Real Estate Market Trends & OutlookLawrence Yun, Ph.D.Chief EconomistNATIONAL ASSOCIATION OF REALTORS®

Presentation at Vanderbilt University

March 17, 2010

Housing Stimulus Impact

• Tax Credit and Higher Loan Limit

• 2 million 1st-time buyers by end of November• Additional 2.4 million buyers (1st time and

many repeat buyers) by end of June 2010

• About 1 million induced-impact– Existing Home Sales gets 15% boost– Home Price gets 3% to 5% support

• Preservation of Middle-Class Wealth

Recent Pending Home Sales

60

70

80

90

100

110

120

Recovery pre-dominantly in lower-end and taking longer to close in recent months

Source: NAR

Bifurcated Recovery

$ thousand

Homes priced under $100K

Homes priced above $500K

% change from one year ago

Source: NAR

Aggregate Months Supply

0

2

4

6

8

10

12

Source: NAR

In thousand units

National Existing Home Sales

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Pre-boom sales

Source: NAR

Vacation Home Sales Nationwide

0

200

400

600

800

1000

1200

2003 2004 2005 2006 2007 2008 2009 est.

Thousand units

Source: NAR

First-Time Buyers Used Up or Pent-Up Demand ?

• In year 2000 (pre-boom)– 11 million renters with qualifying income to

buy a median priced home

• In 2009 – 16 million renters with qualifying income

to buy a median priced home

• Most renters are not qualified and should not be homeowners

First-Time Buyers Used Up or Pent-Up Demand ?

2000(pre-boom)

2009(3 months prior to tax credit)

2009(recent 3 months with tax credit)

Existing Home Sales 5.2 m 4.6 m 5.3 m

New Home Sales 880 K 364 K 418 K

Payroll Jobs 131.8 m 135.0 m 131.4 m

Household Jobs 136.9 m 143.2 m 140.0 m

Median Home Price $143,600 $173,600 $177,900

Mortgage Rates 8.1% 5.5% 5.2%

Underwriting Standard + FHA % Normal (not loose)FHA about 10%

About NormalFHA 24%

About NormalFHA 15% to 20% with higher credit score

Household Income $41,990 $50,303 $50,303

# renters that could buy a median priced home (assume no tax credit)

11.5 million 16.2 million 16.1 million

Change in Pool of Potential 1st Time Buyers (without tax credit)

N/A 4.7 million 4.6 million

Change in Pool of Potential 1st Time Buyers (with tax credit)

N/A/ 4.7 million 5.4 million

Fear Factor Impact (Waiting to buy later at a lower price)

N/A Hard to Measure Hard to Measure

Household Formation(2-year moving average)

Preservation of Middle Class Wealth

• $8000 Price Drop or $8000 Tax Credit ?• No difference from buyer’s perspective

• Major differences on market impact• $8,000 or 4% decline value means $730 billion in

housing wealth destruction

• Consumer wealth effects

• Consumer’s rational postponement of purchase

Financial Wealth Rising

$ billion

Source: Federal ReserveSource: Federal Reserve, NAR estimate

Housing Wealth to Rise($4 trillion wealth loss in housing from peak)

If additional $8,000 price decline … $700 billion further loss

$ billion

Source: Federal ReserveSource: Federal Reserve, NAR estimate

Metro Median Home Price

$ thousand

Riverside

Source: NAR

Indianapolis

National Existing Home Price

0

50000

100000

150000

200000

250000

1970 1975 1980 1985 1990 1995 2000 2005

Overcorrection Needs to be Halted(Home Price to Income Ratio)

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

Stay within Budget and all will be OK !

Source: NAR

Mortgage Payment to Income(by middle income person buying a median priced home)

2.0

7.0

12.0

17.0

22.0

27.0

32.0

37.0

42.0

Stay within Budget and all will be OK !

Source: NAR

Latest Home Price Trend

% change from one year ago

NAR in blueFHFA in Red

Case-Shiller in Green

Housing Starts: Too Much to Too Little

0

500

1,000

1,500

2,000

2,500

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

New Units Needed

3 million more people each year … 1 to 1.4 million household formation … need to account for 300,000 demolitions …. need 1.3 to 1.7 new units

Serious Delinquency Rate(90+ days late or foreclosure)

0.0

5.0

10.0

15.0

20.0

25.0

30.0%

Subprime

• FHA Reserve Fund depleting … Bailout ???• Fannie-Freddie … future reform without private profit and taxpayer loss

• Veterans Affairs backed mortgages … slight rise … even though a zero-down product … stay within budget and all will be OK!

VA (purple)

FHA

Prime (green)

-6.0

-3.0

0.0

3.0

6.0

9.0

20

05

-Q

1

20

05

-Q

3

20

06

-Q

1

20

06

-Q

3

20

07

-Q

1

20

07

-Q

3

20

08

-Q

1

20

08

-Q

3

20

09

-Q

1

20

09

-Q

3

20

09

Q4

20

10

-Q

2

20

10

-Q

4

Economy Recovering

GDP annualized growth rate

Source: BEA

Forecast

Total Payroll Jobs in U.S.

-1000

-800

-600

-400

-200

0

200

400

600

Source: BLS

In thousands

Job Changes in U.S.(Monthly Payroll Job Change)

Total Payroll Jobs in U.S.

-150

-100

-50

0

50

100

150

Source: BLS

In thousands

Temp Hire Job Changes in U.S.(monthly payroll job change)

3500

4000

4500

5000

Source: BLS

In thousands

Total Payroll Jobs in Michigan

2000

2200

2400

2600

Source: BLS; (12-month moving average)

In thousands

Total Payroll Jobs in Washington D.C. Metro

Federal Budget Deficit

-2,000,000

-1,500,000

-1,000,000

-500,000

0

500,000

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: Congressional Budget Office ProjectionsSource: CBO, NAR estimate

Federal Housing Policy

• Tax Favoritism– Mortgage interest deduction – Capital gains tax exclusion– Property tax deduction– But who pays taxes?

• Ownership and Positive Externalities– Student test scores, teen pregnancy, juvenile

delinquency

• What is the proper homeownership rate?• Any Ownership vs Successful Ownership

Economic Outlook

2008 20092010

forecast

GDP 0.4% -2.5% 2.8%

CPI Inflation 3.8% -0.2% 1.8%

Unemployment Rate 5.8% 9.3% 10.0%

10-year Treasury 3.7% 3.3% 3.8%

Unemployment Rate Peak at 10.5% in few months before going down consistently

Housing Outlook

2008 20092010

forecast

Existing Home Sales 4.9 m 5.2 m 5.7 m

New Home Sales 485 k 375 k 446 k

Home Price Growth -10% -13% 2% to 4%

Mortgage Rate 6.1% 5.1% 5.5%

Price Fear Factor ? ? None

0

50

100

150

200

250

300

Index = 100 in 1990

Case-Shiller Residential

MIT Commercial

2009 data is for Q2

Commercial and Residential Property Prices

Who Is Buying?

06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q3 08Q4 09Q1 09Q2 09Q3 $-

$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

Crossborder Equity Fund Inst'l Private Public User/other Unknown

Source: Real Capital Analytics

Credit Crisis 2008: Libor vs. Fed Funds Rate

Jan 1 2007 May 3 2007 Sep 4 2007 Jan 4 2008 May 7 2008 Sep 8 2008 Jan 8 20090

1

2

3

4

5

6

7

8

Libor Fed Funds

Percentage

Subprime acting up

Bear Stearns

Lehman Brothers belly up

Credit Crunch Ending?

• Libor Rates improving• Junk Bond yields becoming less wild• Banks making profit … but are they getting too big

again (75% of assets controlled by 10 banks)• Federal Reserve lending at zero (though not to

consumers)• Not Yet … Need to see

– Lower rate on jumbo mortgages– Lower rate on second home purchases – Lower rate on condo purchases– Lower rate on commercial real estate loans

Office Market Fundamentals

2009.1 2009.2 2009.3 2009.4 2010.1 2010.2

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Completions Absorption Vacancy

Squa

re F

eet (

'000

s)

Perc

ent (

%)

Source: NAR/CBRE-EA

Office Rent Growth

2004 2005 2006 2007 2008 2009 2010

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

National Rent Growth

Source: NAR/CBRE-EA

Commercial Market Outlook• 2008 to 2009

– Net absorption turns negative– Rising Vacancy Rates and Stagnant Rent– Markedly Fewer Transactions– Property Prices Falling– Distress Rising

• 2010– Economic recovery

• Local market recovery

– Commercial recovery with lag time– Modestly Positive net absorption– Rent struggles to move positive