real estate markets in a recovering(?) economy

Wichita Area Economic Outlook ConferenceOctober 1, 2009Dr. Stanley D. LonghoferDirector, WSU Center for Real Estate

The recent housing market downturn has been unprecedented in the post-WWII era Deep declines in:▪ Existing home sales (-35% from peak)▪ New home sales (-75% from peak)▪ Construction (-80% from peak)

Nationwide in scope▪ Past downturns have been regional

Source: National Association of Realtors

Source: U.S. Bureau of the Census

In some ways, it wasn’t While sales and construction have declined

nationwide, price movements have varied across the country

Local market conditions drive local market outcomes

In this downturn, however, most local markets were heavily impacted by a “national” factor: The relaxation and subsequent tightening of

mortgage credit standards

Source: Board of Governors of the Federal Reserve System

The average decline nationwide has been much smaller than most believe

Many markets (including most in Kansas) have continued to appreciate during the downturn

In the worst markets, existing home price measures probably overstate the true magnitude of value declines

Sources: FHFA and Standard & Poors

-30% from peak-30% from peak

-6% from peak-6% from peak

Both indexes are designed to provide a “constant quality” measure of house price changes

Differences in the indexes: Case-Shiller index is “value weighted” FHFA index includes both home sales and

mortgage refinancings Case-Shiller index is heavily influenced by

distressed sales Case-Shiller index is biased toward large,

coastal markets

Sources: WSU Center for Real Estate using data from FHFA and NAR

–8% from peak–8% from peak

–2% from peak–2% from peak

–9% from peak–9% from peak

43% of markets (166 out of 383) have seen prices increase over the past two years Both Wichita and Kansas as a whole have

seen modest appreciation over this time frame

Only 22 markets have seen price declines in excess of 30% over the past two years Other than Las Vegas (41% cumulative

decline), all of these markets are in California or Florida

The markets with the largest measured price declines are markets with a large number of distressed sales Poorly maintained properties Lenders pressured to get REO off their books

Does a distressed sale really reflect the market value of non-distressed properties?

Source: “Recent Trends in Home Prices: Differences across Mortgage and Borrower Characteristics,” OFHEO Research

Paper, August 2008

Homes in Central California that were purchased by high-risk borrowers have seen greater price declines than homes purchased by low-risk borrowers, holding all else constant.

Measured by sales and construction activity, this real estate downturn is unprecedented in the modern era Price declines, while widespread, have not

been as deep as is popularly believed With home sales and construction

having fallen so far, should we expect a strong rebound when the markets recover?

Source: WSU Center for Real Estate using data from NAR and U.S. Bureau of

the Census

Historical Averages:KS = 46US = 39

Source: WSU Center for Real Estate using data from U.S. Bureau of the

Census

Historical Averages:KS = 7

US = 10

Sources: National Association of Realtors and

U.S. Bureau of the Census

There is no reason to expect that sales activity will make a dramatic rebound Sales are not abnormally “low” Employment growth may be slow Financial markets have not fully

normalized A new era of thrift?

There is still excess inventory in many markets There was clearly overbuilding in “boom”

markets Distressed properties are still supply on

the market and compete with non-distressed homes

Construction activity will be especially slow Irrelevant inventory doesn’t matter

Prices have likely bottomed Most markets never saw steep declines The “worst” markets may rebound as

distressed sales become less commonRemember: All real estate markets

are local