real estate and economic outlook, by dr. lawrence yun

Real Estate and Economic Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation to CID, NOMAR, CCIM Louisiana Chapter

at Loyola UniversityNew Orleans, Louisiana

October 16, 2012

Existing Home Sales Recovery:Best in 5 years, but only up 8% year-to-date

2005 2006 2007 2008 2009 2010 2011 2012 est.

0

1

2

3

4

5

6

7

8

7.086.52

5.02

4.12 4.34 4.18 4.264.62

In million units

One Reason for Slower Recovery, aside from credit bubble hangover, is the falling mobility rate

From 18% to 12%

.1

.12

.14

.16

.18

.2

Fra

ction

of

pop

ula

tion

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010Year

(Any Distance)

Fraction of Population Who Moved in the Last 12 Months

Source: Raven Molloy, Federal Reserve Economist, Current Population Survey.

Investors in the Market; and Homebuyers Frustrated

2005 2006 2007 2008 2009 2010 2011 2012 est.

0

500

1000

1500

2000

2500Investor Sales In thousands

2005 2006 2007 2008 2009 2010 2011 2012 est0

100020003000400050006000 Owner-occupant Sales In thousands

New Orleans Housing Statistics

• Units Sold … up 14% year-to-date from one year ago

• Median Price to $203,100 … up 2%

• Days on Market at 95 days (from 102 days one year ago)

Source: NVAR

Everyone Seeing Low Home PricesWarren Buffet: Buy Low (not Buy High)

1995 - Q1

1995 - Q4

1996 - Q3

1997 - Q2

1998 - Q1

1998 - Q4

1999 - Q3

2000 - Q2

2001 - Q1

2001 - Q4

2002 - Q3

2003 - Q2

2004 - Q1

2004 - Q4

2005 - Q3

2006 - Q2

2007 - Q1

2007 - Q4

2008 - Q3

2009 - Q2

2010 - Q1

2010 - Q4

2011 - Q3

2012 - Q2

100

150

200

250

300

350

Phoenix

New Orleans

Source: FHFA

Investors seeing Rising Rent(Not deterred by 3.8% Health Care Tax on Rental Income … because some of it will be passed on to renters)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr

-1

0

1

2

3

4

5

% change from one year ago

Investors also seeing rising # of renters

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q425,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000

Rental Households

Homeowners not Rising

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q450,000

55,000

60,000

65,000

70,000

75,000

80,000

Homeowners

Homeownership Rate at 65.4%(Lowest in 15 years)

1965 - Q1 1971 - Q1 1977 - Q1 1983 - Q1 1989 - Q1 1995 - Q1 2001 - Q1 2007 - Q158

60

62

64

66

68

70%

Visible Housing Inventory(Existing inv. At 8-year low; New inv. at 50-year low)

2000 - Jan 2001 - Dec 2003 - Nov 2005 - Oct 2007 - Sep 2009 - Aug 2011 - Jul0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Existing New

Shadow Inventory … Falling(Seriously delinquent mortgage + homes in foreclosure process)

million units

2000 - Q1

2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1

2007 - Q1

2008 - Q1

2009 - Q1

2010 - Q1

2011 - Q1

2012 - Q1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0Distressed Sales Market Share

2010 … 33%

2011 … 33%

2012 … 25%

2013 … 15%

2014 … 8%

Distressed Property Sales

2008 - Oct

2009 - Jan

2009 - Apr

2009 - Jul

2009 - Oct

2010 - Jan

2010 - Apr

2010 - Jul

2010 - Oct

2011 - Jan

2011 - Apr

2011 - Jul

2011 - Oct

2012 - Jan

2012 - Apr

2012 - Jul

0%

10%

20%

30%

40%

50%

60%

REO Short-Sale

Foreclosures Rapidly Falling in Non-Judicial States

Example: Seriously Delinquent Mortgages in AZ, CA , MI

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

0

2

4

6

8

10

12

14

AZ MI CA

%

Foreclosures Clogged in Judicial States Example Seriously Delinquent Mortgages in CT and IL

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

02468

1012

CT IL

%

Should a trigger be set up to foreclose without a court approval? • Vacant property• Missed Mortgages for 6 months or longer

Shadow in LouisianaSeriously Delinquent Mortgages

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

0

2

4

6

8

10

12

14%

Housing Starts(Well Below 50-year average of 1.5 million each year)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr0

500

1000

1500

2000

2500

multifamily single-familyThousand units (annualized)

Long-term Average

Source: Census, HUD

New Orleans MetroHousing Permits

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20120

2000

4000

6000

8000

10000

12000

14000

Falling Inventory of Homes for Sale2010 July 2011 July 2012 July

Existing Homes for Sale 3.41 million 3.15 million 2.40 million

Newly Constructed Homes for Sale

210,000 165,000 142,000

“Shadow” Estimate(Seriously Delinquent Mortgages and Homes in Foreclosure Process)

4.2 million 3.5 million 3.2 million

Homeowners waiting • for higher home

prices • To be freed from Tax

Credit Lock Period

??? ??? Inconsequential Impact since most will list homes, but with intent also on buying

Wealth Distribution … Who will get Future Wealth?(Federal Reserve data on median net worth)

Renter Owner$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

199820012004200720102014

2014 Forecast by NAR

Improving Factors for Sales in 2012 and Beyond:

1. High Affordability and Job Creation 2. Solid stock market recovery from 20083. Rising rents and a larger pool of qualified renters4. Pent-up release of Household Formation

• Rising demand for ownership and rentals as young-adults move out of parent’s basement

5. Smart money chasing real estate (i.e., investors)6. Consumer confidence in buying an appreciating

asset

Best Affordability Conditions

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

20102012

50

70

90

110

130

150

170

190

210

S&P 500 (Almost 100% from low point)

NASDAQ (More than 100% increase from low point)

2005 - Jan

2005 - Jun

2005 - Nov

2006 - Apr

2006 - Sep

2007 - Feb

2007 - Jul

2007 - Dec

2008 - May

2008 - Oct

2009 - Mar

2009 - Aug

2010 - Jan

2010 - Jun

2010 - Nov

2011 - Apr

2011 - Sep

2012 - Feb

0

500

1,000

1,500

2,000

2,500

3,000

3,500

S&P 500NASDAQ

Annual Household Formation… Future Rent Pressure?

(3 separate Census data)

In millions

Household Formation leads to increase ownership and renters; Could begin to return to normal of at least 1 million from 2012.

Home PricesMetric % change from one year ago Comment

NAR + 9.5% Mix of homes impact price … fewer distressed sales recently …

Leading Data

Case-Shiller +0.5% 30% annualized gains for two straight months

FHFA + 3.6% Monthly gains in 7 of recent 8 months

Monthly Pending Home Sales Index(Seasonally Adjusted)

2007 - Jan

2007 - May

2007 - Sep

2008 - Jan

2008 - May

2008 - Sep

2009 - Jan

2009 - May

2009 - Sep

2010 - Jan

2010 - May

2010 - Sep

2011 - Jan

2011 - May

2011 - Sep

2012 - Jan

2012 - May

70

75

80

85

90

95

100

105

110

115

Homebuyer Tax Credit

Source: NAR

Foot Traffic

2008 - Jan

2008 - Apr

2008 - Jul

2008 - Oct

2009 - Jan

2009 - Apr

2009 - Jul

2009 - Oct

2010 - Jan

2010 - Apr

2010 - Jul

2010 - Oct

2011 - Jan

2011 - Apr

2011 - Jul

2011 - Oct

2012 - Jan

2012 - Apr

2012 - Jul

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Buyer Seller

Banks/Regulators Restricting Credit

(Average Credit Scores of Approved Loans)

Normal 2009 2010 If Normal

Fannie 720 761 762 720

Freddie 720 757 758 720

FHA 650 682 698 660

15% to 20% Higher Sales

Financial Industry Profits(excluding Federal Reserve)

2001 - Q1

2001 - Q4

2002 - Q3

2003 - Q2

2004 - Q1

2004 - Q4

2005 - Q3

2006 - Q2

2007 - Q1

2007 - Q4

2008 - Q3

2009 - Q2

2010 - Q1

2010 - Q4

2011 - Q3

-200

-100

0

100

200

300

400

500$ billion

Economy Growing, though Slowly(No Fresh Recession because of Housing Recovery)

Real GDP Growth Rate

2005 2006 2007 2008 2009 2010 2011 2012 forecast

2013 forecast

-4

-3

-2

-1

0

1

2

3

4%

Payroll Jobs Changes(December to December)

2005 2006 2007 2008 2009 2010 2011 2012 forecast

2013 forecast

-6

-5

-4

-3

-2

-1

0

1

2

3

In millions

Labor Force Participation Rate

1990 - Jan 1993 - Jan 1996 - Jan 1999 - Jan 2002 - Jan 2005 - Jan 2008 - Jan 2011 - Jan61

62

63

64

65

66

67

68%

Louisiana Jobs

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr1650

1700

1750

1800

1850

1900

1950

2000 In thousands

Louisiana Jobs from 1940

1939 - Jan1948 - Jul1958 - Jan1967 - Jul1977 - Jan1986 - Jul1996 - Jan2005 - Jul0

500

1000

1500

2000

2500 In thousands

Nonfarm Payroll Jobs

Consumer Price Inflation(Slightly Above Fed’s preferred 2% core inflation rate)

2005 2006 2007 2008 2009 2010 2011 2012 forecast

2013 forecast

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

All Items Core%

Monetary Policy by Federal Reserve (no change to 2014)

20052006

20072008

20092010

2011

2012 foreca

st

2013 foreca

st

2014 foreca

st01234567

Fed Funds 30-year Mortgage%

Modestly higher rates could help home sales as banks re-staff mortgage work for home purchase applications and less refinance applications.

Huge Federal Budget Deficit … Will Push Up Borrowing Cost

(% of GDP)

1960 - Jan 1967 - Jan 1974 - Jan 1981 - Jan 1988 - Jan 1995 - Jan 2002 - Jan 2009 - Jan

-12

-10

-8

-6

-4

-2

0

2

4

But … Falling Treasury Borrowing Rate

1982 - Aug1986 - Aug1990 - Aug1994 - Aug1998 - Aug2002 - Aug2006 - Aug2010 - Aug0

2

4

6

8

10

12

14

1610-year 3-month

Impact to Deficit

• Mortgage Interest Deduction … $90 billion– Not the source of the current budget deficit since

MID was present for nearly 100 years

• Interest Rates Revert back to historical average … $300 billion in extra interest expense

Housing Forecast Summary2011History

2012Forecast

2013Forecast

Existing Home Sales 4.26 million 4.6 million 5.0 million

New Home Sales 301,000 385,000 608,000

Housing Starts 611,000 775,000 1,150,000

Existing Home Price $166,100 $173,900 $182,700

GDP Growth +1.8% +2.2% +2.6%

Payroll Job Gains +1.7 million +1.5 million +2.3 million

Fed Funds Rate 0.1% 0.1% 0.1%

30-yr Mortgage 4.7% 3.8% 4.1%

Risks to Forecast

• Washington Policy– QRM 20% down payment requirement?– Basel 3 … capital rule that punishes private mortgage with low

down payment and commercial loans– Trim mortgage interest deduction?– Capital gains tax on home sale?

– Fiscal Cliff on January 1, 2013 … if no new compromised budget, then:

• Automatic deep cuts to military and domestic spending• Automatic higher taxes• 3% shaved off GDP … Fresh Economic Recession

Commercial Real Estate

Source: Real Capital Analytics, 4Q 2011.

Big Transactions Coming Back$2.5 million property and above

13

REALTOR® Business Deals(Majority are less than $1 million)

Method of Finance

Underwriting Standards?

Multifamily Fundamentals

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-50,000

0

50,000

100,000

150,000

200,000

250,000

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0Completions Net Absorption Vacancy

Source: NAR/REIS

Apartment Deals and Pricing

Source: RCA, 4Q 2011.

19

Office Fundamentals

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-150,000,000

-100,000,000

-50,000,000

0

50,000,000

100,000,000

150,000,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0


Source: NAR/REIS

Office Deals and Pricing

• Source: RCA, 4Q 2011.

• Source: RCA, 4Q 2011.15

Imports and Exports … Expanding Briskly(International Trade always fall during recessions)

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

800

1300

1800

2300

2800

3300 $ billion

Industrial Fundamentals

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-100,000,000

-50,000,000

0

50,000,000

100,000,000

150,000,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0


Source: NAR/REIS

Industrial Deals and Pricing

Source: RCA, 4Q 2011. 17

Retail Fundamentals

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-30,000,000

-20,000,000

-10,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

0.0

2.0

4.0

6.0

8.0

10.0

12.0


Source: NAR/REIS

Retail Deals and Pricing

Source: RCA, 4Q 2011.

21

Commercial Market ForecastOFFICE 2011 2012 2013

Vacancy Rate 16.6% 16.3% 15.9%Net Absorption ('000 sq. ft.) 20,178 31,700 53,000

Completions ('000 sq. ft.) 11,659 25,474 37,847Rent Growth 1.4% 1.7% 2.4%

INDUSTRIAL 2011 2012 2013


Completions ('000 sq. ft.) 20,462 26,947 54,881Rent Growth -0.5% 1.8% 2.3%

RETAIL 2011 2012 2013


Completions ('000 sq. ft.) 4,207 12,677 19,878Rent Growth -0.2% 0.7% 1.4%

MULTI-FAMILY 2011 2012 2013

Vacancy Rate 5.4% 4.6% 4.5%Net Absorption (Units) 238,398 126,621 102,687

Completions (Units) 38,014 88,839 93,706Rent Growth 2.5% 3.5% 3.8%

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