RMA-SOCL: Real Estate and the Economy (Bill Pittenger)

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RMA-SOCL: Real Estate and the Economy (Bill Pittenger)

  1. 1. Real Estate andthe Economy May 2013William L. PittengerRisk Management AssociationFlorida Commercial Lending School2013Condition | Trends | Outlook
  2. 2. A Quick Look Back: The Great RecessionRecessions are generally thought of as short-term fluctuations of outputaround a path of long-term equilibrium. When recessions occur, the causeis usually some form of economic shock (oil, terrorism), inflation,monetary policy and a wide variety of other factors which lead to decliningGDP, rising unemployment and more. Eventually, the adverse effects flowwidely and broadly into other sectors of the economy including housing.Rarely do recessions begin with housing.The Great Recession, as it has come to be known, began with housing andexpanded like a virus from there.It was also accompanied by a financial crisis which history has showncompounds the effects of recession and prolongs recovery.
  3. 3. The Great RecessionThe Great Recession was broader, deeper and more severe than anyrecession since the Great Depression of the 1930s. It left an indelible markon the nation and its collective psyche.Virtually nothing or no one was immune. It was especially severe due tobeing accompanied by a deep financial crisis. The economy cameremarkably close to a collapse of the U.S. financial system.The Great Recession left its mark on the entire economy but especiallyemployment, real estate, credit and regulation.Many of its effects are structural rather than cyclical. Some will be felt foryears or alter the way we do business.
  4. 4. Where It All BeganSome Things Never Change“In the ruin of all collapsed booms is to be found the work ofmen who bought property at prices they knew perfectly wellwere fictitious, but who were willing to pay such pricessimply because they knew that some still greater fool couldbe depended on to take the property off their hands andleave them with a profit.”Chicago Tribune Editorial,April 13, 1890
  5. 5. Today’s Program• Perspective: A quick look back at The Great Recession andsome of its enduring effects.• Current Conditions• Employment and the Broader Economy• Housing• Commercial Real Estate• Forecast
  6. 6. Some Results of the Great Recession• Most severe U.S. recession since the Great Depression of the 1930’s. Therecession, though technically declared over in June 2009, continues to linger withpainfully slow recovery, lost decade(s) in job creation and economic growth, lowconfidence, record unemployment, record foreclosures, declining house prices andmore.Some Impacts In Perspective• Existing home sales volume declined roughly 50% from 2005 peak.• New home sales declined 80% from 2006 peak.• Median price down declined 33% nationally.• Median price declined 53% in Florida.• Construction employment declined 65% (20+% unemployment by 2010)• Mortgage banking employment declined.
  7. 7. Employment History | CurrentConditions | Outlook
  8. 8. Recession Employment History• 8.8 million jobs lost during “The Great Recession.” Non-farm employment peaked in January2008, one month after declared start of recession. Steadily fell until 2010.• Losses were not confined to the typically cyclical industries such as manufacturing but ratherreached into every sector, largely due to unprecedented growth in housing earlier in thedecade.• Construction, housing and allied industries, including banking and mortgage banking, sawemployment levels fall precipitously. That was compounded by the financial meltdown in Q32008.• Most losses during and after The Great Recession were structural rather than cyclical andprobably won’t be replaced.• Most losses today are more likely to be permanent thereby requiring retraining.
  9. 9. Recession Employment History• Both recession AND impact of technology have constrained job growth.Technology induced productivity gains have been chipping away at employmentsince the 1970’s.• Hardest hit sectors were those in the 18-43 age group which are perhaps the mostproductive and innovative years.• There are currently two million persons unemployed in the 24-35 age group. Evennewly minted college graduates are having difficulty finding “real” employment.• Changed and changing employment dynamics could have significant social andeconomic consequences.
  10. 10. Current Employment ConditionBLS Release for April 2013• Employment has steadily improved since finding a bottom in 2010. That’s the good news.• The bad news is gains have generally been slow, lower pay and fewer people are workingtoday.• Civilian labor force participation rate is 63.3% which is the lowest since 1979. The rate hasdeclined by 0.3% this year.• Employment to population ratio was 58.6%. That is virtually unchanged over the last 12months.• New Payroll Jobs in April: 165,000 NET. Private employers added 176,000 jobs whilegovernment lost 11,000.• Economy has added an average of 162,000 jobs per month over the last three years (169,000over the last 12 months and 208,000 over last six months). That is good but barely enough tocover rising population.
  11. 11. Current Employment Condition• Headline unemployment rate (U-3) declined to 7.5% which is the lowest in four years.Headline unemployment rate does not include:• Involuntary part time: 7.9 million and rising. Rose by 278,000 in April.• Marginally attached: 2.3 million. Unchanged in April.• Discouraged workers: 835,000. Down 133,000 year over year.• Add them up and you get the U6 Measure of unemployment which was 13.9% in April.Probably the best indicator of unemployment and under employment but not widelyreported.• Still 11.7 million unemployed.• Approximately 4.4 million long term (>27 weeks) or 37.4% of the total unemployed.
  12. 12. Employment Trends• The nation’s unemployment rate has averaged 5.7% since 1948; some 64 years. It is verylikely that the “new unemployment rate” will be 6.5% to 7.5%. (Note that EconomistEdmund Phelps, who won a Nobel Price for his work on the natural rate of unemployment,advances that view).• Not only have more people been unemployed during this recession, more have beenunemployed longer. Long term employment has hovered around 40% (37.4 % in April) .• Even during the relatively severe recession of the early 1980’s, job losses were cyclical andthe unemployed quickly found jobs in the same or allied field. Today’s losses are systemic andmore likely permanent.• Technology has changed the unemployment dynamic in the last decade. During the mildrecession of the early 2000s, it took four years to recover jobs during which time wagesstagnated.• Job losses have been most severe in several key sectors of the economy such as construction.No demonstrable change likely in short or mid term.
  13. 13. Looking Forward at Employment• All but the lowest skilled jobs will require specialized training. Jobs that were once mereassembly are now or will soon be automated.• Importantly, there is a growing mis-match between current worker skills and currentemployment needs. In a survey of employers, The Organization for Economic Cooperationand Development (OECD) found that a full 50% of employers had DIFFICULTY filling availablepositions due to skill mis-match.• Specialized training will be less likely to be on the job or employer paid (although it needs tobe to better align worker skills with job demand).• IMPORTANT: As the economy recovers, global competition and skill based technologicalchange will drive worker skill requirements even higher. If the level of educationalachievement does not keep up (and it has not for nearly four decades) the median wage willcontinue to decline, long term unemployment will rise and wage inequality will widen furtherthus increasing the structural unemployment rate.• Note that the median wage for men with only a high school education has declined 46%(inflation adjusted) since 1970.
  14. 14. Changing Employment Dynamics• These trends appear structural in the sense that they are systemic and there are no leadingindicators to suggest a reversal anytime soon.• Does not bode well for the nation’s economy, innovation and competitiveness.• Does not bode well for housing and, by extension, commercial real estate:- Lingering higher than historic average unemployment rate.- Stagnating wages (since the 1970’s)- Longer term unemployment.- Declining work force participation rate.- Skill based technological change.- Wage based disparity.• Many of these factors will profoundly affect housing (and by extension CRE) by constrainingconsumers ability to purchase housing or to move up.
  15. 15. Job Creation PatternLosses Have Been Larger Than Gains-1000-800-600-400-2000200400JobsJobs
  16. 16. Labor Force Participation62.063.064.065.066.067.068.0Labor Force Participation RateLabor Force Participation RateRed LineCurrent labor force participation rateThe labor force participation rate has dropped to 63.3%. That is the lowestrate since 1979. It remained higher throughout four previous recessions
  17. 17. Employment and the Broader EconomyWeakest Employment Recovery Since World War II1990 Recession2001 RecessionCurrent Recession
  18. 18. Employment Recovery• Federal Reserve Bank of Atlanta produces a jobs calculator which takes into account a varietyof factors such as average job growth, population change, etc. to mathematically project jobcreation necessary to achieve certain unemployment rates. For example:• To reach Federal Reserve target of 6.5% to cut back QE:• In 12 months requires 224,805 net new jobs per month.• In 24 months: 164,917.• To reach average historical rate of unemployment (5.7%) over 65 years:• In 12 months requires 322,959 net new jobs per month.• In 24 months: 214,444.• To reach unemployment at peak level of employment (early 2008 - 5.0%):• In 12 months requires 408,845 net new jobs per month.• In 24 months: 257,779• In 60 Months 167,140
  19. 19. Employment Outlook• BUT: New jobs have been generally lower level and lower pay. Wages have stagnated thusdriving down loan opportunities and driving up repayment risk.• Headwinds are against a surge in new job creation as a result of:• Changed and changing employment dynamics.• Shifting demographics.• Sequestration.• Affordable healthcare act.• Likely result:• New average level of unemployment nearer 7.0%.• Positive but mediocre job creation for most of thje current decade.
  20. 20. Housing: History | Current Condition | Outlook
  21. 21. 40 Years of U.S. Home PricesDeparture from long termtrend
  22. 22. Florida Statewide Housing Performance050,000100,000150,000200,000250,000300,000$50,000$100,000$150,000$200,000$250,000$300,000StatewideVolumeMedian SalesPriceLinear(Median SalesPrice)
  23. 23. Current U.S. Housing Conditions• Housing free fall has ended both locally and nationally. The bottom (perhaps arguably)occurred in July 2012. On average, roughly 56% of value loss has been recovered althoughthat varies widely by location.• After six long years, housing markets are recovering. Having been fooled by the “greenshoots” in 2009, the obvious concern is whether recovery is real and sustainable as well ashow robust it will be.• April 2013 Existing Housing:• Volume: 4.92 million (SAAR). Sales have been above year ago levels for 21 consecutivemonths.• SFR Only: 4.32 million• Median Price (all SFR types): $184,300.• Median Price (SFR detached only) $185,100.• Distress Sales: 1.03 million. (13% foreclosures, 8% short sales.• Distress gap: Foreclosure 15%, Short sale 13%• Months of Inventory: 4.7• Median time on market: 62 days.
  24. 24. Current ConditionNew Home Sales & Construction• Builders built somewhere between 25% and 40% more homes in the U.S. than there werepeople to occupy them either by purchase or rental. The problem was widespread with 40%overbuilding occurring in sunbelt states. The result was a steeper slide, more defaults andhuge remaining overhang.• New home sales peaked at 1.389 million units (SAAR) in late 2006.• Fell to a low of 280,000 (-80%) in May 2010.• Current Condition (March 2013):• Sales: 417,000 SAAR (fastest pace since tax credit induced surge in early 2010).• 17.5% increase over year.• Median Price: $247,000• Months of Supply: 4.4• Permits: 902,000 (17.3% increase over the year)• Total housing completions: 800,000 (Single family 593,000)
  25. 25. New Home Sales and ConstructionRed line depicts March 2013sales level.Peak 1.389 Million Units |Late 2006Trough280,000 | May2010
  26. 26. Potential Threats to Robust andSustainable Housing Recovery• Barring a fall over the fiscal cliff early next year, or someother currently unforeseen economic shock, we expectrecovery to continue albeit at an agonizingly slow pace andin an inconsistent and sometimes painful fashion.• HOWEVER, there are still well defined weaknesses andpotential pot holes along the road to robust and full housingrecovery. Housing remains fragile.
  27. 27. Potential Threats to Robust andSustainable Housing Recovery• Tax Payer Relief Act of 2012 (fiscal cliff mitigation).• Affordable Care Act• Impact in 2013 approximately $264 billion.• Fiscal Crisis. Debt and debt ceiling.• Employment: Aggregate losses have been broader and deeper than any of the 11 recessionssince World War II. Recovery is the slowest. New jobs tend to be lower pay. Wages have beenstagnating and job losers tend to be unemployed longer.• Shrinking work force.• Foreclosures: Temporarily slowed but new wave (perhaps the last) is coming.• Shadow Inventory: Down but still over 1.8 million.
  28. 28. Potential Threats to Robust andSustainable Housing Recovery• Delinquencies 6.3% of all mortgages nationally but 15% in Florida (Q2 OCCMortgage Metrics) .• Underwater Mortgages: 20% nationally but 37% in Florida.• Household Wealth.• Financing Availability. Improved but not good.• All indicators have improved over the last 12 months.• IMPORTANT NOTE: Existing home inventories are currently at historically low levelsthus putting upward pressure on prices. This will change as equilibrium isachieved.
  29. 29. Demographics Affecting Housing Inthe New Economy• Marriages down and being deferred.• Household formation down.• Adult children have moved back home for economic reasons.• Also: Less urgency about buying.• Finally: House will again be for shelter – not pure investment, nor forflipping.
  30. 30. Macro Housing Outlook• Prices will re-gain equilibrium at a lower level than we saw at the peak.• Prices will increase much more slowly consistent with the natural rate of growth.• Can’t have housing prices advancing at a rate far faster than people can afford.• Alternative financing instruments will be fewer than we had last decade.• Factors combine to mean fewer sales at lower prices as well as lower homeownership.• OUTLOOK: Continued improvement leading to equilibrium barring currentlyunforeseen economic shock.
  31. 31. Commercial Real Estate
  32. 32. Commercial Real Estate: History | CurrentCondition | Outlook | Sector Analysis• Economically, commercial real estate is secondary to residential which is primary. Everyoneneeds a place to live but not everyone needs office, retail or industrial space.• In a balanced market, commercial development follows residential.• That pattern failed during the run up when some commercial developers sought to getahead of residential. Be there when it arrives.• Rents increased, capitalization rates plunged and prices SOARED.• The “field of dreams “ was built but they didn’t come.• Like residential, markets predictably crashed.
  33. 33. Commercial Real Estate• Commercial real estate prices peaked in December 2007 andbegan to slide precipitously in Q1 2008. The decline wassteeper and faster than the residential sector. The commercialsector reached a trough in December 2009. The trough wasroughly 50% lower than the peak.• Prices have bounced along the bottom since with the onlygains occurring in select markets and among “trophy”properties.
  34. 34. Commercial vs. Residential PricePerformance
  35. 35. Commercial Real EstateCurrent Conditions & Outlook• It is difficult to see meaningful recovery in most CRE product sectors. That is largely theproduct of the broader economy where recession recovery has been the worst of any of the11 recessions since World War II.• The exception is multifamily rental apartments which has been “on fire” for 12 quarters. Thishas largely been the result of the impaired purchase housing market.• Caution is even warranted in the apartment as cracks in the fundamentals are now emerging.• Keep in mind that no sector nor geography can outperform the broader economy on asustained basis.• Under the CRE radar: Small business, middle market, commercial-industrial with real estateare performing better than true CRE. The following is a product by product overview:
  36. 36. Office Real Estate Current Condition• With the economy struggling to recover (GDP roughly half of the long termrate), the office market continues to languish.• Demand for office space remains positive but at a very low level. Reisreports that only 4.096 million square feet were absorbed in Q1 and only1.697 million square feet of new space came on line. Both are down fromprevious recent quarters.• National office vacancy in Q1 was 17.0%. That is equal to the 1993 levelmaking the office sector the slowest recovering sector. The outlook for2013 is modest at best. If current pace of construction continues, sectorwill sety a new historic low.• Average capitalization rates are hovering around 8%. (CBD 7.8% andSuburban 8.4%)
  37. 37. Office Real Estate Current Condition• Historically, post recession, suburban office markets havetended to recover first and more quickly as the recessioncreated new entrepreneurs who tended to migrate to lessexpensive space in the suburbs.• Not so this recovery as entrepreneurs have less financialcapacity to start businesses or expand. Historically, many didso with home equity which is now almost non-existent.• CBD tends to be dominated by larger established companieswith more capacity.
  38. 38. Office OutlookOutlook: The office sector is facing significant structural and demographicchanges that are creating some strong headwinds. Evidence currentlysuggests there may be a demand for less space as a result of more modestspace requirements associated with telecommuting and shiftingpreferences.Lease expirations are also a growing concern as are maturing loans.Economic feasibility (absence of) will keep a lid on value increases andhence new construction until the market works its way through thecurrent foreclosure cycle.
  39. 39. Retail Current Condition• The retail sector has been plagued by slow or no growth in consumer and retail spending pluslow consumer confidence.• The brief retail real estate market recovery seen in 2010 and into 2011 has clearly stalledwith no leading indicators to suggest another short term rebound. Retail sales contractedevery month in Q2 but grew slightly in Q3 due only to rising gasoline prices.• New retail construction has declined to near record lows nationally (1.04 million square feetdelivered in Q1.• The national vacancy rate (Q2) is about 10.9% overall after peaking at 11%. Regional mallshave performed modestly better (9% vacancy) due to the dominance of national tenants whousually, though certainly not always, have more financial capacity and staying power. Havingsaid that, they are more likely to close underperforming stores more quickly.• Capitalization rates are hovering in the low to mid 7% range.
  40. 40. Retail Outlook• Outlook: The retail sector has clearly not yetrecovered but there are some positive signs.Nevertheless fundamentals such as householdincome, employment, confidence and spending willneed to recover before sector recovery is assured.New development will remain constrained as mostprojects are not economically feasible at this time.
  41. 41. Industrial Real Estate Current Condition• The “industrial sector” includes two broad sub sectors: flex / R&D and warehouse /distribution.• Sector vacancy rate was 12.2% overall. The flex sector experienced a 14.1% vacancy rate inQ1 while the warehouse/distribution sub sector registered 11.9%.• Capitalization rates according to PWC registered 8.65% for flex and 7.33% for warehouse /distribution.• Historically, flex space has been the first in the broader industrial to recover as it has beendominated by technology and entrepreneurial ventures. Once again, the current recovery isdifferent. Warehouse / Distribution is recovering quicker due to pent up demand.• Containerized storage is also changing the warehousing dynamic. Port cities are scrambling todeepen channels. Many can currently accommodate most Panamax container ships whichneed a 35 foot channel depth. New ships, however, (especially those from Asia) require 42 to52 feet of channel depth.
  42. 42. Industrial Sector OutlookOutlook. There is clearly improved investorsentiment around warehouse and flex R&D space. Inour view, the warehouse sector will recover firstfollowed closely but not immediately by flex R&D.Cities with deep water ports will do best followed byother port cities and those located near rail ortrucking hubs. Users will be more selective.
  43. 43. Rental Apartment Current Condition• The apartment sector has been “on fire” for over 12 quarters. That begs the question “howlong can it continue?” The answer is “not long” and weakness is emerging.• According to research firm Reis, the Q3 vacancy rate is down to 4.3%. This is the lowest since2001. Improvement in occupancy is slowing. The Q4 2012 occupancy gain was half the lastfew quarters. The vacancy rate is not likely to decline much further for the next five years orso.• Instead of trying to raise occupancy, owners are now trying to raise rents but that comes withsome strong headwinds. The risk is how much more can rents rise in the face of stagnatingincomes, tax increases, sequestration and more. Class A has the most room, Class B&C theleast.• At this moment, absorption is still faster than inventory growth however the risk ofoverbuilding by mid 2013 is high as between 100,000 and 200,000 new units are expected tocome on line in early 2013 and forward.
  44. 44. Rental Apartment Condition• Capitalization rates remain in the mid six percent range (back to 2006 levels).There are anecdotes of lower but those are few and far between and exceptionallyrisky. Absurdly low cap rates are being “justified” by exceptionally low treasuries.• Geographically, tech areas like northern California and a few others are doing best.• By product type Class A is doing best due largely to higher income tenants withmore flexibility.• The apartment market will slow naturally when housing recovers.• CMBS market is limping along.
  45. 45. Rental Apartment OutlookOutlook. The apartment sector has clearly the shining star inthe broader CRE marketplace. Nevertheless, the jury is stillout on whether the current level of performance issustainable. Our view is growth is not sustainable at therecent pace.With broader economic recovery clearly softening and wagesstagnating while the apartment sector is still heating up, ouropinion is that the growth is not sustainable at least mid orlong term. Growing stock could easily damage apartmentsector fundamentals and lay at least a luke-warm blanket onthe once hot sector.
  46. 46. Gross Domestic Product• The first estimate (advance) of GDP for Q3 showed the economy expanded at2.0%. That is the same as the first quarter but higher than the dismal 1.3% growthrecorded in the second quarter.• Virtually all of the increase was government spending which, in the third quarter,was the highest in decades. The government share advanced at 3.7%. Withoutgovernment spending, the GDP would have held steady at 1.3%.• Growth in “non-residential structures” (commercial buildings, etc.) continued tobe a drag on GDP while “residential structures” contributed positively at 14.4%.• Imports fell slightly thereby recording an increase to GDP.• Consumer spending rose 2%.
  47. 47. Gross Domestic Product• Over 12 months, the GDP has averaged about 2% which suggests the economy is still limpingalong and under-performing its potential.• Q1 2013 advance estimate was 2.5% which is much better than Q4 2012 when it was 0.4%.• The gain was led by a 4.3% in crease in consumer spending which came at the expense ofsavings which has retrenched.• Government spending also declined in Q1 and will likely to continue to do so. Governmentdefense spending declined 11.5%.• Especially troubling in the first Q1 report was a 5.3% drop in real disposable income.• Recession probability has declined even in the face of sequestration cuts.
  48. 48. Rate Outlook• The Federal Open Market Committee (FOMC) recently renewed its pledge to keepinterest rates at “rock bottom” until at least 2015. The Fed Funds rate targetremains 0% to 0.25%.• The Fed will keep purchasing mortgage backed securities at the rate of $40 billionper month.• The Fed will continue to reinvest principal payments from repayment of agencydebt thus boosting the Fed’s holdings to $85 billion per month.• The Fed is openly trying to keep mortgage interest rates low to stimulate realestate markets. Stimulus success thus far is questionable.
  49. 49. Regulation• History is replete with evidence of Congress creating new laws to solve the crisisjust passed.• Without dwelling on history and focusing solely on recent banking, finance andappraisal issues, we saw CEBA (The Competitive Equality Banking Act in 1988 andFIRREA, The Financial Institutions Reform Recovery and Enforcement Act of 1989.• At the time, both were the most sweeping pieces of federal legislation to beenacted in the previous 50 years.• Moreover, both were created to solve problems just passed and to help ensurethey did not happen again.• Then came Dodd-Frank.
  50. 50. Regulation• Congress left a lot to the imagination when it finalized The Dodd-Frank Wall Street Reformand Consumer Protection Act in December 2009. It was the most sweeping piece of financiallegislation to be enacted since the Great Depression of the 1930s, some seventy or moreyears earlier. The holes in the law have led to extraordinary uncertainty, fear of retroactiveenforcement and countless unintended consequences.• Despite its length, at around 2,000 pages and inclusion of 16 titles, the Act left gaping holesand created enormous uncertainty throughout the financial services industry. Nevertheless,it was signed into law by the President -- gaping holes and all -- on July 21, 2010.• The holes in the legislation meant 22 affected agencies were required to create some 243rules and conduct as many as 67 studies to interpret the will of Congress and determine howto proceed. Those numbers, however, are just the tip of the iceberg.• Because many of the rules affect more than one agency, the requirement for new rulessuddenly grew to around 400 when the impact on all of the affected agencies is considered.Additionally, the 67 required studies grew to 87.
  51. 51. Regulation• The Act also includes numerous statutory deadlines which agencies have been scrambling tomeet ever since. The initial deadlines were as early as October 2010 and proposed deadlinesreach into 2013.• Since many deadlines have already been missed it is likely that the rule-making process andthe accompanying industry uncertainty will extend past mid-decade.• Cost of implementation is extraordinary. The Government Accountability Office (GAO)recently estimated that Dodd-Frank implementation could cost the federal government asmuch as $2.9 billion over the next five years. First year implementation funding wasestimated at around $974 million.• Not all funding expense will come from taxpayers as at least six agencies receive funding fromassessments on institutions they regulate. Those institutions are predominately bankshowever the timing is clearly poor for banks to bear additional costs of regulation when theindustry as a whole still remains recession weary.
  52. 52. Regulation• The newly created Consumer Financial Protection Bureau (CFPB), gets 100% of its fundingfrom the Federal Reserve. The GAO estimates that the bureau will need to hire another 1,225full time equivalent employees and all of the affected agencies combined will need to hireanother 2,600 new employees just to implement Dodd-Frank rules.• In addition, the Federal Reserve reported that it reassigned 69 of its existing employees toDodd-Frank implementation and that it planned to hire 290 more and spend $77.5 million onimplementation.• The Office of Financial Research, another newly created agency, with broad powers to force financialinstitutions to provide data on their financial condition, has $74.5 million to work with and expects to hireanother 135 full time staff.
  53. 53. Short & Mid Term Forecast• The nation’s GDP is currently at 2.5%. We expect it to remain at or near that levelfor the next two years or so. The current level of job creation is unlikely to driveGDP much higher. A 2.0% GDP is at or near economic stall speed.• The FOMC is walking a tight rope with its QE3 thatcould ignite inflation. At the moment inflation isunder control and within the Fed’s zone oftolerance. As the Fed appears acutely aware of therisks, it seems reasonable that they will actdecisively if too much inflation becomes apparent.• Business confidence will remain low and investmentdollars will remain on the sidelines. Business loan demand will remain low untiluncertainty around taxes, U.S. debt, health care, European crisis and more areresolved.
  54. 54. Short & Mid Term Forecast• Employment nationally and throughout Florida will continue to struggle for the next three tofour years. A return to recent peak employment (about 5.0%) anytime soon is not likely.• Unemployment rate will likely be higher going forward than it has been historically.Unemployment in the “new economy” probably low 7% range.• Housing is recovering nicely but remains in a very deep hole with no quick way out. Strongheadwinds remain.• Commercial real estate is recovering but it too will be a long slow grind. Many risks andimpediments to recovery remain.• The risk trajectory for community banks is up. Uncertainty, economic malaise, low rateenvironment, Basel III capital standards, regulation (Dodd-Frank), too little loan demand,increasing repayment risk due to employment, stagnating wages, diminished householdwealth, economic feasibility constraints in development and general uncertainty.
  55. 55. Questions, Comments & ObservationsRequest PublicationsWilliam “Bill” Pittenger, MAI, SRAWilliam_pittenger@comcast.net

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