In This IssueSome other “R” words. Now that most experts agree that we can “retire” the dreaded word recession, perhaps it’s time to look at some other “R” words – like restor-ing (confidence), reinvigorating (the job market), and lessons learned from rebuilding. In his commentary this month, NAR Chief Economist Lawrence Yun discusses current and future developments in the U.S. economy, and some issues we may want to focus on. Read more.

Foreclosing on 2009. Foreclosures were certainly in the news last year. Of course, some states and metro areas fared better than others. In our In Focus column this month, Research Economist Selma Lewis looks at trends in foreclosures, negative eq-uity, some of the areas most affected, and what may be down the road. Read more.

Latest quarterly figures on existing-home sales by state and metropolitan area home prices showed some hopeful signs. Most states experienced gains in resales – both on a quarter to quarter and a year over year basis. And the number of metro areas reporting a year over year rise in the median sales price of homes was also up from the previous quarter. Read more.

Existing-home sales fell 16.7 percent in December to a seasonally adjusted annual rate of 5.45 million units. The decline was expected after the rush of first-time buyers tried to complete their home purchase transactions before the original November deadline for the first-time buyer tax credit. But December resales were up 15.0 per-cent from a year ago. In addition, for all of 2009 there were 5.16 million existing-home sales, 4.9 percent higher than the number of transactions recorded in 2008 – the first annual sales gain since 2005. Other positive news: the national median home price rose 1.5 percent from December of 2008 – to $178,300. That is the first year-over-year gain in prices since August of 2007. Total housing inventory at the end of December fell 6.6 percent to 3.29 million existing homes available for sale – a 7.2-month supply at the current sales pace. Read more.

February 2010

Real Intelligence – Real Advantages

Table of Contents

Real Estate Monitor 2

Economic Commentary: Reporting, Reinvigorating, Rebuilding 4

U.S. Economic Forecast and Outlook Table and Charts 6

In Focus: “Foreclosing” on 2009 8

Rising Sales in Most States in the Fourth Quarter of 2009 11

Links to Statistical Tables 13

Resources From NAR Research 14

Visit us on the web at www.realtor.org/reinsights

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®2

Existing-home sales rose declined 16.7% in December to a seasonally adjusted annual rate of 5.45 million units. Still, resales were up 15.0% from year ago levels. The national median sales price for an existing home was $178,300 in December – 1.5% ahead of the price in December of 2008. Read more.

New home sales also dipped in December – by 7.6% – to a seasonally adjusted annual rate of 342,000 units. December new home sales were 8.6% below the level a year ago. The number of new homes available for sale at the end of December declined but the months’ supply rose to 8.1 at the current sales pace. Read more.

Housing starts registered a seasonally adjusted annual rate of 557,000 units in December – a 4.0% decline from November, but 0.2% above the rate in December of 2008. Housing permits – generally a reliable indicator of future starts – rose 10.9% in December and were 15.8% above their level a year ago. Read more.

Housing affordability continued at healthy levels. NAR’s housing affordability index registered a reading of 163.8 for December – off from November’s level of 170.2 but ahead of the 159.1 reading in December of 2008. The month to month decline in the index was due primarily to increases in the me-dian home price and qualifying income and a decrease in median family income. Read more.

Mortgage rates Average rates on 30-year fixed rate mort-gages remained nearly flat from one year ago, reaching 5.05% in January after months of see-sawing below the 5 percent mark. The historic low rates can be attributed to the extension of the home buyer tax credit. In the near future, rates could trend or remain low, as Fannie Mae and Freddie Mac recently announced they would begin buying delinquent loans of mortgage-backed securities. Read more.

Employment The job market improved slightly in January but remains a challenge. Employers cut 20,000 non-farm payroll jobs during the month. But the good news is that the unemployment rate actually declined to 9.7%, surprising many analysts who expected it to rise. Read more.

Economic growth Despite the weakness in the job market, the economy continued to improve. Gross domestic product registered a 5.7% gain (from the 3rd to the 4th quarter). This is the first estimate of 4th-quarter GDP. Third quarter GDP rose 2.2%. The rise in GDP reflects increases in private inventory investment, exports, and personal consumption. Read more.

Real Estate Monitor

Monthly Indicator Recent Figures Forecast

Likely Direction Over the Next Six Months

Dec 2009 5,450Nov 2009 6,540Dec 2008 4,740

Dec 2009 342Nov 2009 370Dec 2008 374

Dec 2009 557Nov 2009 580Dec 2008 556

Dec 2009 163.8Nov 2009 170.2Dec 2008 159.1

Jan 2010 5.05% Dec 2009 4.88% Jan 2009 5.06%

Jan 2010 -20Dec 2009 -15012-month total: -4,022

2009:IV +5.7%2009:III +2.2%2008:IV -5.4%

Second quarter rush of buyers to get the tax credit

Climbing out slowly from very depressed levels

Builders want to dig – if they can get construction loans

Income not rising because of high unemployment

Will remain at rock-bottom rates for a prolonged period

Hiring of temp workers first and then permanent ones

Continued expansion but not robust

Notes: All rates are seasonally adjusted. Existing home sales, new home sales and housing starts are shown in thousands. Employment growth is shown as month-to-month change in thousands. Sources: NAR, Bureau of the Census, Bureau of Labor Statistics and Freddie Mac. This report reflects data as of February 5, 2010. Compiled by Wannasiri Chompoopet, Ken Fears and Lawrence Yun.

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®3

Pending home sales stabilized in December. NAR’s Pending Home Sales Index rose 1.0% for the month to a reading of 96.6. December’s reading was 10.9% above that of a year ago. The Pending Home Sales Index is a forward-looking indicator based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not yet closed. Sales are usually finalized within one to two months of signing. The index is based on a large national sample, typically repre-senting about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales contract activ-ity from 2001 through 2004 paralleled the level of closed existing-home sales in the following two months. Please note there is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales perfor-mance than with month-to-month comparisons. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales. The home buyer tax credit continues to play a significant role in households’ decisions to purchase homes. Buyers who have a contract in place to purchase a primary residence by April 30, 2010, have until June 30, 2010, to finalize the transaction to qualify for a tax credit of up to $8,000 for first-time buyers and $6,500 for repeat buyers. Read more.

NAR’s Pending Home Sales Index

4000

4500

5000

5500

6000

6500

7000

EHS

Dec pNov rOct Sept Aug Jul Jun May Apr Mar Feb Jan Dec

80

85

90

95

100

105

110

115

120

PHS

2008

Tho

usan

ds

Pending Sales Index

2009

5,800

6,000

6,200

6,400

6,600

6,800

5,600

EHS PHS

Source: NAR Research

Pending Home Sales(existing home sales lagged by 1-2 months)

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®4

Reporting, Reinvigorating, Rebuildingby Lawrence Yun, NAR Chief Economist

Well, we’ve settled into 2010. Of course, we’re still getting some figures from last year. After having plunged in November, December’s pending home sales index rose ever so modestly over the month. Pending sales – which are contract signings and not closings – fell hard in November. That was likely due to many consumers assuming that the first-time home buyer tax credit would not be available after November 30th, as well as the near impossibility of closing any deal within a month. While the change in pending sales from November to December was small, both months’ activity remained comfortably above year-ago levels, suggesting that the housing market has built up sufficient momentum on its own. As the urgency to beat the new tax credit expiration date reappears late spring and in June, we are likely to see a second surge in home sales activity. After that, sales will surely tumble once more in the immediately following months. The key gauge to monitor at that time is whether or not sales remain above their level a year ago. If so, we can be assured that the housing market is on a sustainable recovery path even without any additional stimulus.

Reporting PerspectiveThe swings in pending home sales had that near direct

relationship with actual closing figures with a one-month lag time. December existing-home sale closings were quite disappointing but not surprising given the huge decline in pending sales in November. Closed sales tumbled by the largest month-to-month percentage change in over 40 years – at least, that’s what was reported by a large segment of the media. But let’s get some perspective on this. As with the pending home sales data, December’s existing-home sales were higher – by 15 percent on a year over year basis. Interestingly, on a seasonally adjusted annualized basis (the accounting method applied to most economic indicators like GDP and job gains), December resales posted the fourth highest monthly tally in two years – a story not highlighted in the headlines. Only the three prior months which reflected tax-credit induced sales registered higher sales. Perhaps the December sales were actually not that much of a disaster.

Restoring ConfidenceRegardless of whether they read the story of the largest

sales decline in 40 years or the fourth highest home sales in two years (whichever the media report), consumers are “smarting up” to the fundamentals in the housing market. They are seeing consistent declines in inventory and prices beginning to stabilize in many parts of the country. Indeed, median home prices (on a national basis) recorded their first 12-month gain in over two years in December. Other price

data – such as that from Case-Shiller and the government’s Federal Housing Finance Agency – have also shown price stability in recent months. With this trend, the consumer “fear factor” regarding home buying will essentially disappear in 2010 and no longer be a drag on the housing market.

Reinvigorating the Job MarketOf course there is anxiety out

there – especially in the job market. The unemployment rate could top 10.5 percent sometime in spring before steadily heading lower. Even those with jobs may be wary of making a large purchase given the high unemployment rate and the greater uncertainty regarding their own jobs. In the U.S. with its growing population, about 80,000 net new job creations on average each month are necessary just to keep the unemployment rate from rising. Much higher job gains are needed in order to drive down the unemployment rate for good. Sometime in the first half of this year, possibly even as early as April, there will be net job additions for the country. But the unemployment rate could easily continue to inch higher because the expected job additions will number less than 80,000 per month. Still, from the real estate market perspective, it is job creation that will be the determinant of demand and not the unemployment rate. In the second half of the year, a total of 700,000 net new jobs could be added to the economy even though the unemployment rate will remain close to double-digits right up to the November mid-term election. We can expect electoral consequences.

Revisiting DeficitsSo, what to do to make sure that the economy stays on

its recovery track in order to spur job creation? Short-term corrective actions to stimulate the economy are well justified provided they are rightly focused. But we do need to worry about deficits. Another year of record high budget deficits is disturbing. The Obama Administration now expects even a higher budget deficit in 2010 than in 2009; $1.6 trillion versus $1.4 trillion, respectively. The previous “record” deficit was not even $500 billion. Even if the budget allocation for the Defense Department was zero (no more soldiers, no more missiles), the U.S. budget deficits in 2009 and 2010 would be still be the highest ever in U.S. history.

To be fair, the deficit should be measured in relation to the U.S. overall economic pie. By this measure, the ’09 and ’10 deficits are, indeed, among the highest – but not the highest. The highest deficit-to-GDP occurred during the Second World War. That makes sense, since during the war years government spending was primarily defense spending. In the years immediately after the war, the deficit was brought down close to zero very quickly because of significant reductions in defense

On a seasonally adjusted annualized basis, December resales posted the fourth highest monthly tally in two years – a story not highlighted in the headlines.

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®5

Reporting, Reinvigorating, Rebuilding(continued)

meant a sharp reduction in overall government spending. That is not the case today. The only good news on the deficit front is that it is expected to slide from 2011 until about 2017.

After that, look out! With about 10,000 baby-boomers expected to retire every single day, Social Security and Medicare benefit payment obligations will soar while at the same time the labor force shrinks in size. The deficit will be completely out of whack unlike anything seen before – and for a sustained period. Taxes will have to be raised and/or government spending reduced drastically. Otherwise, there could be high-inflation or a debt payment default leading to massive disruption and a downward spiral in our standard of living. The debate will be over these two unpleasant choices – unless someone comes up with a third miraculous solution.

Reinforcing Productivity and InnovationActually, someone has. That third solution is economic

growth. The future deficit nightmare scenarios are often based on average GDP growth of 2.5 percent to 2.8 percent per year. If (somehow) GDP grows by 4 percent or 4.5 percent on a sustained basis, then there may not be a need for a tax increase or massive cuts in government spending. While the first estimate of 4th quarter 2009 GDP growth of 5.7 percent looks nice, it is only for one single quarter and the pace of expansion is expected to slide below 3 percent in the upcoming quarters. So is higher GDP growth a possibility or simply a hope and hype? For comparison, the Chinese economy, starting from a low base point, has been growing at about 10 percent per year for the past two decades.

Of course, the U.S. is not China and we have a different economic system. Higher GDP growth can only come from rising labor productivity. One quick solution to increasing productivity is through education. While it would be nice if we could “clone” innovators (Albert Einstein, Bill Gates just to mention two), it is more realistic to ask students to work harder. It may be time to rethink the ‘feel-good’ education system where everyone receives blue ribbons and no one takes courses in advanced math and science. The lure of huge bonus payments in the financial industry could also drain the nation’s talent away from scientific and medical fields where productivity gains make differences. And innovative educational programs don’t necessarily cost more tax dollars. Evidence abounds in the U.S. of no relationship of improved learning to increased funding.

RebuildingA nation’s economic system also matters a great deal in

raising productivity. In light of the Haitian earthquakes and the need for reconstruction, millions of ordinary people have contributed to help Haiti get back on its feet. Perhaps down the road, Haiti can adopt the best of economic ideas in order to promote productivity and a healthy economy. There is precedent. During the Korean War, many U.S. and U.N. soldiers (with heavy sacrifices from Britain and Turkey) did not know

Sometime in the first half of this year, possibly even as early as April, there will be net job additions for the country. But the unemployment rate could easily continue to inch higher.

what they were doing in such a poor country nor about what they were fighting for. The people of North Korea today are even poorer than those in Haiti and live in constant fear. The South Korean economy by contrast is now among the top ten in the world. Perhaps, now with such distinct different economic outcomes between North and South Korea, that war’s veterans and their families have a better understanding how their efforts made profound differences in the lives of millions of Korean people. In a similar vein, Haitians – with the help of many from around the world – can rebuild their country, their society and their economy.

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®6

0

2

4

6

81-Year Adjustable Mortgage Rate

30-Year Fixed Mortgage Rates

Quarter

20112010200920082007200620052004

1-Year Adjustable Mortgage Rate 30-Year Fixed Mortgage Rates

History Forecast

2006200520044 3 42 3 4 1 2 3 4 1 2 3 4 1

20072 3 4

perc

ent

1 22008

3 120092 3 4 1 2

20101 22011

New Home Sales

Existing Home Sales

Quarter

20112010200920082007200620052004

New Home Sales Existing Home Sales

History Forecast

0

2

4

6

8

10

2006200520043 42 3 4 1 2 3 4 1 2 3 4 1

2007

Mill

ions

of U

nits

2 3 4 1 22008

3 4 120092 3 4 1 2

20101 2

2011

Sources: NAR, Bureau of the Census, NAR Forecast

Home SalesSpikes reflect tax credit; more sustainable sales beginning in 2nd half of 2010

Sources: Freddie Mac, NAR Forecast

Mortgage RatesRates move upward with economic recovery

0

500

1000

1500

2000

2500Multi-Family Housing Starts (thousand units)

Single Family Housing Starts (thousand units)

Quarter

20112010200920082007200620052004

Multi-Family Housing StartsSingle Family Housing Starts

History Forecast

2006200520044 3 42 3 4 1 2 3 4 1 2 3 4 1

2007

Tho

usan

ds

2 3 4 1 22008

3 120092 3 4 1 2

20101 2

2011

Sources: Bureau of the Census, NAR Forecast

Housing StartsSlow recovery for construction

-8

-6

-4

-2

0

2

4

6GDP

Quarter

20112010200920082007200620052004

History Forecast

2006200520043 42 3 4 1 2 3 4 1 2 3 4 1

2007

% G

DP

Gro

wth

(S

AA

R)

2 3 42008

1 2 3 42009

1 2 3 4 1 22010

1 22011

Sources: Bureau of Economic Analysis, NAR Forecast

Economic GrowthThings settle down after big spike in 4th quarter of 2009

Sources: Bureau of Labor Statistics, NAR Forecast

UnemploymentUnfortunately, more pain before starting to trend downward

Sources: Bureau of Labor Statistics, NAR Forecast

Job CreationFinally, some positive hiring news in 2010

0

2

4

6

8

10

12GDP

Quarter

20112010200920082007200620052004

History Forecast

2006200520043 42 3 4 1 2 3 4 1 2 3 4 1

2007

Une

mpl

oym

ent

rate

(%

)

2 3 42008

1 2 3 42009

1 2 3 4 1 22010

1 22011

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0GDP

Quarter

20112010200920082007200620052004

History Forecast

2006200520043 42 3 4 1 2 3 4 1 2 3 4 1

2007

New

No

n-fa

rm P

ayro

ll Jo

bs

2 3 42008

1 2 3 42009

1 2 3 4 1 22010 2011

1 2

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®7

U.S. Economic OutlookFebruary 2010

U.S. Economy

Annual Growth Rate

Real GDP -6.4 -0.7 2.2 5.7 2.2 2.1 2.5 3.2 3.3 3.7 0.4 -2.4 2.8 3.2

Nonfarm Payroll Employment -5.9 -4.5 -2.6 -1.4 1.2 1.3 1.4 1.5 1.7 2.4 -0.4 -3.7 -0.1 1.7

Consumer Prices -2.4 1.3 3.6 2.0 1.3 1.3 1.7 1.2 2.2 3.0 3.8 -0.4 1.8 2.3

Real Disposable Income 0.2 6.2 -1.4 -3.8 2.1 2.4 0.2 2.5 6.4 4.2 0.5 0.9 0.6 3.4

Consumer Confidence 30 48 52 51 55 55 56 60 62 65 58 45 57 65

Percent Unemployment 8.1 9.2 9.6 10.1 10.2 10.0 10.0 9.9 9.9 9.7 5.8 9.3 10.0 9.7

Interest Rates, Percent

Fed Funds Rate 0.2 0.2 0.2 0.2 0.2 0.2 0.5 1.0 1.8 2.2 1.9 0.2 0.5 2.3

3-Month T-Bill Rate 0.2 0.2 0.2 0.2 0.2 0.2 0.5 1.0 1.7 2.1 1.4 0.2 0.5 2.2

Prime Rate 3.3 3.3 3.3 3.2 3.3 3.3 3.4 3.8 4.5 5.0 5.1 3.2 3.5 5.3

Corporate Aaa Bond Yield 5.3 5.5 5.3 5.2 5.3 5.2 5.3 5.4 5.6 5.8 5.6 5.3 5.3 5.9

10-Year Government Bond 2.7 3.3 3.5 3.5 3.7 3.7 3.9 4.0 4.2 4.4 3.7 3.3 3.8 4.5

30-Year Government Bond 3.5 4.2 4.3 4.1 4.2 4.3 4.4 4.6 4.8 5.0 4.3 4.0 4.4 5.0

Mortgage Rates, percent

30-Year Fixed Rate 5.1 5.0 5.2 4.9 5.2 5.4 5.5 5.7 6.0 6.2 6.1 5.1 5.5 6.2

1-Year Adjustable 4.9 4.8 4.8 4.5 4.5 4.6 4.7 4.9 5.1 5.4 5.2 4.8 4.7 5.4

Housing Indicators

Thousands

Existingg Home Sales* 4,583 4,757 5,290 6,027 5,358 6,079 5,470 5,665 5,588 5,714 4,913 5,193 5662 5,696

New Single-Family Sales 338 372 407 373 366 406 454 543 599 666 485 375 446 637

Housing Starts 528 540 587 553 549 609 685 826 924 1,034 904 552 668 1,072

Single-Family Units 358 425 498 472 469 495 554 662 730 812 622 438 545 837

Multifamily Units 169 115 88 81 80 115 132 164 194 222 282 113 123 235

Residential Construction** 368 344 360 356 353 356 370 395 426 456 451 357 369 468

Percent Change – Year Ago

Existing Home Sales -7.0 -2.9 5.7 27.2 16.9 27.8 3.4 -6.0 4.3 -6.0 -13.1 5.7 9.0 0.6

New Single-Family Sales -40.1 -27.1 -11.5 -4.6 8.2 9.1 11.5 45.6 63.7 64.1 -37.5 -22.6 18.8 42.9

Housing Starts -50.2 -46.9 -32.4 -16.0 4.1 12.9 16.8 49.4 68.3 69.7 -33.3 -39.0 21.0 60.6

Single-Family Units -51.2 -36.6 -16.6 2.3 30.9 16.4 11.1 40.3 55.7 64.1 -40.5 -29.5 24.3 53.6

Multifamily Units -47.8 -66.8 -67.3 -58.9 -52.7 -0.4 49.2 102.5 142.2 93.8 -8.7 -59.8 8.0 91.5

Residential Construction -23.9 -25.6 -18.9 -14.1 -4.0 3.5 2.8 10.9 20.5 27.8 -0.6 -20.8 3.2 27.0

Median Home Prices

Thousands of Dollars

Existing Home Prices 167.6 174.4 178.3 173.5 169.1 181.0 185.3 180.6 175.9 189.0 198.1 173.9 179.8 187.5

New Home Prices 207.8 218.7 210.4 215.1 212.0 225.9 219.9 225.2 222.3 237.0 232.1 213.3 221.3 231.7

Percent Change -- Year Ago

Existing Home Prices -15.6 -16.2 -11.6 -4.0 0.9 3.8 3.9 4.1 4.0 4.4 -9.5 -12.2 3.4 4.3

New Home Prices -11.8 -7.6 -7.6 -2.9 2.0 3.3 4.5 4.7 4.9 4.9 -6.4 -8.1 3.7 4.7

Housing Affordability Index 174 169 159 170 164 150 142 142 140 127 135 170 151 129

Quarterly figures are seasonally adjusted annual rates.

* Existing-home sales of single-family homes and condo/co-ops; ** billion dollars

2009 2010 2011 2008 2009 2010 2011 I II III IV I II III IV I II

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®8

“Foreclosing” on 2009 by Selma Lewis, Research Economist

At the end of 2009, foreclosures were definitely “in the news.” And for good reason. The number of foreclosures rose from 1.8 million at the end of 2008 to about 2.5 million at the end of 2009. Ac-cording to RealtyTrac, at the end of 2009, there was a total of 2,824,674 properties involved in foreclosure filings; that total in-cludes default notices, scheduled foreclo-sure auctions and bank repossessions. This means that 2.21 percent of all U.S. housing units – one in 45 – received at least one foreclosure filing during 2009. That is up from 1.84 percent in 2008, 1.03 percent in 2007 and 0.58 percent in 2006.

It is important, however, not to gener-alize foreclosure trends across all states. In fact, four states – Nevada, Arizona, Florida, and California – account for 45 percent of the foreclosure inventory (ac-cording to the Mortgage Bankers Asso-ciation’s Mortgage Delinquency Survey) and 50 percent of all delinquency filings (based on data from RealtyTrac). Nevada tops the list with more than 10 percent of its housing units receiving at least one delinquency notice. In general, through-out 2009 these four states topped the list with the highest rates of filings and the number of foreclosures.*

In contrast, Vermont boasted the low-est foreclosure rate – 0.05 percent of its housing units – as well as the lowest abso-lute number of foreclosures – 143. Similarly, North Dakota had only 0.13 percent of its housing units receiving a delinquency notice. West Virginia was third at 0.17 percent and South Dakota ranked fourth at 0.21 percent. For comparison, the aver-age national delinquency rate in the same quarter was at 8.85 percent.

Current situationAt the beginning of the foreclosure

crisis, mortgage defaults were primar-

ily among non-prime borrowers. But things changed. In 2009, the wave of foreclosures were largely among prime loans. This suggests that while the initial crisis stemmed from bad underwriting practices, the extension of the crisis was due to the national economic recession and borrowers losing their jobs. Actu-ally, the number of seriously delinquent prime loans grew at a much faster rate in 2009 – 66 percent – than did the number of seriously delinquent subprime loans, which increased by about 20 percent. As a result, prime loan defaults accounted for about 60 percent of the increase in all delinquent loans over the past year.

Similarly, the number of prime loans

in foreclosure has doubled in each of the past two years, 99 percent between 2007 and 2008, and 95 percent in 2009. In comparison, the number of subprime loans in the process of foreclosure increased only 5 percent in the past year and 12 percent the year before. There has been, however, a much lower share of subprime loans originated in the last year, falling by 14 percent from the year prior. In the 3rd quarter of 2009, prime mortgage foreclosures accounted for 54 percent of all foreclosures, while sub-prime loans accounted for 36 percent.

In the last couple of months, it has become evident that the foreclosure crisis has moved “up market.” Among

* For more information, visit the Mortgage Bankers Association of America web site at www.mbaa.org. RealtyTrac’s web site address is www.realtytrac.com. For county level 90+ days mortgage delinquency rates, please visit: http://data.newyorkfed.org/creditconditions/#US_expMay2011_sp.

Mortgage Delinquency by State(percent)

Source: Mortgage Bankers Association

5%

4%

6%

12% 5%

3%

6%6%

6%

7%

12%

5%

17%

3%

4%

2%

5%

6%

5%

9%

5%

7%

5%6%

6%

8%

8%

7%

6%

7%

9%10%

7%5%

9%

8%

7%

10%

19%

6%

10%

8%

4%

6%8%

9%7%

6%

9%

3%7%

Legend2.4% - 3.0%

3.1% - 6.0%

6.1% - 9.0%

9.1% - 12.0%

12.1% - 18.8%

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®9

recent prime loan defaults, those loans with balances of between $417,000 and $600,000 have performed the worst. In fact, the monthly Mortgage Monitor by Lender Processing Services (LPS) sug-gests that non-agency jumbo prime loans have had the worst deterioration rates year-over-year for both delinquencies and foreclosures, with delinquencies increas-ing some 85 percent and foreclosures increasing some 190 percent, both signifi-cantly higher than other product types. In 2006, homes in the bottom one-third of home values accounted for almost 55 percent of all foreclosures. In 2009, the bottom one-third made up 35 percent of foreclosures, compared to 35 percent and 30 percent for the middle and top one-thirds, respectively. That means 30 percent of foreclosures are homes in the top tier of local home values, almost twice the proportion of foreclosures than three years ago. Data by Amherst Securities suggest that the increasing rate of negative equity among top home price tiers might be kindling this trend.

Under waterNearly 10.7 million, or 23 percent, of

all residential properties with mortgages were in negative equity as of the second quarter of 2009. An additional 2.3 million mortgages were possibly approaching negative equity – or having less than five percent in equity. That adds up to nearly 28 percent of all residential properties with a mortgage nationwide.

The share of homeowners “under water” is still largely concentrated in five states – in fact, those states with the highest foreclosure rates, namely Nevada, Arizona, Florida, Michigan, and California. Among the top five states, the average negative equity share was 46 percent, compared to 13 percent for the remaining states.

In terms of larger metropolitan areas

“Foreclosing” on 2009 (continued)

(with population greater than 50,000 people), the highest levels of negative equity are in those metros located in the top five “negative equity” states. Within smaller metropolitan areas largest losses are seen in Merced, CA and El Cen-tro, CA (both 85 percent underwater), Modesto, CA and Stockton, CA (both 84 percent), Bakersfield, CA (79 percent), and Port St. Lucie, FL (79 percent).

“Strategic Defaults” With estimates from LPS of some 25

percent of borrowers currently having negative equity nationwide, the ques-tion increasingly being asked is what the likelihood may be of homeowners underwater who are likely to “leave the

pool”, or “strategically default”. According to a study by Experian and Oliver Wyman, more than a quarter of all existing defaults were found to be strategic and they more than doubled from 2007 to 2008 to 588,000. The study also found that bor-rowers with higher credit scores were 50 percent more likely to strategically default than those with lower credit scores.

In another survey study by Guiso, Sa-pienza, and Zingales**, the authors found that 26 percent of existing defaults were strategic. They also found that no house-hold would default if the equity shortfall is less than 10 percent of the value of the home. Yet, 17 percent of households would default, even if they could afford to pay the mortgage, when the equity

** Guiso, Luigi, Paola Sapienza and Luigi Zingales: Moral and Social Constraints to Strategic Default on Mortgages, NBER Working Paper No. w15145, July 2009.

Negative Equity by State(percent)

* This data only includes properties with a mortgage. Non-mortgaged properties are by definition not included.Source: First American CoreLogic

11%

6%

35%

11%48%

65% 9%

19%

9%14%

6%

16%

18%

20%

10%

9%

7%

9%14%

14%

6%

7%

24%

18%

14%

9%

11%

9%

13%

37%

20%

24%

12%

45%

37%

22%

18%16%

15%

11%

14%

16%

10%

8%

LegendBelow average

Average

Above average

High above average

No Data

N/A

N/A

N/A

N/A

N/A N/A

N/A

Legend2.4% - 3.0%

3.1% - 6.0%

6.1% - 9.0%

9.1% - 12.0%

12.1% - 18.8%

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®10

shortfall reaches 50 percent of the value of their house.

Besides relocation costs, the most important variables in predicting strategic default are moral and social consider-ations. All things being equal, people who consider it immoral to default are 77 percent less likely to declare their inten-tion to do so, while people who know someone who defaulted are 82 percent more likely to declare their intention to do so. That said, there is some research that suggests that while borrowers with negative equity should be walking away in droves, most homeowners choose not to strategically default due to the desire to avoid the shame and guilt of foreclosure and exaggerated anxiety over the per-ceived consequences from foreclosure.

What May Lie AheadWhat many analysts are finding alarm-

ing is the decreasing rate of delinquencies that are ending up in foreclosures. Loss mitigation efforts such as the Making Home Affordable Program (HAMP), as well as backlogs caused by the elevated delinquent loan volumes, are extending the number of days in delinquency. The data by LPS suggest that average number of delinquent days for loans in foreclosure has risen from 249 to 406 from January 2008 to December 2009 – an increase of 63 percent. The fear is that the increasing pool of troubled loans, also referred to as the “shadow inventory,” is only going to lead to more inventory and home price problems in the future. (We’ll discuss shadow inventory in a follow-up article in next month’s Real Estate Insights.)

The impact of HAMP is still difficult to evaluate. December’s numbers sug-gest 1,164,507 cumulative trial-period

“Foreclosing” on 2009 (continued)

Source: First-American CoreLogic, 3rd quarter 2009 data

Large Metros with Highest Negative Equity (population greater than 50,000)

Negative UnemploymentMetropolitan Area Equity Rate

Las Vegas-Paradise, NV 70 % 14 %Riverside-San Bernardino-Ontario, CA 54 14Phoenix-Mesa-Scottsdale, AZ 54 9Fort Lauderdale-Pompano Beach-Deerfield Beach, FL 52 11Orlando-Kissimmee, FL 51 11Tampa-St. Petersburg-Clearwater, FL 46 12Miami-Miami Beach-Kendall, FL 46 11Sacramento-Arden-Arcade-Roseville-Woodland, CA 44 12Detroit-Livonia-Dearborn, MI Metropolitan Division 44 17West Palm Beach – Boca Raton. Boynton Beach, FL Metropolitan Division 44 11

*** The State Foreclosure Prevention Working Group was formed in the summer of 2007 with the goal to reduce the number of foreclosures by encouraging loan modifications and other sustainable, long-term solutions. The Group currently consists of representatives of the Attorneys General of 12 states (Ari-zona, California, Colorado, Florida, Illinois, Iowa, Massachusetts, Nevada, North Carolina, Ohio, Texas, and Washington), three state bank regulators (Maryland, New York and North Carolina), and the Conference of State Bank Supervisors.

plan offers extended to borrowers, and 902,620 trial modifications started. The goal is 3-4 million homeowners with lower mortgage payments through a modification through 2012. Available data indicate around 112,000 modifications have turned permanent. The latest assess-ment of the program’s progress by the State Foreclosure Prevention Working Group*** also suggests that while the HAMP has helped to slow down the foreclosure crisis, current efforts have been insufficient as the total number of struggling homeowners not on track for any foreclosure prevention assistance continues to grow. Indeed, the Working Group found that only four out of ten seriously delinquent borrowers were involved in loss mitigation efforts.

As the increase in the rates of prime loan defaults suggests, so does the pre-dominant hardship reason for permanent

modifications under the Making Home Af-fordable program: curtailment of income is currently the primary reason for mortgage defaulting. With the unemployment rate at or near 10 percent nationally, and millions of more Americans having either exited the workforce or remaining underemployed, it is very difficult to say definitively how the economy will play out in the next couple of years and what the effects will be on the future foreclosure rates.

More in-depth analysis of this issue by NAR Research is available at www.realtor.org/research.

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®11

Rising Sales in Most States, and Rising Prices in Many Metros (at Last!)by NAR Staff

There was good news for most states in the 4th quarter of 2009. Existing-home sales rose from the 3rd to 4th quarter in 48 states and the District of Columbia. In fact, 32 states experienced double-digit quarterly gains. On a year over year basis, resales were higher in 49 states and the District, with all but three posting double-digit annual increases.

According to the latest quarterly statistics released by NAR Research, total state existing-home sales, including single-family and condo, jumped 13.9 per-cent to a seasonally adjusted annual rate of 6.03 million in the fourth quarter – up from 5.29 million in the third quarter. Existing-home sales rose 27.2 percent from their 4th quarter 2008 pace of 4.74 million units. As a further sign of hous-ing market stability, distressed proper-ties accounted for 32 percent of fourth quarter transactions; that is down from 37 percent a year earlier.

Metropolitan Area Home PricesThere was some good news on the

home price front as well. In the fourth quarter, 67 out of 151 metropolitan statistical areas boasted higher median existing single-family home prices com-pared with prices registered in the fourth quarter of 2008. In the third quarter only 30 MSAs showed annual price increases. Sixteen metros experienced double-digit increases. On a national basis, the news was not quite as good. The national median existing single-family home price was $172,900, 4.1 percent below the price registered in the fourth quarter of 2008. But on the positive front, that was the smallest price decline in over two years. It should be noted that the most recent monthly price data showed a broad stabilization in home prices.

In the condo sector, metro area condominium and cooperative prices – covering changes in 54 metro areas – showed the national median existing-condo price was $177,300 in the fourth quarter, down 4.8 percent from the fourth quarter of 2008. Eleven metros showed increases in the median condo

Source: NAR Research

Fourth Quarter 2009 Existing-home Sales

0

5

10

15

20

25

30

35

40Year-over year percentage change

% change from 3rd to 4th quarter

WestSouthMidwestNortheastUnitedStates

perc

ent

% change from 3rd to 4th quarter

Year-over year percentage change

18.2

28.229.9

33.6

27.2

16.213.814.5

11.1

13.9

Source: NAR Research

Metropolitan Area Median Sales Prices of Existing Single-Family Homes4th quarter 2009

Median year over year Sales percentage Price change

U.S. $172,900 -4.1 %Northeast 234,900 -5.6Midwest 141,100 1.1South 153,000 -2.4West 227,200 -8.9

price from a year earlier. In the third quarter only four metros experienced annual price gains.

Regional DifferencesAll four regions of the country saw

rising home sales. Existing-home sales in the Northeast rose 11.1 percent from the 3rd quarter to 1.03 million units; Northeast resales were 33.6 percent higher than a year ago. The median existing single-family home price in

the Northeast declined 5.6 percent to $234,900 in the fourth quarter from the same quarter in 2008, but with widely varying conditions. Markets with lower median prices that have avoided wide swings, such as Buffalo, are generally showing consistent price gains. And even some of the higher cost areas such as Nassau-Suffolk (NY) and Boston (MA) are exhibiting signs of stabilization.

In the Midwest, existing-home sales jumped 14.5 percent (on a quarter to

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®12

Rising Sales in Most States, and Rising Prices in Many Metros (at Last!)(continued)

quarter basis) to a pace of 1.38 million units and were 29.9 percent above a year ago. The median existing single-family home price in the region rose 1.1 per-cent from a year ago to $141,100. In fact, the Midwest accounted for the majority of metro areas experiencing double-digit price gains.

Existing-home sales in the South increased 13.8 percent from the 3rd to the 4th quarter of 2009 to an annual rate of 2.23 million units; resales in the region were 28.2 percent higher than in the fourth quarter of 2008. The median exist-ing single-family home price in the South was $153,000 in the fourth quarter, down 2.4 percent from a year earlier.

The West experienced a 16.2 percent increase in existing-home sales, posting an annual rate of 1.38 million units. On a year over year basis, resales in the region were up 18.2 percent. The me-dian existing single-family home price in the West did decline 8.9 percent from a year ago (to $227,200), but many metros showed price gains.

Behind the NumbersWhat’s driving the rising home sales

and stabilizing prices? The dominant fac-tor is the home buyer tax credit. Buyers are responding to the program, and that – combined with record low mortgage interest rates – are attracting purchasers to the market.

One cautionary issue down the road will face buyers. They will need to ac-celerate their buying plans if they want to qualify for the tax credit. While repeat buyers do not have to sell their exist-ing home, all buyers must occupy the property they purchase as a primary residence in order to qualify for the tax credit. Buyers who have a contract in place by April 30, 2010, have until June 30, 2010, to finalize the transaction to get a credit of up to $8,000 for first-time buy-ers and $6,500 for repeat buyers.

Near-term market conditions will remain favorable. While interest rates are expected to trend up later this year, affordability continues at healthy levels. In general, housing market conditions are

good – home prices are steadying and inventory, while drawing down, continues to be plentiful offering potential buyers a variety of options.

For the latest statistics on existing-home sales by state and median home prices by metropolitan area, visit www.realtor.org/research.

Source: NAR Research

Metropolitan Area Median Sales Price for Existing Condominium/Co-ops4th quarter 2009

Median year over year Sales percentage Price change

U.S. $177,300 -4.8 %Northeast 228,700 -1.3Midwest 157,400 -9.5South 134,800 -9.7West 169,200 -5.2

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®13

To view the latest housing statistics from NAR, click on the links below.

Existing Home Sales – Monthly seriesn December existing home sales and median sales prices – single-family and

condominiums/co-opsn Single-family home sales and median sales prices n Condominium/co-op sales and median sales pricesn The latest EHS statistics in spreadsheet format available here

Existing Home Sales and Metropolitan Area Median Home Sales Prices –

Fourth Quarter 2009n Fourth Quarter 2009 existing home sales by staten Existing home sales by state in spreadsheet formatn Fourth Quarter 2009 Median Home Prices by Metropolitan Area n Fourth Quarter Single-family median home prices n Fourth Quarter Single-family median home prices in spreadsheet format here n Fourth Quarter Condominium/Co-op median sales price n Fourth Quarter Condominium/Co-op median sales price in spreadsheet format here

NAR’s Pending Home Sales Indexn December pending home sales indexn The latest pending home sales index in spreadsheet format available here

NAR’s Housing Affordability Indexn December HAI Indexn December Housing Affordability Index in spreadsheet format available heren Quarterly Housing Affordability Series n Fourth Quarter 2009 Affordability Index n Fourth Quarter 2009 Affordability Index in spreadsheet format available here n First-time homebuyer Affordability Index, Fourth Quarter 2009 n First-time homebuyer Affordability Index in spreadsheet format available here

Click here for more details about NAR’s existing home sales, pending home sales,

and housing affordability index series, including methodology, links to the latest news

releases, statistical release schedule, and how to access historical information.

Links to Statistical Data Series

Real Estate Insights / February 2010 / ©2010 NATIONAL ASSOCIATION OF REALTORS®14

New from NAR Research

There’ll be some changes made... to Real Estate INSIGHTS!

Thanks to the input we’ve received from regular readers of Real Estate INSIGHTS, you’ll soon see some changes. Those changes will include:

n easier to read graphics

n a revamped ‘links” page to give you quicker access to the data you’ve told us you want

n email links to the authors of our feature articles

... and a new feature – the “ABCs” of using NAR Research information. Each month we’ll give you some “insights” on how you can more effectively use NAR Research data to enhance your business, your marketing strategies, and your communications.

In the meantime, don’t forget to bookmark www.realtor.org/reinsights and www.realtor.org/research for the latest and most insightful data and analyses about real estate and the U.S. economy. In This Issue

Some other “R” words. Now that most experts agree that we can “retire” the dreaded word recession, perhaps it’s time to look at some other “R” words – like restor-ing (confidence), reinvigorating (the job market), and lessons learned from rebuilding. In his commentary this month, NAR Chief Economist Lawrence Yun discusses current and future developments in the U.S. economy, and some issues we may want to focus on. Read more.

Foreclosing on 2009. Foreclosures were certainly in the news last year. Of course, some states and metro areas fared better than others. In our In Focus column this month, Research Economist Selma Lewis looks at trends in foreclosures, negative eq-uity, some of the areas most affected, and what may be down the road. Read more.Latest quarterly figures on existing-home sales by state and metropolitan area home prices showed some hopeful signs. Most states experienced gains in resales – both on a quarter to quarter and a year over year basis. And the number of metro areas reporting a year over year rise in the median sales price of homes was also up from the previous quarter. Read more.

Existing-home sales fell 16.7 percent in December to a seasonally adjusted annual rate of 5.45 million units. The decline was expected after the rush of first-time buyers tried to complete their home purchase transactions before the original November deadline for the first-time buyer tax credit. But December resales were up 15.0 per-cent from a year ago. In addition, for all of 2009 there were 5.16 million existing-home sales, 4.9 percent higher than the number of transactions recorded in 2008 – the first annual sales gain since 2005. Other positive news: the national median home price rose 1.5 percent from December of 2008 – to $178,300. That is the first year-over-year gain in prices since August of 2007. Total housing inventory at the end of December fell 6.6 percent to 3.29 million existing homes available for sale – a 7.2-month supply at the current sales pace. Read more.

February 2010

Real Intelligence – Real Advantages

Table of Contents

Real Estate Monitor 2Economic Commentary: Reporting, Reinvigorating, Rebuilding 4U.S. Economic Forecast and Outlook Table and Charts 6In Focus: “Foreclosing” on 2009 8Rising Sales in Most States in theFourth Quarter of 2009 11Links to Statistical Tables 12Resources From NAR Research 14

Visit us on the web at www.realtor.org/reinsights