2012 Year in Review Charleston Realtors Market Update

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2012 Year in Review Charleston Realtors Market Update

  1. 1. RESIDENTIAL MARKETUPDATE 2012 Year-In-ReviewJanuary 29, 2013Charleston Marriott presented by The Charleston Trident Association of Realtors®
  2. 2. Stephen Slifer Economist NumberNomics Formerly of Lehman Brothers The Federal Reservewww.NumberNomics.com Facebook.com/NumberNomics Steve@NumberNomics.com
  3. 3. The Highlights1. GDP growth in 2013 = 2.7% (vs. 2.0% in 2012)2. Consumers and businesses will be engines of growth.3. Longer-term budget problems -- perspective.4. Longer-term budget problems -- the solution.
  4. 4. 6.0% GDP (Real) 4.0% 2.0% 0.0% -2.0% GDP (Real) Year-over-year -4.0% Slow, but steady. -6.0% GDP growth for 2012 came in at 2.0% 2013 growth expected to be 2.7% even with some drag from fiscal policy. -8.0%-10.0% 2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1
  5. 5. GDP Components Investment 15% Consumption Trade 60% 10.0%Government 15.0%
  6. 6. 100.0 Consumer Sentiment 95.0 Consumer sentiment plunged in December as fiscal cliff fears mounted. 90.0 Recession It remained low in January as the 2% increase in the payroll tax kicked in. 85.0 Even so, confidence remains relatively high. 80.0 75.0 70.0 65.0 60.0 55.0 50.0 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013
  7. 7. 16001500 S&P 50014001300120011001000 The stock market has regained all of the 900 ground it lost during the recession, and is close to its record high level of 1561 set back in October 2007. 800 700 600
  8. 8. $70.0 Consumer Net Worth (Trillions $)$65.0$60.0$55.0$50.0 The gain in stock prices means that consumers$45.0 have restored most of the wealth they lost during the recession.$40.0 The other important component of wealth is the value of your home.$35.0
  9. 9. 15.0% Consumer Debt Service Ratio Consumers were highly leveraged at the beginning of the recession.14.0% They have since paid down enormous amounts of debt, and this debt ratio is the lowest since 1983.13.0% They can quicken the pace of spending if they so choose.12.0% Trend11.0%10.0%
  10. 10. Mortgage Rates4.9 At 3.4% mortgage rates today are at a record low level…4.4 And they are going lower as the Fed keeps buying mortgage- backed securities.3.93.42.9
  11. 11. Case Shiller Home Price Index245.00235.00225.00 At the same time prices are 30%215.00 lower than they were at the peak of the housing market back in 2006.205.00195.00185.00175.00165.00155.00145.00 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jul 2005 Jul 2006 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012
  12. 12. Housing Affordability Index200 Record low mortgage rates and sharply reduced prices mean that housing today is more affordable than180 it has been at any time in 40 years160140120100 2007 2008 2009 2010 2011 2012
  13. 13. 1900 Housing Starts1700 We need housing starts of 1.3 million to keep pace with growth in the population. Those people need a place to live.1500 Starts have been below that pace for 5 years.1300 Thus, demand has exceeded supply for 5 years.1100 900 Housing Starts Trend 700 500 Jan 2006 Jul 2006 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012
  14. 14. Rental Vacancy Rate10.5 9.5 8.5 7.5 That increase in demand has created A shortage of rental properties. 6.5 Vacancy rates have fallen sharply and are the lowest in a decade. 5.5 4.5 1980:Q1 1983:Q1 1986:Q1 1989:Q1 1992:Q1 1995:Q1 1998:Q1 2001:Q1 2004:Q1 2007:Q1 2010:Q1
  15. 15. Asking Rent -- Vacant Rentals$740$720$700$680$660 The shortage of rental property is beginning to push rents upwards.$640$620$600 2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1
  16. 16. 245.00 Case Shiller Home Price Index235.00225.00 After a big drop, home prices hit bottom in January 2012215.00 Since that time they have been climbing205.00 at a 7.0% annual rate.195.00 As prices climb, fewer homeowners will be upside down and fence-sitters185.00 will be encouraged to buy.175.00165.00155.00145.00 Jan 2005 Jan 2006 Jan 2007 Jan 2008 Jan 2009 Jan 2010 Jan 2011 Jan 2012 Jul 2005 Jul 2006 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 Jul 2012
  17. 17. 1. Consumers feel confident.2. They have restored almost all of their net worth.3. The consumers’ debt burden is quite comfortable.4. Interest rates are at record low levels.5. Housing is as affordable as it has ever been.
  18. 18. GDP Components Investment 15% Consumption Trade 60% 10.0%Government 15.0%
  19. 19. CEO Confidence64615855 CEO confidence is high and should climb in the months ahead if the government successfully deals with budget problems.5249 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
  20. 20. 16001500 S&P 50014001300120011001000 Stock prices have been climbing steadily. 900 As a result, many firms have chosen to 800 raise capital by issuing more stock. 700 600
  21. 21. $2,100 Corporate Profits with IVA and CC 65.0%$2,000 By cutting costs and boosting$1,900 productivity, profits have soared and are still climbing at a healthy 6% pace. 45.0%$1,800$1,700$1,600 Corporate Profits 25.0%$1,500 Year-over-year$1,400 5.0%$1,300$1,200$1,100 -15.0%$1,000 $900 $800 -35.0%
  22. 22. 11.0 Corporate Bond Rates10.0 9.0 Aaa Baa 8.0 7.0 6.0 Corporate borrowing rates are the lowest 5.0 they have been in more than 50 years. 4.0 Firms have been replacing high cost debt with lower cost borrowing. Lowers costs. Boosts profits. 50-year bonds anyone? 3.0
  23. 23. 25.0% C & I Loans (%) 13.0%15.0% 8.0% 3.0% 5.0% -2.0% -5.0% C & I Loans (L) Year-Over-Year (R) -7.0%-15.0% Credit is readily available via commercial -12.0% paper and bond issuance.-25.0% In addition, bank loans to businesses are -17.0% growing at a robust 13% pace.-35.0% -22.0% Oct 2012 Oct 2011 Jan 2012 Oct 2010 Jan 2011 Jul 2012 Jan 2010 Jul 2011 Jul 2010 Apr 2012 Apr 2011 Apr 2010
  24. 24. 10.5% Corporate Cash / Assets (%) Corporate cash levels have never10.0% been higher. They have plenty of cash available for investment. 9.5% 9.0% 8.5% 8.0%
  25. 25. 1. CEO’s feel relatively confident.2. Profits are soaring.3. Interest rates are at record low levels.4. Credit is readily available.5. Firms have accumulated a mountain of cash.
  26. 26. Nonresidential Investment20.0% Investment spending had been growing at a 10% rate. But it has been gradually slowing since the beginning of last year.10.0% 0.0% Why? Uncertainty.-10.0% Nonresidential Invest.-20.0% Year-over-year-30.0%
  27. 27. 100 150 200 250 300 -50 350 0 50Jan-10Feb-10Mar-10Apr-10May-10Jun-10 Jul-10Aug-10Sep-10 Why? Uncertainty.Oct-10Nov-10 That is OK, but not great. 170 thousand per month.Dec-10Jan-11Feb-11 Jobs have been climbing by aboutMar-11Apr-11May-11Jun-11 Jul-11Aug-11Sep-11Oct-11Nov-11Dec-11 Private EmploymentJan-12Feb-12Mar-12Apr-12May-12Jun-12 Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Jan-13Feb-13
  28. 28. We Have a Long-Term Budget Problem
  29. 29. $400 Budget Deficit $200 $0 -$200 -$400 -$600 We have had 4 consecutive -$800 $1 trillion budget deficits. To finance a $1 trillion deficit-$1,000 need to issue $1 trillion of debt.-$1,200 In past 4 years we have added $5 trillion to debt outstanding.-$1,400-$1,600 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
  30. 30. 100.0% Debt -- % GDP Danger 90.0% 80.0% As a result debt to GDP ratio has climbed sharply. 70.0% Will reach danger level of 90% during next 10 years. 60.0% 50.0% Acceptable 40.0% 30.0% 20.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
  31. 31. 200.0% Debt -- % GDP180.0% The real problems begin beyond 2022 because the baby boomers (born 1946-1964)160.0% will retire between 2011-2029.140.0% Debt to GDP ratio could reach 186%. Think Greece.120.0%100.0% Danger 80.0% 60.0% Acceptable 40.0% 20.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
  32. 32. What Do We Do?
  33. 33. 12.0% Deficit -- % GDP10.0% Projected deficits will climb to almost 6.0% of GDP by 2022. 8.0% Would like it to be 2.0%. 6.0% Thus, must shrink it by 4.0%. 4.0% 2.0% 0.0%-2.0%-4.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
  34. 34. 22.0% Tax Revenue % GDP21.0% Current revenue is 15.7% of GDP will rise to about 18.5% as the economy improves.20.0%19.0%18.0%17.0%16.0% Historical average is 17.7%.15.0% Probably not a lot of room to increase taxes.14.0% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
  35. 35. 26.0% Govt. Spending % GDP25.0% Government spending today is 23% of GDP.24.0% Climbs to 24% by 2022. Historical average if 19.7%.23.0% Way too high!22.0%21.0%20.0%19.0%18.0%17.0%16.0% 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
  36. 36. 12.0% Deficit -- % GDP10.0% Slifer solution: 8.0% Tax Revenue = 0.0% Expenditure cuts = -4.0% 6.0% Deficit Reduction = -4.0% Not everybody agrees. 4.0% 2.0% 0.0% Most policy makers want a ratio of 3:1-2.0% of spending cuts vs. higher tax revenue.-4.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
  37. 37. Tax Revenue Other = 8% Corporate = 11% Individual = 46% Social Security = 35%To boost tax revenue they must increase individual taxes and/or Social Security taxes. Combined they account for 81% of the total.
  38. 38. Government Spending Interest = 6% Nondefense = 14% Entitlements = 62% Defense = 18%To cut spending they must include entitlements such as Social Security, Medicare,and Medicaid (62%). Discretionary spending is only 32% or roughly 1/3 of the pie.
  39. 39. Now We Have a Broad PlanRevenues = 0.0%, Expenditures = -4.0%What specific taxes will be increased? What expenditures will be cut?
  40. 40. Erskine - Bowles CommissionThe Blueprint for a Solution
  41. 41. Erskine Bowles Commission1. Bipartisan. 18 members. Formed in 2010.2. 9 Republicans. 9 Democrats3. Nobody expected them to find a solution. But they did.
  42. 42. Erskine Bowles Commission1. Bipartisan. 18 members. Formed in 2010.2. 9 Republicans. 9 Democrats3. Nobody expected them to find a solution. But they did.4. 11 votes in favor (61%)5. Needed 14 to formally adopt the blueprint.
  43. 43. Erskine Bowles Commission1. Individual TaxesThree brackets – 8%, 14%, 23% (vs. 39%)Eliminate most tax deductionsTax rates lower, but tax revenue rises.
  44. 44. Erskine Bowles Commission2. Corporate taxesCorporate tax rate – 26% (vs. 35% today)Eliminate most tax deductions.Tax rates lower, but tax revenue rises.
  45. 45. Erskine Bowles Commission3. Discretionary SpendingCut to 2008 levels quickly (pre-recession).Allowed to grow at ½ of inflation rate.Equal percentage cuts for security and non- security.
  46. 46. Government Spending Interest = 6% Nondefense = 14% Entitlements = 62%Defense = 18%
  47. 47. Erskine Bowles Commission4. Social SecurityReduce benefits, particularly for high income individuals.Increase retirement age gradually to 68.Increase payroll tax max from $168 thousand to $190 thousand.
  48. 48. Erskine Bowles Commission5. MedicareMedigap policies -- First $500 not covered.$500-5,000 coverage is 50% of expenditure.Raise eligibility age to 68.
  49. 49. Debt -- % GDP200.0%180.0%160.0% Instead of debt to GDP ratio climbing to 186% by 2035,140.0% Simpson Bowles would shrink it to 40%.120.0% It may take 25 years to get there, but it can be done.100.0% Danger 80.0% 60.0% Acceptable 40.0% 20.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035
  50. 50. If They Can Find A Solution…1. Less uncertainty.2. Higher consumer and business confidence.3. Faster growth in investment.4. Faster GDP growth. Faster income growth.5. More hiring. Lower unemployment rate.6. Stock market soars.
  51. 51. Two Important Dates1. February 28. Government begins to sequester money.2. March 27. Continuing resolution expires. Government shutdown.
  52. 52. 2013 Forecasts 2012 2013GDP 2.0% 2.7%Unemployment Rate 7.8% 7.3%Inflation Rate 1.9% 1.9%Fed Funds Rate 0.1% 0.1%10-year Note 1.7% 1.3%30-year Mortgage 3.4% 3.0%
  53. 53. Seize the Moment Stephen Slifer NumberNomics www.NumberNomics.com
  54. 54. Joey Von Nessen, Ph.D Research Economist USC’s Moore School of Business RESH Marketing & Research www.Resh.com@RESHMarketingYouTube.com/RESHMarketingjoey.vonnessen@moore.sc.edu
  55. 55. Thank You to our Sponsors!
  56. 56. Find today’s presentations on: Slideshare.net/CharlestonRealtors Facebook.com/CharlestonRealtors Download the 2012 Annual Market Report and post in your… blog, website, newsletter facebook or twitter!

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