Market Update Oct2007

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Market Update Oct2007

  1. 1. October 8, 2007 NAR Research Market Update
  2. 2. Why Buy Now? • Time of “crisis” often turns out to have been a time ofTime of “crisis” often turns out to have been a time of opportunity in hindsightopportunity in hindsight • Wide selection of housing inventoryWide selection of housing inventory • Favorable mortgage ratesFavorable mortgage rates • Prime borrowers – low favorable conforming rate loansPrime borrowers – low favorable conforming rate loans • Jumbo borrowers – rates coming down after AugustJumbo borrowers – rates coming down after August credit crunchcredit crunch • Non-prime borrowers – moving away from the riskyNon-prime borrowers – moving away from the risky subprime loans into safer FHA loans (Major reform insubprime loans into safer FHA loans (Major reform in FHA program taking place)FHA program taking place) • Worst in credit crunch is over – Alan GreenspanWorst in credit crunch is over – Alan Greenspan • More jobs, more income, more wealth --- significant pent-upMore jobs, more income, more wealth --- significant pent-up demand --- buy before others dodemand --- buy before others do • Homeowners in it for the long-term nearly always come outHomeowners in it for the long-term nearly always come out ahead in building wealthahead in building wealth
  3. 3. Latest Key Data IndicatorIndicator Trend from aTrend from a year agoyear ago CommentComment Existing Home SalesExisting Home Sales Down 13%Down 13% Impact of August creditImpact of August credit crunchcrunch Home PriceHome Price Up 0.2%Up 0.2% First increase in 13 monthsFirst increase in 13 months Single-familySingle-family Housing StartsHousing Starts Down 27%Down 27% Good news to thin outGood news to thin out inventoryinventory Existing homeExisting home inventoryinventory Up 19%Up 19% A lot of choices for buyersA lot of choices for buyers Mortgage RatesMortgage Rates 6.3%6.3% Historically favorableHistorically favorable Net New JobsNet New Jobs 1.6 million1.6 million Pent-up demandPent-up demand accumulatingaccumulating Aggregate IncomeAggregate Income Up 7%Up 7% Plenty of financialPlenty of financial wherewithalwherewithal
  4. 4. Monthly Existing-Home Sales (from 7 million in peak to 5.5 million now) 5,000 6,000 7,000 8,000 2001 -Jan2001 -Jul2002 -Jan2002 -Jul2003 -Jan2003 -Jul2004 -Jan2004 -Jul2005 -Jan2005 -Jul2006 -Jan2006 -Jul2007 -Jan2007 -Jul Source: NAR In thousand units Peak
  5. 5. Annual Existing-Home Sales and Forecast (5th best year in 2007 and recovery in 2008) 0 2,000 4,000 6,000 8,000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 20062007 est2008 est Source: NAR In thousand units
  6. 6. Existing Home Inventory (From 2 million to 4.5 million) 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 2001 -Jan2001 -Jul2002 -Jan2002 -Jul2003 -Jan2003 -Jul2004 -Jan2004 -Jul2005 -Jan2005 -Jul2006 -Jan2006 -Jul2007 -Jan2007 -Jul Source: NAR
  7. 7. New Home Inventory (Already Topped Out) 200,000 300,000 400,000 500,000 600,000 2001 -Jan2001 -Jul2002 -Jan2002 -Jul2003 -Jan2003 -Jul2004 -Jan2004 -Jul2005 -Jan2005 -Jul2006 -Jan2006 -Jul2007 -Jan2007 -Jul Source: Census
  8. 8. Single-Family Housing Starts (Major fall – but, good trend to control inventory) 0 500 1,000 1,500 2,000 2001 -Jan2001 -Jul2002 -Jan2002 -Jul2003 -Jan2003 -Jul2004 -Jan2004 -Jul2005 -Jan2005 -Jul2006 -Jan2006 -Jul2007 -Jan2007 -Jul Source: Census
  9. 9. Home Price Change (1st rise in 13 months) -6 -3 0 3 6 9 12 15 18 2001 -Jan2001 -Jul2002 -Jan2002 -Jul2003 -Jan2003 -Jul2004 -Jan2004 -Jul2005 -Jan2005 -Jul2006 -Jan2006 -Jul2007 -Jan2007 -Jul Source: NAR
  10. 10. Home Price Change in the Northeast (First region to undergo a slump – but now already into a respectable recovery) -5 0 5 10 15 20 25 2001 -Jan2001 -Jul2002 -Jan2002 -Jul2003 -Jan2003 -Jul2004 -Jan2004 -Jul2005 -Jan2005 -Jul2006 -Jan2006 -Jul2007 -Jan2007 -Jul Source: NAR Positive Gains
  11. 11. Interest Rates (Another Fed rate cut likely before year end) 5.0 6.0 7.0 8.0 9.0 2005 - Jan 2005 - A pr 2005 - Jul 2005 - O ct 2006 - Jan 2006 - A pr 2006 - Jul 2006 - O ct 2007 - Jan 2007 - A pr 2007 - Jul 2007 - O ct Mortgage Rate Prime Rate Source: Freddie Mac, Federal Reserve
  12. 12. Jumbo Loan Rate Spread (August panic over – but still not back to norm) 0.0 25.0 50.0 75.0 100.0 1/5/2007 1/19/2007 2/2/2007 2/16/2007 3/2/2007 3/16/2007 3/30/2007 4/13/2007 4/27/2007 5/11/2007 5/25/2007 6/8/2007 6/22/2007 7/6/2007 7/20/2007 8/3/2007 8/17/2007 8/31/2007 9/14/2007 9/28/2007 Source: Freddie Mac Basis Points
  13. 13. U.S. Job Gains- Less Strong (Still 4 million new jobs in past 24 months – time period when sales were falling …. points to Accumulating pent-up demand) -3 -2 -1 0 1 2 3 4 2000 -Jan2000 -Jul 2001 -Jan2001 -Jul 2002 -Jan2002 -Jul 2003 -Jan2003 -Jul 2004 -Jan2004 -Jul 2005 -Jan2005 -Jul 2006 -Jan2006 -Jul 2007 -Jan2007 -Jul Source: BLS 12-month payroll job changes in millions
  14. 14. Resetting Mortgage Burden • There are $450 billion in resetting mortgages over theThere are $450 billion in resetting mortgages over the next 12 months (about 2 million loans)next 12 months (about 2 million loans) – If all reset (without any refis) to rates 4 to 5 percentageIf all reset (without any refis) to rates 4 to 5 percentage points higher, then $18 to $22 billion in additional mortgagepoints higher, then $18 to $22 billion in additional mortgage paymentspayments – About 10% to 20% (worst case scenario) of subprimes willAbout 10% to 20% (worst case scenario) of subprimes will default … 200,000 to 400,000 additional inventorydefault … 200,000 to 400,000 additional inventory • Personal Income (aggregate) to rise by $700 billion inPersonal Income (aggregate) to rise by $700 billion in 20072007 • Resets are burdensome and will raise foreclosures.Resets are burdensome and will raise foreclosures. But the impact to the economy is small in relation toBut the impact to the economy is small in relation to the positive income gains ... and the impact onthe positive income gains ... and the impact on overall inventory is about 5% to 10% to the currentoverall inventory is about 5% to 10% to the current inventory.inventory.
  15. 15. Bottom Line • Home sales weak and growing inventoryHome sales weak and growing inventory • The national median home price – interestingly -The national median home price – interestingly - remains flatremains flat • Local price trends vary – Northeast showing goodLocal price trends vary – Northeast showing good appreciationappreciation – Seattle, Austin, Raleigh, and 2/3 of the countrySeattle, Austin, Raleigh, and 2/3 of the country with price gainswith price gains • Job gains evidently supporting pricesJob gains evidently supporting prices • Plenty of wealth -- solid income gains and recordPlenty of wealth -- solid income gains and record high stock markethigh stock market • Pent-up demand accumulatingPent-up demand accumulating • Few more months of “bad” press coverageFew more months of “bad” press coverage • Media coverage to become positive in 2008Media coverage to become positive in 2008 • Forecast: 2008 will be better than 2007; 2009 toForecast: 2008 will be better than 2007; 2009 to improve furtherimprove further
  16. 16. Consumer Messages
  17. 17. Something appears Out of Whack! (If viewing solely by home price and income, but … next page) 50 100 150 200 250 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Income Home Price Income and Price set to Index of 100 in 1990 Source: NAR
  18. 18. Rates: Near 45-Year Lows (Low rate permit people to take out a larger loan with less burden) Source: Freddie Mac 1970s 9% average 1980s 13% average 1990s 8% average 2000s 6.5% average
  19. 19. Mortgage Obligation to Income (better indicator of to assess “bubble” and it is not out of whack) Manageable and not out of Whack 10 15 20 25 30 1990 -Jan1991 -Jan1992 -Jan1993 -Jan1994 -Jan1995 -Jan1996 -Jan1997 -Jan1998 -Jan1999 -Jan2000 -Jan2001 -Jan2002 -Jan2003 -Jan2004 -Jan2005 -Jan2006 -Jan2007 -Jan U.S. Average Source: NAR %
  20. 20. Apartment Rents (Rising rents force some renters to about ownership) -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 2002.12002.22002.32002.42003.12003.22003.32003.42004.12004.22004.32004.42005.12005.22005.32005.42006.12006.22006.32006.4 Rent Growth Source: Torto-Wheaton Research %
  21. 21. Subprime Loan Exposure (subprime makes up less than 10% of homeowners) Prime 50% FHA+ VA 6%Sub- prime 9% Free + Clear Homes 35% Source: NAR Estimate
  22. 22. Foreclosed Homes (less than 10% of subprime owners make up more than ½ of foreclosures) Prime 33% FHA+ VA 14% Sub- prime 53% Source: NAR Estimate
  23. 23. 0.0 2.0 4.0 6.0 8.0 10.0 Prime VA FHA Sub-prime Fixed Sub-prime ARM Foreclosure Rates by Loan Type 2007 Q2 (Problem is principally the resetting subprime loans) Data: MBA
  24. 24. 0% 20% 40% 60% Prime VA FHA Sub-prime Foreclosure Probability once becoming Delinquent (Latest Foreclosure/Delinquency ratio) Better Loss Mitigation Programs for VA and FHA
  25. 25. FHA Loan Impact • FHA had been the choice for first-timeFHA had been the choice for first-time homebuyers and for those with blemishedhomebuyers and for those with blemished credit in the pastcredit in the past • FHA dramatically lost market share toFHA dramatically lost market share to subprime loans in the past 5 yearssubprime loans in the past 5 years • FHA interest rates are much more favorableFHA interest rates are much more favorable than APR of subprime loans (afterthan APR of subprime loans (after considering resets)considering resets) • Major FHA reform will better help first timeMajor FHA reform will better help first time homebuyers to enter the markethomebuyers to enter the market
  26. 26. FHA Market Share for Home Purchase 0% 5% 10% 15% 20% 2000 2001 2002 2003 2004 2005 2006 2007 est. 2008 forecast 2009 forecast Source: HMDA,NAR estimate
  27. 27. U.S. Job Gains (Still 4 million new jobs in past 24 months – time period when sales were falling …. points to Accumulating pent-up demand) -3 -2 -1 0 1 2 3 4 2000 -Jan2000 -Jul 2001 -Jan2001 -Jul 2002 -Jan2002 -Jul 2003 -Jan2003 -Jul 2004 -Jan2004 -Jul 2005 -Jan2005 -Jul 2006 -Jan2006 -Jul 2007 -Jan2007 -Jul Source: BLS 12-month payroll job changes in millions
  28. 28. Wage Growth Rising Strongly 1 2 3 4 5 2000 -Jan2000 -Jul 2001 -Jan2001 -Jul 2002 -Jan2002 -Jul 2003 -Jan2003 -Jul 2004 -Jan2004 -Jul 2005 -Jan2005 -Jul 2006 -Jan2006 -Jul 2007 -Jan2007 -Jul % change from a year ago % Source: BLS
  29. 29. Total U.S. Wages and Salary Disbursement Rising Strongly 4,000 5,000 6,000 7,000 2000 -Q 12000 -Q 32001 -Q 12001 -Q 32002 -Q 12002 -Q 32003 -Q 12003 -Q 32004 -Q 12004 -Q 32005 -Q 12005 -Q 32006 -Q 12006 -Q 32007 -Q 1 Source: BEA $ billion
  30. 30. Corporate Profits – at near Record High 500 1,000 1,500 2,000 2000 -Q 12000 -Q 32001 -Q 12001 -Q 32002 -Q 12002 -Q 32003 -Q 12003 -Q 32004 -Q 12004 -Q 32005 -Q 12005 -Q 32006 -Q 12006 -Q 32007 -Q 1 Source: BEA $ billion
  31. 31. Stock Market at Record High S&P 500 Index 800 1000 1200 1400 1600 2000 -Jan2000 -Jul 2001 -Jan2001 -Jul 2002 -Jan2002 -Jul 2003 -Jan2003 -Jul 2004 -Jan2004 -Jul 2005 -Jan2005 -Jul 2006 -Jan2006 -Jul 2007 -Jan2007 -Jul Source: NYSE
  32. 32. $0 $50,000 $100,000 $150,000 $200,000 Renter Homeowner 1995 1998 2001 2004 Best Evidence: Household Wealth Accumulation Source: Federal Reserve Median Net Worth $184,400 $4,000
  33. 33. $10,000 $10,000 $10,000 $23,600 $35,200 $110,300 $0 $50,000 $100,000 $150,000 Stock Market (normal market) Stock Market (bull market) Homeowner (normal market) Now 10-years later Wealth Accumulation – The Power of Leverage for Homeowners ($10,000 down payment on a $200,000 home) 10% appreciations 15% appreciations 5% appreciations
  34. 34. Why Buy Now? – Repeat the Mantra • Time of “crisis” often turns out to have been a time ofTime of “crisis” often turns out to have been a time of opportunity in hindsightopportunity in hindsight • Wide selection of housing inventoryWide selection of housing inventory • Favorable mortgage ratesFavorable mortgage rates • Prime borrowers – low favorable conforming rate loansPrime borrowers – low favorable conforming rate loans • Jumbo borrowers – rates coming down after AugustJumbo borrowers – rates coming down after August credit crunchcredit crunch • Non-prime borrowers – moving away from the riskyNon-prime borrowers – moving away from the risky subprime loans into safer FHA loans (Major reform insubprime loans into safer FHA loans (Major reform in FHA program taking place)FHA program taking place) • Worst in credit crunch is over – Alan GreenspanWorst in credit crunch is over – Alan Greenspan • More jobs, more income, more wealth --- significant pent-upMore jobs, more income, more wealth --- significant pent-up demand --- buy before others dodemand --- buy before others do • Homeowners in it for the long-term nearly always come outHomeowners in it for the long-term nearly always come out ahead in building wealthahead in building wealth

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