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Economic Update
by Ted Jones
House Keeping
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You’re Nobody and Unless You’re
The Internet, Real Estate, Interest
Rates, Bubblettes and the Economy
Ted C. Jones, PhD
Senior Vice President-Chief Economist
Stewart Title
Dr. Ivan Schmedemann
Professor Emeritus
Axiom #1
“When you make
more money, you
are simply broke at
a higher level.”
minks, farming chinchillas,
uranium mines, oil drilling, gold,
exotic cattle, stock markets,
raising emus, ostriches, llamas,
alpacas, tech stocks, Dot Coms,
flipping real estate, mergers and
acquisitions, private equity…….
Get Rich Quick Schemes $$$$$$$$$$$$$$$$$$$$$$$$$$$$$$$
Real Estate: 3 Simple Steps
• Jobs—Net Number New (Loss)
• Interest Rates—Cost of Capital
• Supply and Demand
1 2 3
Fed Funds & 10-Year T-Bond Rates
0
1
2
3
4
5
6
7
'00 '01 '02 '03 '04 '05 '06 '07
Fed Funds 10-Year T-Bonds
Percent Correlation Since 1960 0.862
Time
Bomb
Loans
2005 First-Time Homebuyers
January 18 2006
43 Percent Put Zero Down
Median Down Payment Was
2 Percent
1/3 Interest Only or Minimum
Payment Loans
Slide From 2006 Presentation
Ted “Does this bother anyone but me?”
“Phase I inspections provide some
representation of previous or
current CMBS deals in the
pipeline. An EDR survey last
Wednesday found 75 percent of
260-300 national environmental
consultant clients had significant
or slightly fewer transactions
overall in the past few months.”
Meanwhile, Moody's Investors
Service, New York, forecasts higher
bond spreads and lower issuance
from fewer and smaller deals when
the CMBS market stabilizes
because cheap and abundant
liquidity appears unlikely to return
from the first half of the year.
http://ml-implode.com/
“The Mortgage Bankers Association
reported recently that the percentage
of subprime loans that were 30 or
more days past due climbed to 15.75
percent in the first three months of
this year, a record high and up from
14.44 percent in the final three
months of last years.”
Versus 3.25 Percent for All Loans
Subprime Spill Over
The credit crunch has raised the cost of
mortgages even for borrowers with pristine
credit and put further downward pressure on
home prices. David Adamo, CEO of Luxury
Mortgage, a mortgage banker in Connecticut,
says that three months ago he could sell a
high-quality $3 million mortgage to 20
different banks at an interest rate of 6.75%.
Today only two will even consider buying the
loans, and they want 10%.
August 23 2007: 12:21 PM EDT
Interest Rate Difference Between
30-Year and 1-Year ARM Loans
65
95
125
155
185
215
245
6-Aug
-03
6-Ja
n-04
6-Ju
n-04
6-Nov
-04
6-Apr
-05
6-Sep
-05
6-Feb
-06
6-Ju
l-06
6-Dec
-06
6-M
ay-0
7
Basis Points
The lower the difference,
the better reason to get a
fixed-rate mortgage loan
72
$0
$20
$40
$60
$80
$100
$120
72 75 78 81 84 87 90 93 96 99 '02 '05
4
8
12
16
20
Oil Prices Interest
Rates %
Oil Prices & 30-Year Residential
Mortgage Interest Rates August 2007 Dollars
Source: Stewart Title Guaranty Company
$20
$30
$40
$50
$60
$70
$80
'02 '03 '04 '05 '06 '07
$0.80
$1.00
$1.20
$1.40
$1.60
Oil Prices
Dollars
Per
Euro
Oil Prices & Exchange Rates $US Per Euro
Oil in August 2007 Dollars
What Caused This?
Oil Price
Killer D’s 2
Weakened Dollar Causes
US Balance of Trade Inflation Adjusted April 2007 $ Dollars
-$1,000
-$800
-$600
-$400
-$200
$0
93 95 97 99 '01 '03 '05 '07
$ Billions, Prior 12 Months
Federal Budget Surplus (Deficit)
-$450.0
-$350.0
-$250.0
-$150.0
-$50.0
$50.0
$150.0
$250.090 91 92 93 94 95 96 97 98 99 '00
'01
'02
'03
'04
'05
'06
'07
2007 Forecast Based on Current Trend
$ Billions
Te
d’s
20
08
Fo
rec
as
t
Ch
an
ge
Fro
m N
ow
Up Another 25
Basis Points
By
December
2008
Travis Jones
Texas Sheep Company
Axiom #1
“If you own a four-
wheel drive pickup
you will be stuck
200 yards further
from the Road.”
Percent
Of Home
Buyers
That
Commence
Their
Search
Online
Percent of Homebuyers That
First Found Their Home
Purchased on the Internet
29%
2%0%
4%
8%11%
24%
15%
0%
5%
10%
15%
20%
25%
30%
35%
'95 '97 '99 '01 '03 '04 '05 '06
National Association of REALTORS®
Percent of Homebuyers That
First Found Their Home
Purchased in the Newspaper
5%
8%
9%
8%
7% 7%
5%5%
0%
2%
4%
6%
8%
10%
'95 '97 '99 '01 '03 '04 '05 '06
National Association of REALTORS®
Percent of Homebuyers That First
Found Their Home Purchased By
the Real Estate Agent
35%
50%50% 49% 48%
41%36%38%
0%
10%
20%
30%
40%
50%
60%
'95 '97 '99 '01 '03 '04 '05 '06
National Association of REALTORS®
National Association of REALTORS®
US Job Growth Rates
1.16%
1.16%
1.60%
1.42%
1.12%
0.00% 0.50% 1.00% 1.50%
10 Years
5 Years
3 Years
2 Years
1 Year
August Comparison CAGR
US Job Growth
-2.0%
0.0%
2.0%
98 99 '00 '01 '02 '03 '04 '05 '06 '07
Percent Change from Same Month Prior Year
1.521 Million Net New Jobs in Past 12 Months
Texas
1.77%
1.83%
2.72%
2.78%
2.68%
0.00% 1.00% 2.00% 3.00%
10 Years
5 Years
3 Years
2 Years
1 Year
July Comparison CAGR
51.4 Percent Greater Than 10-Year Average
139 Percent Greater Than US Job Growth Rate
-2.0%
0.0%
2.0%
4.0%
98 99 '00 '01 '02 '03 '04 '05 '06 '07
US Texas
Percent Change from Same Month Prior Year
Texas Job Growth Rates
267,000 Net New Additional Jobs in the Past 12 Months
Job Growth
Net
Additional
Jobs
(Thousands) 1 Year 10 Years
Abilene 1.7 2.64% 0.79%
Amarillo 3.2 2.93% 1.47%
Austin-Round Rock 33.0 4.63% 2.86%
Beaumont-Port Arthur 5.4 3.43% 0.34%
Brownsville-Harlingen 1.8 1.48% 2.49%
College Station-Bryan 0.9 1.04% 1.97%
Corpus Christi 4.2 2.43% 1.12%
Dallas-Ft Worth-Arlington 91.0 3.19% 1.83%
Dallas-Plano-Irving 68.7 3.40% 1.83%
Compound Annual
Job Growth
Job Growth
Net
Additional
Jobs
(Thousands) 1 Year 10 Years
El Paso 8.4 3.24% 0.98%
Ft Worth-Arlington 22.3 2.68% 1.83%
Houston-Baytown-Sugar Land 82.0 3.37% 2.06%
Killeen-Temple-Fort Hood 0.8 0.68% 1.62%
Laredo 2.4 2.87% 3.75%
Longview 1.9 2.09% 1.62%
Lubbock 4.9 3.90% 1.37%
McAllen-Edinburg-Pharr 10.6 5.45% 4.59%
Midland 3.2 5.10% 1.80%
Compound Annual
Job Growth
Job Growth
Net
Additional
Jobs
(Thousands) 1 Year 10 Years
Odessa 2.3 4.01% 2.45%
San Angelo 0.8 1.81% 0.36%
San Antonio 16.2 2.00% 1.96%
Sherman-Denison 1.2 2.71% 0.41%
Texarkana 1.2 2.20% 0.89%
Tyler 1.0 1.09% 1.84%
Victoria 1.3 2.62% 0.97%
Waco 2.0 1.90% 1.02%
Wichita Falls 1.6 2.59% 0.40%
Compound Annual
Job Growth
Texas
Single Multi
Year Family Family Title
97 82,228 43,794 126,022
98 99,912 56,918 156,830
99 101,928 44,716 146,644
00 108,782 32,620 141,402
01 111,915 38,427 150,342
02 122,913 42,409 165,322
03 137,493 43,081 180,574
04 151,384 39,796 191,180
05 166,203 44,431 210,634
06 163,032 53,894 216,926
07p 132,527 51,444 183,971
Building Permits
Texas
Last 12 Months
New Jobs 267,000
Residential Permits 183,971
New Jobs Per Dwelling 1.45
Jobs Per Dwelling
Normal markets typically create 1.25
to 1.5 net new jobs per new
dwelling unit.
Los Angeles Retail Market
Value = ----------------- Income (NOI)
Cap Rate
Capitalization Rates Are Too Low
Next Three Years: Rents Up, Vacancies
Down, Cap Rates Up
http://www.cbre.com/Global/Research/
Commercial Market Reports
CBRE
Colliers International
http://www.colliers.com/Corporate/MarketReports/
http://www.grubbellis.com/Research/quart_trends_reports.aspx
Grubb and Ellis
Ted C. Jones
Axiom #1
“The Early
Bird May Get
the Worm,
But the
Second Rat
Gets the
Cheese.”
http://data.bls.gov/cgi-bin/dsrv?la
http://recenter.tamu.edu/data/bpm/
Data Sources
Employment
Building Permits
Interest Rates
http://www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp?year=2007
Fannie Mae Forecast
http://www.fanniemae.com/media/berson/monthly/index.jhtml
Approval Ratings
President: 32 Percent Approval Rating
August 13 - 16, 2007
US House & Senate
18 Percent Approval Rating
76 Percent Disapproved all Americans
2007 Economic Concerns
• Some Bubbles Do Exist
• Time Bomb Loans
• Cold War II—Terrorists
• Inflation (and Cap Rates)
• Pandemic (bird flu…..)
• More Hedge Funds Will Fail
• Energy: US Imports 64 Percent of Oil
• Extreme Partisan Politics
Housing Sales Down
6 to 11 Percent
Thank you
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Next Texas TIPS Online
10-18-07 “Spooky Claims 2007” by Susan Withers
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