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Economic and Housing Market

OUTLOOK
Lawrence Yun, Ph.D.
Chief Economist
NATIONAL ASSOCIATION OF REALTORS
Presentation at 2012 Resort and Second-Home Symposium
Kiawah Island, SC

March 19, 2012

4,500,000

4,000,000

2008 - Jan
2008 - Mar
2008 - May
2008 - Jul
2008 - Sep
2008 - Nov
2009 - Jan
2009 - Mar
2009 - May
2009 - Jul
2009 - Sep
2009 - Nov
2010 - Jan
2010 - Mar
2010 - May
2010 - Jul
2010 - Sep
2010 - Nov
2011 - Jan
2011 - Mar
2011 - May
2011 - Jul
2011 - Sep
2011 - Nov
2012 - Jan

Monthly Existing Home Sales Recovering

6,000,000

Tax Credit Impact

5,500,000

5,000,000

Old Data

New Data

3,500,000

3,000,000

Annual U.S. Existing Home Sales


Flat Line for 4 tough years

1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0

Second Home Sales


4000

In thousands

3500
3000
2500

Investment
Vacation

2000
1500
1000
500
0

2003 2004 2005 2006 2007 2008 2009 2010 2011

Case-Shiller Price Index


Stability from 2009
200
180
160
140
120
100
80
60
40
20
0

Median Price of Transacted Homes:


Vacation Home Suffered More
Primary (Blue) vs Vacation (Red)

220000
200000
180000
160000
140000
120000
100000
2007

Source: NAR

2008

2009

2010

2011

Columbia and Myrtle Beach


(Home Price Index: 1995 = 100)
240
220
200

180
160
140
120
100
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 - 2011 Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Source: Federal Housing Finance Agency

Bend and Portland, Oregon


(Home Price Index: 1995 = 100)
350
300
250
200
150
100
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 - 2011 Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Source: Federal Housing Finance Agency

Santa Fe and Albuquerque


(Home Price Index: 1995 = 100)
220
200
180
160
140
120
100
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 - 2011 Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Source: Federal Housing Finance Agency

Las Vegas and Miami vs


Kansas City and Milwaukee
400

(Home Price Index: 1995 = 100)

350
300
250
200
150
100
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 - 2011 Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Q1
Source: Federal Housing Finance Agency

2500

1959 - Jan
1961 - Jan
1963 - Jan
1965 - Jan
1967 - Jan
1969 - Jan
1971 - Jan
1973 - Jan
1975 - Jan
1977 - Jan
1979 - Jan
1981 - Jan
1983 - Jan
1985 - Jan
1987 - Jan
1989 - Jan
1991 - Jan
1993 - Jan
1995 - Jan
1997 - Jan
1999 - Jan
2001 - Jan
2003 - Jan
2005 - Jan
2007 - Jan
2009 - Jan
2011 - Jan

U.S. Housing Starts

Lowest since the Second World War in the past three years

3000

Housing Starts in thousands

Long-term Average;
Long-term Requirement

2000

1500

1000

500

1963 - Jan
1965 - Jan
1967 - Jan
1969 - Jan
1971 - Jan
1973 - Jan
1975 - Jan
1977 - Jan
1979 - Jan
1981 - Jan
1983 - Jan
1985 - Jan
1987 - Jan
1989 - Jan
1991 - Jan
1993 - Jan
1995 - Jan
1997 - Jan
1999 - Jan
2001 - Jan
2003 - Jan
2005 - Jan
2007 - Jan
2009 - Jan
2011 - Jan

New Home Inventory 50 year low

700

600

500

400

300

200

100

Visible Existing Home Inventory


(6-year lows)
4500000
4000000

3500000
3000000
2500000

2000000
1500000
1000000

500000
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

2000 - Q1
2000 - Q3
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
2009 - Q1
2009 - Q3
2010 - Q1
2010 - Q3
2011 - Q1
2011-Q3

Serious Delinquent Mortgages

Mostly those who took out loans in bubble years


(90+ days late or in foreclosure process)

U.S.

12.0
10.0
8.0
6.0
4.0
2.0
0.0

U.S.

Fannie and Freddie Performance


Mortgage Default after 18 months
Fannie Mae
Vintage

Cumulative
Default Rate
after 18 months

Freddie Mac
Vintage

Cumulative
Default Rate
after 18 months

2002

3.1%

2002

2.7%

2003

2.5%

2003

1.2%

2004

4.6%

2004

2.0%

2005

4.8%

2005

1.8%

2006

11.6%

2006

6.0%

2007

28.7%

2007

22.3%

2008

12.6%

2008

13.7%

2009

1.2%

2009

1.1%

Source: Federal Housing Finance Agency

Foreclosure Starts
(% of all mortgage outstanding; about 1/3 of homes are free and
clear)
3.0

2.5

New Jersey

Arizona

2.0
1.5
1.0
0.5
0.0
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 - 2011 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1

Foreclosure Inventory
(% of all mortgage outstanding; about 1/3 of homes are free and
clear)
9.0
New Jersey
Arizona
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2000 - 2001 - 2002 - 2003 - 2004 - 2005 - 2006 - 2007 - 2008 - 2009 - 2010 - 2011 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1

-2

-4

-6

-8

-10
2000 - Q1
2000 - Q3
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
2009 - Q1
2009 - Q3
2010 - Q1
2010 - Q3
2011 - Q1
2011 - Q3

Economic Expansion

(GDP growth after recession should be


sustained 4% to 5% not 1.7% as occurred in 2011)

10

Desired Pace

140000

2000 - Jan
2000 - Jul
2001 - Jan
2001 - Jul
2002 - Jan
2002 - Jul
2003 - Jan
2003 - Jul
2004 - Jan
2004 - Jul
2005 - Jan
2005 - Jul
2006 - Jan
2006 - Jul
2007 - Jan
2007 - Jul
2008 - Jan
2008 - Jul
2009 - Jan
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul
2012 - Jan

Total U.S. Payroll Jobs Recovering


(3.4 million job creation from low point in 2010)

In thousands

138000

136000

134000

132000

130000

128000

126000

124000

68

1990 - Jan
1991 - Jan
1992 - Jan
1993 - Jan
1994 - Jan
1995 - Jan
1996 - Jan
1997 - Jan
1998 - Jan
1999 - Jan
2000 - Jan
2001 - Jan
2002 - Jan
2003 - Jan
2004 - Jan
2005 - Jan
2006 - Jan
2007 - Jan
2008 - Jan
2009 - Jan
2010 - Jan
2011 - Jan
2012 - Jan

Labor Force Participation Rate

67

66

65

64

63

62

61

-100
2011 - Q3

2011 - Q1

2010 - Q3

2010 - Q1

2009 - Q3

2009 - Q1

2008 - Q3

2008 - Q1

2007 - Q3

2007 - Q1

2006 - Q3

2006 - Q1

2005 - Q3

2005 - Q1

2004 - Q3

2004 - Q1

2003 - Q3

2003 - Q1

2002 - Q3

2002 - Q1

2001 - Q3

600

2001 - Q1

Financial Industry Corporate Profits

$ billions; seasonally adjusted annualized

500

400

300

200

100

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
2011 - Jan
2011 - Jul
2012 - Jan

Federal Reserve
Loose Monetary Policy
30-year Mortgage
Fed Funds

9
8
7
6
5
4
3
2
1
0

Banks/Regulators
Restricting Credit
(Average Credit Scores of Approved Loans)

Normal

2009

2010

If Normal

Fannie

720

761

762

720

Freddie

720

757

758

720

FHA

650

682

698

660

15% to 20% Higher Sales

-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
2007 - Jan
2007 - Jul
2008 - Jan
2008 - Jul
2009 - Jan
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul

CPI Rent is Rising


Biggest Weight to CPI
(% change from 12 month ago)

5 %

Home Value Undervaluation


(Recent analysis by The Economist magazine)
Metric

Magnitude of Over or
Undervaluation

U.S. Home Prices

Home Price vs. Rent

8% undervaluation

U.S. Home Prices

Home Price vs. Income

22% undervaluation

U.K. Home Prices

Home Price vs. Rent

28% overvaluation

U.K. Home Prices

Home Price vs. Income

20% overvaluation

Ireland Home Prices

Home Price vs. Rent

10% overvaluation

Ireland Home Prices

Home Price vs. Income

Proper valuation
(neither over nor under)

Improving Factors for Higher Home Sales


Improving Factors

Job Creation
Solid stock market recovery from 2008
Rising rents and larger pool of qualified renters
Pent-up Release of Household Formation
Smart money chasing real estate (instead of gold?)
Consumer confidence OK (no longer dire)
Great affordability conditions
Favorable demographics for second home buyers

Potential Huge Positive Lending opens up


Potential Huge Negative Washington policy

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.

Expensive Gold Price


(Hedge against Inflation?)
2000
1800
1600
1400
1200
1000
800
600
400
200
0

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

Consumer Confidence
160
140
120
100
80
60

40
20
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

Best Affordability Conditions

Monthly Pending Home Sales Index


(Seasonally Adjusted)
115
110

Homebuyer Tax Credit

105
100
95

90
85
80

75
70
2007 - 2007 - 2008 - 2008 - 2009 - 2009 - 2010 - 2010 - 2011 - 2011 - 2012 Jan
Jul
Jan
Jul
Jan
Jul
Jan
Jul
Jan
July
Jan

Median Age and Income of Homebuyers


Primary

37 years old with $69,600

Investment

45 years old with $87,600

Vacation

49 years old with $99,500

U.S. Population Aged 55-to-64


40000
35000
30000

25000
20000
15000
10000
5000
0

Forecast Population Aged 55-to-64


50000
48000
46000
44000
42000
40000
38000
36000
34000
32000
2050

2048

2046

2044

2042

2040

2038

2036

2034

2032

2030

2028

2026

2024

2022

2020

2018

2016

2014

2012

30000

Rising World Population


10

In billion

8
7
6
5
4
3
2

1
0

1000 1100 1200 1300 1400 1500 1600 1700 1800 1900 2000 2100

Washington Policy Obstacles


QRM 20% downpayment rules

Mortgage Interest Deduction Limitation on


second homes
Capital gains tax increase
Lower loan limit for conforming mortgages
More consumers face jumbo mortgages

Rising mortgages rates (market forces of


higher inflation and high budget deficit)

Forecast
2011

2012

2013

Existing Home Sales 4.26 million

4.55 million

4.70 million

New Home Sales

305,000

370,000

510,000

Housing Starts

599,000

710,000

980,000

Existing Home Price

$166,100

$168,000

$172,000

GDP Growth

+1.8%

+2.3%

+3.1%

Payroll Job Gains

+1.7 million

+2.3 million

+2.6 million

30-yr Mortgage

4.7%

4.4%

5.4%

Second Home and Resort Markets suffered more Therefore,


Ripe for a stronger recovery for both sales and prices

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