NAR Economic Forecast for August 2012

1. NAR Economic Forecast
By NAR Research
July 26, 2012

2. Economy
Real GDP Growth Nominal GDP Growth
%
7
6
5
4
3
2
1
0
‐1 2005 2006 2007 2008 2009 2010 2011 2012 2013
‐2
‐3 forecast forecast
‐4
Real GDP is a measurement of everyone’s and every entity’s income all combined after
subtracting away inflationary portion. This is the one reported by the media and used by
analysts. Historically, GDP grows by 3 percent a year.
Nominal GDP is raw dollar figures with no adjustments made for inflation. It is used by many
companies and governments for sales and tax revenue projections.
Latest and Forecast: Real GDP growth in the first quarter was 1.9 percent, subpar. It is
forecasted grow at less than 2 percent for the remainder of the year. No recession, but also
no robust expansion.

3. Payroll Jobs Changes
(December to December)
4
In millions
2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
‐2 forecast forecast
‐4
‐6
Payroll Jobs are based on figures reported by companies. It differs from household
employment figures, which are based on survey of households and not companies. Payroll
data is watched more closely regarding job creation or job cuts because of larger and more
reliable sample. Household data, however, is used to compute the unemployment rate and
about people staying in or out of the labor force.
Latest and Forecast: Only 89,000 net new jobs added in June. That is like treading water
given 3 million additional people living in the country each year. Likely to generate 1.5 net
new jobs in 2012, and then accelerate to 2.3 million new jobs in 2013.

4. Total Jobs: Payroll vs. Household
150000
In thousands
140000
130000
120000
110000
100000
Household Payroll
The two series generally moves together though they do not always match up. In some
years, the gap between the two narrows or widens more than normal. One relevant
example is REALTORS® who are mostly independent contractors and not on any company’s
payroll. Yet, they would say they are working when asked via Household survey.
Roughly speaking, about a half of jobs lost during recession has been recovered so far.

5. Unemployment Rate
%
(Average during the Year)
12
10
8
6
4
2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast forecast
Unemployment Rate is simply the number of unemployed people divided by the number of
people in the labor force. The unemployed people have to be looking for a job to be
counted as being in the labor force. If they stopped looking for a job then they are counted
as being out of the labor force and not unemployed. It is based on household data and not
company payroll data.
Latest and Forecast: The unemployment rate was unchanged and stood at 8.2% in June
because of lackluster job creation. It will remain at near 8% for most of 2012, even with 1.5
million net new jobs because labor force participation will slightly edge up.

6. Labor Force Participation Rate
%
68
67
66
65
64
63
62
61
1990 ‐ Jan
1991 ‐ Jan
1992 ‐ Jan
1993 ‐ Jan
1994 ‐ Jan
1995 ‐ Jan
1996 ‐ Jan
1997 ‐ Jan
1998 ‐ Jan
1999 ‐ Jan
2000 ‐ Jan
2001 ‐ Jan
2002 ‐ Jan
2003 ‐ Jan
2004 ‐ Jan
2005 ‐ Jan
2006 ‐ Jan
2007 ‐ Jan
2008 ‐ Jan
2009 ‐ Jan
2010 ‐ Jan
2011 ‐ Jan
2012 ‐ Jan
Labor Force Participation Rate has been falling at the beginning of the recession. Many
went to school or took early retirement packages and are therefore no longer counted as
part of the labor force. Some went on disability benefits. If the labor force participation
were to be normal (or had it not fallen) then the corresponding unemployment rate would
be closer to 11%.
Latest and Forecast: Highly unusual for the labor force participation rate to collapse so
steeply since late 2008. There will be recent school graduates who will need to re‐enter the
workforce as prolonged student loan borrowing is not sustainable.

7. Consumer Price Inflation
Rent All Items Core
6 %
4
2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
‐2 forecast forecast
Consumer Price Inflation is what it cost to buy stuff. Higher inflation means corresponding
chipping away at the purchasing power of money. All Item inflation tends to be somewhat
volatile because it accounts for food and energy prices that tend to swing at times. Core
Inflation is a measure of all inflation after subtracting away the food and energy component,
and hence has less volatility. Rent is in essence what the renters are facing, though there are
assumptions regarding what homeowners would pay to rent their own house.
Latest and Forecast: Falling commodity prices, including oil, is pushing down inflation. But
rising rent is forcing up the core‐inflation rate. Based on recent trends the cost‐of‐living
adjustment in 2013 for social security checks will be around 2.0%.

8. Fed Policy and Interest Rates
Fed Funds 10‐year Treasury 30‐year Mortgage
8 %
6
4
2
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast forecast
Fed Funds Rate is one primary instrument for the Federal Reserve to steer the economy. It is a very
short term borrowing rate between the banks. If rents rise as anticipated than the Fed will be forced
to raise rates much earlier than planned. Late 2013 is the likely period of the first rate hike since 2006.
The longer‐dated interest rates do not move in lock‐step with the Fed Funds Rate. The long‐term rates
like the 10‐year Treasury will also be impacted by the budget deficit and inflationary pressures. The
30‐year fixed mortgage rate generally move in close tandem with the 10‐year Treasury rate.
Latest and Forecast: Despite public statements by the Fed to keep interest rate low well into 2014, the
fed funds rate may need to be increased as early as Autumn in 2013. Core inflation rate is already
above its desired pace and is anticipated to rise higher because of rent increases.

9. Housing Starts
2500
In thousand units
2000
1500
Multifamily
1000
Single‐Family
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast forecast
Housing starts measure the number of newly constructed homes. U.S. Population grows generally by
3 million each year (though it is estimated have slowed to 2 million in 2011). Based on population
growth and the need to replace some of the demolished housing units, most economists believe
about 1.5 million housing units need to be built each year, which also happens to be the historical
average. But in any given year, the housing starts will be much different from the average. In recent
years, new home construction has been well below the norm. Multifamily unit are predominately for
rentals, and that sector is likely to experience a stronger recovery because of the rising rent trends.
Latest and Forecast: Starts have been rising by better 20% so far this year. Falling inventory means
builders need to ramp up production. But many small time homebuilders cannot obtain construction
loans. Starts will rise by 25% in 2012 followed by a 50% jump in 2013.

10. New Home Sales
In thousand units NHS Single‐family starts
2000
1500
1000
500
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast forecast
New Home Sales measure contract signings. At the moment, the Census do not publish the
actual closing figures for new home sales. Not all of the single‐family housing starts are
counted as new home sales, which explains for the gap between starts and sales. Those
housing construction initiated by owners and never comes up for sale would be an example
of data inclusion into housing starts but not new home sales. New home sales tend to swing
more widely than existing home sales, with steeper downturns and more robust upturns.
Latest and Forecast: New home sales have been rising by 20% so far in 2012 and will surpass
600,000 by 2013. That would in essence double the 2011 figure of 300,000 new home sales.
During the peak bubble year of 2005, new sales hit 1.2 million.

11. Existing Home Sales
8 In million units
7
6
5
4
3
7.08 6.52
2
5.02 4.12 4.34 4.18 4.26 4.63 4.97
1
0
2005 2006 2007 2008 2009 2010 2011 2012 2013
forecast forecast
Existing Home Sales measure actual closings of all home sales that are not newly built. It is
an estimation based on MLS sales count but benchmarked periodically to Census data about
household movement patterns.
Latest and Forecast: Existing home sales have been rising roughly at 10% from comparable
period one year ago. Shortage of inventory in some markets and excessively tight
underwriting standards are hold back potentially bigger gains. Sales will rise to nearly 5
million in 2013.

12. Visible Housing Inventory
(Existing inv. At 6‐year low; New inv. at 50‐year low)
4,500,000
4,000,000
3,500,000
3,000,000
2,500,000
2,000,000
1,500,000
1,000,000
500,000
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan ‐ Jan
Existing New

13. Shadow Inventory
(Seriously delinquent mortgage + homes in foreclosure process)
million units
5.0
4.0
3.0
2.0
1.0
0.0
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
2008 ‐ Q3
2009 ‐ Q1
2009 ‐ Q3
2010 ‐ Q1
2010 ‐ Q3
2011 ‐ Q1
2011 ‐ Q3
2012 ‐ Q1
Shadow Inventory can be defined as those distressed properties not yet on the market but will at
some point appear given the serious delinquency situation.
Latest and Forecast: Shadow inventory admittedly is still high, but it is about 1 million fewer than two
years ago and is anticipated to steadily diminish over time. The falling share of distressed properties
over time will lead to the median price of all homes that gets transacted to be higher.

14. Median Home Price
300,000
250,000 History Forecast
200,000
150,000
100,000
Existing New
Median Price reflects the middle price of all homes sold during a period. In normal times where
types of homes do not change measurably from one period to the next, then the median price can be
a good gauge about home price appreciation or depreciation. However, the median price can also be
a reflection not about price change but about the type of homes being sold. If, for example, mostly
distressed properties are being sold then the median will be low. If mostly high‐end homes are being
sold, then the median will be high. Supply and Demand dynamics impact both new and existing
home prices. But new home prices are also to a greater degree impacted by changes in the cost of
construction, such as commodity prices and labor costs.
Latest and Forecast: Prices have not only stabilized, but already increasing at the national level.
Nationally, prices will rise by 4% in 2012 followed by 5% gain in 2013. Low inventory and low housing
starts are the key reasons for the price gain. Phoenix could see 10% to 15% price gain 2012.

15. Forecast Summary
2011 2012 2013
History Forecast Forecast
Existing Home Sales 4.26 million 4.6 million 5.0 million
New Home Sales 301,000 390,000 630,000
Housing Starts 611,000 770,000 1,150,000
Existing Home Price $166,100 $173,000 $182,000
GDP Growth +1.7% +2.0% +2.9%
Payroll Job Gains +1.7 million +1.5 million +2.3 million
Fed Funds Rate 0.1% 0.1% 0.1%
30‐yr Mortgage 4.7% 3.8% 4.1%