Economic Issues & Residential Real Estate Trends Forum

November 11, 2011

Local Market Reports

Free to members Contrast national perspective with local conditions Create more accurate picture of local conditions
Frame the discussion for the sub-market

How to Use
Agents share with buyers/seller clients Brokers use to direct agents Focused on the big picture at local level
Not geared toward pricing

Sections
Metro prices and State Sales volume Demand: Employment and unemployment Supply: Construction, Foreclosures, and Delinquencies Affordability measures Mortgage Market Special Topics

Headline Trends
Long and short time horizon Level and Growth Rates

Zooming In.

Demand
Employment Unemployment Industry Strengths Local Economic Index

Supply
Construction is traditionally a driver of housing supply

Supply
Foreclosures and delinquencies are now a large part of the housing inventory

Affordability
Monthly payment/Income as well as price/income

Mortgage Market

Explanation of mortgage rate trends

Special Topics.
This section changes topic each quarter to address timely information

Local Market Reports: Availability Limited by the data: metro areas

Metro areas defined by the Federal government and consistent across all groups that create statistics Data is created quarterly reports are quarterly

Employment, construction, mortgage information not available for all markets

WWW.Realtor.org/Researc h

Economic and Housing Market

OUTLOOK
Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS
Presentation at Residential Real Estate Forum NAR Annual Convention Anaheim, CA

November 11, 2011

Strange World
Great!
Best Affordability Conditions National home prices have stabilized for 2 years Lowest newly constructed inventory Huge Cash Reserves at Banks Record High Profits in Financial Industry in 2010 and just as good in 2011 Federal Reserve Monetary Stimulus to encourage more lending Consumers work hard to demonstrate financial responsibility

What the Heck?

No Pick-up in Home Sales Everyone believes home values have been falling throughout Why? Housing Starts still Dead Cash not circulating into the economy Bank stock prices in the tanks Regulation to discourage lending Some must pay higher borrowing cost because they are jumbo

Strangeness Continued
Great! What the Heck?

Less risk of a further price decline after 33 More risk-based lending and added fees percent price drop to protect against price declines Fannie and Freddie are making internal self-sustaining profits on new mortgages Investors are seeking bargains Fannie and Freddie are still reporting net losses because legacy assets Not enough foreclosed properties on average taking more than a year to reach the market Very Low Consumer Confidence 1-year Treasury borrowing rate is 0.2% (Save money to get essentially nothing)

Improving Job Market Inflation is 4% (Everything is 4% more expensive)

Best Affordability Conditions

Monthly Existing Home Sales Flat Line outside of Tax Credit No Pick Up Despite Best Affordability
Tax Credit Impact

20-Metro Case-Shiller Price Index Remarkable Stability from 2009

National NAR Median Price and National Case-Shiller Price Index

NAR Price is the median single-family in $ thousand Case-Shiller is an index value

Local Market Trends

Prices Up
Bismarck Boston Buffalo San Diego San Francisco Washington, DC

Prices Down
Atlanta Chicago Las Vegas Miami Phoenix Portland, OR

Newly Built Home Inventory

(40 year lows)
In thousands

U.S. Housing Starts

Lowest since the Second World War in the past three years

Housing Starts in thousands

Existing Home Inventory

(Elevated but Falling even as distressed and shadow inventory flows in)

Financial Industry Corporate Profits

KBW Bank Stock Index

(still down 64% from pre-crisis levels)

Federal Reserve Loose Monetary Policy

via Fed Funds Rate and MBS purchase

Banks/Regulators Restricting Credit

(Average Credit Scores of Approved Loans)

Normal Fannie Freddie FHA 720 720 650

2009 761 757 682

2010 762 758 698

If Normal 720 720 660

15% to 20% Higher Sales

Demographics of Recent Buyers

2011 Profile Median Age Gross Household Income Household Composition 43 $80,900 64% married couples 18% single females 10% single males 7% unmarried couples 19% 2010 Profile 39 $72,200 58% married couples 20% single females 12% single males 8% unmarried couples 14%

Own a 2nd Home

First-Time Home Buyer Share Dropped

Source: 2011 NAR Home Buyers and Sellers Survey

Loan Limit Changes to 42 States

More People need to take out Jumbo Mortgages CBO Lower taxpayer risk if loan limits are raised America today Work hard, be financially responsible then you will get punished ??? Conforming Rate = 4.1% Jumbo Rate = 4.8%

Price Decline Potential?

If prices fall more underwater homeowners more default risk More risk to decline when there is a bubble Less risk to decline after a crash Many metrics suggest price decline potential is minimal with more price increase potential Yet Banks/Regulators have been pursuing easy lending during bubble and tight lending after crash

Home Price vs Rent Price Change Potential?

(index = 100 in 1980)

Rent is CPI Primary Rent and Price is NAR median price

CPI Rent is Rising Price Change Potential?

(3-month moving avg., annualized rate)

Rental Households

Rents expected to rise 7% to 10% in the next two years Home prices should therefore rise in the next two years

Annual Household Formation Future Rent Pressure?

(3 separate Census data)
In millions

Household Formation leads to increase ownership and renters; Could begin to return to normal of at least 1 million from 2012.

Home Price vs Construction Cost Price Change Potential?

Price is NAR Single-family median price and Construction Cost is Census Construction Cost Weighted Price Index

Home Price to Income Ratio Price Change Potential ?

(Median single-family home price and median household income)

Cost Comparisons over 30 years

Item Price Index in 1981 87.2 84.7 91.6 103.6 75.8 78.6 $598
(14% mortgage rate)

Consumer price index Rent index Food price index Gasoline price index College tuition index Medical care index Monthly mortgage payment on a median priced home

Price Index in 2011 226.3 254.3 229.6 308.4 601.3 401.4 $698
(4% mortgage rate)

% Change

160% 200% 150% 197% 693% 410% 17%

Fannie/Freddie Future
Disastrous Outcome as government-backed Private Corporation
Perverse incentive to gamble with taxpayers money

Good Outcome as government corporation

Pre-1970s no problem Post-2009 no problem Government corporations generate enough internal profit for selfsustainability Assure liquidity on a very simple non-innovative mortgage product (e.g., fixed rate mortgages that meets basic underwriting standards)
Grandparents 30-year mortgage same as Grandchildrens 30-year mortgage

Need to pursue counter-cyclical policy less fees in downturn and more fees during boom/bubble Never trust government to produce innovative products

Fannie and Freddie Performance Mortgage Default after 18 months

Fannie Mae Vintage 2002 2003 2004 2005 2006 2007 2008 2009 Cumulative Default Rate after 18 months 3.1% 2.5% 4.6% 4.8% 11.6% 28.7% 12.6% 1.2% Freddie Mac Vintage 2002 2003 2004 2005 2006 2007 2008 2009 Cumulative Default Rate after 18 months 2.7% 1.2% 2.0% 1.8% 6.0% 22.3% 13.7% 1.1%

Source: Federal Housing Finance Agency

Investors want Deals

All-cash record high at 30% to 35% of all sales
Multiple bidding becoming common on foreclosed properties (though not on short-sales) Financial asset recovery helping with cash Rental income beats putting money in the bank Anticipating rising home prices
Opens up lending more home sales Boost consumer confidence more home sales Further boost home prices and rate of return on investment

Hedge against future inflation alternative to expensive gold Not enough foreclosed homes for sale?

Expensive Gold Price (Hedge against Inflation?)

Will Investors shift money to alternative inflation hedge instrument to real estate?

Florida Home Sales Rising despite/because of many distressed properties

Arizona Home Sales Rising

U.S. Existing Home Sales No Meaningful Recovery

New downwardly revised figures to come out soon Re-benchmarking process to assure better accuracy Overtime, MLS figures get inflated due to double-counting issues, flippings, and fewer FSBOs

Total U.S. Payroll Jobs Modest Recovery

(2.2 million job creation from low point in 2010)
In thousands

High Unemployment Rate

Source: BLS

Economic Expansion
(GDP growth after recession should be sustained 4% to 5% not 1% as in 1st half in 2011)

Desired Pace

Consumer Confidence in the Tanks

North Dakota Jobs Everywhere

(Starting Wage at McDonalds $15 to 18 per hour)
In thousands

CPI Inflation Rising

(% change from one year ago)

Social Security COLA forecast to rise 3.5% in 2012 Workers Wage to rise by 1.7% in 2011

Broad Inflationary Pressure

Indicator Consumer Price Index Producer Price Index (Finished Product) Producer Price Index (Intermediate Product) Producer Price Index (Crude Product) Dow Jones Commodity Spot Price Index Gold Price % change from one year ago 3.9% 7.0% 10.8% 21.1% 7.2% decelerating Off Record High Price but very high

CPI Inflation and 10-year Treasury Yield

(Rare for Inflation to be higher than 10-year yield)

10-year Treasury (red)

CPI Inflation (blue)

10-Year Treasury yield at 2.2%; CPI Inflation at 3.9% If Inflation does not turn down then expect rising interest rate environment.

Forecast
2012 GDP Growth Net New Jobs CPI Inflation Rent Growth Home price Growth Home Sales Mortgage Rate 2.0% to 2.5% 1.7 to 2.2 million 3.0 to 3.5% 3.0% 2.0% 4.0% 4.5% 2013 2.3% to 2.8% 2.0 to 2.5 million 3.0 to 3.5% 3.5% 3.0% 6.0% 4.8% 2014 3.0% to 3.5% 2.5 to 3.0 million 2.5 to 3.0% 3.5% 4.0% 6.0% 5.5%

Special Local Market Forecast for 2012

North Dakota continuing 3% to 5% price increase
Jobs, Jobs, Jobs, Everywhere 3.3% unemployment rate

South Florida surprising 10% price increase

Slow jobs recovery, but prices are too good to pass up Bargain hunters circling and bidding International Destination attracts foreign buyers (from weakened U.S. dollar)

The End of Strangeness

Let the Prices Recover without obstacles If 5% gain in home price
2 million fewer underwater homeowners Bank lending opens up Consumer confidence about home buying improves Strangeness is past and back towards normalcy

But what could be the obstacles

Rising mortgages rates (market forces of higher inflation and high budget deficit) QRM 20% downpayment rules, loan limit, MID (Washington policymakers)

The Road to Reality

Most Academics, Newspaper Editorials, Think-Tanks
Attacking Homeownership

Tea Party Leave us alone tyranny of the government Occupy Wall Street Someone screwed us tyranny of corporations James Madison
Road to reality runs through politics. Property owners are best defenders against tyranny.

REALTORS and Consumers

Defend ownership Sustainable ownership (not bubble ownership) related to higher student test scores, more volunteer time, civic engagement, etc.

National Museum of American History

4 million no-downpayment VA mortgages for World War II veterans Fueled an unprecedented growth of Americas middle class

For Daily Update and Analysis

FACEBOOK
http://www.Facebook.com/NarResearchGroup

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@NAR_Research

US Macro Overview Dick Peach November 11, 2011

Disclaimer The views I am about to express are my own and do not necessarily reflect the views of the Federal Reserve Bank of New York or the Federal Reserve System.

63

Overview
Nearly two and one half years since the official end of the Great Recession, the economy continues to operate well below its potential. Growth strengthened somewhat in 2011Q3 as temporary restraining factors began to fade. Nonetheless, the economy continues to face significant structural impediments to growth. The legacy of the housing boom and bust. Fiscal contraction at the federal and state and local levels. Inflation rose more than expected over 2011H1, but fundamentals suggest a return to subdued inflation.

64

Personal Income Excluding Current Transfer Receipts Per Capita

(Series Set to 1.00 at NBER Peak)
Ratio
1.12

Ratio
1.12

1969 Cycle
1.08 1.08

1981 Cycle
1.04

1960 Cycle 1957 Cycle

1.04

1.00

1.00

1990 Cycle
0.96

1953 Cycle

2001 Cycle 1973 Cycle

0.96

0.92

0.92

Current Cycle
0.88 -4 -2 0 2 4 6 8 10 12 14 16 0.88

Quarters Since NBER Peak Source: Bureau of Labor Statistics

65

Employment to Population Ratio

Percent Percent

65

65

63

63

61

61

59

59

57

57

55 1980

55 1984 1988 1992 1996 2000 2004 2008 2012

66
Source: Bureau of Labor Statistics

The Distribution of National Income

Percent Percent

70

20

68
Corporate Profits (Right Axis) Q3 Est. (15.0%)

17

66

14 64
Employee Compensation (Left Axis)

11 62 8

60

58 1951

5 1963 1975 1987 1999 2011

67
Source: Bureau of Economic Analysis

University of Michigan Index of Consumer Sentiment

Level Level

120
Current Conditions

120

100

100

80

80

60

Consumer Expectations Consumer Sentiment

60

40 2001

40 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

68
Source: University of Michigan

Consumer Price Inflation

12-Month % Change (Annualized) 12-Month % Change (Annualized)

10

60 50

Total CPI (Left Axis)

CPI- Food (13.7%) (Left Axis)

40 30 20 10

0 -10

CPI- Energy (9.1%) (Right Axis)

-5 2000 2002 2004 2006 2008 2010 2012

-20 -30

69
Source: Bureau of Labor Statistics

Real PCE, Disposable Income and Personal Saving Rate

% Change Year to Year 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 2000 2002 2004 2006 2008 2010 Real PCE Real Disposable Income Personal Saving Rate Percent 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5

70
Source: Bureau of Economic Analysis

Personal Saving Rate and Household Net Worth

Personal Saving Rate (Percent) Personal Saving Rate (Percent)

16 14 12 10 8 6 4 2 0 400
2009Q2 2010Q2 2011Q3 Estimate (486.8 , 4.1) 2006-2007 2011Q2 2008Q2

16 14 12 10 8 6 4 2 0 650

450

500

550

600

Households Net Worth as a Percent of Disposable Income Source: Bureau of Economic Analysis and Federal Reserve Board Note: Fitted line is from 1983Q1 to 2005Q4.

Government Consumption & Gross Investment

% Change Year to Year % Change Year to Year

12 10 8 6 4 2 0 -2 -4 -6 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Real State & Local Government Consumption & Gross Investment (Right Axis) Real Federal Government Consumption & Gross Investment (Left Axis)

12 10 8 6 4 2 0 -2 -4 -6

72
Source: Bureau of Economic Analysis

1003

Stance of Fiscal Policy

Real GDP (Right Axis)

Change in Full Employment Primary Balance as a Percent of Potential GDP Percent Percent

6 4 2 0

6 4 2 0

-2 -4 -6

Change in Full Employment Primary Balance (Percent of Potential GDP) (Left Axis)

-2 -4 -6
73

1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: Bureau of Economic Analysis, Congressional Budget Office

Real Private Residential Investment

(Series Set to 1.0 at NBER Peak)
Ratio 1.50 1981 Cycle Ratio
1.50

1.25

2001 Cycle

1.25

1990 Cycle
1.00 1.00

1973 Cycle
0.75 0.75

Current Cycle

0.50 -2 0 2 4 6 8 10 12 14 16

0.50

Quarters Since NBER Peak

74
Source: Bureau of Labor Statistics

Single Family Housing Market

Level Level

230

200

NAR Months Supply of Single Family Homes on the Market (Right Axis)

13 12 11

170

10

140

CoreLogic Single Family Detached House Price Index (Left Axis)

Buyers Market

8 7 6 5

110

80

50 4 20 1984

Sellers Market
1987 1990 1993 1996 1999 2002 2005 2008 2011

75
Source: CoreLogic, National Association of REALTORS

Price to Earnings Ratios

Ratio Ratio

35

30

25

S&P 500 Composite Price/Operating Earnings Ratio (Left Axis)

Home Price/Rent (Right Axis)

0.75

20 0.5 15

10

0.25

0 1985

0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

76
Source: S&P, BLS, and CoreLogic

Months 11 10 9 8 7 6 5 4 3 2 1
May-04

Average Duration by Performance Status For first mortgage loans originated on or after 2004
Months Foreclosure 11 9 REO 7 5 90+ days delinquent 3 1
May-05 May-06 May-07 May-08 May-09 May-10 May-11
77

Historical and Forecasted Annual Flows (Millions)

Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 60dd into 90dd 0.60 0.63 0.95 1.77 2.77 2.19 1.52 1.29 1.11 90dd to Foreclosure 0.29 0.34 0.57 1.00 1.60 1.73 1.40 1.72 1.23 Foreclosure to REO 0.09 0.13 0.20 0.37 0.45 0.61 1.10 1.86 1.82 Out of REO 0.11 0.12 0.11 0.21 0.34 0.34 0.46 1.83 1.93

78

79

Real Business Investment: Equipment and Software

(Series Set to 1.00 at NBER Peak)
Ratio 1.40 1.30 Ratio 1.40 1.30

1.20 1.10 1973 Cycle

1.20 1.10 1981 Cycle

1990 Cycle

1.00 0.90 2001 Cycle

1.00 0.90

Current Cycle 0.80 0.70 -2 0 2 4 6 8 10 12 14 16 0.80 0.70

Quarters Since NBER Peak Source: Bureau of Labor Statistics

80

Real Business Investment: Nonresidential Structures

(Series Set to 1.00 at NBER Peak)
Ratio 1.20 Ratio 1.20

1.10

1981 Cycle

1.10

1.00

1990 Cycle

1.00

1973 Cycle

0.90

2001 Cycle

0.90

0.80

Current Cycle

0.80

0.70 -2 0 2 4 6 8 10 12 14 16

0.70

Quarters Since NBER Peak Source: Bureau of Labor Statistics

81

Real Exports of Goods and Services

(Series Set to 1.00 at NBER Peak)
Ratio
1.5

Ratio
1.5

1.4

1.4

1.3

1.3

1.2

1990-91 Cycle

1.2

1.1

1973-75 Cycle

1.1

1.0

1.0

1981-82 Cycle
0.9 0.9

2001 Cycle
0.8 -2 0 2 4 6

Current Cycle
0.8 8 10 12 14 16 18 20

Quarters Since NBER Peak Source: Bureau of Economic Analysis

82

Senior Loan Officers Survey

Net Percent Net Percent

100
Tightening Standards for Residential Mortgages

100

75

50

Tightening Standards for Commercial Real Estate

Tightening Standards for Consumer Credit Cards

75

Banks Tightening C&I Loans

50

25

25

-25 1991

-25 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

83
Source: Federal Reserve Board

C&I Loans: All Commercial Banks

% Change 13-week AR
40

% Change 13-week AR
40

30

30

20

20

10

10

-10

-10

-20

-20

-30 2001

-30 2003 2005 2007 2009 2011

84
Source: Federal Reserve Board

Implicit Price Deflator and Unit Labor Costs

% Change 8-Quarter AR
5.0

% Change 8-Quarter AR
5.0

Implicit Price Deflator

2.5

2.5

0.0

0.0

Unit Labor Costs

-2.5 1995

-2.5 2000 2005 2010

85
Source: Bureau of Labor Statistics

TIPS Based Inflation Expectations

Percent 4 5-10 Years Percent 4 November 2: 2.48

1
4-5 Years

November 2: 2.12

0
2-3 Years November 2: 2.09

-1 2006

-1 2007 2008 2009 2010 2011

86
Source: Federal Reserve Board Note: Carry-adjusted.

Monetary Policy Developments

Conventional
Open Market Operations
In September of 2007, FOMC began to reduce the federal funds rate, reaching 0 to 25 basis points by December of 2008.

Forward guidance
December of 2008for some time March of 2009---for an extended period August of 2011---until mid 2013

Unconventionalmonetary policy at the zero bound

November, 2008announce purchases of GSE MBS and debt. March, 2009expand purchases of GSE MBS to $1.25 trillion, of GSE debt up to $200 billion, and announce purchases of up to $300 billion of longer dated Treasury debt. November, 2010---announce purchase of an additional $600 billion of Treasury debt. September, 2011--- maturity extension of Treasury portfolio and reinvestment of MBS prepayments back into MBS.
87

Federal Funds Rate

Percent 7 Percent 7

6 5 4 3 2 1 0 -1 -2 2001
Real Federal Funds Rate Effective Federal Funds Rate

6 5 4 3 2 1 0 -1 -2 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Real Federal Funds Rate = Nominal Federal Funds Rate 12 Month % Change of the Core CPI

88

Source: Bureau of Economic Analysis, Bureau of Labor Statistics

30 Year Mortgage Interest Rate Spreads

Percent Percent

2.8

Primary/Risk Free Spread

2.8

2.4

2.4

1.6

1.6

1.2

Secondary/Risk Free Rate Spread Nov. 25, 2008: Announcement of MBS Program

1.2

0.8

Primary/Secondary Spread

0.8

0.4

0.4

0 2007

0 2008 2009 2010 2011

28
Source: Federal Reserve Board /Federal Home Loan Mortgage Corporation

QEII Led to an Improvement in Financial Conditions

Baa-Aaa Spread
Difference Difference

2-3 Year TIPS Based Inflation Expectations

4.0 3.5 3.0 2.5 2.0 1.5 1.0
Nov. 1: 1.31 Percent Percent

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2005 2006 2007 2008 2009 2010

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 2005 2006 2008 2009 2011
Nov. 2: 2.09

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0

0.5 0.0

2011

2012

Source: Federal Reserve Board

Source: Federal Reserve Board

S&P 500 Composite

Index Index

Nominal Broad Dollar

Index, January 1997 = 100 Index, January 1997 = 100

1600 1500 1400 1300 1200 1100 1000 900 800 700 2005 2006 2007 2008 2009 2010 2011
Nov. 2: 1238

1600 1500 1400 1300 1200 1100 1000 900 800 700 2012

115 110 105 100 95 90 2005 2006 2007 2008 2009 2010
Oct. 28: 96.88

115 110 105 100 95 90 2012

2011

Source: Wall Street Journal

Source: Federal Reserve Board

Note: Trade-Weighed.

90

Reference Slides

91

The Federal Fiscal Pipeline (Current Law)

2012 Expiration of 2 percentage point reduction of employee's share of OASDI payroll tax. Expiration of full expensing of qualified investment put in place.
Reverts to 50% bonus depreciation in 2012 and then reverts to old depreciation schedules in 2013.

Significant reduction of AMT exemption amount. Expiration of EUC and EB unemployment benefits. Provision of Budget Control Act. Caps on discretionary spending (-$27 billion, 0.2% of GDP) Join Select Committee provisions (unknown, but likely in the $20 to $30 billion) Steep reduction of Medicare reimbursements to physicians. 2013 Provision of Budget Control Act. Caps on discretionary spending (-$49 billion, 0.3% of GDP) Join Select Committee provisions (unknown, but likely $50 to $60 billion) New taxes on high income ($200,000 single/$250,000 joint) taxpayers included in health reform legislation. (about $22 billion in 2013) Individuals share of HI (Medicare Part A) payroll tax rises from 1.45% to 2.35% of earned income. 3.8% surtax on lesser of investment income or other income above threshold. 2001/2003 tax cuts expire

Effect of Deficit Control Act of 2010 on Federal Deficit

Billions of Dollars
FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 FY2019 FY2020 FY2021

Total 2012-2021

Discretionary Spending Establishment of Caps Program Integrity Subtotal Mandatory Spending Program Integrity Pell Grants Other education Subtotal Debt Service Joint Select Committee on Deficit Reduction* Total Effect on Deficit* Percent of GDP Source: CBO *Author's allocation of 10 year total.

-25 1 -25

-47 1 -46

-59 1 -58

-67 1 -66

-74 2 -72

-81 2 -79

-89 2 -87

-97 2 -95

-104 2 -102

-112 2 -110

-756 15 -741

0 4 -1 3 0 -25

0 8 -2 6 -1 -50

-1 5 -2 2 -3 -75

-1 0 -2 -3 -6 -100

-1 0 -2 -3 -10 -125

-2 0 -2 -4 -15 -160

-2 0 -2 -4 -20 -195

-2 0 -2 -4 -26 -230

-3 0 -2 -5 -33 -255

-3 0 -3 -6 -40 -285

-16 17 -22 -21 -154 -1500

-47 -0.3

-92 -0.6

-135 -0.8

-176 -1.0

-211 -1.1

-258 -1.3

-306 -1.5

-355 -1.6

-395 -1.7

-441 -1.9

-2416

93

Federal Deficit as a Percentage of GDP

% of GDP
4

% of GDP
4

With Budget Control Act

-2

-4

With Budget Control Act Caps on Discretionary Spending

-2

-4

-6

-6

-8

-8

Under Current Policy

-10 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
94

-10

Source: CBO and authors calculations

Federal Debt Held by Public

% of GDP 110 100 90 80 70 60 50 40 30 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020
95

% of GDP 110

Under Current Policy With Budget Control Act Caps on Discretionary Spending

100 90 80 70 60 50 40 30

With Budget Control Act

Source: CBO and authors calculations

Federal Discretionary Outlays

% of GDP
6

% of GDP
6

Defense Outlays
Dotted Line = With Budget Control Act Caps on Discretionary Spending
5

Solid Line = Under Current Policy

Non Defense Outlays

Dotted Line = With Budget Control Act Caps on Discretionary Spending
2

Solid Line = Under Current Policy

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

2
96

Source: CBO and authors calculations

ISM Indices
Level
65

Level
65

Nonmanufacturing Index
60 60

55

55

50

50

45

45

Manufacturing Index
40 40

35

35

30 2000

30 2002 2004 2006 2008 2010

97
Source: Institute of Supply Management Note: Above 50 = Increasing

Percent of First Mortgage Loans with CLTV>100

State 2011Q1 State 2011Q1 Alabama 10.3% Indiana 10.9% Alaska 7.6% Iowa 8.8% Arizona 49.6% Kansas 10.3% Arkansas 10.1% Kentucky 8.7% California 30.9% Louisiana NA Colorado 20.2% Maine NA Connecticut 12.9% Maryland 23.8% Delaware 14.1% Massachusetts 15.4% Florida 46.1% Michigan 36.0% Georgia 30.4% Minnesota 16.1% Hawaii 9.9% Mississippi NA Idaho 24.2% Missouri 15.7% Illinois 21.7% Montana 8.0% State 2011Q1 State Nebraska 9.3% South Carolina Nevada 62.6% South Dakota New Hampshire 18.7% Tennessee New Jersey 16.2% Texas New Mexico 13.4% Utah New York 6.2% Vermont North Carolina 11.2% Virginia North Dakota 6.9% W ashington Ohio 21.9% W ashington, DC Oklahoma 6.5% W est Virginia Oregon 17.2% W isconsin Pennsylvania 7.5% W yoming Rhode Island 21.2% US 2011Q1 15.2% NA 14.1% 10.1% 21.2% NA 23.1% 16.9% 14.7% NA 14.5% NA 22.7%

11 million property owners are underwater by an average amount of $65,000 Another 2.4 million are near negative equity, meaning 95 < CLTV <100.
98
Source: CoreLogic

Financial Conditions Have Deteriorated

Mortgage Rate vs. 7 Year Swap Spread
Difference Difference

Baa-Aaa Spread
Difference Difference

3 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6 0.3 0 2005 2006 2007 2008 2009 2010 2011
October: 2.4

3 2.7 2.4 2.1 1.8 1.5 1.2 0.9 0.6 0.3 0 2012

4 3.5 3 2.5 2 1.5 1 0.5 0 2005 2006 2007 2008 2009 2010
Nov. 1: 1.31

4 4 3 3 2 2 1 1 0 2012

2011

Source: Federal Reserve Board

Source: Federal Reserve Board

S&P 500 Composite

Index Index

Nominal Broad Dollar

Index, January 1997 = 100 Index, January 1997 = 100

1600 1500 1400 1300 1200 1100 1000 900 800 700 2005 2006 2007 2008 2009 2010 2011
Nov. 2: 1238

1600 1500 1400 1300 1200 1100 1000 900 800 700 2012

115 110 105 100 95 90 2005 2006 2007 2008 2009 2010
Oct. 28: 96.88

115 110 105 100 95 90 2012

2011

Source: Wall Street Journal

Source: Federal Reserve Board

Note: Trade-Weighed.

99

Blue Chip Forecasts for US Economy

October 11

Q4/Q4 growth rate

Real GDP CPI Unemployment (End of Period Level)

2010
3.1 1.2 9.6

2011
1.7 3.1 9.1

2012
2.0 2.2 9.0

31