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2010 NAR Annual Convention & Expo Economic Issues & Residential Real Estate Business Trends Forum
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Recovery to Normalcy
Lawrence Yun, Ph.D.Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation at NAR Annual MeetingsNew Orleans, LA
November 5, 2010
Consumer Confidence on Present Conditions: Awful
1980 - Jan 1984 - Jan 1988 - Jan 1992 - Jan 1996 - Jan 2000 - Jan 2004 - Jan 2008 - Jan0
20406080
100120140160180200
Consumer Confidence on Future Conditions:
Not Good but Not as Bad
1980 - Jan 1984 - Jan 1988 - Jan 1992 - Jan 1996 - Jan 2000 - Jan 2004 - Jan 2008 - Jan0
20
40
60
80
100
120
140
9.6% unemployment rate, but different confidence level
Business Spending Shows Weak Confidence in Relation to Profits
2000 - Q2
2000 - Q4
2001 - Q2
2001 - Q4
2002 - Q2
2002 - Q4
2003 - Q2
2003 - Q4
2004 - Q2
2004 - Q4
2005 - Q2
2005 - Q4
2006 - Q2
2006 - Q4
2007 - Q2
2007 - Q4
2008 - Q2
2008 - Q4
2009 - Q2
2009 - Q4
2010 - Q2
200
700
1200
1700
2200
2700
Corporate Profits
Business Investment
Business Investment = private fixed investment in GDP accounting
$ billion
REALTORS’ Home Value Expectation:over the next 12 months
2008 - Oct
2008 - Dec
2009 - Feb
2009 - Apr
2009 - Jun
2009 - Aug
2009 - Oct
2009 - Dec
2010 - Feb
2010 - Apr
2010 - Jun
2010 - Aug
0%10%20%30%40%50%60%70%80%
Increase or Stable
Decrease
REALTOR Expectation vs RealityDate % respondents saying prices will have
fallen at this time from 12 month priorCase-Shiller price change
2009.1051%
-7.3
2009.1156%
-5.4
2009.1260%
-3.1
2010.0155%
-0.7
2010.0254%
+0.7
2010.0343% (minority say falling price)
+2.3 (price did not fall)
2010.0435%
+3.8
2010.0535%
+4.6
2010.0636%
+4.2
2010.0736%
+3.2
Government Spending (Confidence)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010200
700
1200
1700
2200
2700
3200
3700
Government Receipt
Government Outlay
$ billion
GDP Growing, but Without Vigor
1980 - Q1 1984 - Q1 1988 - Q1 1992 - Q1 1996 - Q1 2000 - Q1 2004 - Q1 2008 - Q1
-10
-5
0
5
10
15 annualized % growth rate
U.S. Private Sector Job Gains(863,000 from Jan. to Sep. 2010)
1980 - Jan1984 - Jan1988 - Jan1992 - Jan1996 - Jan2000 - Jan2004 - Jan2008 - Jan
-1000
-500
0
500
1000
1500Month-to-month job gains in thousands
Total Payroll Jobs in the U.S. (same as in 2000, but with 30 million more people)
2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul124000
126000
128000
130000
132000
134000
136000
138000
140000
How Many Years to Get Job Market Back to Normal?
Jobs added per month Assumed new jobs needed for growing population per month
How many years?
100,000 100,000 Treading water and never back to normal
200,000 100,000 6.3 years300,000 100,000 3.2 years400,000 100,000 2.1 years
3500
4000
4500
5000
Source: BLS
In thousands
Total Payroll Jobs in Michigan
2000
2200
2400
2600
Source: BLS)
In thousands
Total Payroll Jobs in Washington D.C. Metro
Weekly 1st time Unemployment Claims: Need to Fall Further
2000 - Feb2001 - Aug2003 - Feb2004 - Aug2006 - Feb2007 - Aug2009 - Feb2010 - Aug0
100
200
300
400
500
600
700 In thousands
Existing Home Sales (Closings)
2000 - Feb 2001 - Sep 2003 - Apr 2004 - Nov 2006 - Jun 2008 - Jan 2009 - Aug3000000
3500000
4000000
4500000
5000000
5500000
6000000
6500000
7000000
7500000Tax Credit Impact
New Home Sales (Contracts)
2001 - Feb2002 - Jun 2003 - Oct2005 - Feb2006 - Jun 2007 - Oct2009 - Feb2010 - Jun70
270
470
670
870
1070
1270
1470
Where is the tax credit impact?
High Existing Home Inventory
2000 - Feb 2001 - Apr 2002 - Jun 2003 - Aug 2004 - Oct 2005 - Dec 2007 - Feb 2008 - Apr 2009 - Jun 2010 - Aug02468
101214
Months Supply
Total homes on the market(in millions)
Distressed Loans and Shadow Inventory
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
20
06
/Q1
20
06
/Q2
20
06
/Q3
20
06
/Q4
20
07
/Q1
20
07
/Q2
20
07
/Q3
20
07
/Q4
20
08
/Q1
20
08
/Q2
20
08
/Q3
20
08
/Q4
20
09
/Q1
20
09
/Q2
20
09
/Q3
20
09
/Q4
Tho
usa
nd
s
Mortgage Payments Past Due 30-59 Days
Mortgage Payments Past Due 90+ Days
Mortgage Foreclosures Started
Mortgage Foreclosure Inventory
Bad loans are nearly always made in good times. But recently originated loans are performing very well.
Newly Built Home Inventory and Its Shadow Inventory
2000 - Feb 2001 - Jun 2002 - Oct 2004 - Feb 2005 - Jun 2006 - Oct 2008 - Feb 2009 - Jun0
100
200
300
400
500
600
700
Depressed Housing Starts
0
500
1,000
1,500
2,000
2,500 In thousands
Return to Normalcy
• Unprecedented Boom and Bust: 2000 to 2010• Sales Boomed and Retreated • Prices Overshot and Corrected • Fundamentals Back to Justifiable Levels• Long-standing Housing Policy still in place• Credit Market Bubble … out the window
22
Existing-Home Sales
In million units
23
Home Sale to Jobs
National Median Home Price
0
50,000
100,000
150,000
200,000
250,000
Source: NAR
Metro Median Home Price
0
50
100
150
200
250
300
350$ thousand
Source: NAR
Las Vegas
Columbia
National Median Home Price Stabilizing(Combination of price change and type of homes that are selling)
2001 - Feb 2002 - Feb 2003 - Feb 2004 - Feb 2005 - Feb 2006 - Feb 2007 - Feb 2008 - Feb 2009 - Feb 2010 - Feb100000
120000
140000
160000
180000
200000
220000
240000
260000
280000
New Home Price
Existing Home Price
Other Home Price Measurements also Showing Price Stabilization
Home Price-to-Income Ratio (No Bubble)
2.02.22.42.62.83.03.23.43.6
Source: NAR
Home Price and Construction Cost(No Bubble)
2000 - Feb 2001 - Jan 2001 - Dec 2002 - Nov 2003 - Oct 2004 - Sep 2005 - Aug 2006 - Jul 2007 - Jun 2008 - May 2009 - Apr80
90
100
110
120
130
140
150
160
170
NAR Price Index
PPI Residential Construction Cost Index
Long Standing Housing Policy• Mortgage Interest Deduction
– If eliminated, there will be about a 15% hit to home values– Massive wealth destruction for property owners who have
saved and saved (in many cases to pass it on to the next generation)
• FHA– Self-financing without ever needing taxpayer funds (as of
yet)• Fannie and Freddie
– Made mistakes and need to be restructured
Credit Bubble DeadSubprime, Alt-A, Home Equity Mortgage Origination
0
200
400
600
800
1,000
1,200
1,400
1,600
2003 2005-2006 2009-2010
Source: NAR estimate based on Inside Mortgage Finance data
$ billion
1995
1995
1998
1998
2001
2001
2004
2004
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
Renter Homeowner
2007
20072007
2007
Long-Term Path to Self Reliance May be Helped from Long-Term Housing Wealth Gains
Long-Term Path to Self Reliance May be Helped from Long-Term Housing Wealth Gains
Source: Federal Reserve, NAR estimate for 2010
Median Family Net Worth
2010
2010
Compelling AffordabilityMonthly Mortgage to buy a Median Priced Home
2005 Q2 2010 Q2
San Diego $ 2,833 $ 1,564
Miami $ 1,726 $ 853
Milwaukee $ 1,014 $ 797
Kansas City $ 735 $ 600
Economists Expect Price Increases in Upcoming Years
• Macromarkets, a firm associated with Professor Robert Shiller, surveys about 100 economists about home price outlook.
• The consensus forecast as of August 2010 (which can be found from Macromarkets or from news media stories such as Wall Street Journal) are for
• 0.78% price increase in 2011• 2.43% price increase in 2012• 3.20% price increase in 2013• 3.69% price increase in 2014• No forecast for 2015 and beyond
10-Year Treasury impacted by Inflationary Expectations
1971 - May 1976 - Apr 1981 - Mar 1986 - Feb 1991 - Jan 1995 - Dec 2000 - Nov 2005 - Oct
-5
0
5
10
15
20 %
CPI Inflation
10-year Treasury Yield
Inflationary Pressure ?Indicator % change from one year ago
Consumer Price Index (CPI) 1.1%
Housing Rent Component CPI 0.2% (but heading higher?)
Producer Price Index (Finished Product) 4.0%
Producer Price Index (Intermediate Product) 5.5%
Producer Price Index (Crude Product) 20.2%
Commodity: Coffee, Cotton, Wheat, Meat Very high
Gold Price Record High Price
CPI-Housing Rent Inflation(Home price is not part of CPI because of asset/investment aspect)
-1
0
1
2
3
4
5 %
Housing Rent Inflation
Baseline Outlook
• Moderate GDP Expansion 2 to 2.5% in the next 2 years (historical average is 3%)
• 1.5 million annual job additions in the next 2 years
• Unemployment rate of 8% in 2012 … and normal 6% in 2015
Baseline Outlook Cont’d• Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012
• People fussing about home values could miss out on low rates
• Home values – no meaningful change in the national price in the next 2 years
• Home sales to be choppy, but overall improving, in line with job growth … 5.2 million in 2011 (up from 4.8 m in 2010, but same as in 2000)• Affordability conditions are too compelling
• There may be some pent-up demand. 30 million additional people compared to 2000, but same number of home sales as in 2000.
Alternative Possibility
• High inflation: people desire tangible investment like real estate, but interest rate will be higher
• Deflation: people hold back for better price, which holds back economy
• Budget deficit tipping point: higher interest rate and sharp cut backs in standards of living
• Sharp 4% to 5% GDP growth … release of pent-up housing demand (30 million more people today versus 2000 when home sales were similar) … surprisingly higher home sales and home prices
Virtuous or Vicious Cycle?• Home values stabilizing scenario
– Foreclosures steadily fall– Strategic default lessens and underwater homeowners become
hopeful – FHA and Fannie/Freddie finances improve (will need less
taxpayer funds)– Consumer spending opens up– Home value stabilize further or even begin to rise …– Self-sustaining normal growth rates in sales and prices
• Home values fall meaningfully … ugly scenario
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