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Recovery to Normalcy

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2010 NAR Annual Convention & Expo
Economic Issues & Residential Real Estate Business Trends Forum

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Recovery to Normalcy

  1. 1. Recovery to Normalcy Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS® Presentation at NAR Annual Meetings New Orleans, LA November 5, 2010
  2. 2. Consumer Confidence on Present Conditions: Awful 0 50 100 150 200 1980-Jan 1981-Apr 1982-Jul 1983-Oct 1985-Jan 1986-Apr 1987-Jul 1988-Oct 1990-Jan 1991-Apr 1992-Jul 1993-Oct 1995-Jan 1996-Apr 1997-Jul 1998-Oct 2000-Jan 2001-Apr 2002-Jul 2003-Oct 2005-Jan 2006-Apr 2007-Jul 2008-Oct 2010-Jan
  3. 3. Consumer Confidence on Future Conditions: Not Good but Not as Bad 0 20 40 60 80 100 120 140 1980-Jan 1981-Apr 1982-Jul 1983-Oct 1985-Jan 1986-Apr 1987-Jul 1988-Oct 1990-Jan 1991-Apr 1992-Jul 1993-Oct 1995-Jan 1996-Apr 1997-Jul 1998-Oct 2000-Jan 2001-Apr 2002-Jul 2003-Oct 2005-Jan 2006-Apr 2007-Jul 2008-Oct 2010-Jan 9.6% unemployment rate, but different confidence level
  4. 4. Business Spending Shows Weak Confidence in Relation to Profits 200 700 1200 1700 2200 2700 2000-Q2 2000-Q4 2001-Q2 2001-Q4 2002-Q2 2002-Q4 2003-Q2 2003-Q4 2004-Q2 2004-Q4 2005-Q2 2005-Q4 2006-Q2 2006-Q4 2007-Q2 2007-Q4 2008-Q2 2008-Q4 2009-Q2 2009-Q4 2010-Q2 Corporate Profits Business Investment Business Investment = private fixed investment in GDP accounting $ billion
  5. 5. REALTORS’ Home Value Expectation: over the next 12 months 0% 10% 20% 30% 40% 50% 60% 70% 80% 2008-Oct 2008-Nov 2008-Dec 2009-Jan 2009-Feb 2009-Mar 2009-Apr 2009-May 2009-Jun 2009-Jul 2009-Aug 2009-Sep 2009-Oct 2009-Nov 2009-Dec 2010-Jan 2010-Feb 2010-Mar 2010-Apr 2010-May 2010-Jun 2010-Jul 2010-Aug 2010-Sep Increase or Stable Decrease
  6. 6. REALTOR Expectation vs Reality Date % respondents saying prices will have fallen at this time from 12 month prior Case-Shiller price change 2009.10 51% -7.3 2009.11 56% -5.4 2009.12 60% -3.1 2010.01 55% -0.7 2010.02 54% +0.7 2010.03 43% (minority say falling price) +2.3 (price did not fall) 2010.04 35% +3.8 2010.05 35% +4.6 2010.06 36% +4.2 2010.07 36% +3.2
  7. 7. Government Spending (Confidence) 200 700 1200 1700 2200 2700 3200 3700 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Government Receipt Government Outlay $ billion
  8. 8. GDP Growing, but Without Vigor -10 -8 -6 -4 -2 0 2 4 6 8 10 12 1980-Q1 1981-Q2 1982-Q3 1983-Q4 1985-Q1 1986-Q2 1987-Q3 1988-Q4 1990-Q1 1991-Q2 1992-Q3 1993-Q4 1995-Q1 1996-Q2 1997-Q3 1998-Q4 2000-Q1 2001-Q2 2002-Q3 2003-Q4 2005-Q1 2006-Q2 2007-Q3 2008-Q4 2010-Q1 annualized % growth rate
  9. 9. U.S. Private Sector Job Gains (863,000 from Jan. to Sep. 2010) -1000 -500 0 500 1000 1500 1980-Jan 1981-Apr 1982-Jul 1983-Oct 1985-Jan 1986-Apr 1987-Jul 1988-Oct 1990-Jan 1991-Apr 1992-Jul 1993-Oct 1995-Jan 1996-Apr 1997-Jul 1998-Oct 2000-Jan 2001-Apr 2002-Jul 2003-Oct 2005-Jan 2006-Apr 2007-Jul 2008-Oct 2010-Jan Month-to-month job gains in thousands
  10. 10. Total Payroll Jobs in the U.S. (same as in 2000, but with 30 million more people) 124000 126000 128000 130000 132000 134000 136000 138000 140000 2000-Jan 2000-Jul 2001-Jan 2001-Jul 2002-Jan 2002-Jul 2003-Jan 2003-Jul 2004-Jan 2004-Jul 2005-Jan 2005-Jul 2006-Jan 2006-Jul 2007-Jan 2007-Jul 2008-Jan 2008-Jul 2009-Jan 2009-Jul 2010-Jan 2010-Jul
  11. 11. How Many Years to Get Job Market Back to Normal? Jobs added per month Assumed new jobs needed for growing population per month How many years? 100,000 100,000 Treading water and never back to normal 200,000 100,000 6.3 years 300,000 100,000 3.2 years 400,000 100,000 2.1 years
  12. 12. 3500 4000 4500 5000 Source: BLS In thousands Total Payroll Jobs in Michigan
  13. 13. 2000 2200 2400 2600 Source: BLS) In thousands Total Payroll Jobs in Washington D.C. Metro
  14. 14. Weekly 1st time Unemployment Claims: Need to Fall Further 0 100 200 300 400 500 600 700 2000-Feb 2000-Jul 2000-Dec 2001-May 2001-Oct 2002-Mar 2002-Aug 2003-Jan 2003-Jun 2003-Nov 2004-Apr 2004-Sep 2005-Feb 2005-Jul 2005-Dec 2006-May 2006-Oct 2007-Mar 2007-Aug 2008-Jan 2008-Jun 2008-Nov 2009-Apr 2009-Sep 2010-Feb 2010-Jul In thousands
  15. 15. Existing Home Sales (Closings) 3000000 3500000 4000000 4500000 5000000 5500000 6000000 6500000 7000000 7500000 2000-Feb 2000-Aug 2001-Feb 2001-Aug 2002-Feb 2002-Aug 2003-Feb 2003-Aug 2004-Feb 2004-Aug 2005-Feb 2005-Aug 2006-Feb 2006-Aug 2007-Feb 2007-Aug 2008-Feb 2008-Aug 2009-Feb 2009-Aug 2010-Feb 2010-Aug Tax Credit Impact
  16. 16. New Home Sales (Contracts) 70 270 470 670 870 1070 1270 1470 2001-Feb 2001-Aug 2002-Feb 2002-Aug 2003-Feb 2003-Aug 2004-Feb 2004-Aug 2005-Feb 2005-Aug 2006-Feb 2006-Aug 2007-Feb 2007-Aug 2008-Feb 2008-Aug 2009-Feb 2009-Aug 2010-Feb 2010-Aug Where is the tax credit impact?
  17. 17. High Existing Home Inventory 0 2 4 6 8 10 12 14 2000-Feb 2000-Jun 2000-Oct 2001-Feb 2001-Jun 2001-Oct 2002-Feb 2002-Jun 2002-Oct 2003-Feb 2003-Jun 2003-Oct 2004-Feb 2004-Jun 2004-Oct 2005-Feb 2005-Jun 2005-Oct 2006-Feb 2006-Jun 2006-Oct 2007-Feb 2007-Jun 2007-Oct 2008-Feb 2008-Jun 2008-Oct 2009-Feb 2009-Jun 2009-Oct 2010-Feb 2010-Jun Months Supply Total homes on the market (in millions)
  18. 18. Distressed Loans and Shadow Inventory 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 2006/Q1 2006/Q2 2006/Q3 2006/Q4 2007/Q1 2007/Q2 2007/Q3 2007/Q4 2008/Q1 2008/Q2 2008/Q3 2008/Q4 2009/Q1 2009/Q2 2009/Q3 2009/Q4 Thousands Mortgage Payments Past Due 30-59 Days Mortgage Payments Past Due 90+ Days Mortgage Foreclosures Started Mortgage Foreclosure Inventory Bad loans are nearly always made in good times. But recently originated loans are performing very well.
  19. 19. Newly Built Home Inventory and Its Shadow Inventory 0 100 200 300 400 500 600 700 2000-Feb 2000-Jul 2000-Dec 2001-May 2001-Oct 2002-Mar 2002-Aug 2003-Jan 2003-Jun 2003-Nov 2004-Apr 2004-Sep 2005-Feb 2005-Jul 2005-Dec 2006-May 2006-Oct 2007-Mar 2007-Aug 2008-Jan 2008-Jun 2008-Nov 2009-Apr 2009-Sep 2010-Feb 2010-Jul
  20. 20. Depressed Housing Starts 0 500 1,000 1,500 2,000 2,500 In thousands
  21. 21. Return to Normalcy • Unprecedented Boom and Bust: 2000 to 2010 • Sales Boomed and Retreated • Prices Overshot and Corrected • Fundamentals Back to Justifiable Levels • Long-standing Housing Policy still in place • Credit Market Bubble … out the window
  22. 22. 22 Existing-Home Sales In million units
  23. 23. 23 Home Sale to Jobs
  24. 24. National Median Home Price 0 50,000 100,000 150,000 200,000 250,000 Source: NAR
  25. 25. Metro Median Home Price 0 50 100 150 200 250 300 350 $ thousand Source: NAR Las Vegas Columbia
  26. 26. National Median Home Price Stabilizing (Combination of price change and type of homes that are selling) 100000 120000 140000 160000 180000 200000 220000 240000 260000 280000 2001-Feb 2001-May 2001-Aug 2001-Nov 2002-Feb 2002-May 2002-Aug 2002-Nov 2003-Feb 2003-May 2003-Aug 2003-Nov 2004-Feb 2004-May 2004-Aug 2004-Nov 2005-Feb 2005-May 2005-Aug 2005-Nov 2006-Feb 2006-May 2006-Aug 2006-Nov 2007-Feb 2007-May 2007-Aug 2007-Nov 2008-Feb 2008-May 2008-Aug 2008-Nov 2009-Feb 2009-May 2009-Aug 2009-Nov 2010-Feb 2010-May 2010-Aug New Home Price Existing Home Price
  27. 27. Other Home Price Measurements also Showing Price Stabilization
  28. 28. Home Price-to-Income Ratio (No Bubble) 2.0 2.2 2.4 2.6 2.8 3.0 3.2 3.4 3.6 Source: NAR
  29. 29. Home Price and Construction Cost (No Bubble) 80 90 100 110 120 130 140 150 160 170 2000-Feb 2000-May 2000-Aug 2000-Nov 2001-Feb 2001-May 2001-Aug 2001-Nov 2002-Feb 2002-May 2002-Aug 2002-Nov 2003-Feb 2003-May 2003-Aug 2003-Nov 2004-Feb 2004-May 2004-Aug 2004-Nov 2005-Feb 2005-May 2005-Aug 2005-Nov 2006-Feb 2006-May 2006-Aug 2006-Nov 2007-Feb 2007-May 2007-Aug 2007-Nov 2008-Feb 2008-May 2008-Aug 2008-Nov 2009-Feb 2009-May NAR Price Index PPI Residential Construction Cost Index
  30. 30. Long Standing Housing Policy • Mortgage Interest Deduction – If eliminated, there will be about a 15% hit to home values – Massive wealth destruction for property owners who have saved and saved (in many cases to pass it on to the next generation) • FHA – Self-financing without ever needing taxpayer funds (as of yet) • Fannie and Freddie – Made mistakes and need to be restructured
  31. 31. Credit Bubble Dead Subprime, Alt-A, Home Equity Mortgage Origination 0 200 400 600 800 1,000 1,200 1,400 1,600 2003 2005-2006 2009-2010 Source: NAR estimate based on Inside Mortgage Finance data $ billion
  32. 32. 1995 1995 1998 1998 2001 2001 2004 2004 $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 Renter Homeowner 2007 20072007 2007 Long-Term Path to Self Reliance May be Helped from Long-Term Housing Wealth Gains Source: Federal Reserve, NAR estimate for 2010 Median Family Net Worth 2010 2010
  33. 33. Compelling Affordability Monthly Mortgage to buy a Median Priced Home 2005 Q2 2010 Q2 San Diego $ 2,833 $ 1,564 Miami $ 1,726 $ 853 Milwaukee $ 1,014 $ 797 Kansas City $ 735 $ 600
  34. 34. Economists Expect Price Increases in Upcoming Years • Macromarkets, a firm associated with Professor Robert Shiller, surveys about 100 economists about home price outlook. • The consensus forecast as of August 2010 (which can be found from Macromarkets or from news media stories such as Wall Street Journal) are for • 0.78% price increase in 2011 • 2.43% price increase in 2012 • 3.20% price increase in 2013 • 3.69% price increase in 2014 • No forecast for 2015 and beyond
  35. 35. 10-Year Treasury impacted by Inflationary Expectations -4 -2 0 2 4 6 8 10 12 14 16 18 1971-May 1972-Sep 1974-Jan 1975-May 1976-Sep 1978-Jan 1979-May 1980-Sep 1982-Jan 1983-May 1984-Sep 1986-Jan 1987-May 1988-Sep 1990-Jan 1991-May 1992-Sep 1994-Jan 1995-May 1996-Sep 1998-Jan 1999-May 2000-Sep 2002-Jan 2003-May 2004-Sep 2006-Jan 2007-May 2008-Sep 2010-Jan % CPI Inflation 10-year Treasury Yield
  36. 36. Inflationary Pressure ? Indicator % change from one year ago Consumer Price Index (CPI) 1.1% Housing Rent Component CPI 0.2% (but heading higher?) Producer Price Index (Finished Product) 4.0% Producer Price Index (Intermediate Product) 5.5% Producer Price Index (Crude Product) 20.2% Commodity: Coffee, Cotton, Wheat, Meat Very high Gold Price Record High Price
  37. 37. CPI-Housing Rent Inflation (Home price is not part of CPI because of asset/investment aspect) -1 0 1 2 3 4 5 2005-Jan 2005-Apr 2005-Jul 2005-Oct 2006-Jan 2006-Apr 2006-Jul 2006-Oct 2007-Jan 2007-Apr 2007-Jul 2007-Oct 2008-Jan 2008-Apr 2008-Jul 2008-Oct 2009-Jan 2009-Apr 2009-Jul 2009-Oct 2010-Jan 2010-Apr 2010-Jul % Housing Rent Inflation
  38. 38. Baseline Outlook • Moderate GDP Expansion 2 to 2.5% in the next 2 years (historical average is 3%) • 1.5 million annual job additions in the next 2 years • Unemployment rate of 8% in 2012 … and normal 6% in 2015
  39. 39. Baseline Outlook Cont’d • Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012 • People fussing about home values could miss out on low rates • Home values – no meaningful change in the national price in the next 2 years • Home sales to be choppy, but overall improving, in line with job growth … 5.2 million in 2011 (up from 4.8 m in 2010, but same as in 2000) • Affordability conditions are too compelling • There may be some pent-up demand. 30 million additional people compared to 2000, but same number of home sales as in 2000.
  40. 40. Alternative Possibility • High inflation: people desire tangible investment like real estate, but interest rate will be higher • Deflation: people hold back for better price, which holds back economy • Budget deficit tipping point: higher interest rate and sharp cut backs in standards of living • Sharp 4% to 5% GDP growth … release of pent-up housing demand (30 million more people today versus 2000 when home sales were similar) … surprisingly higher home sales and home prices
  41. 41. Virtuous or Vicious Cycle? • Home values stabilizing scenario – Foreclosures steadily fall – Strategic default lessens and underwater homeowners become hopeful – FHA and Fannie/Freddie finances improve (will need less taxpayer funds) – Consumer spending opens up – Home value stabilize further or even begin to rise … – Self-sustaining normal growth rates in sales and prices • Home values fall meaningfully … ugly scenario

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