REALTORS CONFIDENCE INDEX

Report and Market Outlook

July 2012 Edition
Based on Data Collected July 23 July 30, 2012

NAR Building, Washington,D.C., looking towards the Capitol

NATIONAL ASSOCIATION OF REALTORS

Research Department Lawrence Yun, Senior Vice President and Chief Economist

Table of Contents
Summary Real Estate Markets Continue to Recover..... .......3 REALTORS Confidence Index: Current Conditions...3 REALTORS Confidence Index: Six Month Outlook...4 Section 1: Market Conditions Single Family Properties.........6 Townhouse Properties.........7 Condo Properties.............7 Eighty-five Percent Expect Constant or Higher Residential Prices in the Next 12 Months...8 Buyer Traffic Continues to Outpace Seller Traffic.....9 Thirty-Three Percent of Houses Sold in One Month .........................9 Distressed Sales Continued to Decline in Market Share...10 Distressed Real EstateBelow Market Prices......11 Property Condition Affects Selling Price of Distressed Properties.......11 Section 2: Buyer and Seller Characteristics Cash Sales: 27 Percent of Residential Sales.........13 First Time Buyers: 34 Percent of Residential Buyers ..........13 Relocation Buyers: 15 Percent of Residential Market.......14 Residential Sales to Investors: 16 Percent of Residential Market .....14 Second Home Purchases: 11 Percent of Residential Market.............15 Mortgage Down Payments....16 REALTORS Continue to Report Rising Rents for Residential Properties........16 International Transactions : Two Percent of Residential Market......17 Section 3: Current Issues AppraisalsA Continuing Problem.....18 Tight Credit Conditions....18 Section 4: Recent NAR Articles Home Price Update Lawrence Yun............20 Low Rates, But Who Can Get Them?Ken Fears...22 REALTORS CommentsJed Smith.....24 RRALTORS Commercial Markets Maintain Momentum in Second Quarter 2012George Ratiu.25

SUMMARY Real Estate Markets Continue to Recover

Gay Cororaton and Jed Smith The REALTORS Confidence Index (RCI) report provides monthly information pertaining to expectations about overall market conditions, buyer/seller traffic, price, buyer profiles, and issues affecting real estate. The July edition is based on responses of over 3,400 REALTORS to a survey conducted during June 25 July 30, 2012.1 All real estate is local: conditions in specific markets may vary from the overall national trends presented in this report. The REALTORS current confidence index declined slightly in July even as the level of existing home sales and prices showed an ongoing recovery. Based on respondents comments, several factors appear to be constraining the recovery. REALTORS reported that buyers continued to face tight mortgage standards, a stringent and slow bank approval process, low appraisal values, low inventory relative to demand, and multi-bidding situations in some cases. Sellers were reported as reluctant to list at the new normal level of prices, and in addition, not enough bank-owned inventory is being released to relieve the tight supply. There continues to be a concern that a big release of shadow inventory could depress prices in the future. The Current Conditions Confidence Index declined in July for all types of residential property after a surge earlier in the year. Still, the RCI-SF (single family) current index is at 54.0 which means that expectations are slightly above moderate (an index=50 indicates moderate expectations). The current confidence indexes for for the townhouse and condominium markets remain below moderate.
July 2012 REALTORS Confidence Index Current Conditions
70.0 60.0 50.0

SF: 54 TH: 35 Condo 29

40.0 30.0 20.0 10.0 0.0

Nov08 Nov09

Aug10

Nov10

Feb11

Nov11

Feb08

Feb09

Feb10

May08

Aug08

Aug09

May09

May10

May11

Aug11

Feb12

SF

TH

Condo

There were 3,409 respondents to the July survey, which was sent to about 50,000 REALTORS.

May12

Prices continued to hold up with 64 percent of REALTORS reporting constant or increasing prices compared to the same time a year ago; 85 percent of REALTORS expect constant or rising prices in the next 12 months. Buyer traffic tapered off in July , but was still above moderate, at 56; meanwhile, seller traffic index was below moderate at 4, resulting in a low inventory level relative to demand. The percentage of REALTORS reporting distressed (foreclosed and short sales) property sales was at 24% , compared to approximately a third a year ago.

Market Outlook The Six-Month Outlook Confidence Index for all property types fell in July. However, the single family index still reflects above moderate expectations for the direction of this segment of the market in the next 6 months (an index of 50 indicates moderate expectations).
July 2012 REALTORS Confidence Index Six-Month Outlook
70.0

60.0
50.0 40.0 30.0 20.0 10.0

SF: 56 TH: 38 Condo 32

0.0
Nov08 Nov09

Aug10

Nov10

Feb11

Nov11

Feb08

Feb09

Feb10

May08

Aug08

Aug09

May09

May10

May11

Aug11

Feb12

SF

TH

Condo

NARs latest projects continued increases in residential sales along with continued price improvement (although sales and price trends will vary from market to market). Existing home sales are projected to expand to 4.63 million in 2012 ( 5 million in 2013) while the median price for existing home sales is forecasted at hit $173,000 in 2012 ( $182,000 in 2013). The forecast is based on an economy expected to grow at 2 percent in 2012 (2.9 percent in 2013), which can create 1.5 million jobs in 2012 (2.3million jobs in 2013). [See forecast on NAR Research at http://www.realtor.org/sites/default/files/reports/2012/embargoes/2012-06-phsa5625a54ef4c4e0627448b63e137a4a9/forecast-08-2012-us-economic-outlook-presentationslides-06-26-2012.pdf)

May12

Existing Home Sales: Actual and Forecast Outlook for 2012: 4.63 Million Home Sales
8000000
6000000 4000000 2000000 0

250000 200000 150000

100000
50000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan
Median Price Forecast

Economic Factors Affecting the Housing Market Shadow inventory is still high, but it is about 1 million fewer than two years ago and is anticipated to steadily diminish over time. The falling share of distressed properties over time may lead to a higher median price for all homes. Housing starts are project to rise by 25% in 2012 followed by a 50% jump in 2013. This will lead to new home sales surpassing 600,000 by 2013. Job generation has been disappointing, with the unemployment rate at 8.2% in June. The slowdown in economic growth especially in the Euro countries and the possibility of recession in Europe remain potential problems. The potentially adverse economic effect of the fiscal cliff(expiration of Bush tax cuts and mandated spending cuts in the absence of legislative action) is also a political as well as an economic issue. Projections are based on muddling through the problem.

1999 - Dec 2000 - Aug 2001 - Apr 2001 - Dec 2002 - Aug 2003 - Apr 2003 - Dec 2004 - Aug 2005 - Apr 2005 - Dec 2006 - Aug 2007 - Apr 2007 - Dec 2008 - Aug 2009 - Apr 2009 - Dec 2010 - Aug 2011 - Apr 2011 - Dec 2012 - Aug 2013 - Apr 2013 - Dec
Twelve Month Roll Forecast

Prices by Month, Not Statistically Adjusted Outlook Projecting Improvement

What Does This Mean For REALTORS? Compared to a year ago the real estate markets continue to recover in terms of sales and price although the REALTORS Confidence Indexes have declined slightly, possibly as a result of decreased available inventories and an uncertain economic outlook. The major issues right now are mortgage availability and appraisals. Interest rates continue to be reasonable. The major cloud overhanging the economy is the budgetary/fiscal cliff issue.

I. Market Conditions
REALTORS Confidence Index Drops in July The REALTORS Confidence Index (RCI) is an indicator of housing market strength based on a monthly survey sent to over 50,000 real estate practitioners. Respondents indicate whether conditions are, or are expected to be "strong" (100 points), "moderate" (50 points), and "weak" (0 points). A score of 50 for the index is the threshold between strong" and weak conditions. The REALTORS Confidence Indexes reflect current market conditions and expectations for the next six months for single family, townhouse, and condo markets. The RCI indexes fell across all markets in July, although the indexes for single family property remains above moderate. Among the factors mentioned by REALTORS as adversely affecting the real estate markets are unrealistic appraisals, difficulties in getting mortgages, and limited availability of inventory in some markets.

July 2012 REALTORS Confidence Index Current and Six Month Outlook: Single Family Properties
70.0 60.0 50.0 40.0 30.0

Current: 54 Outlook: 56

20.0
10.0 0.0

Nov08

Nov09

Nov10

Feb11

May08

Nov11

Feb08

Feb09

Feb10

May09

May10

May11

Feb12

Current Confidence

Confidence in Outlook

May12

Aug10

Aug08

Aug09

Aug11

July 2012 REALTORS Confidence Index Current and Six Month Outlook: Townhouse Properties
50.0 40.0 30.0

Current: 35 Outlook: 38

20.0
10.0 0.0

Current Confidence

Confidence in Outlook

July 2012 REALTORS Confidence Index Current and Six Month Outlook: Condo Properties
40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0

Current: 28.9 Outlook: 32

Current Confidence

Confidence in Outlook

REALTORS Continued to Report Constant or Higher Prices on Recent Transactions Compared to a Year Ago Home prices continue to firm up as demand is reported to be increasing faster than supply. For the current survey, 64 percent of respondents to the RCI reported constant prices (29 percent) or rising prices (35 percent). About 4 percent reported seeing price increases of 10 percent or more. This is consistent with the rising median price of existing home sales, which NAR reported as rising to $ 189,400 in June from $ 180,300 in May.

Prices on Recent Transactions Relative to a Year Ago

35% 30% 25% 20% 15% 10% 5% 0%

2012 Mar

2012-Apr

2012 May

2012 Jun

2012 Jul

Eighty-five Percent of Responding REALTORS Expect Constant or Higher Residential Prices in the Next 12 Months. Eighty-five percent of respondents reported the expectation of constant or higher prices in the next year.

REALTORS Price Expectations--Next 12 Months

100%

80%
60% 40% 20% 0%

Buyer Traffic Continues to Outpace Seller Traffic Buyer and seller traffic indexes continue to indicate an imbalance between demand and supply. The buyer traffic index declined slightly although the index reflects above moderate expectations. Buyer traffic is likely adversely affected by the stringent lending and appraisal environment, as well as a continued slow economy and concerns over job availability and
8

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206
Constant/Rising Prices Falling Prices

insecurity (one REALTOR reported having 4 clients who lost their jobs!). Meanwhile, the seller traffic index has remained relatively constant. Potential sellers appear to be holding back from listing their properties, possibly still recovering from the housing market of the Great Recession.

Indexes of Buyer and Seller Traffic for July 2012

70.0 60.0 50.0 40.0 30.0

Buyer: 56 Seller: 41

20.0
10.0 0.0

201104

201204

200801

200804

200807

200810

200901

200904

200907

200910

201001

201004

201007

201010

201101

201107

201110

201201
5%

Buyer Traffic

Seller Traffic

Thirty-Three Percent of Houses Sold in One Month Time on the market when a property is sold has been declining. Approximately a third of REALTORS noted that recently sold properties were on the market for less than a month when sold, and 59 percent were sold within 3 months. The proportion of REALTORS who responded that the house had been on the market for 6 months or more when sold fell to 21 percent from 30 percent a year ago.

35%

33%

Time On Market When Sold

30%
25% 20%

15%
10% 5% 0%

14%

12% 9% 6% 5% 7% 9%

<1 mo 1-2 mo 2-3 mo 3-4 mo 4-5 mo 5-6 mo 6-9 mo 9-12 mo >=12 mo

Apr-12

May-12

June-12

12-Jul

201207

On Market 6 Months or More

31% 30% 30%
26% 28% 29% 28% 29% 28% 26% 28% 27% 23% 24%

21%

Distressed Sales Continued to Decline in Market Share Twenty-four percent of respondents reported selling distressed property (foreclosed and short sales), lower than last years figure of 31 percent. Cash sales accounted for 39 percent of distressed sales. Respondents reported multi-bidding on foreclosed and short sale properties and also experiencing a frustrating lending and appraisal process.
Percent of Respondents Reporting Distressed Sales
60% 50%

Foreclosed: 12% Shortsale: 12%

40%
30% 20% 10% 0%

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206
Foreclosed Short Sale

10

Distressed Real EstateBelow Market Prices Distressed properties typically sell below the market price of similar non-distressed properties, a similar property being noted as being in a distressed condition and possibly poorly maintained. The level of discount fluctuates depending on sales location, type of property, and property condition. Foreclosures have been selling at approximately 20 percent below market: 17 percent as of July 2012. Short Sales have been selling at approximately 15 percent below market: 15 percent as of July 2012.

Distressed Sales Mean Percentage Discount

25.00

20.00
15.00 10.00 5.00

0.00
200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206
Foreclosed Shortsale

Property Condition Affects the Selling Price of Distressed Properties The discount to market experienced by distressed property is affected by the propertys physical condition. Well maintained properties tend to sell at a lower discount than is the case for properties in poor condition. The un-weighted average price discounts to market are presented for the time periods August 2011 through July 2012. Prices for distressed houses with above average condition are discounted at about 13 15 percent, with the discount increasing significantly depending on property deterioration.

11

Percent Price Discount by Property Condition

Unweighted Average for August 2011 to July 2012 Surveys
40.0 36.1 36.1

30.0 20.0
10.0 0.0 1-Above average 2-Average 3-Below average 15.5 13.5 17.2

29.4 20.6
13.3 24.6 17.1

4-Well below 5-Bottom 1% ave

Foreclosed

Shortsale

Property Discounts as a Function of ConditionJuly Data

Mean Percent Below Market Value July 2012 RCI Survey House Condition 1-Above average 2-Average 3-Below average 4-Well below ave 5-Bottom 1% Foreclosure 14.7 14.0 21.8 23.4 27.3 Short Sale 12.9 12.5 17.0 30.4 -

12

II. Buyer and Seller Characteristics

Cash Sales: 27 Percent of Residential Sales Approximately 27 percent of REALTORS reported making cash sales in July, slightly dowm from 29 percent in June. The percentage of cash payments fluctuates from month to month, currently being towards the upper end. The high preponderance of all-cash sales appears to be due to stricter mortgage/underwriting standards, and purchases by investors and second home buyers, who frequently pay cash, possibly edging out buyers needing to secure a mortgage.

Cash Sales as Percent of Market

40% 35% 30% 25% 20%

July: 27%

15% 10%
5% 0%

First Time Buyers: 34 Percent of Residential Buyers Approximately 34 percent of REALTORS who responded reported making a sale to first time home buyers, slightly higher than the June figure of 32 percent. Normally first time
buyers are in the neighborhood of 40 percent of total residential sales, according to NARs Profile of Home Buyers and Seller. The proportion of first-time homebuyers hit a peak of approximately 50

percent in 2009. About 11.3 percent of REALTORS who made a first time home buyer sale reported a cash sale. The relatively low level of first time buyers in part reflects the difficulty of securing mortgage financing and/or the delay with distressed sales. REALTORS have also noted that that investors offering all-cash sales to sellers have crowded out first-time buyers in some cases, particularly in the case of distressed properties. Unsuccessful first-time buyers typically continue their property search, sometimes making a number of bids before securing a property.

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206

13

First Tme Buyers as Percent of Total Buyers

60% 50%

July: 34%

40%
30% 20% 10% 0%

Buyers Due to Relocation/Job Changes: 15 Percent of Residential Market REALTORS reported that 15 percent of residential sales were to buyers for relocation purposes, i.e., a job move, retirement, etc. Approximately 19.5 percent of REALTORS who made a sale to a relocation buyer reported a cash sale.

13%

Residential Sales to Investors: 16 Percent of Residential Market REALTORS reported that investors accounted for 16 percent of total residential sales in July, down from 19 percent in June. Investors have reported that in many cases they can obtain a positive cash flow converting properties to rental units. Approximately 69 percent of respondents who reported a sale to an investor reported a cash sale.

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206

Relocation Buyers as Percent of Market

14% 14%
15% 15% 15% 15%

14% 14%

15% 15% 15% 13% 11% 12% 13%

14

Sales to Investors as Percent of Total Sales

30%

July: 16%
25% 20% 15%

10%
5% 0%

Second Home Purchases: 11 Percent of Residential Market REALTORS who reported making a second home sale accounted for 11 percent of responses. Approximately 51percent of second home sales were for cash.

12% 11% 10%

201009 201010 201011 201012 201101 201102 201103 201104 201105 201106 201107 201108 201109 201110 201111 201112 201201 201202 201203 201204 201205 201206 201207

200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206

Second Home Buyers as Percent of Market

13%

14% 14% 13% 13% 13% 13%

10%

13%13% 12% 12% 12% 12% 12% 11% 11% 11% 11% 10%

15

34 Percent of Residential Sales Involved Mortgage Down Payments of 20 Percent or More Mortgages with a down payment of 20 percent or more accounted for 36 percent of all mortgage down payment sales that were reported by REALTORS who responded. Down payments of 11-19 percent slightly rose to 6 percent.

Percent of Transactions by Downpayment Levels

34%
37% 36% 32% 36% 35% 34% 35% 34% 34% 34% 33% 32% 37% 36% 34%

5% 4% 4% 5% 4% 5% 5% 4% 5% 4% 4% 5% 5% 5% 4% 6%

11-19%

>=20%

REALTORS Continued to Report Rising Rents for Residential Properties Higher residential rents compared to a year ago were reported by 57 percent of REALTORS, up from 54 percent in June. Lower rents were reported by 10 percent of REALTORS who responded, and constant rents were reported by 17 percent. The continued trend of rising rents increases the value of homeownership.

Percent of REALTORS Reporting Changing Rents Compared to 12 Months Ago

60% 50% 40% 30% 20%

10%
0%

201110

201111

201101

201102

201103

201104

201105

201106

201107

201108

201109

201112

201201

201202

201203

201204

201205

201206

Higher Rents

Lower Rents

Constant rents

16

201207

International Transactions: Two Percent of Residential Market Approximately 2 percent of REALTORS who responded reported sales of U.S. residential real estate to foreigners not residing in the U.S. Approximately 73 percent of respondents who reported transactions with international clients reported cash sales. Information on international activities is available at http://www.realtor.org/research/research/reportsintl.

International Sales as Percent of Market

5% 4% 4%

July: 2%

3%
3% 2% 2% 1% 1%

0%

17

III. Current Issues

AppraisalsA Continuing Problem Appraisals continue to be a problem. A number of REALTORS reported that appraisal values are not keeping pace with the appreciation in market values. Respondents also reported encounters with out-of-town appraisers who have little knowledge of the neighborhood/local conditions. Respondents also reported slow turn around time from appraisers. Thirty-four percent of REALTORS reported having had a problem with an appraisal in the past 3 months. Approximately 10 percent of the respondents reported contract cancellation, 10 percent reported a delay, and 14 percent reported that the appraisal problems led to lower prices.

REALTORS Reporting Appraisal Problems With A Contract in Past 3 Months

50% 40% 30% 20% 10% 0%

July: 34%

Contract Cancelled

Contract Delayed

Negotiated to Lower Price

Tight Credit Conditions and Slow Lending Process One of the most frequent comments by REALTORS was a concern over unreasonably tight credit conditions. Respondents indicated that credit conditions continue to be too tight, that lenders are taking too long in approving an application, and that information required from borrowers is excessive. Some respondents expressed frustration that financial institutions appear to be focusing on making loans only to individuals with the highest levels of credit scores. It is well known that a number of financial institutions have weak loan portfolios due to previous lending standards now perceived as having been too loose. The lending pendulum appears to have swung to the other extreme in some cases, resulting in some institutions decreasing their overall lending efforts and/or imposing unrealistically high credit standards. The meaning for REALTORS is clear: If a potential buyer is turned down by one bank, try, try, try again at a different financial institution. For example, respondents noted that regional and community banks as well as credit unions were potential alternative sources of mortgages.

18

In 2005a time of normal residential real estate markets before the Great Recession-approximately 43 percent of Fannie Maes and Freddie Macs loans went to applicants with credit scores above 740. The current RCI data shows that 54 percent of residential real estate loans have FICO scores above 740. FICO Scores: Recent Scores in 2012 vs. Scores in 2005
lt 620 60% 49% 57% 53% 740+ 58% 54% 42% 44%

2%

2%

1%

1%

1%

1%

5%

4%

19

IV. Recent NAR Articles

Home Price Update Lawrence Yun, Senior Vice President and Chief Economist

Home prices keep going up, according to the latest data from the Federal Housing Finance Agency. Prices are up 3.7 percent from one year ago to May. The Mountain states covering Arizona, Nevada, Idaho, Montana, Utah, Colorado, and New Mexico showed the strongest gains with a 6.3 percent annual gain. Read the FHFA press release here > The following table shows home price trends according to various separate measurements using different methodologies. Though the magnitudes differ, one consistent theme is that home prices have been rising in recent months. No doubt there are markets with continued falling prices, but now there are more markets with rising prices, which thereby raises the national price index. Another point to note is that all price measurements are lagging indicators. What is happening now in late July is likely to even further strengthen home values because of tightening inventory conditions. Qualitative information, such as foot traffic at open houses, the number of phone inquiries, and the degree of seriousness of buyers are all rising according to REALTOR member survey of market conditions. Though some homebuyers are now entering the market a step late they are still nonetheless essentially buying at record high affordability conditions. Of the below price indices, Case-Shiller and FHFA are useful to assess broad market price changes as they utilize the repeat price methodology. But they are not all that timely. NAR and HUD data are good to know for brokers and homebuilders as they show direct business revenue and the economic impact of a home sale. However, for REALTOR members and serious consumers, the data to monitor closely is LPS and CoreLogic because lender business decisions are made from these valuation models. There are numerous other price information data out there on the web and they generate some silly fun, though they should not be taken seriously since business decision makers do not take them seriously. Now, one big drawback of rising prices aside from buyers who wanted to pick something up at the absolute bottom is that appraisals may not be catching up in a timely fashion. Thus, appraisal related delays could be with us for the near term. Those REALTOR members with access to NARs RPR should print out localized information to share with appraisers and lenders. As always any special non-tangible information about the property should also be shared with appraisers and lenders.

20

21

Low Rates, But Who Can Get Them? Ken Fears, Manager, Regional Economics The average rate for a 30-year fixed rate mortgage hit another all-time low last week according to Freddie Mac. Last weeks average rate was 3.49 percent, breaking the 3.5 percent threshold and more than a full point below the 4.55 percent average from a year ago at this time. While the historic rate means great things for affordability, it also appears to be historically difficult to qualify for these record low rates. Record rates are a boon to consumers. The monthly payment on a $200,000 mortgage at the rate reported by Freddie Mac last week translates into a monthly principle and interest payment of $897 compared to $1,019 last year at this time. That is a savings of $122 per month and more than $13,000 over a 9-year period, the average tenure of a homeowner. That all sounds great, but the clutch of would-be buyers who qualify for these rates tightened in recent years. Based on data provided by Amherst Securities [1] and Ellie Mae, the current average [2] FICO scores on loans (originated) by the FHA was 707 in May, which is an improvement from 2011 when the rate averaged 709. However, the average FICO score for a denied loan application was 669 in May, well above the 656 average for originated loans back in 2001 and above to the 660 [3] mark used by the Office of the Comptroller of the Currency (OCC) to delineate prime loans.

22

Likewise, standards on conventional loans, those financed at Fannie Mae and Freddie Mac, increased from an average of 711 in 2001 to an average of 765 in May of this year. Whats remarkable is that the average FICO of a rejected purchase application was 724 in May, well above the average FICO of an originated loan back in 2001. Data for average characteristics of mortgages that are originated do not offer a full picture of the tightness of underwriting. However, the data from Ellie Mae which provides insight into the characteristics of denied loan applications delivers more insight into how tight overall underwriting standards are. It may be the case that the average FICO does not account for other factors that disqualify a borrower such as a low downpayment, difficulty documenting income (e.g. workers without payroll stubs like consultants or contractors) or high debt-to-income (DTI) ratios. However, a high average FICO for denials would suggest limitations on underwriters ability or willingness to take into account mitigating circumstances for low downpayments or high DTI ratios during the origination process. Finally, the high average FICO of denied applicants suggests an impact on would-be mortgage applicants. Tight underwriting standards may already have signaled to less creditworthy borrowers that they are likely to be rejected and thus they may not apply for loans. Likewise, credit overlays such as the GSEs loan level pricing adjustments may also preclude would-be applicants with less than pristine credit, high DTIs like first-time buyers, or small downpayments from applying for loans as these charges result in higher upfront costs or higher effective mortgage rates. Tight underwriting in the current environment comes as little surprise to most practitioners. This data provides better insight to how current underwriting compares historically and more importantly it provides insight into the quality of borrowers that are being denied. While home sales have experienced their strongest spring in years, the over correction in lending standards is holding the housing market back from a robust recovery. [1] Amherst Securities analyzed the Corelogic dataset (purchase and refinance) to estimate average borrower characteristics from 2001 to 2011. Monthly data on purchase applications and originations provided by Ellie Mae is used to supplement the Amherst analysis for 2012. The Corelogic database represents roughly 80 percent of outstanding mortgages, while the Ellie Mae data survey covers roughly 20 percent of annual mortgage originations. [2] Weighted averages for both denied and originated loans at the FHA and GSEs were created using purchase and refinance originations weighted by the national shares reported by Ellie Mae. Consequently, the estimates may slightly understate the FICOs of the GSEs because of the high current share of GSE refinance volumes. [3] http://www.occ.treas.gov/publications/publications-by-type/other-publicationsreports/mortgage-metrics-2012/mortgage-metrics-q1-2012.pdf

23

Realtor Comments in the Survey Jed Smith, Managing Director, Quantitative Research Every month REALTORS provide a variety of written, open-ended comments when replying to the RCI questionnaire. Here is a summary of this months comments: Problems with the appraisal process seemed to be the most important issue. REALTORS noted that in areas with rising market prices appraisals tend to come in at below market price. In addition, there are problems with delays in the timely completion of appraisals, a lack of competency in the appraisals due to the use of appraisers who are not familiar with the specific area, and the failure by appraisers to take supply and demand issues into account when rendering an estimate. The second most cited group of problems were the difficulties in obtaining a mortgage. Banks were criticized for requiring excessive paperwork for the underwriting process, for requiring excessivelyhigh credit scores, and for being excessively risk averse. Bank delays in the short sale process were mentioned as causing major delays. As the real estate markets recover, inventory is in short supply in some areas. This is cited as a specific reason why sales are lower than would otherwise be the case in some areas. A number of REALTORS noted that condos have become very difficult to sell due to FHA issues. Other market characteristics included substantial levels of multi-bidding for realistically priced homes, the large number of people interested in obtaining a rental unit, and buyers making all-cash offers.

24

REALTORS Commercial Markets Maintain Momentum in Second Quarter 2012 George Ratiu, Manager, Quantitative & Commercial Research Commercial real estate in REALTOR markets continued on a stabilizing path during the second quarter of 2012. Based on the results of the July Commercial Real Estate Market Survey, market activity at the national level posted improvements compared with the first quarter of the year. On the leasing side, activity rose four percent over the previous quarter, indicating rising demand. On the supply side, new construction is showing signs of improvement. Vacancies declined for all property types, except office. Industrial rates declined 15 basis points, to 15.5 percent while retail rates decreased 50 basis points, to 15.8 percent. Multifamily properties recorded vacancies of 7.2 percent in the second quarter, down 14 basis points from the first quarter. Office availability rates rose from 18.0 percent in the first quarter to 24.7 percent in the second quarter.

Vacancy Rates
30.0%

25.0%

20.0% Office 15.0% Industrial Retail 10.0% Multifamily Hotel 5.0%

0.0% 2010.Q1 2010.Q2 2010.Q3 2010.Q4 2011.Q1 2011.Q2 2011.Q3 2011.Q4 2012.Q1 2012.Q2 Source: National Association of Realtors

Declines in availability led to lower levels of rent concessions. The decline in rental rates also continued slowing, moving towards equilibrium. In terms of space size, tenant demand for space increased in three size categories: 2,500-4,999 sq. ft.; 7,500-9,999 sq. ft.; and 10,000-49,999 sq. ft. Lease terms remained steady, with 36-month and 60-month leases capturing the bulk of the market.

25

Average Rental Space Demanded During Last Transaction

Over 100,000 sq ft 2012.Q1 50,000 - 100,000 sq ft 10,000 - 49,999 sq ft 7,500 - 9,999 sq feet 2012.Q2 5,000 - 7,499 sq feet 2,500 - 4,999 sq feet Under 2,500 sq feet 0% 20% 40% 60% 80% 100%

Investment sales rose 3.0 percent from the second quarter. Nationally, 69.0 percent of REALTORS reported completing a sales transaction during the quarter. Compared with a year ago, sales advanced 12.0 percent, indicating increased investor interest. Prices continued their decline, decreasing five percent compared with a year ago. Cap rates rose for all office properties, except hotels. Cap Rates
15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% Office Industrial Retail Multifamily Hotel Development

Source: National Association of Realtors

The average transaction price remained steady at $1.1 million in the second quarter. Commercial practitioners continued to find financing as the top obstacle in closing deals, followed closely by the pricing gap between buyers and sellers. Based on respondent comments, market trends have been geographically distinct, with select regions posting marked improvement in leasing and sales activity. For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.
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