RESIDENTIAL MARKET UPDATE 2012 Year-In-Review January 29, 2013 Charleston Marriott

presented by

The Charleston Trident Association of Realtors®

Stephen Slifer Economist NumberNomics Formerly of Lehman Brothers The Federal Reserve

Steve@NumberNomics.com

Facebook.com/NumberNomics

www.NumberNomics.com

The Highlights

1. GDP growth in 2013 = 2.7% (vs. 2.0% in 2012) 2. Consumers and businesses will be engines of growth. 3. Longer-term budget problems -- perspective. 4. Longer-term budget problems -- the solution.

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

GDP (Real)

Year-over-year

GDP (Real)

Slow, but steady. GDP growth for 2012 came in at 2.0% 2013 growth expected to be 2.7% even with some drag from fiscal policy.

Consumption 60%

Government 15.0%

Trade 10.0%

Investment 15%

GDP Components

50.0

55.0

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013

Consumer Sentiment

Recession

Consumer sentiment plunged in December as fiscal cliff fears mounted. It remained low in January as the 2% increase in the payroll tax kicked in. Even so, confidence remains relatively high.

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

S&P 500

The stock market has regained all of the ground it lost during the recession, and is close to its record high level of 1561 set back in October 2007.

$35.0

$40.0

$45.0

$50.0

$55.0

$60.0

$65.0

$70.0Consumer Net Worth (Trillions $)

The gain in stock prices means that consumers have restored most of the wealth they lost during the recession. The other important component of wealth is the value of your home.

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

Consumer Debt Service Ratio

Trend

Consumers were highly leveraged at the beginning of the recession. They have since paid down enormous amounts of debt, and this debt ratio is the lowest since 1983. They can quicken the pace of spending if they so choose.

2.9

3.4

3.9

4.4

4.9

Mortgage Rates

At 3.4% mortgage rates today are at a record low level… And they are going lower as the Fed keeps buying mortgage- backed securities.

145.00

155.00

165.00

175.00

185.00

195.00

205.00

215.00

225.00

235.00

245.00

Jan

2005

Jul 2

005

Jan

2006

Jul 2

006

Jan

2007

Jul 2

007

Jan

2008

Jul 2

008

Jan

2009

Jul 2

009

Jan

2010

Jul 2

010

Jan

2011

Jul 2

011

Jan

2012

Jul 2

012

Case Shiller Home Price Index

At the same time prices are 30% lower than they were at the peak of the housing market back in 2006.

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012

Housing Affordability Index

Record low mortgage rates and sharply reduced prices mean that housing today is more affordable than it has been at any time in 40 years

500

700

900

1100

1300

1500

1700

1900

Jan 2006 Jul 2006 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012

Housing Starts

Trend

Housing Starts

We need housing starts of 1.3 million to keep pace with growth in the population. Those people need a place to live. Starts have been below that pace for 5 years. Thus, demand has exceeded supply for 5 years.

4.5

5.5

6.5

7.5

8.5

9.5

10.5

1980:Q1 1983:Q1 1986:Q1 1989:Q1 1992:Q1 1995:Q1 1998:Q1 2001:Q1 2004:Q1 2007:Q1 2010:Q1

Rental Vacancy Rate

That increase in demand has created A shortage of rental properties. Vacancy rates have fallen sharply and are the lowest in a decade.

$600

$620

$640

$660

$680

$700

$720

$740

2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1

Asking Rent -- Vacant Rentals

The shortage of rental property is beginning to push rents upwards.

145.00

155.00

165.00

175.00

185.00

195.00

205.00

215.00

225.00

235.00

245.00Ja

n 20

05

Jul 2

005

Jan

2006

Jul 2

006

Jan

2007

Jul 2

007

Jan

2008

Jul 2

008

Jan

2009

Jul 2

009

Jan

2010

Jul 2

010

Jan

2011

Jul 2

011

Jan

2012

Jul 2

012

Case Shiller Home Price Index

After a big drop, home prices hit bottom in January 2012 Since that time they have been climbing at a 7.0% annual rate. As prices climb, fewer homeowners will be upside down and fence-sitters will be encouraged to buy.

1. Consumers feel confident.

2. They have restored almost all of their net worth.

3. The consumers’ debt burden is quite comfortable.

4. Interest rates are at record low levels.

5. Housing is as affordable as it has ever been.

Consumption 60%

Government 15.0%

Trade 10.0%

Investment 15%

GDP Components

49

52

55

58

61

64

Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

CEO Confidence

CEO confidence is high and should climb in the months ahead if the government successfully deals with budget problems.

600

700

800

900

1000

1100

1200

1300

1400

1500

1600

S&P 500

Stock prices have been climbing steadily. As a result, many firms have chosen to raise capital by issuing more stock.

-35.0%

-15.0%

5.0%

25.0%

45.0%

65.0%

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

$1,800

$1,900

$2,000

$2,100 Corporate Profits with IVA and CC

Corporate Profits

Year-over-year

By cutting costs and boosting productivity, profits have soared and are still climbing at a healthy 6% pace.

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Corporate Bond Rates

Aaa

Baa

Corporate borrowing rates are the lowest they have been in more than 50 years. Firms have been replacing high cost debt with lower cost borrowing. Lowers costs. Boosts profits. 50-year bonds anyone?

-22.0%

-17.0%

-12.0%

-7.0%

-2.0%

3.0%

8.0%

13.0%

-35.0%

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

Jan

2010

Apr 2

010

Jul 2

010

Oct

201

0

Jan

2011

Apr 2

011

Jul 2

011

Oct

201

1

Jan

2012

Apr 2

012

Jul 2

012

Oct

201

2

C & I Loans (L)

Year-Over-Year (R)

C & I Loans (%)

Credit is readily available via commercial paper and bond issuance. In addition, bank loans to businesses are growing at a robust 13% pace.

8.0%

8.5%

9.0%

9.5%

10.0%

10.5%

Corporate Cash / Assets (%)

Corporate cash levels have never been higher. They have plenty of cash available for investment.

1. CEO’s feel relatively confident.

2. Profits are soaring.

3. Interest rates are at record low levels.

4. Credit is readily available.

5. Firms have accumulated a mountain of cash.

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

Nonresidential Invest.

Year-over-year

Nonresidential Investment Investment spending had been growing at a 10% rate. But it has been gradually slowing since the beginning of last year.

Why? Uncertainty.

-50

0

50

100

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200

250

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350Ja

n-10

Feb-

10M

ar-1

0Ap

r-10

May

-10

Jun-

10Ju

l-10

Aug-

10Se

p-10

Oct

-10

Nov

-10

Dec-

10Ja

n-11

Feb-

11M

ar-1

1Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov

-11

Dec-

11Ja

n-12

Feb-

12M

ar-1

2Ap

r-12

May

-12

Jun-

12Ju

l-12

Aug-

12Se

p-12

Oct

-12

Nov

-12

Dec-

12Ja

n-13

Feb-

13

Private Employment Jobs have been climbing by about 170 thousand per month. That is OK, but not great. Why? Uncertainty.

We Have a Long-Term Budget Problem

-$1,600

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-$1,000

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$0

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2020

2021

2022

Budget Deficit

We have had 4 consecutive $1 trillion budget deficits. To finance a $1 trillion deficit need to issue $1 trillion of debt. In past 4 years we have added $5 trillion to debt outstanding.

20.0%

30.0%

40.0%

50.0%

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90.0%

100.0%

2000

2001

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2021

2022

Debt -- % GDP

Acceptable

Danger

As a result debt to GDP ratio has climbed sharply. Will reach danger level of 90% during next 10 years.

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

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180.0%

200.0%

2000

2001

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2035

Debt -- % GDP

Danger

Acceptable

The real problems begin beyond 2022 because the baby boomers (born 1946-1964) will retire between 2011-2029. Debt to GDP ratio could reach 186%. Think Greece.

What Do We Do?

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

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12.0%

2000

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2019

2020

2021

2022

Deficit -- % GDP

Projected deficits will climb to almost 6.0% of GDP by 2022. Would like it to be 2.0%. Thus, must shrink it by 4.0%.

14.0%

15.0%

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

1960

1962

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2022

Tax Revenue % GDP

Current revenue is 15.7% of GDP will rise to about 18.5% as the economy improves.

Historical average is 17.7%. Probably not a lot of room to increase taxes.

16.0%

17.0%

18.0%

19.0%

20.0%

21.0%

22.0%

23.0%

24.0%

25.0%

26.0%

1960

1962

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1990

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2020

2022

Govt. Spending % GDP

Government spending today is 23% of GDP. Climbs to 24% by 2022. Historical average if 19.7%. Way too high!

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2000

2001

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2005

2006

2007

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2011

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2022

Deficit -- % GDP Slifer solution: Tax Revenue = 0.0% Expenditure cuts = -4.0% Deficit Reduction = -4.0% Not everybody agrees.

Most policy makers want a ratio of 3:1 of spending cuts vs. higher tax revenue.

Tax Revenue

Individual = 46%

Social Security = 35%

Corporate = 11%

Other = 8%

To boost tax revenue they must increase individual taxes and/or Social Security taxes. Combined they account for 81% of the total.

Government Spending

Entitlements = 62%

Nondefense = 14%

Interest = 6%

Defense = 18%

To cut spending they must include entitlements such as Social Security, Medicare, and Medicaid (62%). Discretionary spending is only 32% or roughly 1/3 of the pie.

Now We Have a Broad Plan

Revenues = 0.0%, Expenditures = -4.0%

What specific taxes will be increased?

What expenditures will be cut?

Erskine - Bowles Commission

The Blueprint for a Solution

Erskine Bowles Commission

1. Bipartisan. 18 members. Formed in 2010. 2. 9 Republicans. 9 Democrats 3. Nobody expected them to find a solution.

But they did.

Erskine Bowles Commission

1. Bipartisan. 18 members. Formed in 2010. 2. 9 Republicans. 9 Democrats 3. Nobody expected them to find a solution.

But they did. 4. 11 votes in favor (61%) 5. Needed 14 to formally adopt the blueprint.

Erskine Bowles Commission

1. Individual Taxes Three brackets – 8%, 14%, 23% (vs. 39%) Eliminate most tax deductions Tax rates lower, but tax revenue rises.

Erskine Bowles Commission

2. Corporate taxes Corporate tax rate – 26% (vs. 35% today) Eliminate most tax deductions. Tax rates lower, but tax revenue rises.

Erskine Bowles Commission

3. Discretionary Spending

Cut to 2008 levels quickly (pre-recession). Allowed to grow at ½ of inflation rate. Equal percentage cuts for security and non-

security.

Government Spending

Entitlements = 62%

Nondefense = 14%

Interest = 6%

Defense = 18%

Erskine Bowles Commission

4. Social Security

Reduce benefits, particularly for high income individuals.

Increase retirement age gradually to 68. Increase payroll tax max from $168

thousand to $190 thousand.

Erskine Bowles Commission

5. Medicare

Medigap policies -- First $500 not covered. $500-5,000 coverage is 50% of expenditure. Raise eligibility age to 68.

20.0%

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80.0%

100.0%

120.0%

140.0%

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200.0%

2000

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2030

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2035

Debt -- % GDP

Danger

Acceptable

Instead of debt to GDP ratio climbing to 186% by 2035, Simpson Bowles would shrink it to 40%. It may take 25 years to get there, but it can be done.

If They Can Find A Solution…

1. Less uncertainty. 2. Higher consumer and business confidence. 3. Faster growth in investment. 4. Faster GDP growth. Faster income growth. 5. More hiring. Lower unemployment rate. 6. Stock market soars.

Two Important Dates

1. February 28. Government begins to sequester money. 2. March 27. Continuing resolution expires. Government shutdown.

2013 Forecasts

2012 2013 GDP 2.0% 2.7% Unemployment Rate 7.8% 7.3% Inflation Rate 1.9% 1.9% Fed Funds Rate 0.1% 0.1% 10-year Note 1.7% 1.3% 30-year Mortgage 3.4% 3.0%

Seize the Moment

Stephen Slifer NumberNomics www.NumberNomics.com

Joey Von Nessen, Ph.D Research Economist USC’s Moore School of Business RESH Marketing & Research

joey.vonnessen@moore.sc.edu

YouTube.com/RESHMarketing

www.Resh.com

@RESHMarketing

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