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Economic Issues & Residential
 Real Estate Business Trends
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Patrick Bissett
            Chair
Residential Real Estate Forum
Economic Issues & Residential
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Dean Asher
Florida State Association
     President-Elect
Economic Issues & Residential
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Mayor Buddy Dyer
Economic Issues & Residential
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U.S. Economic Outlook

Mark Vitner, Managing Director &
Senior Economist
November 9, 2012
Economic Growth




                                                                                 U.S. Real GDP
                                                                  Bars = CAGR           Line = Yr/Yr Percent Change
                                       10%                                                                                             10%
                                                                                        GDP - CAGR: Q3 @ 2.0%
                                         8%                                             GDP - Yr/Yr Percent Change: Q3 @ 2.3%          8%

                                         6%                                                                                            6%

     We are more than three years        4%                                                                                 Forecast   4%
    into the economic recovery and
                                         2%                                                                                            2%
       there is still a considerable
   amount of uncertainty regarding       0%                                                                                            0%
   sovereign debt issues in Europe,
                                       -2%                                                                                             -2%
     the federal budget deficit and
      the willingness of businesses    -4%                                                                                             -4%

     and households to commit to       -6%                                                                                             -6%
        major capital purchases.
                                       -8%                                                                                             -8%

                                       -10%                                                                                            -10%
                                           2000           2002         2004         2006        2008          2010   2012      2014




                                        Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                            10
Financial Crises Are Becoming More Frequent




                                                     10-Year Treasury & Fed Funds Target
                                                                                          Yield
                                     21%                                                                                             21%
                                                                                        10-Year Treasury Yield: Oct @ 1.75%
                                                                                        Fed Funds Target: Oct @ 0.25%
                                     18%                                                                                             18%


                                     15%                                                                                             15%


     Treasury yields are currently   12%                                                                                             12%
      near record low levels. We
      believe uncertainty is the     9%                                                                                              9%
          primary driver of
       ultra-low interest rates.     6%                                                                                              6%


                                     3%                                                                                              3%


                                     0%                                                                                              0%
                                       1971          1976         1981        1986         1991   1996     2002    2007       2012




                                     Source: IHS Global Insight and Wells Fargo Securities, LLC




Economic Outlook                                          11
The Timing of The First Fed Rate Hike



                   The timing for the Fed’s first tightening move has been pushed even further out.
                               Long-term growth estimates have also been scaled back.


                   Consensus Fed Funds Rate Hike                                               Individual FOMC Member Forecasts


                 Appropriate Timing of Policy Firming                                            Appropriate Pace of Policy Firming
                                    Number of Participants                                                Target Federal Funds Rate at Year-End
 14                                                                          14        5.0%                                                                    5.0%
              June Release                                                                    June Projection
              September Release                                                        4.5%   September Projection                                             4.5%
 12                                                                          12
                                                                                       4.0%                                                                    4.0%

 10                                                                          10        3.5%                                                                    3.5%

                                                                                       3.0%                                                                    3.0%
  8                                                                          8
                                                                                       2.5%                                                                    2.5%
  6                                                                          6
                                                                                       2.0%                                                                    2.0%


  4                                                                          4         1.5%                                                                    1.5%

                                                                                       1.0%                                                                    1.0%
  2                                                                          2
                                                                                       0.5%                                                                    0.5%

  0                                                                          0         0.0%                                                                    0.0%
            2012             2013           2014             2015     2016                    2012              2013      2014          2015      Longer Run




      Source: Federal Reserve Board and Wells Fargo Securities, LLC




Economic Outlook                                                                  12
Federal Reserve Balance Sheet




                                                              Federal Reserve Balance Sheet
                                                                                           Trillions
                                      $3.5                                                                           $3.5
                                                     Other: Oct @ $206.0B
                                                     Foreign Swaps: Oct @ $12.6B
                                      $3.0           PDCF & TAF                                                      $3.0
                                                     Commercial Paper & Money Market
                                                     Repos & Dis. Window: Oct @ $0.1B
                                      $2.5           Agencies & MBS: Oct @ $918.4B                                   $2.5
                                                     Treasuries: Oct @ $1,648.5B

    The massive expansion of the      $2.0                                                                           $2.0
     Fed’s balance sheet has lifted
    asset prices and has also given   $1.5                                                                           $1.5
     the economy a boost. But all
      magic comes with a price!       $1.0                                                                           $1.0


                                      $0.5                                                                           $0.5


                                      $0.0                                                                           $0.0
                                         2007               2008             2009              2010    2011   2012




                                       Source: Federal Reserve Board and Wells Fargo Securities, LLC




Economic Outlook                                           13
Labor Market




                                                          Unemployment Rate - SA vs. NSA
                                                                                       Percent
                                   12.0%                                                                                   12.0%
                                                         12-Month Rolling Average (NSA): Oct @ 8.2%
                                                         Unemployment Rate (SA): Oct @ 7.9%

                                   10.0%                                                                                   10.0%




                                   8.0%                                                                                    8.0%
      Unemployment is gradually
    trending down, although much
     of the improvement has come   6.0%                                                                                    6.0%
          from unusual forces.

                                   4.0%                                                                                    4.0%




                                   2.0%                                                                                    2.0%
                                       1994             1997           2000            2003           2006   2009   2012




                                   Source: U.S. Department of Labor and Wells Fargo Securities, LLC




Economic Outlook                                       14
Labor Market




                                                                         Employment Cycles
                                                                        Percent Change from Cycle Peak
                                     20%                                                                                              20%
                                                          1948-1949 Cycle
                                                          1981-1982 Cycle
                                     16%                  1989-1991 Cycle                                                             16%
                                                          2001 Cycle
                                                          2007-To-Date
                                     12%                  Forecast                                                                    12%


                                       8%                                                                                             8%
   Job losses exceeded every post-
   World War II downturn, and the
                                       4%                                                                                             4%
     modest recovery to date has
    been extremely disappointing.
                                       0%                                                                                             0%


                                      -4%                                                                                             -4%


                                      -8%                                                                                             -8%
                                              0     6     12     18     24     30    36     42     48   54   60   66   72   78   84




                                     Source: U.S. Department of Labor and Wells Fargo Securities, LLC




Economic Outlook                                         15
Consumer Related



       This year’s improved stock market has helped bolster consumer spending at a time when real
              incomes are barely growing, and consumer confidence remains historically low.


                                  Household Wealth                                                                                    Consumer Confidence


                                   Household Assets                                                                    Confidence vs. Retail Sales and Income
                                         Trillions of Dollars                                                          Conference Board Consumer Confidence, Yr/Yr % Chg. 3-MMA
 $90                                                                                             $90        210                                                                          16.0%
                 Financial Assets: Q2 @ $51.9 Trillion                                                                      Confidence Yr/Yr % Chg: Oct @ 76.7%
 $80             Household Real Estate Holdings: Q2 @ $16.9 Trillion                             $80                        Confidence: Oct @ 72.2 (Left Axis)
                                                                                                            180             Retail Sales Ex-Auto: Sep @ 3.9% (Right Axis)                12.0%
                 Other Tangible Assets: Q2 @ $7.3 Trillion
                                                                                                                            Real Disposible Per Cap Inc.: Sep @ 1.1% (Right Axis)
 $70                                                                                             $70
                                                                                                            150                                                                          8.0%
 $60                                                                                             $60


 $50                                                                                             $50        120                                                                          4.0%


 $40                                                                                             $40        90                                                                           0.0%

 $30                                                                                             $30
                                                                                                            60                                                                           -4.0%
 $20                                                                                             $20

                                                                                                            30                                                                           -8.0%
 $10                                                                                             $10


  $0                                                                                             $0          0                                                                           -12.0%
       80   82    84    86   88   90   92   94   96      98   00   02   04   06   08   10   12                    93   95      97      99      01      03        05   07      09    11




   Source: U.S. Department of Commerce, Conference Board and Wells Fargo Securities, LLC




Economic Outlook                                                                                       16
Consumer Confidence



            Economic growth is unlikely to accelerate in a meaningful way until consumers feel better
               about current economic conditions than they do about future economic prospects.


                             Consumer Confidence                                                                                Confidence Gap


             Conference Board Consumer Confidence                                                                               Confidence Gap
                         Present Situation and Expectations Index                                                        Present Situation Minus Expectations
 250                                                                             250        100                                                                                100
              Present Situation Yr/Yr % Chg: Oct @ 107.1%
              Expectations Yr/Yr % Chg: Oct @ 65.8%
                                                                                             75                                                                                75
              Present Situation: Oct @ 56.2
 200          Expectations: Oct @ 82.9                                           200
                                                                                             50                                                                                50


                                                                                             25                                                                                25
 150                                                                             150

                                                                                              0                                                                                0

 100                                                                             100
                                                                                             -25                                                                               -25


                                                                                             -50                                                                               -50
  50                                                                             50

                                                                                             -75                                                                               -75
                                                                                                             Confidence Gap: Oct @ -26.8
  0                                                                              0          -100                                                                               -100
       87    89   91    93    95    97        99   01   03   05   07   09   11                     87   89    91    93     95    97    99   01    03   05       07   09   11




   Source: Conference Board and Wells Fargo Securities, LLC




Economic Outlook                                                                       17
Retail Sales




                                                     Retail Sales Ex. Auto & Gas Stations vs. Income
                                                                                3-Month Moving Average
                                        15%                                                                                               15%
                                                                       Stock Market                 Tax Cut 2   Housing Refi
                                                                          Bubble      Tax Cut 1                    Boom
                                                                                                                                 Tax
                                                                                                                               Rebates
                                        10%                                                                                               10%



                                         5%                                                                                               5%


   Retail sales have risen sharply in
                                         0%                                                                                               0%
   recent months, while disposable
     income growth has begun to
                stagnate.               -5%                                                                                               -5%



                                        -10%                                                                                              -10%

                                                        Disposable Personal Income, Yr/Yr % Change: Aug @ 3.2%
                                                        Retail Sales, ex. Autos & Gas, 3-Month Annual Rate: Sep @ 4.6%
                                        -15%                                                                                              -15%
                                               96         98         00          02         04         06       08        10         12




                                        Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                            18
Retail Sales




                                                                         Furniture Stores Sales
                                                                                 3-Month Moving Average
                                         25%                                                                                  25%

                                         20%                                                                                  20%

                                         15%                                                                                  15%

                                         10%                                                                                  10%

                                          5%                                                                                  5%

                                          0%                                                                                  0%

   Furniture store sales continue to     -5%                                                                                  -5%
   rise, but the pace is decelerating.
                                         -10%                                                                                 -10%

                                         -15%                                                                                 -15%

                                         -20%                                                                                 -20%

                                         -25%            Year-over-Year Percent Change: Sep @ 8.9%                            -25%
                                                         3-Month Annual Rate: Sep @ 7.6%
                                         -30%                                                                                 -30%
                                                93       95        97       99        01        03       05    07   09   11




                                         Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                              19
Residential Investment




                                                               Real Residential Investment
                                                                Bars = CAGR           Line = Yr/Yr Percent Change
                                       30%                                                                                       30%

                                                                                                                      Forecast
                                       20%                                                                                       20%


                                       10%                                                                                       10%


                                         0%                                                                                      0%


   Our forecast calls for continued   -10%                                                                                       -10%
    strengthening in residential
            investment.               -20%                                                                                       -20%


                                      -30%                                                                                       -30%


                                      -40%                                                                                       -40%
                                                       Res. Investment - CAGR: Q3 @ 14.4%
                                                       Res. Construction - Yr/Yr Percent Change: Q3 @ 13.8%
                                      -50%                                                                                       -50%
                                          2000            2002        2004        2006        2008          2010   2012   2014




                                      Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                          20
Homebuilding




                                                                              Housing Starts
                                                                                   Millions of Units
                                     2.4                                                                               2.4




                                                                                                                             Thousands
                                               Multifamily Starts
                                               Multifamily Forecast
                                     2.1                                                                               2.1
                                               Single-family Starts
                                               Single-family Forecast
                                     1.8                                                                               1.8

                                                                                                            Forecast
                                     1.5                                                                               1.5

    We believe housing starts have
                                     1.2                                                                               1.2
     bottomed and will increase
     modestly over the next few
                                     0.9                                                                               0.9
                years.
                                     0.6                                                                               0.6


                                     0.3                                                                               0.3


                                     0.0                                                                               0.0
                                           80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18




                                      Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                          21
Housing Market




                                                              NAHB Housing Market Index &
                                                                 U.S. Distressed Sales
                                         50                                                                                        50
                                                                                      Total Distressed: Sep @ 24.0%
                                                                                      NAHB Housing Market Index: Oct @ 41.0


                                         40                                                                                        40




                                         30                                                                                        30
   The share of distressed sales has
    come down concurrently with
      the rise of the the NAHB           20                                                                                        20
       Housing Market Index.

                                         10                                                                                        10




                                          0                                                                                         0
                                          Oct-08      Apr-09      Oct-09      Apr-10       Oct-10   Apr-11   Oct-11   Apr-12   Oct-12




                                       Source: NAHB, NAR and Wells Fargo Securities, LLC




Economic Outlook                                          22
Housing Starts



          Apartment construction accounts for much of the recent improvement in homebuilding.
            We believe multifamily housing will account for a larger proportion of future starts.


               Single & Multifamily Housing Starts                                                                  Multifamily Housing Starts


                   Single & Multifamily Housing Starts                                                               Multifamily Housing Starts
                       SAAR, In Thousands, 3-Month Moving Average                                                   SAAR, In Thousands, 3-Month Moving Average
 2,000                                                                              600        500                                                                            200
                                                                                                                                          5+ Units: Sep @ 226.3 (Left Axis)
 1,800                                                                              540                                                   2-4 Units: Sep @ 9.0 (Right Axis)

 1,600                                                                              480        400                                                                            160

 1,400                                                                              420

 1,200                                                                              360        300                                                                            120

 1,000                                                                              300

  800                                                                               240        200                                                                            80

  600                                                                               180

  400                                                                               120        100                                                                            40

                   Single-family Housing Starts: Sep @ 551K (Left Axis)
  200                                                                               60
                   Multifamily Housing Starts: Sep @ 235K (Right Axis)
    0                                                                               0           0                                                                             0
         87   89     91    93    95    97    99    01    03    05    07   09   11                    87   89   91    93    95   97   99   01    03    05    07     09    11




   Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                                                          23
New Home Sales


   New home sales have begun to creep back up but are still near the lows of the Great Recession.
   Inventories of new homes have come down, and month’s supply has dropped to 4.5 months in
                September, which may lead to improvement in the housing market.


                              New Home Sales                                                                      Inventory of New Homes


                              New Home Sales                                                               Inventory of New Homes for Sale
                    Seasonally Adjusted Annual Rate, In Thousands                                                 Non-Seasonally Adjusted, In Thousands
 1,500                                                                        1,500        600                                                                      600
                                                                                                           Inventory: Sep @ 146,000
                                                                                                           Completed New Homes: Sep @ 38,000
 1,300                                                                        1,300

                                                                                           450                                                                      450
 1,100                                                                        1,100


  900                                                                         900
                                                                                           300                                                                      300

  700                                                                         700


  500                                                                         500
                                                                                           150                                                                      150


  300                                                                         300
                   New Home Sales: Sep @ 389,000
                   3-Month Moving Average: Sep @ 376,667
  100                                                                         100           0                                                                       0
         89   91   93    95   97    99    01    03    05   07   09       11                      89   91    93    95     97    99     01   03   05   07   09   11




   Source: U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                                                      24
Existing Home Sales




                               Existing home sales have recovered much faster than new home sales.



                                    New Home Sales                                                                              Inventory of New Homes


                              Existing Home Resales                                                            Existing & New Single-Family Home Sales
                         Seasonally Adjusted Annual Rate - In Millions                                                      In Millions, Seasonally Adjusted Annual Rate
 7.5                                                                                     7.5        1.6                                                                                   8.0


 7.0                                                                                     7.0        1.4                                                                                   7.0

 6.5                                                                                     6.5
                                                                                                    1.2                                                                                   6.0

 6.0                                                                                     6.0
                                                                                                    1.0                                                                                   5.0

 5.5                                                                                     5.5
                                                                                                    0.8                                                                                   4.0
 5.0                                                                                     5.0
                                                                                                    0.6                                                                                   3.0
 4.5                                                                                     4.5
                                                                                                    0.4                                                                                   2.0
 4.0                                                                                     4.0

                                                                                                    0.2              New Home Sales: Sep @ 389 Thousand (Left Axis)                       1.0
 3.5                                                                                     3.5
                 Existing Home Sales: Sep @ 4.75 Million                                                             Existing Home Sales: Sep @ 4.2 Million (Right Axis)

 3.0                                                                                     3.0        0.0                                                                                   0.0
       99   00    01    02     03    04     05    06       07   08   09   10   11   12                    94    96         98       00        02       04        06        08   10   12




   Source: NAR, U.S. Department of Commerce and Wells Fargo Securities, LLC




Economic Outlook                                                                               25
Home Prices




                                                                                    Home Prices
                                                                           Year-over-Year Percentage Change
                                         24%                                                                                                           24%


                                         16%                                                                                                           16%


                                          8%                                                                                                           8%
        Home prices have firmed
      recently as foreclosures have       0%                                                                                                           0%
      become a smaller portion of
     overall sales. Prices will likely   -8%                                                                                                           -8%
    fluctuate along a low trajectory
      until more foreclosures clear      -16%                                                                                                          -16%
          through the pipeline.
                                                        Median Sale Price: Sep @ $184,300
                                         -24%           Median Sales Price 3-M Mov. Avg.: Sep @ 9.9%                                                   -24%
                                                        FHFA (OFHEO) Purchase Only Index: Aug @ 4.7%
                                                        S&P Case-Shiller Composite 10: Aug @ 1.3%
                                         -32%                                                                                                          -32%
                                                96         98          00          02          04          06         08          10          12




                                         Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC




Economic Outlook                                             26
NAHB/Wells Fargo Housing Market Index




                                                        NAHB/Wells Fargo Housing Market Index
                                                                                          Diffusion Index
                                           90                                                                                                   90


                                           80                                                                                                   80


                                           70                                                                                                   70


                                           60                                                                                                   60


     Homebuilder sentiment has             50                                                                                                   50

   risen significantly over the past       40                                                                                                   40
   year, but it is still at a relatively
               low level.                  30                                                                                                   30


                                           20                                                                                                   20


                                           10                                                                                                   10
                                                            NAHB Housing Market Index: Oct @ 41.0

                                           0                                                                                                    0
                                                87    89       91      93      95       97      99      01      03          05   07   09   11




                                            Source: National Association of Home Builders and Wells Fargo Securities, LLC




Economic Outlook                                                27
U.S. Mortgage Rates




                                                      Conventional 30-Year Mortgage Rate
                                                                     Percent, FHLMC Fixed-Rate Mortgage
                                      7.0%                                                                                7.0%


                                      6.5%                                                                                6.5%


                                      6.0%                                                                                6.0%


                                      5.5%                                                                                5.5%


                                      5.0%                                                                                5.0%
     Mortgage rates are at historic
     lows and are likely to remain    4.5%                                                                                4.5%

          low for some time.
                                      4.0%                                                                                4.0%


                                      3.5%                                                                                3.5%


                                      3.0%                                                                                3.0%
                                                          Conventional 30-Year Fixed Mortg. Rate: Oct @ 3.4%
                                      2.5%                                                                                2.5%
                                          2004        2005      2006       2007        2008   2009   2010   2011   2012




                                       Source: FHLMC and Wells Fargo Securities, LLC




Economic Outlook                                          28
International Forecast




                                                        Real Global GDP Growth (Wells Fargo)
                                                                   Year-over-Year Percent Change, PPP Weights
                                         7.5%                                                                                           7.5%



                                         6.0%                                                                                           6.0%
                                                                                          Period Average


                                         4.5%                                                                                           4.5%

   The European financial crisis is
      dragging global economic           3.0%                                                                                           3.0%

    growth lower, but we believe
   growth should pick up by 2014.        1.5%                                                                                           1.5%



                                         0.0%                                                                                           0.0%



                                        -1.5%                                                                                           -1.5%
                                                1970      1975      1980      1985      1990       1995      2000         2005   2010




                                      Source: Congressional International Monetary Fund and Wells Fargo Securities, LLC




Economic Outlook                                          29
Issues to Watch




                            European            Credit Availability
                            Debt Crisis         & Financial Reform




             Fiscal Cliff
                                                                       Deleveraging
             Uncertainty




           China Economic                                               Fiscal &
              Slowdown                                                Monetary Policy




                            Geopolitical        Energy/Commodity
                             Tensions              Price Swings




Economic Outlook                           30
Our Forecast




                                                           Wells Fargo U.S. Economic Forecast
                                               Actual                               Forecast                          Actual            Forecast
                                                        2012                                   2013                2010   2011   2012     2013
                                              1Q    2Q         3Q        4Q         1Q     2Q         3Q    4Q

     Real Gross Domestic Product     1       2.0    1.3        2.0       1.4        1.0    2.1        2.2   2.2    2.4    1.8    2.1      1.6
       Personal Consumption                  2.4    1.5        2.0       2.4        0.6    1.2        1.4   1.3    1.8    2.5    1.9      1.4
                            2
     Inflation Indicators
       PCE Deflator                          2.4    1.6        1.5       1.8        1.5    1.7        1.6   1.5    1.9    2.4    1.8      1.6
       Consumer Price Index                  2.8    1.9        1.7       2.3        2.2    2.7        2.7   2.3    1.6    3.1    2.2      2.5
                                1            5.9    2.6      -0.4        0.5        0.7    3.5        4.1   4.1    5.4    4.1    3.6      1.8
     Industrial Production
     Corporate Profits Before Taxes      2   10.3   6.7        5.7       5.3        4.8    5.2        5.7   6.3    26.8   7.3    6.9      5.5
     Trade Weighted Dollar Index     3       72.7   74.5     72.7    73.0           74.0   75.0   76.0      77.0   75.4   70.9   73.2     75.5
     Unemployment Rate                       8.3    8.2        8.1       7.8        7.7    7.8        7.9   7.9    9.6    9.0    8.1      7.8
     Housing Starts   4
                                             0.71   0.74     0.79    0.84           0.90   0.96   1.02      1.08   0.59   0.61   0.77     0.99

     Quarter-End Interest Rates 5
      Federal Funds Target Rate              0.25   0.25     0.25    0.25           0.25   0.25   0.25      0.25   0.25   0.25   0.25     0.25
       Conventional Mortgage Rate            3.95   3.68     3.50    3.40           3.40   3.40   3.45      3.50   4.69   4.46   3.63     3.44
       10 Year Note                          2.23   1.67     1.65    1.70           1.70   1.80   1.85      1.90   3.22   2.78   1.81     1.81
     Forecast as of: November 8, 2012
       1
         C ompound Annual Growth Rate Quarter-over-Quarter
       2
         Year-over-Year Percentage C hange
       3
         Federal Reserve Major C urrency Index, 1973=100 - Quarter End
       4
         Millions of Units
      5
          Annual Numbers Represent Averages




Economic Outlook                                                               31
Appendix
Wells Fargo Economics Group Publications

                                        A Sampling of Our Recent Special, Regional & Industry Commentary
                                                                           Recent Special Commentary
                                             Date                                               Title                            Authors
                                          November-01   North Carolina Economic Outlook                               Vitner, Brown & Watt
                                          October-29    Housing Data Wrap-Up: October 2012                            Vitner & Khan
                                          October-24    2012 Holiday Sales Outlook                                    Aleman, Iqubal & Brown
                                          October-18    U.S. Fiscal Primer III: Federal Revenues                      Silvia, Bryson & Brown
                                          October-18    Retirement in America: Extending the Finish Line              Bryson, Iqbal & Watt
                                          October-12    The Great Unemplyoment Rate Debate                            Silvia, Watt & Swankoski
                                          October-08    The Unemployment Rate: Seasonality and Sampling               Silvia, Iqbal & Watt
                                          October-02    Housing Chartbook: September 2012                             Vitner, Khan & Silverman

   To view any of our past research      September-25
                                         September-17
                                                        Local Budgets Under Pressure: A Fiscal Outlook
                                                        Global Chartbook: September 2012
                                                                                                                      Silvia & Brown
                                                                                                                      Bryson, Aleman & Quinlan

             please visit:               September-10
                                         September-06
                                                        U.S. Fiscal Primer II: Federal Government Spending
                                                        Commercial Real Estate Chartbook: Quarter 2
                                                                                                                      Silvia, Bryson & Brown
                                                                                                                      Vitner & Khan
                                         September-05   Brazilian Economy Slows Down; Better Times Ahead              Aleman
    http://www.wellsfargo.com/             August-22    Mexico: Thanks to Auto Demand                                 Aleman

             economics                     August-15
                                           August-14
                                                        California's Economy: Gaining Momentum
                                                        Real GDP in Eurozone Slumped in Q2
                                                                                                                      Vitner & Watt
                                                                                                                      Bryson
                                           August-09    Rocky Mountain Summit: July 2012                              Silvia
                                           August-06    Orders and Production: No Time for Complacency                Silvia, Quinlan & Watt
                                           August-01    U.S. Fiscal Primer I: The Deficit and Debt                    Silvia, Bryson & Brown
                                            July-19     U.S. States Grapple with Europe's Woes                        Vitner & Brown

      To join any of our research           July-13
                                            July-11
                                                        The Lowdown on Consumer Spending
                                                        Employment: Beyond the Sound Bites—Reading the Signals IX
                                                                                                                      Vitner & Quinlan
                                                                                                                      Silvia & Watt

     distribution lists please visit:       July-10
                                            July-09
                                                        Employment: Beyond the Sound Bites—Reading the Signals VIII
                                                        Employment: Beyond the Sound Bites—Reading the Signals VII
                                                                                                                      Silvia & Watt
                                                                                                                      Silvia & Watt
                                            July-05     Housing Data Wrap-Up: June 2012                               Vitner & Khan
     http://www.wellsfargo.com/             July-02     Do Too Many Dollars Make Us an Inflation Nation?              Bullard & Quinlan

            economicsemail                  June-29
                                            June-22
                                                        2012 State Budget Outlook
                                                        Student Loans: The Best of Intentions
                                                                                                                      Silvia & Brown
                                                                                                                      Silvia, Seydl & Watt
                                            June-20     FOMC: Keep On Twisting Until Europe's Fever Breaks            Vitner
                                            June-20     The Fiscal Cliff: Likelihood and Economic Impact              Silvia, Brown & Watt
                                            June-20     Credit Quality Monitor: June 2012                             Anderson & Kashmarkek
                                            June-19     The Fed: Same Goal, Different Method                          Silvia & Khan
                                            June-15     Economic Growth Appears to Be Lost in a Fog of Uncertainty    Vitner
                                            June-07     What Happens if Span or Italy Leaves EMU?                     Bryson, Quinlan & Swankoski
                                            June-07     Housing Chartbook: May 2012                                   Vitner, Khan & Seydl
                                            May-29      Implications of a Euro Exit to Greece                         Bryson, Quinlan & Swankoski




Economic Outlook                                          33
Wells Fargo Securities, LLC Economics Group

                     Global Head of Research and Economics                                                                                       Economists

 Diane Schumaker-Krieg        ………………… ….diane.schumaker@wellsfargo.com
                                                       ……
                                                                                                           Azhar Iqbal, Econometrician………………………………azhar.iqbal@wellsfargo.com
     Global Head of Research & Economics
                                                                                                           Tim Quinlan, Economist …………………………………..tim.quinlan@wellsfargo.com
                                      Chief Economist
                                                                                                           Michael A. Brown, Economist ………………… michael.a.brown@wellsfargo.com
 John Silvia     …                       ...................... …
                                                             .           john.silvia@wellsfargo.com
                                                                                                                                            Economic Analysts
                                    Senior Economists
                                                                                                           Sarah Watt, Economic Analyst …………………………… .sarah.watt@wellsfargo.com
 Mark Vitner, Senior Economist……………....………. .                           mark.vitner@wellsfargo.com
                                                                                                           Kaylyn Swankoski, Economic Analyst                kaylyn.swankoski@wellsfargo.com
                                                                    .




 Jay Bryson, Global Economist           …………………....……….jay.bryson@wellsfargo.com                           Zachary Griffiths, Economic Analyst                  zachary.griffiths@wellsfargo.com

 Eugenio Aleman, Senior Economist             …………….eugenio.j.aleman@wellsfargo.com                        Sara Silverman, Economic Analyst                       sara.silverman@wellsfargo.com

 Sam Bullard, Senior Economist          ………………………….sam.bullard@wellsfargo.com                                                          Administrative Assistants

 Anika Khan, Senior Economist          .…                           . anika.khan@wellsfargo.com            Peg Gavin, Executive Assistant.                            peg.gavin@wellsfargo.com

                                                                                                           Cyndi Flowe, Administrative Assistant                  cyndi.h.flowe@wellsfargo.com




 Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the
 Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but
 not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general
 information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from
 the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as
 an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated
 banks and is a wholly owned subsidiary of Wells Fargo & Company.
 SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE
 Important Information for Non-U.S. Recipients
 For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited (“WFSIL”). WFSIL is a U.K. incorporated investment firm authorized and regulated by the
 Financial Services Authority. The content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in
 Financial Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, not will the Financial
 Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this
 document (collectively, the “Materials”) are provided for general informational purposes only.


Economic Outlook                                                                                      34
Economic Issues & Residential
 Real Estate Business Trends
           Forum
GEORGE RATIU
Manager, Quantitative & Commercial Research
    National Association of REALTORS®



  Economic Issues & Residential Real Estate
          Business Trends Forum
    2012 REALTORS® Conference & Expo
     Orange County Convention Center
             November 9, 2012
                Orlando, FL
Discover Your Magic…
Discover Your Magic…
REALTORS® and Commercial
             CRE Sales   CRE Apartment Rental

                   4%                                4%
     3%                                3%

                                                3%
             2%
2%
                                 2%




Jul 2012     Aug 2012             Sep 2012      Oct 2012
                                                           Source: NAR
By The Numbers


     • 79,000 Commercial
     REALTORS®

     • 200,000 – 400,000
     REALTORS® handled
     commercial real estate
     in 2012
0.0




                                      -40.0
                                               -30.0
                                                              -20.0
                                                                           -10.0
                                                                                                                       30.0




                                                                                                   10.0
                                                                                                              20.0
                                                                           2001 - Q1
                                                                           2001 - Q2
                                                                           2001 - Q3
                                                                           2001 - Q4
                                                                           2002 - Q1
                                                                           2002 - Q2
                                                                           2002 - Q3
                                                                           2002 - Q4
                                                                           2003 - Q1
                                                                           2003 - Q2
                                                                           2003 - Q3
                                                                           2003 - Q4
                                                                           2004 - Q1
                                                                           2004 - Q2
                                                                           2004 - Q3
                                                                           2004 - Q4
                                                                           2005 - Q1
                                                                           2005 - Q2
                                                                           2005 - Q3
                                                                           2005 - Q4
                                                                           2006 - Q1
                                                                                                                              EHS (YoY % Chg)




                                                                           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
                                                                                                                              CRE Sales (YoY % Chg)




                                                                           2010 - Q1
                                                                           2010 - Q2
                                                                           2010 - Q3
                                                                           2010 - Q4
                                                                           2011 - Q1
                                                                           2011 - Q2
                                                                           2011 - Q3
                                                                           2011 - Q4
                                                                           2012 - Q1
                                                                           2012 - Q2
                                                                                                                                                      Residential vs. Commercial




                                                                           2013 - Q3
                                                                                    0
                                                                                                          1
                                                                                                                       2




                                              -2
                                                                      -1
                                                                                             0.5
                                                                                                                 1.5




                                      -2.5
                                                       -1.5
                                                                             -0.5




Source: NAR, Real Capital Analytics
Commercial Sales
           $160   Office   Industrial   Retail   Apartment   Hotel
Billions




           $140

           $120   $570B in 2007                              $181 B in 2012.ytd
           $100

           $80

           $60

           $40

           $20

             $-


                                                                     Source: Real Capital Analytics
110
                                                             130
                                                                         170
                                                                               190
                                                                                     210




                                                                   150




                                                  90
                                 2000 December
                                          April
                                        August
                                 2001 December
                                          April
                                        August
                                 2002 December
                                          April
                                        August
                                 2003 December
                                          April
                                        August
                                 2004 December
                                                                                     Apartment




                                          April
                                        August
                                 2005 December
                                          April
                                                                                     Retail




                                        August
                                 2006 December
                                          April
                                        August
                                 2007 December
                                                                                     Industrial




                                          April
                                        August
                                                                                                  Moody's/RCA CPPI - Composite Indices




                                 2008 December
                                          April
                                                                                     Office




                                        August
                                 2009 December
                                          April
                                                                                                                                         Commercial Prices




                                        August
                                 2010 December
                                          April
                                        August
                                 2011 December
                                          April
Source: Real Capital Analytics
Tale of Two Commercial Markets
                                 Sales Volume (YoY % Chg)
                           Major CRE Markets       REALTOR Markets
200%


150%


100%                    Deals of $2M +

 50%


  0%
        08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3
 -50%
                                         Deals < $2M +

-100%                                                                Source: NAR, Real Capital Analytics
REALTOR® Commercial Markets

    Did you complete a sales                             Dollar amount of last transaction
          transaction?
                                                       Under $250K                            33%
                                            Between $250K and $500K                   23%
                                            Between $500K and $1 M                19%
                 35%
   Yes                                       Between $1 M and $2 M              17%
   No                              65%
                                                     $2 M and $5 M    6%
                                                                              92% of deals are <$2M
                                            Between $5 M and $10 M    1%
                                                        Over $10 M    1%
Source: National Association of REALTORS®
REALTOR® Commercial Markets
                                           Commercial Sales Trends, Quarterly
                             Sales Volume                 Sales Prices              Business Opportunity
10%                                                                                                                                           4%


 5%                                                                                                                                           2%

                                                                                                                                              0%
 0%
       2008.Q4 2009.Q1 2009.Q2 2009.Q3 2009.Q4 2010.Q1 2010.Q2 2010.Q3 2010.Q4 2011.Q1 2011.Q2 2011.Q3 2011.Q4 2012.Q1 2012.Q2 2012.Q3
                                                                                                                                              -2%
-5%
                                                                                                                                              -4%
-10%
                                                                                                                                              -6%

-15%
                                                                                                                                              -8%

-20%                                                                                                                                          -10%

-25%                                                                                                                                          -12%
                                                                                                            Source: National Association of Realtors®
REALTOR® Commercial Concerns
                                       REALTORS® Most Pressing Challenges


                                                                                   Inventory

                                                                                   Distress
2012.Q2

                                                                                   Financing

                                                                                   Local Economy

                                                                                   National Economy
2012.Q3
                                                                                   Pricing Gap: Buyers vs
                                                                                   Sellers
                                                                                   Other
          0%   10%   20%   30%   40%     50%    60%   70%   80%    90%      100%
Major Markets - Financing




Source: Real Capital Analytics
REALTOR® Markets - Financing
                        REALTORS® 2012 Commercial Lending Survey

        Other, please specify     3%
Small Business Administration     11%
            Public companies      1%
             Private investors    18%
                        REITs     4%
    Life insurance companies      6%
                Credit unions     7%
                  Local banks     25%
              Regional banks      17%
  National banks (“Big four”)     8%                           Source: National Association of REALTORS®

                                 0%     5%     10%      15%        20%              25%               30%
REALTOR® Markets – Financing
                                               Lending Hampers Sales
        Have you had a sales transaction fail              Have your clients failed to complete a
         during the past 12 months due to                   re-financing transaction during the
                 lack of financing?                                  past 12 months?




       33%

                                                    Yes                                             Yes
                                                          50%                          50%
                                                    No                                              No

                                              67%



Source: National Association of REALTORS®
50%
                                                           100%
                                                                                       150%
                                                                                                           200%
                                                                                                                                                    250%




                                 -100%
                                                0%


                                         -50%
                      Manhattan
                     Los Angeles
                          Chicago
                   San Francisco




Source: Real Capital Analytics
                           Dallas
                           Seattle
                           Boston
                         Phoenix
                         Houston
                         San Jose
                          Atlanta
                           Denver
                            Miami
                               DC
                       San Diego
                  NYC Boroughs
                                                                                                            Improving Fundamentals & Rising Sales

                                                                  Growth of Secondary & Tertiary Markets




                      Orange Co.
                        Charlotte
                       Baltimore
                                                                                                                                                           2012.H1 Sales Volume (YoY % Chg)




                    Broward Co.
                         East Bay
                            Austin
                    Minneapolis
                        Nashville
                Raleigh/Durham
                         Orlando
                         Portland
                           Hawaii
                           Detroit
                                                                                                                                                                                              Commercial Markets Outlook




                       Las Vegas
Light at End of Tunnel – Exit?
        Total ($Bil)      Loans with LTV > 100%                           Banks      CMBS       Life Cos.      Other
350                                                        70%     350


300                                                        60%     300


250                                                        50%     250


200                                                        40%     200


150                                                        30%     150


100                                                        20%     100


 50                                                        10%      50


 0                                                         0%       0
      2009   2010      2011   2012   2013       2014                     2009     2010   2011    2012       2013       2014
                                     Source: Foresight Analytics                                     Source: Foresight Analytics
Light at End of Tunnel – Train?


                                           FEDERAL
                                   VS
                                        REGULATIONS
                                              +
                                        “FISCAL CLIFF”
  Source: Real Capital Analytics
For More Information…
REALTOR® Resources

•     > economistsoutlook.blogs.realtor.org


•     > www.facebook.com/narresearchgroup


•     > twitter.com/#!/NAR_Research


•     > www.realtor.org/research-and-statistics
Discover Your Magic…
Discover Your Magic…
Economic Issues & Residential
 Real Estate Business Trends
           Forum
Housing Market
      and
Economic Outlook
       Lawrence Yun, Ph.D.
          Chief Economist
NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Annual Conference

             Orlando, FL


         November 9, 2012
Forecast #1: Inflation will be Notably
           Higher by 2015

• No Threatening Inflation Signs for 2013

• But Inflation rises to 4% to 6% in 2015

• Well above Fed’s preferred rate of 2%

• But not in double-digits as in 1970s
-4
    -2
     0
     2
     4
     6
     8
    10
    12
    16
    14
1970 - Jan
1972 - Jan
1974 - Jan
1976 - Jan
1978 - Jan
1980 - Jan
1982 - Jan
1984 - Jan
1986 - Jan
             Core




1988 - Jan
1990 - Jan
1992 - Jan
1994 - Jan
1996 - Jan
             Overall




1998 - Jan
                       (% change from one year ago)




2000 - Jan
2002 - Jan
2004 - Jan
                                                      Consumer Price Inflation




2006 - Jan
2008 - Jan
2010 - Jan
2012 - Jan
0
                 1
                     2
                         3
                             4
                                 5




     -1
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
                                     Owners' Equivalent Rent




2007 - Jan
2007 - Jul
2008 - Jan
2008 - Jul
2009 - Jan
2009 - Jul
2010 - Jan
                                                               (the biggest weight to Consumer Price Index)




2010 - Jul
                                     Renters' Rent




2011 - Jan
2011 - Jul
2012 - Jan
                                                                                                              Rising Renters’ and Homeowners’ Rent Growth




2012 - Jul
Percent of REALTORS® Reporting Changing
      Rent Levels as Compared to 12 Months Ago
60%

                 Sept '12: Rising rent: 57%
50%




40%




30%




20%




10%




0%




          Higher Rents    Lower Rents         Constant rents
Monetary Policy by Federal Reserve
           (zero rate policy to 2015 ?)
                       Fed Funds
6   %

5

4

3

2

1

0
Federal Reserve Balance Sheet from
          Quantitative Easing
                                 Total Assets
3500000

3000000   $ million
2500000

2000000

1500000

1000000

 500000

      0
     1-Aug-07         1-Aug-08   1-Aug-09   1-Aug-10   1-Aug-11   1-Aug-12
1000000
               1500000
               2000000
               2500000
               3000000
               4000000




                     0
                500000
 1970 - Jan
1971 - Nov
 1973 - Sep
  1975 - Jul
1977 - May
1979 - Mar
 1981 - Jan
1982 - Nov
               3500000 12-month tally in $ million




 1984 - Sep
  1986 - Jul
                                                     Revenue




1988 - May
1990 - Mar
 1992 - Jan
1993 - Nov
 1995 - Sep
                                                     Spending




  1997 - Jul
1999 - May
                                                                   Federal Government




2001 - Mar
 2003 - Jan
                                                                Tax Revenue and Spending




2004 - Nov
 2006 - Sep
  2008 - Jul
2010 - May
2012 - Mar
Huge Federal Budget Deficit … Will Push Up
  Borrowing Cost and/or Ignite Inflation
 4
      Deficit in relation to GDP
 2

 0
   1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012
 -2
    - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan
 -4

 -6

 -8

-10

-12
Impact to Deficit
• Mortgage Interest Deduction … $90 billion
  – Not the source of the current budget deficit since
    MID was present for nearly 100 years


• Interest Rates Revert back to historical
  average … $300 billion in extra interest
  expense
Mortgage Rate Forecast
           (Average Rate of 5.5% in 2015 ?)
                             30-year Mortgage
       %
   7
   6
   5
   4
   3
   2
   1
   0




Modestly higher rates could help home sales as banks re-staff mortgage
work for home purchase applications and less refinance applications.
Forecast #2: Meaningfully Higher
              Home Prices
• Demand is Up … Supply is Down

• 4% to 5% in 2012 (Case-Shiller, FHFA)

• 5% to 7% in 2012 (Median Home Price)

• Home price growth could slow or accelerate … all
  depends on housing starts

• Probably 15% cumulative growth over 3 years
10.0
             20.0
             30.0
             40.0
             50.0
             60.0
             70.0




              0.0
2008 - Jan
2008 - Apr
2008 - Jul
2008 - Oct
2009 - Jan
2009 - Apr
2009 - Jul
2009 - Oct
                    Buyer




2010 - Jan
2010 - Apr
2010 - Jul
2010 - Oct
                    Seller




2011 - Jan
2011 - Apr
2011 - Jul
                             from REALTOR® Survey
                             Buyer and Seller Traffic




2011 - Oct
2012 - Jan
2012 - Apr
2012 - Jul
SentriLock Key Usage
(limited region; adjusted to get us comparable data)
70
                             75
                             80
                             85
                             90
                             95
                            100
                            105
                            110
                            115
              2007 - Jan
              2007 - Apr




Source: NAR
               2007 - Jul
              2007 - Oct
              2008 - Jan
              2008 - Apr
               2008 - Jul
              2008 - Oct
              2009 - Jan
              2009 - Apr
                              Homebuyer Tax Credit




               2009 - Jul
              2009 - Oct
              2010 - Jan
              2010 - Apr
                                                     (Seasonally Adjusted)




               2010 - Jul
              2010 - Oct
              2011 - Jan
              2011 - Apr
              2011 - July
              2011 - Oct
              2012 - Jan
               2012-Apr
               2012 - Jul
                                                                             Monthly Pending Home Sales Index
Annual Existing Home Sales:
               U-Shaped Recovery
8
  In million units
7 7.08
6         6.52
5                                                                        5.3
                                                                                5.6
               5.02                                               5.05
4                                                     4.65
                          4.12   4.34   4.18   4.26
3
2
1
0




                                                                         2014
     2005

            2006

                   2007

                          2008

                                 2009

                                        2010

                                               2011



                                                                  2013



                                                                                2015
                                                      2012 est.
124000
                      126000
                               128000
                                        130000
                                                 132000
                                                          134000
                                                                   136000
                                                                            138000
2000 - Jan
2000 - Jul
2001 - Jan
2001 - Jul
                                                                                     140000 In thousands



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
                                                                                                                  Total Payroll Jobs




2008 - Jul
2009 - Jan
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
                                                                                                           (Lost Decade: Up, Down, ½ Up)




2011 - Jul
2012 - Jan
2012 - Jul
0
                     4
                         6
                             8
                                 10
                                      12




                 2
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
                                            Unemployment Rate




2009 - Jul
                                           (Slow Steady Progress)




2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul
2012 - Jan
2012 - Jul
54%
                         58%
                               60%
                                     62%
                                           64%
                                                 66%




                   56%
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
                                                       (How many of the civilian population is working)




2011 - Jan
                                                                                                          Employment Rate … No Progress




2011 - Jul
2012 - Jan
2012 - Jul
Visible Housing Inventory
            (Existing home inventory at 8-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
0
                 100
                       200
                             300
                                   400
                                         500
                                                     700

                                               600
1964 - Jan
1966 - Jan
1968 - Jan
1970 - Jan
1972 - Jan
1974 - Jan
1976 - Jan
1978 - Jan
1980 - Jan
1982 - Jan
1984 - Jan
1986 - Jan
1988 - Jan
1990 - Jan
1992 - Jan
1994 - Jan
1996 - Jan
1998 - Jan
2000 - Jan
2002 - Jan
                                                                                                                Visible Housing Inventory




2004 - Jan
2006 - Jan
2008 - Jan
                                                           (Newly Constructed Homes Inventory at 50-year low)




2010 - Jan
2012 - Jan
Housing Starts
       (Well Below 50-year average of 1.5 million each year)

                 multifamily      single-family
       Thousand units (annualized)
2500

2000
                                        Long-term Average
                                                            NASDAQ up 13%
1500
                                                            Dow up 9%
                                                            Homebuilder stocks up 62%
1000                                                        in 12 months

500

   0
        2002 - Apr




        2005 - Apr




        2008 - Apr




        2011 - Apr
        2000 - Oct




        2003 - Oct




        2006 - Oct




        2009 - Oct
         2001 - Jul




         2004 - Jul




         2007 - Jul




         2010 - Jul
        2000 - Jan




        2003 - Jan




        2006 - Jan




        2009 - Jan




        2012 - Jan
0.5
                                  1.0
                                              1.5
                                                      2.0
                                                                 2.5
                                                                           3.0
                                                                                    3.5
                                                                                           4.0
                                                                                                   4.5
                                                                                                          5.0




               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
                                                                                                                                             million units




2010 - Q1
2010 - Q3
2011 - Q1
2011 - Q3
2012 - Q1
                                                                                                                                                                                     Shadow Inventory … Falling




   2015 … 5%
               2014 … 8%
                                                                                                                    (Seriously delinquent mortgage + homes in foreclosure process)




                                 2013 … 15%
                                                    2012 … 25%
                                                                       2011 … 33%
                                                                                      2010 … 33%
                                                                                                     Market Share
                                                                                                     Distressed Sales
Home Prices
Metric         % change from one year ago         Comment

NAR            + 11.3% (September)                Mix of homes impact price …
Median Price                                      fewer distressed sales recently …




Case-Shiller   +2.0% (June, July, August average) Lagging indicator

                                                  Near double-digit on an
                                                  annualized basis in recent months

FHFA           + 4.7% (August)                    Monthly gains in 9 of recent 10
                                                  months
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Economic Issues & Residential Real Estate Business Trends Forum 

  • 1.
  • 2. Economic Issues & Residential Real Estate Business Trends Forum
  • 3. Patrick Bissett Chair Residential Real Estate Forum
  • 4. Economic Issues & Residential Real Estate Business Trends Forum
  • 5. Dean Asher Florida State Association President-Elect
  • 6. Economic Issues & Residential Real Estate Business Trends Forum
  • 8. Economic Issues & Residential Real Estate Business Trends Forum
  • 9. U.S. Economic Outlook Mark Vitner, Managing Director & Senior Economist November 9, 2012
  • 10. Economic Growth U.S. Real GDP Bars = CAGR Line = Yr/Yr Percent Change 10% 10% GDP - CAGR: Q3 @ 2.0% 8% GDP - Yr/Yr Percent Change: Q3 @ 2.3% 8% 6% 6% We are more than three years 4% Forecast 4% into the economic recovery and 2% 2% there is still a considerable amount of uncertainty regarding 0% 0% sovereign debt issues in Europe, -2% -2% the federal budget deficit and the willingness of businesses -4% -4% and households to commit to -6% -6% major capital purchases. -8% -8% -10% -10% 2000 2002 2004 2006 2008 2010 2012 2014 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 10
  • 11. Financial Crises Are Becoming More Frequent 10-Year Treasury & Fed Funds Target Yield 21% 21% 10-Year Treasury Yield: Oct @ 1.75% Fed Funds Target: Oct @ 0.25% 18% 18% 15% 15% Treasury yields are currently 12% 12% near record low levels. We believe uncertainty is the 9% 9% primary driver of ultra-low interest rates. 6% 6% 3% 3% 0% 0% 1971 1976 1981 1986 1991 1996 2002 2007 2012 Source: IHS Global Insight and Wells Fargo Securities, LLC Economic Outlook 11
  • 12. The Timing of The First Fed Rate Hike The timing for the Fed’s first tightening move has been pushed even further out. Long-term growth estimates have also been scaled back. Consensus Fed Funds Rate Hike Individual FOMC Member Forecasts Appropriate Timing of Policy Firming Appropriate Pace of Policy Firming Number of Participants Target Federal Funds Rate at Year-End 14 14 5.0% 5.0% June Release June Projection September Release 4.5% September Projection 4.5% 12 12 4.0% 4.0% 10 10 3.5% 3.5% 3.0% 3.0% 8 8 2.5% 2.5% 6 6 2.0% 2.0% 4 4 1.5% 1.5% 1.0% 1.0% 2 2 0.5% 0.5% 0 0 0.0% 0.0% 2012 2013 2014 2015 2016 2012 2013 2014 2015 Longer Run Source: Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 12
  • 13. Federal Reserve Balance Sheet Federal Reserve Balance Sheet Trillions $3.5 $3.5 Other: Oct @ $206.0B Foreign Swaps: Oct @ $12.6B $3.0 PDCF & TAF $3.0 Commercial Paper & Money Market Repos & Dis. Window: Oct @ $0.1B $2.5 Agencies & MBS: Oct @ $918.4B $2.5 Treasuries: Oct @ $1,648.5B The massive expansion of the $2.0 $2.0 Fed’s balance sheet has lifted asset prices and has also given $1.5 $1.5 the economy a boost. But all magic comes with a price! $1.0 $1.0 $0.5 $0.5 $0.0 $0.0 2007 2008 2009 2010 2011 2012 Source: Federal Reserve Board and Wells Fargo Securities, LLC Economic Outlook 13
  • 14. Labor Market Unemployment Rate - SA vs. NSA Percent 12.0% 12.0% 12-Month Rolling Average (NSA): Oct @ 8.2% Unemployment Rate (SA): Oct @ 7.9% 10.0% 10.0% 8.0% 8.0% Unemployment is gradually trending down, although much of the improvement has come 6.0% 6.0% from unusual forces. 4.0% 4.0% 2.0% 2.0% 1994 1997 2000 2003 2006 2009 2012 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 14
  • 15. Labor Market Employment Cycles Percent Change from Cycle Peak 20% 20% 1948-1949 Cycle 1981-1982 Cycle 16% 1989-1991 Cycle 16% 2001 Cycle 2007-To-Date 12% Forecast 12% 8% 8% Job losses exceeded every post- World War II downturn, and the 4% 4% modest recovery to date has been extremely disappointing. 0% 0% -4% -4% -8% -8% 0 6 12 18 24 30 36 42 48 54 60 66 72 78 84 Source: U.S. Department of Labor and Wells Fargo Securities, LLC Economic Outlook 15
  • 16. Consumer Related This year’s improved stock market has helped bolster consumer spending at a time when real incomes are barely growing, and consumer confidence remains historically low. Household Wealth Consumer Confidence Household Assets Confidence vs. Retail Sales and Income Trillions of Dollars Conference Board Consumer Confidence, Yr/Yr % Chg. 3-MMA $90 $90 210 16.0% Financial Assets: Q2 @ $51.9 Trillion Confidence Yr/Yr % Chg: Oct @ 76.7% $80 Household Real Estate Holdings: Q2 @ $16.9 Trillion $80 Confidence: Oct @ 72.2 (Left Axis) 180 Retail Sales Ex-Auto: Sep @ 3.9% (Right Axis) 12.0% Other Tangible Assets: Q2 @ $7.3 Trillion Real Disposible Per Cap Inc.: Sep @ 1.1% (Right Axis) $70 $70 150 8.0% $60 $60 $50 $50 120 4.0% $40 $40 90 0.0% $30 $30 60 -4.0% $20 $20 30 -8.0% $10 $10 $0 $0 0 -12.0% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 93 95 97 99 01 03 05 07 09 11 Source: U.S. Department of Commerce, Conference Board and Wells Fargo Securities, LLC Economic Outlook 16
  • 17. Consumer Confidence Economic growth is unlikely to accelerate in a meaningful way until consumers feel better about current economic conditions than they do about future economic prospects. Consumer Confidence Confidence Gap Conference Board Consumer Confidence Confidence Gap Present Situation and Expectations Index Present Situation Minus Expectations 250 250 100 100 Present Situation Yr/Yr % Chg: Oct @ 107.1% Expectations Yr/Yr % Chg: Oct @ 65.8% 75 75 Present Situation: Oct @ 56.2 200 Expectations: Oct @ 82.9 200 50 50 25 25 150 150 0 0 100 100 -25 -25 -50 -50 50 50 -75 -75 Confidence Gap: Oct @ -26.8 0 0 -100 -100 87 89 91 93 95 97 99 01 03 05 07 09 11 87 89 91 93 95 97 99 01 03 05 07 09 11 Source: Conference Board and Wells Fargo Securities, LLC Economic Outlook 17
  • 18. Retail Sales Retail Sales Ex. Auto & Gas Stations vs. Income 3-Month Moving Average 15% 15% Stock Market Tax Cut 2 Housing Refi Bubble Tax Cut 1 Boom Tax Rebates 10% 10% 5% 5% Retail sales have risen sharply in 0% 0% recent months, while disposable income growth has begun to stagnate. -5% -5% -10% -10% Disposable Personal Income, Yr/Yr % Change: Aug @ 3.2% Retail Sales, ex. Autos & Gas, 3-Month Annual Rate: Sep @ 4.6% -15% -15% 96 98 00 02 04 06 08 10 12 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 18
  • 19. Retail Sales Furniture Stores Sales 3-Month Moving Average 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% Furniture store sales continue to -5% -5% rise, but the pace is decelerating. -10% -10% -15% -15% -20% -20% -25% Year-over-Year Percent Change: Sep @ 8.9% -25% 3-Month Annual Rate: Sep @ 7.6% -30% -30% 93 95 97 99 01 03 05 07 09 11 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 19
  • 20. Residential Investment Real Residential Investment Bars = CAGR Line = Yr/Yr Percent Change 30% 30% Forecast 20% 20% 10% 10% 0% 0% Our forecast calls for continued -10% -10% strengthening in residential investment. -20% -20% -30% -30% -40% -40% Res. Investment - CAGR: Q3 @ 14.4% Res. Construction - Yr/Yr Percent Change: Q3 @ 13.8% -50% -50% 2000 2002 2004 2006 2008 2010 2012 2014 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 20
  • 21. Homebuilding Housing Starts Millions of Units 2.4 2.4 Thousands Multifamily Starts Multifamily Forecast 2.1 2.1 Single-family Starts Single-family Forecast 1.8 1.8 Forecast 1.5 1.5 We believe housing starts have 1.2 1.2 bottomed and will increase modestly over the next few 0.9 0.9 years. 0.6 0.6 0.3 0.3 0.0 0.0 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 21
  • 22. Housing Market NAHB Housing Market Index & U.S. Distressed Sales 50 50 Total Distressed: Sep @ 24.0% NAHB Housing Market Index: Oct @ 41.0 40 40 30 30 The share of distressed sales has come down concurrently with the rise of the the NAHB 20 20 Housing Market Index. 10 10 0 0 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Source: NAHB, NAR and Wells Fargo Securities, LLC Economic Outlook 22
  • 23. Housing Starts Apartment construction accounts for much of the recent improvement in homebuilding. We believe multifamily housing will account for a larger proportion of future starts. Single & Multifamily Housing Starts Multifamily Housing Starts Single & Multifamily Housing Starts Multifamily Housing Starts SAAR, In Thousands, 3-Month Moving Average SAAR, In Thousands, 3-Month Moving Average 2,000 600 500 200 5+ Units: Sep @ 226.3 (Left Axis) 1,800 540 2-4 Units: Sep @ 9.0 (Right Axis) 1,600 480 400 160 1,400 420 1,200 360 300 120 1,000 300 800 240 200 80 600 180 400 120 100 40 Single-family Housing Starts: Sep @ 551K (Left Axis) 200 60 Multifamily Housing Starts: Sep @ 235K (Right Axis) 0 0 0 0 87 89 91 93 95 97 99 01 03 05 07 09 11 87 89 91 93 95 97 99 01 03 05 07 09 11 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 23
  • 24. New Home Sales New home sales have begun to creep back up but are still near the lows of the Great Recession. Inventories of new homes have come down, and month’s supply has dropped to 4.5 months in September, which may lead to improvement in the housing market. New Home Sales Inventory of New Homes New Home Sales Inventory of New Homes for Sale Seasonally Adjusted Annual Rate, In Thousands Non-Seasonally Adjusted, In Thousands 1,500 1,500 600 600 Inventory: Sep @ 146,000 Completed New Homes: Sep @ 38,000 1,300 1,300 450 450 1,100 1,100 900 900 300 300 700 700 500 500 150 150 300 300 New Home Sales: Sep @ 389,000 3-Month Moving Average: Sep @ 376,667 100 100 0 0 89 91 93 95 97 99 01 03 05 07 09 11 89 91 93 95 97 99 01 03 05 07 09 11 Source: U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 24
  • 25. Existing Home Sales Existing home sales have recovered much faster than new home sales. New Home Sales Inventory of New Homes Existing Home Resales Existing & New Single-Family Home Sales Seasonally Adjusted Annual Rate - In Millions In Millions, Seasonally Adjusted Annual Rate 7.5 7.5 1.6 8.0 7.0 7.0 1.4 7.0 6.5 6.5 1.2 6.0 6.0 6.0 1.0 5.0 5.5 5.5 0.8 4.0 5.0 5.0 0.6 3.0 4.5 4.5 0.4 2.0 4.0 4.0 0.2 New Home Sales: Sep @ 389 Thousand (Left Axis) 1.0 3.5 3.5 Existing Home Sales: Sep @ 4.75 Million Existing Home Sales: Sep @ 4.2 Million (Right Axis) 3.0 3.0 0.0 0.0 99 00 01 02 03 04 05 06 07 08 09 10 11 12 94 96 98 00 02 04 06 08 10 12 Source: NAR, U.S. Department of Commerce and Wells Fargo Securities, LLC Economic Outlook 25
  • 26. Home Prices Home Prices Year-over-Year Percentage Change 24% 24% 16% 16% 8% 8% Home prices have firmed recently as foreclosures have 0% 0% become a smaller portion of overall sales. Prices will likely -8% -8% fluctuate along a low trajectory until more foreclosures clear -16% -16% through the pipeline. Median Sale Price: Sep @ $184,300 -24% Median Sales Price 3-M Mov. Avg.: Sep @ 9.9% -24% FHFA (OFHEO) Purchase Only Index: Aug @ 4.7% S&P Case-Shiller Composite 10: Aug @ 1.3% -32% -32% 96 98 00 02 04 06 08 10 12 Source: Federal Housing Finance Agency, National Association of Realtors, S&P Corp. and Wells Fargo Securities, LLC Economic Outlook 26
  • 27. NAHB/Wells Fargo Housing Market Index NAHB/Wells Fargo Housing Market Index Diffusion Index 90 90 80 80 70 70 60 60 Homebuilder sentiment has 50 50 risen significantly over the past 40 40 year, but it is still at a relatively low level. 30 30 20 20 10 10 NAHB Housing Market Index: Oct @ 41.0 0 0 87 89 91 93 95 97 99 01 03 05 07 09 11 Source: National Association of Home Builders and Wells Fargo Securities, LLC Economic Outlook 27
  • 28. U.S. Mortgage Rates Conventional 30-Year Mortgage Rate Percent, FHLMC Fixed-Rate Mortgage 7.0% 7.0% 6.5% 6.5% 6.0% 6.0% 5.5% 5.5% 5.0% 5.0% Mortgage rates are at historic lows and are likely to remain 4.5% 4.5% low for some time. 4.0% 4.0% 3.5% 3.5% 3.0% 3.0% Conventional 30-Year Fixed Mortg. Rate: Oct @ 3.4% 2.5% 2.5% 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FHLMC and Wells Fargo Securities, LLC Economic Outlook 28
  • 29. International Forecast Real Global GDP Growth (Wells Fargo) Year-over-Year Percent Change, PPP Weights 7.5% 7.5% 6.0% 6.0% Period Average 4.5% 4.5% The European financial crisis is dragging global economic 3.0% 3.0% growth lower, but we believe growth should pick up by 2014. 1.5% 1.5% 0.0% 0.0% -1.5% -1.5% 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Congressional International Monetary Fund and Wells Fargo Securities, LLC Economic Outlook 29
  • 30. Issues to Watch European Credit Availability Debt Crisis & Financial Reform Fiscal Cliff Deleveraging Uncertainty China Economic Fiscal & Slowdown Monetary Policy Geopolitical Energy/Commodity Tensions Price Swings Economic Outlook 30
  • 31. Our Forecast Wells Fargo U.S. Economic Forecast Actual Forecast Actual Forecast 2012 2013 2010 2011 2012 2013 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real Gross Domestic Product 1 2.0 1.3 2.0 1.4 1.0 2.1 2.2 2.2 2.4 1.8 2.1 1.6 Personal Consumption 2.4 1.5 2.0 2.4 0.6 1.2 1.4 1.3 1.8 2.5 1.9 1.4 2 Inflation Indicators PCE Deflator 2.4 1.6 1.5 1.8 1.5 1.7 1.6 1.5 1.9 2.4 1.8 1.6 Consumer Price Index 2.8 1.9 1.7 2.3 2.2 2.7 2.7 2.3 1.6 3.1 2.2 2.5 1 5.9 2.6 -0.4 0.5 0.7 3.5 4.1 4.1 5.4 4.1 3.6 1.8 Industrial Production Corporate Profits Before Taxes 2 10.3 6.7 5.7 5.3 4.8 5.2 5.7 6.3 26.8 7.3 6.9 5.5 Trade Weighted Dollar Index 3 72.7 74.5 72.7 73.0 74.0 75.0 76.0 77.0 75.4 70.9 73.2 75.5 Unemployment Rate 8.3 8.2 8.1 7.8 7.7 7.8 7.9 7.9 9.6 9.0 8.1 7.8 Housing Starts 4 0.71 0.74 0.79 0.84 0.90 0.96 1.02 1.08 0.59 0.61 0.77 0.99 Quarter-End Interest Rates 5 Federal Funds Target Rate 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 0.25 Conventional Mortgage Rate 3.95 3.68 3.50 3.40 3.40 3.40 3.45 3.50 4.69 4.46 3.63 3.44 10 Year Note 2.23 1.67 1.65 1.70 1.70 1.80 1.85 1.90 3.22 2.78 1.81 1.81 Forecast as of: November 8, 2012 1 C ompound Annual Growth Rate Quarter-over-Quarter 2 Year-over-Year Percentage C hange 3 Federal Reserve Major C urrency Index, 1973=100 - Quarter End 4 Millions of Units 5 Annual Numbers Represent Averages Economic Outlook 31
  • 33. Wells Fargo Economics Group Publications A Sampling of Our Recent Special, Regional & Industry Commentary Recent Special Commentary Date Title Authors November-01 North Carolina Economic Outlook Vitner, Brown & Watt October-29 Housing Data Wrap-Up: October 2012 Vitner & Khan October-24 2012 Holiday Sales Outlook Aleman, Iqubal & Brown October-18 U.S. Fiscal Primer III: Federal Revenues Silvia, Bryson & Brown October-18 Retirement in America: Extending the Finish Line Bryson, Iqbal & Watt October-12 The Great Unemplyoment Rate Debate Silvia, Watt & Swankoski October-08 The Unemployment Rate: Seasonality and Sampling Silvia, Iqbal & Watt October-02 Housing Chartbook: September 2012 Vitner, Khan & Silverman To view any of our past research September-25 September-17 Local Budgets Under Pressure: A Fiscal Outlook Global Chartbook: September 2012 Silvia & Brown Bryson, Aleman & Quinlan please visit: September-10 September-06 U.S. Fiscal Primer II: Federal Government Spending Commercial Real Estate Chartbook: Quarter 2 Silvia, Bryson & Brown Vitner & Khan September-05 Brazilian Economy Slows Down; Better Times Ahead Aleman http://www.wellsfargo.com/ August-22 Mexico: Thanks to Auto Demand Aleman economics August-15 August-14 California's Economy: Gaining Momentum Real GDP in Eurozone Slumped in Q2 Vitner & Watt Bryson August-09 Rocky Mountain Summit: July 2012 Silvia August-06 Orders and Production: No Time for Complacency Silvia, Quinlan & Watt August-01 U.S. Fiscal Primer I: The Deficit and Debt Silvia, Bryson & Brown July-19 U.S. States Grapple with Europe's Woes Vitner & Brown To join any of our research July-13 July-11 The Lowdown on Consumer Spending Employment: Beyond the Sound Bites—Reading the Signals IX Vitner & Quinlan Silvia & Watt distribution lists please visit: July-10 July-09 Employment: Beyond the Sound Bites—Reading the Signals VIII Employment: Beyond the Sound Bites—Reading the Signals VII Silvia & Watt Silvia & Watt July-05 Housing Data Wrap-Up: June 2012 Vitner & Khan http://www.wellsfargo.com/ July-02 Do Too Many Dollars Make Us an Inflation Nation? Bullard & Quinlan economicsemail June-29 June-22 2012 State Budget Outlook Student Loans: The Best of Intentions Silvia & Brown Silvia, Seydl & Watt June-20 FOMC: Keep On Twisting Until Europe's Fever Breaks Vitner June-20 The Fiscal Cliff: Likelihood and Economic Impact Silvia, Brown & Watt June-20 Credit Quality Monitor: June 2012 Anderson & Kashmarkek June-19 The Fed: Same Goal, Different Method Silvia & Khan June-15 Economic Growth Appears to Be Lost in a Fog of Uncertainty Vitner June-07 What Happens if Span or Italy Leaves EMU? Bryson, Quinlan & Swankoski June-07 Housing Chartbook: May 2012 Vitner, Khan & Seydl May-29 Implications of a Euro Exit to Greece Bryson, Quinlan & Swankoski Economic Outlook 33
  • 34. Wells Fargo Securities, LLC Economics Group Global Head of Research and Economics Economists Diane Schumaker-Krieg ………………… ….diane.schumaker@wellsfargo.com …… Azhar Iqbal, Econometrician………………………………azhar.iqbal@wellsfargo.com Global Head of Research & Economics Tim Quinlan, Economist …………………………………..tim.quinlan@wellsfargo.com Chief Economist Michael A. Brown, Economist ………………… michael.a.brown@wellsfargo.com John Silvia … ...................... … . john.silvia@wellsfargo.com Economic Analysts Senior Economists Sarah Watt, Economic Analyst …………………………… .sarah.watt@wellsfargo.com Mark Vitner, Senior Economist……………....………. . mark.vitner@wellsfargo.com Kaylyn Swankoski, Economic Analyst kaylyn.swankoski@wellsfargo.com . Jay Bryson, Global Economist …………………....……….jay.bryson@wellsfargo.com Zachary Griffiths, Economic Analyst zachary.griffiths@wellsfargo.com Eugenio Aleman, Senior Economist …………….eugenio.j.aleman@wellsfargo.com Sara Silverman, Economic Analyst sara.silverman@wellsfargo.com Sam Bullard, Senior Economist ………………………….sam.bullard@wellsfargo.com Administrative Assistants Anika Khan, Senior Economist .… . anika.khan@wellsfargo.com Peg Gavin, Executive Assistant. peg.gavin@wellsfargo.com Cyndi Flowe, Administrative Assistant cyndi.h.flowe@wellsfargo.com Wells Fargo Securities Economics Group publications are produced by Wells Fargo Securities, LLC, a U.S broker-dealer registered with the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and the Securities Investor Protection Corp. Wells Fargo Securities, LLC, distributes these publications directly and through subsidiaries including, but not limited to, Wells Fargo & Company, Wells Fargo Bank N.A, Wells Fargo Advisors, LLC, and Wells Fargo Securities International Limited. The information and opinions herein are for general information use only. Wells Fargo Securities, LLC does not guarantee their accuracy or completeness, nor does Wells Fargo Securities, LLC assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice, are for general information only and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. Wells Fargo Securities, LLC is a separate legal entity and distinct from affiliated banks and is a wholly owned subsidiary of Wells Fargo & Company. SECURITIES: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE Important Information for Non-U.S. Recipients For recipients in the EEA, this report is distributed by Wells Fargo Securities International Limited (“WFSIL”). WFSIL is a U.K. incorporated investment firm authorized and regulated by the Financial Services Authority. The content of this report has been approved by WFSIL a regulated person under the Act. WFSIL does not deal with retail clients as defined in the Markets in Financial Instruments Directive 2007. The FSA rules made under the Financial Services and Markets Act 2000 for the protection of retail clients will therefore not apply, not will the Financial Services Compensation Scheme be available. This report is not intended for, and should not be relied upon by, retail clients. This document and any other materials accompanying this document (collectively, the “Materials”) are provided for general informational purposes only. Economic Outlook 34
  • 35. Economic Issues & Residential Real Estate Business Trends Forum
  • 36. GEORGE RATIU Manager, Quantitative & Commercial Research National Association of REALTORS® Economic Issues & Residential Real Estate Business Trends Forum 2012 REALTORS® Conference & Expo Orange County Convention Center November 9, 2012 Orlando, FL
  • 39. REALTORS® and Commercial CRE Sales CRE Apartment Rental 4% 4% 3% 3% 3% 2% 2% 2% Jul 2012 Aug 2012 Sep 2012 Oct 2012 Source: NAR
  • 40. By The Numbers • 79,000 Commercial REALTORS® • 200,000 – 400,000 REALTORS® handled commercial real estate in 2012
  • 41. 0.0 -40.0 -30.0 -20.0 -10.0 30.0 10.0 20.0 2001 - Q1 2001 - Q2 2001 - Q3 2001 - Q4 2002 - Q1 2002 - Q2 2002 - Q3 2002 - Q4 2003 - Q1 2003 - Q2 2003 - Q3 2003 - Q4 2004 - Q1 2004 - Q2 2004 - Q3 2004 - Q4 2005 - Q1 2005 - Q2 2005 - Q3 2005 - Q4 2006 - Q1 EHS (YoY % Chg) 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 CRE Sales (YoY % Chg) 2010 - Q1 2010 - Q2 2010 - Q3 2010 - Q4 2011 - Q1 2011 - Q2 2011 - Q3 2011 - Q4 2012 - Q1 2012 - Q2 Residential vs. Commercial 2013 - Q3 0 1 2 -2 -1 0.5 1.5 -2.5 -1.5 -0.5 Source: NAR, Real Capital Analytics
  • 42. Commercial Sales $160 Office Industrial Retail Apartment Hotel Billions $140 $120 $570B in 2007 $181 B in 2012.ytd $100 $80 $60 $40 $20 $- Source: Real Capital Analytics
  • 43. 110 130 170 190 210 150 90 2000 December April August 2001 December April August 2002 December April August 2003 December April August 2004 December Apartment April August 2005 December April Retail August 2006 December April August 2007 December Industrial April August Moody's/RCA CPPI - Composite Indices 2008 December April Office August 2009 December April Commercial Prices August 2010 December April August 2011 December April Source: Real Capital Analytics
  • 44. Tale of Two Commercial Markets Sales Volume (YoY % Chg) Major CRE Markets REALTOR Markets 200% 150% 100% Deals of $2M + 50% 0% 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q2 11Q3 11Q4 12Q1 12Q2 12Q3 -50% Deals < $2M + -100% Source: NAR, Real Capital Analytics
  • 45. REALTOR® Commercial Markets Did you complete a sales Dollar amount of last transaction transaction? Under $250K 33% Between $250K and $500K 23% Between $500K and $1 M 19% 35% Yes Between $1 M and $2 M 17% No 65% $2 M and $5 M 6% 92% of deals are <$2M Between $5 M and $10 M 1% Over $10 M 1% Source: National Association of REALTORS®
  • 46. REALTOR® Commercial Markets Commercial Sales Trends, Quarterly Sales Volume Sales Prices Business Opportunity 10% 4% 5% 2% 0% 0% 2008.Q4 2009.Q1 2009.Q2 2009.Q3 2009.Q4 2010.Q1 2010.Q2 2010.Q3 2010.Q4 2011.Q1 2011.Q2 2011.Q3 2011.Q4 2012.Q1 2012.Q2 2012.Q3 -2% -5% -4% -10% -6% -15% -8% -20% -10% -25% -12% Source: National Association of Realtors®
  • 47. REALTOR® Commercial Concerns REALTORS® Most Pressing Challenges Inventory Distress 2012.Q2 Financing Local Economy National Economy 2012.Q3 Pricing Gap: Buyers vs Sellers Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
  • 48. Major Markets - Financing Source: Real Capital Analytics
  • 49. REALTOR® Markets - Financing REALTORS® 2012 Commercial Lending Survey Other, please specify 3% Small Business Administration 11% Public companies 1% Private investors 18% REITs 4% Life insurance companies 6% Credit unions 7% Local banks 25% Regional banks 17% National banks (“Big four”) 8% Source: National Association of REALTORS® 0% 5% 10% 15% 20% 25% 30%
  • 50. REALTOR® Markets – Financing Lending Hampers Sales Have you had a sales transaction fail Have your clients failed to complete a during the past 12 months due to re-financing transaction during the lack of financing? past 12 months? 33% Yes Yes 50% 50% No No 67% Source: National Association of REALTORS®
  • 51. 50% 100% 150% 200% 250% -100% 0% -50% Manhattan Los Angeles Chicago San Francisco Source: Real Capital Analytics Dallas Seattle Boston Phoenix Houston San Jose Atlanta Denver Miami DC San Diego NYC Boroughs Improving Fundamentals & Rising Sales Growth of Secondary & Tertiary Markets Orange Co. Charlotte Baltimore 2012.H1 Sales Volume (YoY % Chg) Broward Co. East Bay Austin Minneapolis Nashville Raleigh/Durham Orlando Portland Hawaii Detroit Commercial Markets Outlook Las Vegas
  • 52. Light at End of Tunnel – Exit? Total ($Bil) Loans with LTV > 100% Banks CMBS Life Cos. Other 350 70% 350 300 60% 300 250 50% 250 200 40% 200 150 30% 150 100 20% 100 50 10% 50 0 0% 0 2009 2010 2011 2012 2013 2014 2009 2010 2011 2012 2013 2014 Source: Foresight Analytics Source: Foresight Analytics
  • 53. Light at End of Tunnel – Train? FEDERAL VS REGULATIONS + “FISCAL CLIFF” Source: Real Capital Analytics
  • 55. REALTOR® Resources • > economistsoutlook.blogs.realtor.org • > www.facebook.com/narresearchgroup • > twitter.com/#!/NAR_Research • > www.realtor.org/research-and-statistics
  • 58. Economic Issues & Residential Real Estate Business Trends Forum
  • 59. Housing Market and Economic Outlook Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS® Presentation at NAR Annual Conference Orlando, FL November 9, 2012
  • 60. Forecast #1: Inflation will be Notably Higher by 2015 • No Threatening Inflation Signs for 2013 • But Inflation rises to 4% to 6% in 2015 • Well above Fed’s preferred rate of 2% • But not in double-digits as in 1970s
  • 61. -4 -2 0 2 4 6 8 10 12 16 14 1970 - Jan 1972 - Jan 1974 - Jan 1976 - Jan 1978 - Jan 1980 - Jan 1982 - Jan 1984 - Jan 1986 - Jan Core 1988 - Jan 1990 - Jan 1992 - Jan 1994 - Jan 1996 - Jan Overall 1998 - Jan (% change from one year ago) 2000 - Jan 2002 - Jan 2004 - Jan Consumer Price Inflation 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan
  • 62. 0 1 2 3 4 5 -1 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 Owners' Equivalent Rent 2007 - Jan 2007 - Jul 2008 - Jan 2008 - Jul 2009 - Jan 2009 - Jul 2010 - Jan (the biggest weight to Consumer Price Index) 2010 - Jul Renters' Rent 2011 - Jan 2011 - Jul 2012 - Jan Rising Renters’ and Homeowners’ Rent Growth 2012 - Jul
  • 63. Percent of REALTORS® Reporting Changing Rent Levels as Compared to 12 Months Ago 60% Sept '12: Rising rent: 57% 50% 40% 30% 20% 10% 0% Higher Rents Lower Rents Constant rents
  • 64. Monetary Policy by Federal Reserve (zero rate policy to 2015 ?) Fed Funds 6 % 5 4 3 2 1 0
  • 65. Federal Reserve Balance Sheet from Quantitative Easing Total Assets 3500000 3000000 $ million 2500000 2000000 1500000 1000000 500000 0 1-Aug-07 1-Aug-08 1-Aug-09 1-Aug-10 1-Aug-11 1-Aug-12
  • 66. 1000000 1500000 2000000 2500000 3000000 4000000 0 500000 1970 - Jan 1971 - Nov 1973 - Sep 1975 - Jul 1977 - May 1979 - Mar 1981 - Jan 1982 - Nov 3500000 12-month tally in $ million 1984 - Sep 1986 - Jul Revenue 1988 - May 1990 - Mar 1992 - Jan 1993 - Nov 1995 - Sep Spending 1997 - Jul 1999 - May Federal Government 2001 - Mar 2003 - Jan Tax Revenue and Spending 2004 - Nov 2006 - Sep 2008 - Jul 2010 - May 2012 - Mar
  • 67. Huge Federal Budget Deficit … Will Push Up Borrowing Cost and/or Ignite Inflation 4 Deficit in relation to GDP 2 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 -2 - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan -4 -6 -8 -10 -12
  • 68. Impact to Deficit • Mortgage Interest Deduction … $90 billion – Not the source of the current budget deficit since MID was present for nearly 100 years • Interest Rates Revert back to historical average … $300 billion in extra interest expense
  • 69. Mortgage Rate Forecast (Average Rate of 5.5% in 2015 ?) 30-year Mortgage % 7 6 5 4 3 2 1 0 Modestly higher rates could help home sales as banks re-staff mortgage work for home purchase applications and less refinance applications.
  • 70. Forecast #2: Meaningfully Higher Home Prices • Demand is Up … Supply is Down • 4% to 5% in 2012 (Case-Shiller, FHFA) • 5% to 7% in 2012 (Median Home Price) • Home price growth could slow or accelerate … all depends on housing starts • Probably 15% cumulative growth over 3 years
  • 71. 10.0 20.0 30.0 40.0 50.0 60.0 70.0 0.0 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct 2009 - Jan 2009 - Apr 2009 - Jul 2009 - Oct Buyer 2010 - Jan 2010 - Apr 2010 - Jul 2010 - Oct Seller 2011 - Jan 2011 - Apr 2011 - Jul from REALTOR® Survey Buyer and Seller Traffic 2011 - Oct 2012 - Jan 2012 - Apr 2012 - Jul
  • 72. SentriLock Key Usage (limited region; adjusted to get us comparable data)
  • 73. 70 75 80 85 90 95 100 105 110 115 2007 - Jan 2007 - Apr Source: NAR 2007 - Jul 2007 - Oct 2008 - Jan 2008 - Apr 2008 - Jul 2008 - Oct 2009 - Jan 2009 - Apr Homebuyer Tax Credit 2009 - Jul 2009 - Oct 2010 - Jan 2010 - Apr (Seasonally Adjusted) 2010 - Jul 2010 - Oct 2011 - Jan 2011 - Apr 2011 - July 2011 - Oct 2012 - Jan 2012-Apr 2012 - Jul Monthly Pending Home Sales Index
  • 74. Annual Existing Home Sales: U-Shaped Recovery 8 In million units 7 7.08 6 6.52 5 5.3 5.6 5.02 5.05 4 4.65 4.12 4.34 4.18 4.26 3 2 1 0 2014 2005 2006 2007 2008 2009 2010 2011 2013 2015 2012 est.
  • 75. 124000 126000 128000 130000 132000 134000 136000 138000 2000 - Jan 2000 - Jul 2001 - Jan 2001 - Jul 140000 In thousands 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 Total Payroll Jobs 2008 - Jul 2009 - Jan 2009 - Jul 2010 - Jan 2010 - Jul 2011 - Jan (Lost Decade: Up, Down, ½ Up) 2011 - Jul 2012 - Jan 2012 - Jul
  • 76. 0 4 6 8 10 12 2 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 Unemployment Rate 2009 - Jul (Slow Steady Progress) 2010 - Jan 2010 - Jul 2011 - Jan 2011 - Jul 2012 - Jan 2012 - Jul
  • 77. 54% 58% 60% 62% 64% 66% 56% 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 (How many of the civilian population is working) 2011 - Jan Employment Rate … No Progress 2011 - Jul 2012 - Jan 2012 - Jul
  • 78. Visible Housing Inventory (Existing home inventory at 8-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
  • 79. 0 100 200 300 400 500 700 600 1964 - Jan 1966 - Jan 1968 - Jan 1970 - Jan 1972 - Jan 1974 - Jan 1976 - Jan 1978 - Jan 1980 - Jan 1982 - Jan 1984 - Jan 1986 - Jan 1988 - Jan 1990 - Jan 1992 - Jan 1994 - Jan 1996 - Jan 1998 - Jan 2000 - Jan 2002 - Jan Visible Housing Inventory 2004 - Jan 2006 - Jan 2008 - Jan (Newly Constructed Homes Inventory at 50-year low) 2010 - Jan 2012 - Jan
  • 80. Housing Starts (Well Below 50-year average of 1.5 million each year) multifamily single-family Thousand units (annualized) 2500 2000 Long-term Average NASDAQ up 13% 1500 Dow up 9% Homebuilder stocks up 62% 1000 in 12 months 500 0 2002 - Apr 2005 - Apr 2008 - Apr 2011 - Apr 2000 - Oct 2003 - Oct 2006 - Oct 2009 - Oct 2001 - Jul 2004 - Jul 2007 - Jul 2010 - Jul 2000 - Jan 2003 - Jan 2006 - Jan 2009 - Jan 2012 - Jan
  • 81. 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 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 million units 2010 - Q1 2010 - Q3 2011 - Q1 2011 - Q3 2012 - Q1 Shadow Inventory … Falling 2015 … 5% 2014 … 8% (Seriously delinquent mortgage + homes in foreclosure process) 2013 … 15% 2012 … 25% 2011 … 33% 2010 … 33% Market Share Distressed Sales
  • 82. Home Prices Metric % change from one year ago Comment NAR + 11.3% (September) Mix of homes impact price … Median Price fewer distressed sales recently … Case-Shiller +2.0% (June, July, August average) Lagging indicator Near double-digit on an annualized basis in recent months FHFA + 4.7% (August) Monthly gains in 9 of recent 10 months