Mae Cumulative Freddie Mac CumulativeVintage Default Rate Vintage Default Rate after 18 months after 18 months2002 3.1% 2002 2.7%2003 2.5% 2003 1.2%2004 4.6% 2004 2.0%2005 4.8% 2005 1.8%2006 11.6% 2006 6.0%2007 28.7% 2007 22.3%2008 12.6% 2008 13.7%2009 1.2% 2009 1.1%Source: Federal Housing Finance Agency
  • Investors want Deals• All-cash record high at 30% to 35% of all sales – Multiple bidding becoming common on foreclosed properties (though not on short-sales) – Financial asset recovery helping with cash – Rental income … beats putting money in the bank – Anticipating rising home prices • Opens up lending … more home sales • Boost consumer confidence … more home sales • Further boost home prices and rate of return on investment – Hedge against future inflation … alternative to expensive gold – Not enough foreclosed homes for sale?
  • 0 200 400 800 1000 1200 1400 1800 2000 600 1600 1975 - Jan 1977 - Jan 1979 - Jan 1981 - Jan 1983 - Jan 1985 - Jan 1987 - Jan 1989 - Jan 1991 - Jan 1993 - Jan 1995 - Jan 1997 - Jan 1999 - Jan Expensive Gold Price 2001 - Jan 2003 - Jan (Hedge against Inflation?) 2005 - Jan 2007 - Jan 2009 - JanWill Investors shift money to alternative inflation hedge instrument … to real estate? 2011 - Jan
  • Total U.S. Payroll Jobs – Modest Recovery (2.6 million job creation from low point in 2010)In thousands
  • -8 -6 -4 -2 10 0 2 4 6 8-10 2000 - Q1 2000 - Q3 2001 - Q1 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 Economic Expansion 2008 - Q3 2009 - Q1 2009 - Q3 (GDP growth after recession should be 2010 - Q1 2010 - Q3 2011 - Q1 sustained 4% to 5% … not 1.7% as occurred in 2011) 2011 - Q3 Desired Pace
  • North Dakota … Jobs Everywhere (Starting Wage at McDonalds … $15 to 18 per hour) In thousands
  • Michigan Payroll Jobs – Ongoing Structural ChangesIn thousands
  • 1200 1220 1240 1260 1280 1300 1320 1360 1380 1400 13402000 -…2000 -…2001 -… In thousands2001 -…2002 -…2002 -…2003 -…2003 -…2004 -…2004 -…2005 -…2005 -…2006 -…2006 -…2007 -…2007 -…2008 -…2008 -…2009 -… St. Louis Area Payroll Jobs2009 -…2010 -…2010 -…2011 -…2011 -…
  • -2 -1 1 2 3 4 5 6 02000 - Jan2000 - Jul2001 - Jan2001 - Jul2002 - Jan2002 - Jul2003 - Jan2003 - Jul2004 - Jan2004 - Jul2005 - Jan2005 - Jul2006 - Jan2006 - Jul2007 - Jan2007 - Jul2008 - Jan2008 - Jul (% change from one year ago)2009 - Jan CPI Inflation Retreating?2009 - Jul2010 - Jan2010 - Jul2011 - Jan2011 - Jul
  • Broad Inflationary Pressure (Data as of November 2010)Indicator % change from one year agoConsumer Price Index 3.4%Producer Price Index (Finished Product) 5.9%Producer Price Index (Intermediate Product) 7.8%Producer Price Index (Crude Product) 15.3%Dow Jones Commodity Spot Price Index -4.0%Gold Price Off Record High Price … but very high
  • 0.0 2.0 4.0 6.0 8.0 10.0 12.0 2000 - Q1 2000 - Q3 2001 - Q1 2001 - Q3 2002 - Q1 2002 - Q3 2003 - Q1 2003 - Q3 2004 - Q1 2004 - Q3U.S. 2005 - Q1 2005 - Q3 2006 - Q1MO 2006 - Q3 2007 - Q1 2007 - Q3 2008 - Q1 2008 - Q3 (90+ days late or in foreclosure process) 2009 - Q1 Serious Delinquent Mortgages … 2009 - Q3 2010 - Q1 2010 - Q3 Mostly those who took out loans in bubble years 2011 - Q1 2011-Q3
  • Distress Sales: 30% to 40% of Transactions Will Remain Significant for Next 2 years
  • Improving Factors for Higher Home Sales• Improving Factors – Job Creation (though slowly) – Solid stock market recovery from 2008 – Rising rents and larger pool of qualified renters – Smart money chasing real estate• Potential Huge Positive … Lending opens up• Potential Huge Negative … Washington policy
  • The End of Strangeness• Let the Prices Recover without obstacles• If 5% gain in home price – 2 million fewer underwater homeowners – Bank lending opens up – Consumer confidence about home buying improves – Strangeness is past and back towards normalcy• But what could be the obstacles – QRM 20% downpayment rules, MID, Property tax deduction, capital gains, still lower loan limit – Rising mortgages rates (market forces of higher inflation and high budget deficit)
  • National Forecast 2012 2013 2014GDP Growth 2.0% to 2.5% 2.3% to 2.8% 3.0% to 3.5%Net New Jobs 1.8 to 2.2 million 2.0 to 2.5 million 2.5 to 3.0 millionCPI Inflation 3.0 to 3.5% 3.0 to 3.5% 3.0% to 3.5%Rent Growth 3.0% 3.5% 3.5%Home price Growth 2.0% 3.0% 4.0%Home Sales 4.0% 6.0% 6.0%Mortgage Rate 4.5% 4.8% 5.5%
  • Presidential Quotes• Franklin Delano Roosevelt: “A nation of homeowners is unconquerable.”• Ronald Reagan “We will preserve the part of the Americandream which the mortgage-interest deductionsymbolizes."
  • National Museum of American History • 4 million no-down- payment VA mortgages for World War II veterans • Fueled an unprecedented growth of America’s middle class
  • For Daily Update and Analysis• FACEBOOK http://www.Facebook.com/NarResearchGroup• Twitter @NAR_Research