Presentation to Greater Washington Commercial Association of REALTORS ®

Tysons Corner, VAFebruary 19, 2009

Presentation to Greater Washington Commercial Association of REALTORS ®

Tysons Corner, VAFebruary 19, 2009

Lawrence Yun, Ph.D. Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Lawrence Yun, Ph.D. Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Real Estate Market Outlook Through Economic Recession

Real Estate Market Outlook Through Economic Recession

Stimulus PackageStimulus Package

• $789 billion … some good, some bad projects$789 billion … some good, some bad projects• Housing stimulusHousing stimulus

– $8,000 first-time buyer credit$8,000 first-time buyer credit– Higher loan limit to $729,000Higher loan limit to $729,000– Continuing low mortgage rates (viaTARP)Continuing low mortgage rates (viaTARP)

• Commercial stimulusCommercial stimulus– Preserve low capital gains tax ratePreserve low capital gains tax rate– Suspend mark-to-market accountingSuspend mark-to-market accounting– Fed buy CMBS (via TARP)Fed buy CMBS (via TARP)

Economy ContractsEconomy Contracts

GDP annualized growth rate

Source: BEA

Last Data

Forecast

Consumers Tapped OutConsumers Tapped Out

Personal Consumption annualized growth rate

Source: BEA

Consumer SentimentConsumer Sentiment

Source: University of MichiganSource: University of Michigan

Stock Market Wealth($8 trillion loss from peak)

Stock Market Wealth($8 trillion loss from peak)

Source: WSJ Source: WSJ

SP 500 Index

Housing Valuation($2 trillion loss in wealth from peak)

Housing Valuation($2 trillion loss in wealth from peak)

$ billion

Source: Federal Reserve, NAR estimate

Job Changes in U.S. Job Changes in U.S.

Source: BLSSource: BLS

One-month payroll job changes in thousands

Job Changes in Greater D.C. Job Changes in Greater D.C.

-20

0

20

40

60

80

100

120

140

Source: BLSSource: BLS

One-month payroll job changes in thousands

Retail Market FundamentalsRetail Market FundamentalsRetail Market FundamentalsRetail Market Fundamentals

In thousand sq. ft.

Retail Vacancy RateRetail Vacancy RateRetail Vacancy RateRetail Vacancy Rate

Retail Rent GrowthRetail Rent GrowthRetail Rent GrowthRetail Rent Growth

Retail Investment MarketRetail Investment MarketRetail Investment MarketRetail Investment Market

Office Market FundamentalsOffice Market FundamentalsOffice Market FundamentalsOffice Market Fundamentals

In thousand sq. ft.

Office Vacancy RateOffice Vacancy RateOffice Vacancy RateOffice Vacancy Rate

Office Rent GrowthOffice Rent GrowthOffice Rent GrowthOffice Rent Growth

Office Investment MarketOffice Investment MarketOffice Investment MarketOffice Investment Market

Exports and ImportsExports and Imports

$ billion

Source: BEA

Industrial Market FundamentalsIndustrial Market FundamentalsIndustrial Market FundamentalsIndustrial Market Fundamentals

Industrial Vacancy RateIndustrial Vacancy RateIndustrial Vacancy RateIndustrial Vacancy Rate

Industrial Rent GrowthIndustrial Rent GrowthIndustrial Rent GrowthIndustrial Rent Growth

Industrial Investment MarketIndustrial Investment MarketIndustrial Investment MarketIndustrial Investment Market

Multifamily Market FundamentalsMultifamily Market FundamentalsMultifamily Market FundamentalsMultifamily Market Fundamentals

In thousand sq. ft.

Multifamily Vacancy RateMultifamily Vacancy RateMultifamily Vacancy RateMultifamily Vacancy Rate

Multifamily Rent GrowthMultifamily Rent GrowthMultifamily Rent GrowthMultifamily Rent Growth

Multifamily Investment MarketMultifamily Investment MarketMultifamily Investment MarketMultifamily Investment Market

Cap Rates by Property TypeCap Rates by Property TypeCap Rates by Property TypeCap Rates by Property Type

Housing MarketHousing Market

Recession Impact on Home SalesRecession Impact on Home Sales

Source: NARSource: NAR

Existing Single-family Home Sales

Residential: Challenging MarketsResidential: Challenging Markets

• National Sales—Existing Homes.National Sales—Existing Homes.– Down 35% as of December from Sept 05 peak.Down 35% as of December from Sept 05 peak.– Down 3.5% 12 mo ending December 08. Down 3.5% 12 mo ending December 08.

• National Prices—Existing Homes.National Prices—Existing Homes.– Median Down 24% as of December 08 from July 2006 peak.Median Down 24% as of December 08 from July 2006 peak.– Median Down 15.3% 12 mo ending December 08. Median Down 15.3% 12 mo ending December 08.

• Sales—New Single Family Homes.Sales—New Single Family Homes.– National Down 75 % from October 2005 peak as of December ‘08. National Down 75 % from October 2005 peak as of December ‘08. – National Down 45 % for 12 mo ending December 08. National Down 45 % for 12 mo ending December 08.

• Real Estate Trends: Has Been A Weak Market.Real Estate Trends: Has Been A Weak Market.– Distressed Sales: Foreclosures--30%; Short Sales--15%.Distressed Sales: Foreclosures--30%; Short Sales--15%.– Negative Equity: 30% of homes bought in last 5 years. Negative Equity: 30% of homes bought in last 5 years. – Homes Sold at loss: 30 % in past year.Homes Sold at loss: 30 % in past year.– First time homebuyers: 30% of market in December.First time homebuyers: 30% of market in December.– Prospective Buyer traffic: Down; Prospective Seller traffic: Up.Prospective Buyer traffic: Down; Prospective Seller traffic: Up.

Housing Affordability Index(Higher numbers mean more people can afford to buy a home)

Housing Affordability Index(Higher numbers mean more people can afford to buy a home)

Source: NAR; 2009 projection based on 5.2% mortgage rate

Good News--Affordability: U.S. Median Mortgage Payment (Principle and Interest) as Percent of Income

Good News--Affordability: U.S. Median Mortgage Payment (Principle and Interest) as Percent of Income

10

15

20

25

30

Current Average

Source: NARSource: NAR

%

Things Out of Whack at the Height of the Boom

Things Out of Whack at the Height of the Boom

• Home Price 1998 to 2006 Home Price 1998 to 2006 – Case-Shiller IndexCase-Shiller Index up 108%up 108%

– OFHEO IndexOFHEO Index up 75%up 75%

– NAR medianNAR median up 64%up 64%

• Income 1998 to 2006Income 1998 to 2006– HouseholdHousehold up 24%up 24%

– Per CapitaPer Capita up 31%up 31%

– Hourly WageHourly Wage up 29%up 29%

• Cost of ConstructionCost of Construction up 46%up 46%

• Renter’s Rent Renter’s Rent up 31%up 31%

The period covers from 1998 Q3 to 2006 Q3 if quarterly data is available, otherwise annual data.

How Much More Correction is Needed? How Much More Correction is Needed?

• Home Price 1998 to 2008 Home Price 1998 to 2008 – Case-Shiller IndexCase-Shiller Index up 67%up 67%

– OFHEO IndexOFHEO Index up 67%up 67%

– NAR medianNAR median up 45%up 45%

• Income 1998 to 2008Income 1998 to 2008– HouseholdHousehold up 34%up 34%

– Per CapitaPer Capita up 39%up 39%

– Hourly WageHourly Wage up 39%up 39%

• Cost of ConstructionCost of Construction up 39%up 39%

• Renter’s Rent Renter’s Rent up 41%up 41%The period covers from 1998 Q3 to 2008 Q3 if quarterly data is available, otherwise annual data.

But Lower Rates Today But Lower Rates Today

• 30-year fixed Mortgage Rates 30-year fixed Mortgage Rates – 1998 1998 Around 7% with 1% feeAround 7% with 1% fee

– 20082008 Around 6% with 0.5% feeAround 6% with 0.5% fee

– Similar underwriting standards now with 1998?Similar underwriting standards now with 1998?

• Monthly Mortgage Payment for a median income Monthly Mortgage Payment for a median income household buying a median priced-homehousehold buying a median priced-home

– 19981998 19%19%

– 20082008 19%19%– Consider only rates and not fees Consider only rates and not fees

Birmingham vs Ft.Myers Home Price

Birmingham vs Ft.Myers Home Price

0

50

100

150

200

250

300

Source: NARSource: NAR

$ thousand

Overshooting and Collateral DamageOvershooting and Collateral Damage

• Consumer Spending Contraction from Consumer Spending Contraction from Negative Wealth EffectNegative Wealth Effect

• Primary Foreclosure Determinant … Home Primary Foreclosure Determinant … Home PricesPrices

• Mortgage Credit Loss … Multiplier Effect on Mortgage Credit Loss … Multiplier Effect on Credit ContractionCredit Contraction

• Self-reinforcing pessimismSelf-reinforcing pessimism– Buyers sit on fence, Inventory builds, Buyers sit on fence, Inventory builds,

Prices fall, Foreclosures rise, Buyers sit on Prices fall, Foreclosures rise, Buyers sit on fencefence

Federal Budget DeficitFederal Budget Deficit

$ million

Existing Home Sales—Outlook Continued

Existing Home Sales—Outlook Continued

• The Economy—What is Needed for Recovery?The Economy—What is Needed for Recovery?– Interest Rates, Jobs, Financial Accountability, Risk Interest Rates, Jobs, Financial Accountability, Risk

Analysis, Confidence.Analysis, Confidence.– Possible turn in 2009 Q3/Q4.Possible turn in 2009 Q3/Q4.

• Housing Markets—What is Needed for Recovery?Housing Markets—What is Needed for Recovery?– Interest Rates, Jobs, Confidence.Interest Rates, Jobs, Confidence.– Existing Home Sales—Possibilities and risks of an upturn in Existing Home Sales—Possibilities and risks of an upturn in

late 2009. late 2009. – Changes in buyer perceptions and attitudes.Changes in buyer perceptions and attitudes.

• Long term investment.Long term investment.• Focus on value: home--not a house, lifestyle not a “flip”, Focus on value: home--not a house, lifestyle not a “flip”,

realistic prices and expectations—not a speculation.realistic prices and expectations—not a speculation.

Oil Prices LowerOil Prices Lower

0

40

80

120

160

Economic Outlook Economic Outlook

20082008 20092009 20102010

GDPGDP 1.1%1.1% -1.9%-1.9% 1.8%1.8%

CPI InflationCPI Inflation 3.9%3.9% -0.3%-0.3% 1.9%1.9%

Unemployment RateUnemployment Rate 5.7%5.7% 8.1%8.1% 8.4%8.4%

National Commercial Market National Commercial Market OutlookOutlook

National Commercial Market National Commercial Market OutlookOutlook

• 2008 to 2009 2008 to 2009 – Net absorption turns negativeNet absorption turns negative– Rising Vacancy Rates and Stagnant RentRising Vacancy Rates and Stagnant Rent– Markedly Fewer TransactionsMarkedly Fewer Transactions– Property Prices Falling … providing opportunities for Property Prices Falling … providing opportunities for

parked cashparked cash– Apartments holding up betterApartments holding up better– Alabama to outperform national trends because of Alabama to outperform national trends because of

favorable demographic shiftsfavorable demographic shifts

• 20102010– Economic recoveryEconomic recovery– Pent-up and delayed transactionsPent-up and delayed transactions– Positive net absorption and rising rentsPositive net absorption and rising rents

Local Housing ForecastLocal Housing Forecast

• Stimulus and falling inventory will help Stimulus and falling inventory will help stabilize pricesstabilize prices

• Existing Home Sales bump of 30% to Existing Home Sales bump of 30% to 40% in the second half compared to 40% in the second half compared to year beforeyear before

• Builders may not see a recovery till Builders may not see a recovery till 2010 2010

From the REALTOR® PerspectiveAddressing Current Market Conditions

From the REALTOR® PerspectiveAddressing Current Market Conditions

• Trusted Resource for Real Estate Information.Trusted Resource for Real Estate Information.– Professional Advice.Professional Advice.

– Coming off of Unusual Boom Times.Coming off of Unusual Boom Times.

– Economy favorable, significant underlying demand.Economy favorable, significant underlying demand.

– A three to five year horizon is appropriate.A three to five year horizon is appropriate.

– Bad economic news—a good time to buy.Bad economic news—a good time to buy.

• Adding Value.Adding Value.– Marketing: Realistic Pricing, targeting, segmentation, Marketing: Realistic Pricing, targeting, segmentation,

demographics, defining needs.demographics, defining needs.

– Staging—How many times do you make a first impression?Staging—How many times do you make a first impression?

• Innovator.Innovator.– Technology Implementation. Technology Implementation.

– Customer communications: Boomers, GEN-X, GEN-Y.Customer communications: Boomers, GEN-X, GEN-Y.

From the REALTOR® PerspectiveFrom the REALTOR® Perspective

• NAR an advocate for homeownership.NAR an advocate for homeownership.• Strong representation in Washington.Strong representation in Washington.• Online presence: www.realtors.org.Online presence: www.realtors.org.

• Homeownership and long-term value.Homeownership and long-term value.• Lifestyle.Lifestyle.• Long term investment.Long term investment.

• Building Community.Building Community.– Establishing a presence/active in community service.Establishing a presence/active in community service.– Part of the backbone/establishment.Part of the backbone/establishment.

Information for a Competitive EdgeInformation for a Competitive Edge