Housing Market and Economic Outlook

Lawrence Yun, Ph.D. Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at Charlotte Regional REALTOR® Association

Charlotte, NC

November 1, 2011

U.S. Annual Existing Home Sales …Ready to Breakout?

0

1,000,000

2,000,000

3,000,000

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5,000,000

6,000,000

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Monthly Existing Home Sales … Flat Line outside of Tax Credit

3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

2008

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Tax Credit Impact

… Despite Record Low Rates

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30-year Mortgage Fed Funds

Economy Losing Momentum (GDP growth after recession should be sustained 4% to 5% …

not 1% as in 1st half in 2011)

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Desired Pace

Consumer Confidence in the Tanks

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2010 -Jan

2011 -Jan

NC Home Sales - Annual

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1990

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Case-Shiller Index: Charlotte and Miami

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Charlotte Region Activity • September 2011 YTD … up 1.1% • September 2010 YTD … up 4.0% (with tax credit)

• Inventory … down 20%

• Closed average price … down 6.5% • Listed average price … up 5%

• Case-Shiller price index … bottomed ??? … up 2 out of the

past 3 months

Source: CRRA 10K reports

U.S. Housing Starts… Very Low and much below Long-term Average

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Long-term Average; Long-term Requirement

Housing Starts in thousands

Newly Built Home Inventory (40 year lows)

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In thousands

Charlotte Housing Permits

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Improving Factors for Higher Home Sales

• Improving Factors – Job Creation (though slowly) – Stock market recovery from 2008 – Rising rents and larger pool of qualified renters – Buyers want distressed properties … at deep discounts – International buyers cashing in on the weakened dollar – Smart money chasing real estate

• Potential Huge Positive … Lending opens up • Potential Huge Negative … Washington policy change

Total U.S. Payroll Jobs – Modest Recovery (1.3 million in the past 12 months)

124000

126000

128000

130000

132000

134000

136000

138000

140000

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In thousands 6.5 million below prior peak In thousands

North Dakota Jobs - Booming

300310320330340350360370380390400

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In thousands

In thousands

Texas Payroll Jobs – Fully Recovered

8500

9000

9500

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10500

11000

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In thousands

In thousands

Michigan Payroll Jobs – Ongoing Structural Changes

3500

3700

3900

4100

4300

4500

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In thousands

In thousands

NC Jobs – Recovery Starting

3500

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In thousands In thousands

Charlotte Long-Term Job Growth

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In thousands

In thousands

Weekly Fresh Unemployment Claims … Not Going under 400,000

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In thousands In thousands

Financial Asset at $45 trillion … Good Recovery from 2008

30000

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50000

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2000 -Q1

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2011 -Q1 est.

Source: Federal Reserve

Housing Equity (source of funds for small business owners) … Down

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Source: Federal Reserve

CPI Apartment Rent (3-month moving avg., annualized rate)

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%

Home Price vs Rent (index = 100 in 1980)

0.050.0

100.0150.0200.0250.0300.0350.0400.0450.0

1980 -Jan

1984 -Jan

1988 -Jan

1992 -Jan

1996 -Jan

2000 -Jan

2004 -Jan

2008 -Jan

rent price

Serious Delinquent Mortgages … Mostly those who took out loans in bubble years

(90+ days late or in foreclosure process)

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U.S. NC

In millions

In 2010, there were 1.5 million distressed sales … need to wait 2.7 years

Distress Sales: 30% to 40% of Transactions Will Remain Significant for Next 2 years

20%

25%

30%

35%

40%

45%

50%

55%

2008 -Oct

2009 -Jan

2009 -Apr

2009 -Jul

2009 -Oct

2010 -Jan

2010 -Apr

2010 -Jul

2010 -Oct

2011 -Jan

2011 -Apr

Very Low Default among Recent Homebuyers Fannie and Freddie Backed Mortgage Loan Performance

Fannie Mae Vintage

Cumulative Default Rate after 18 months

2002 3.1%

2003 2.5%

2004 4.6%

2005 4.8%

2006 11.6%

2007 28.7%

2008 12.6%

2009 1.2%

Freddie Mac Vintage

Cumulative Default Rate after 18 months

2002 2.7%

2003 1.2%

2004 2.0%

2005 1.8%

2006 6.0%

2007 22.3%

2008 13.7%

2009 1.1%

Source: Federal Housing Finance Agency

Smart Money Buying?

• All-cash record high at 30% to 35% of all sales – Investors want quick deals – Investors cannot get mortgage – Some do not want to bother with appraisals – Financial asset recovery helping with cash – Hedge against future inflation … alternative to

expensive gold – Hedge against future housing shortage? – Empty nesters downsizing and using leftover cash for

kids’ home?

Real Estate as Inflation Hedge? (single-family home price in blue vs CPI in red)

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Good inflation hedge in the past before the housing bubble/bust

CPI Inflation Rising (% change from one year ago)

-2-10123456

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• Social Security COLA forecast to rise 3.5% in 2012 • Workers Wage to rise by 1.7% in 2011

Broad Inflationary Pressure Indicator % change from one year ago

Consumer Price Index

3.8%

Producer Price Index (Finished Product)

6.5%

Producer Price Index (Intermediate Product)

7.5%

Producer Price Index (Crude Product)

24.2%

Dow Jones Commodity Spot Price Index

28.3%

Gold Price

Off Record High Price … but very high

Upside Potential Surprise

Average Credit Score for Loan Origination

Normal 2009 2010 If

Fannie 720 761 762 720

Freddie 720 757 758 720

FHA 650 682 698 660

15% to 20% Higher Sales

Downside Potential Surprise

Washington Policy Change? • QRM and 20% downpayment requirement ???

– Affordability (staying within budget) more important than down payment

– No taxpayer bailout for FHA and VA program • Limit mortgage interest deduction for high income and

second homes ??? – Crush the working class in resort areas (Yacht Tax Impact) – Cascading impact to middle class homes and hurts confidence to

buy a home • Lower conforming loan limit ??? • Fannie and Freddie model was flawed (private

profit/taxpayer loss) and need a fundamental restructuring … not total privatization – Jumbo interest rates on all loans? – Non-existent loans in times of crisis?

National Museum of American History

• 4 million no-down-payment VA mortgages for World War II veterans • Fueled an unprecedented growth of America’s middle class

Real Estate Baseline Outlook • Moderate GDP Expansion 1.5% to 2.5% in the next 2 years

• 1.0 to 1.5 million annual job additions yearly in the next 2 years

• Mortgage Rates rising to 4.3% by year-end 2011 and 5.0% in 2012 • Not that important compared to underwriting standards

• Home sales – no reason to go lower … slight increases next 2 years

• Home values – steady and slow growth in the national price in the next 2 years … critical source of small business start-up funds

• Commercial : net absorption rising, vacancy rates falling, cap rates falling

Presidential Quotes

• Franklin Delano Roosevelt: “A nation of homeowners is unconquerable.”

• Ronald Reagan “We will preserve the part of the American dream which the mortgage-interest deduction symbolizes."

For More Information

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