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Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS®
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Economic Outlook in Uncertain Times
Lawrence Yun, Ph.D.Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation at NAR Leadership SummitChicago, IL
August 6, 2010
Federal Reserve FOMC • Ben Bernanke (Chairman):
• “Outlook remains unusually uncertain”
• Alan Greenspan (former Chairman):• “If home prices start falling again, we could be facing a double-dip
recession”
• James Bullard (St. Louis Fed): • “The U.S. is closer to a Japanese-style deflationary outcome”
• Thomas Hoenig (Kansas City Fed): • “Too rapid money creation results in eventual high inflation”• To speak at NAR conference in New Orleans
GDP Growing, but Decelerating
1960 - Q21966 - Q41973 - Q21979 - Q41986 - Q21992 - Q41999 - Q22005 - Q4
-10
-5
0
5
10
15
20 annualized % growth rate
Sources of Economic Growth
• Consumers … more cautious– Historically 4% growth (above inflation), but expect 2%
growth in upcoming years • Federal Government … stimulus spending
– Historically 1% growth (above inflation), now strong 6%-7% growth in the past 2 years
• State/Local Government … cut back – Historically 2% growth (above inflation), now cutting by
1%-2% in the past 2 years
Sources of Economic Growth Cont.
• Net Exports … some improvement – Oil price and oil import could hold back net export gains
• Real Estate– Residential: Recovery in existing home sales but very
low new home construction– Commercial: Very low new construction
• Businesses … huge profits but not wanting to invest– Why are businesses holding on to cash ???
Construction Spending
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
200300400500600700800900
Residential
Commercial
$ billion
Pending Contracts on Existing Homes
2001 - Feb 2002 - Jul 2003 - Dec 2005 - May 2006 - Oct 2008 - Mar 2009 - Aug70
80
90
100
110
120
130Tax Credit Impact
Pending Contracts on New Homes
2001 - Feb 2002 - Jul 2003 - Dec 2005 - May 2006 - Oct 2008 - Mar 2009 - Aug70
270
470
670
870
1070
1270
1470
Where is the tax credit impact?
Corporate Profits and Business Spending
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
200
700
1200
1700
2200
2700
Business Spending
Profits
$ billion
Private Sector Job Gains(593,000 in 1st half of 2010)
1960 - Feb 1966 - Oct 1973 - Jun 1980 - Feb 1986 - Oct 1993 - Jun 2000 - Feb 2006 - Oct
-8
-6
-4
-2
0
2
4
6
8% change from one year ago
Local Job Markets• Dallas-Ft. Worth +27,000 in 12 months• Washington D.C. +15,000• Austin +10,000• Boston +9,000
• New Hampshire +1.5% in 12 months• Kentucky +1.3%• Alaska +1.2%• Indiana +1.1%• Utah +1.0%
• North Dakota 3.6% unemployment rate• South Dakota 4.5% • Nebraska 4.8%
Weekly 1st time Unemployment Claims: Need to Fall Further
2000 - Feb 2001 - Aug 2003 - Feb 2004 - Aug 2006 - Feb 2007 - Aug 2009 - Feb0
100
200
300
400
500
600
700In thousands
National Median Home Price Stabilizing(combination of price change and type of homes that are selling)
2001 - Feb 2002 - Jan 2002 - Dec 2003 - Nov 2004 - Oct 2005 - Sep 2006 - Aug 2007 - Jul 2008 - Jun 2009 - May2010 - Apr100000
120000
140000
160000
180000
200000
220000
240000
260000
280000
New Home Price
Existing Home Price
Other Home Price Measurements
2001 - Feb 2002 - Jan 2002 - Dec 2003 - Nov 2004 - Oct 2005 - Sep 2006 - Aug 2007 - Jul 2008 - Jun 2009 - May 2010 - Apr100
120
140
160
180
200
220
240
FHFA (Fannie/Freddie Loans)
Case-ShillerCore Logic
Metro Median Home Price
0
50
100
150
200
250
300
350 $ thousand
Source: NAR
Las Vegas
St. Louis
Sample Markets with Price Increases
0
2
4
6
8
10
12
14
16
San Diego Orange Cty Boston Houston Buffalo D.C. Columbia
Source: NAR
% change from one year ago
Still High Months Supply of Existing Home Inventory
2000 - Feb 2001 - Mar 2002 - Apr 2003 - May 2004 - Jun 2005 - Jul 2006 - Aug 2007 - Sep 2008 - Oct 2009 - Nov0
2
4
6
8
10
12
Pent-up Supply and Demand
Newly Built Homes on the Market
2000 - Feb 2001 - Jun 2002 - Oct 2004 - Feb 2005 - Jun 2006 - Oct 2008 - Feb 2009 - Jun0
100
200
300
400
500
600
700
Average 30-year Mortgage Rate(lowest since ?)
1971 - May 1976 - Apr 1981 - Mar 1986 - Feb 1991 - Jan 1995 - Dec 2000 - Nov 2005 - Oct02468
101214161820 %
30-year Mortgage
10-year Treasury
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
U.S. Budget Deficit
-1,600,000
-1,400,000
-1,200,000
-1,000,000
-800,000
-600,000
-400,000
-200,000
0
200,000
400,000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
Source: CBO, NAR estimate
Existing Home Sales over the Long Term(single-family sales without condos)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
Source: NAR
1982: 18% Mortgage Rate, 40 million fewer workers
10
12
14
16
18
20
22
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Source: Census
People Mobility
(How many move each year?)
260 million stay put
25 million move within same county
6 million move to another county in same state
5 million move to another state (very low)
1 million move abroad
%
Investment-Rental Home Sales
0
500
1000
1500
2000
2500
2003 2004 2005 2006 2007 2008 2009
Thousand units
Source: NAR
13 Regional Vice President Reports• RVP Region 4: “stable at best … downward spiral at worst”
• RVP Region 7: “more expensive homes selling … but the underwriting process is difficult”
• REALTOR® member comments• “more active in selling vacant lots this year”• “phone hardly rings”• “buyers pay too much for appraisals”• “commercial lending needs to loosen up” • “ a lot of people looking at second homes, but won’t get off the fence”• “our rental market is going strong”
Commercial Real Estate Transactions(of those above $5 million properties)
$-
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
$100,000,000,000
$120,000,000,000
$140,000,000,000
UnknownUser/otherPublicPrivateInstitutionalEquity FundCrossborder
Source: Real Capital Analytics
NAR Commercial Market Survey• NAR Survey … members were engaged in average transaction value
of $1.2 million
• NAR Survey shows sales down 6%
• NAR Survey shows average price down 16%
• NAR Survey shows leasing up 3%
• NAR Survey shows rental rate down 10%
Baseline Outlook
• Moderate GDP Expansion 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.• Mortgage Rates rising to 5.7% in 2011 and 6.2% in 2012 and higher
in later years
• Home values – no meaningful change in the national price in the next 2 years
• Housing Starts to rise 40% to 50% in 2011 to about 900,000 … from exceptionally low levels of the past two years (historical normal is 1.5 million)
• Home sales will struggle in the near term (after tax credit hangover) and then rise in line with job growth
• Commercial real estate coming off depressed levels but no improvements in vacancy until 2011 and in rent growth until 2012
Alternative Outlooks
• High inflation … people desire tangible investment like real estate, but interest rate will be higher
• Deflation … people hold back for better price … holds back economy• Budget deficit tipping point … higher interest rate and sharp cut
back in standard 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