Jed Smith Managing Director for Quantitative ResearchNATIONAL ASSOCIATION OF REALTORS®
Economic OutlookResidential and Commercial Real Estate
Market Conditions
NPMA Legislative Day, Monday, March 1, 2010, at the Mayflower Hotel on Connecticut Avenue. As the session stands, we are set for 10:30am to noon and it is a breakout.
Economic Snapshot
• Recovering from a recession—slowly.– Continued high unemployment.– Key Issue: JOBS, JOBS, JOBS.
• Consumer Confidence: Short term and long term outlooks.
– Entitlement Programs, Government Spending, and Budget.– National Debt.– National Wealth– Housing Issues– Liquidity
• For 2010: EHS: 5.7 Million.– Price: +3%, Starts 668,000 up from 552,000.
Key IssuesRecession/Recovery and JOBS
• What Happened to the Economy?• Where are We Now?• What’s the Economic Outlook?• What’s the Housing Outlook?• What are the Forecast Risks?• What’s the Commercial Outlook• Conclusions
What Happened to the Economy?Shadow Banking System/Recession—CRASH
May2008
Jun 2008
July 2008
Sep 2008
2009Aug 2008
Unemployment Rate
3
4
5
6
7
8
9
10
11 %
Source: BLS
What Happened?Consumer Confidence: The Cyber Cracker Barrel
Conference Board: Consumer Confidence
SA, 1985=100
0908070605040302010099Source: The Conference Board /Haver Analytics 02/24/10
150
125
100
75
50
25
150
125
100
75
50
25
Longer Unemployment—Slow to Find a Job
Average {Mean} Duration of Unemployment
SA, Weeks
0500959085807570Source: Bureau of Labor Statistics /Haver Analytics 02/26/10
35
30
25
20
15
10
5
35
30
25
20
15
10
5
What Happened--Total U.S. JobsNon-Farm, Establishment Data
125000
135000
145000
Source: BLS
Single-Family Housing Starts
0
500
1,000
1,500
2,000
Source: Census
In thousand units
Construction Spending
0100,000200,000300,000400,000500,000600,000700,000800,000900,000
1,000,0001,100,000
Private Construction Public Construction
Source: Census
$ million
Foreclosures—A Major Problem
Source: Mortgage Bankers
$ million All Loans: Total Past Due, U.S.SA, %
Mortgage Payments Past Due 30-59 Days: United StatesSA, %
0908070605040302010099Source: Mortgage Bankers Association /Haver Analytics 02/26/10
10
9
8
7
6
5
4
3.8
3.6
3.4
3.2
3.0
2.8
2.6
GDP Growth% annualized growth rate
Source: BEA
Real Gross Domestic Product
% Change - Year to Year SAAR, Bil.Chn.2005$
050095908580Source: Bureau of Economic Analysis /Haver Analytics 02/26/10
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
10.0
7.5
5.0
2.5
0.0
-2.5
-5.0
Where Are We Now?Recent Real Estate Market Experience
• Financial System: Cleaning Up From The Tsunami.– Weakened Balance Sheets, Increased Risk Aversion.– Financial Institutions: Credit less available.
• Impacting Housing Markets: Debris from Tsunami. – Major Loss of Wealth, Low Consumer Confidence, Lost Jobs. – Distressed Property: Foreclosures and Short Sales– Negative Equity.
• The Current Housing Markets. – Residential Sales: Recovering, Price Still an Issue. – Commercial: Financing, Price, Foreclosures, Slow Recovery.– Continuing Issues: Concern over market trends and outlook.– The KEY ISSUE: Jobs
Where Are We Now?Recent Real Estate Market Experience
• National Sales – Existing Homes.– Down 30% as of January ‘10 from Sept 05 peak.– Up 11.5% January 09 vs. January ‘10. – Market forecast is 5,700,000 nationally for 2010.
• National Prices – Existing Homes.– Median Down 29% as of January 09 from July 2006 peak.– Median Constant January 09 vs. January ‘10.
• Sales – New Single Family Homes Sold.– National Down 78% from July 2005 peak as of January ‘10. – National Down 6% January ‘10 vs. January ‘09.
• Real Estate Trends.– Distressed Sales: 38% of total including foreclosures and short sales. – Negative Equity—est. at 25 percent of mortgages– continuing problem. – REALTOR® expectations: 67% currently see constant/rising prices during
next year, vs. 61% who saw declining prices in January 09.
Where Are We Now?Interest Rates: At Historic Lows
4.0
4.5
5.0
5.5
6.0
6.5
7.0
1 Yr. Arm 30 Yr Fixed
Source: Freddie Mac
Existing-Home Inventory
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
Source: NAR
Single Family New Home Inventory
200,000
300,000
400,000
500,000
600,000
Source: Census
What’s the Economic Outlook?
2007 2008 2009 2010 2011
Annual Growth Rate Real GDP 2.0 0.4 -2.5 2.8 2.7Nonfarm Payroll Employment 1.1 -0.4 -3.7 -0.2 1.3Consumer Prices 2.9 3.8 -0.4 1.8 2.9Real Disposable Income 2.8 0.5 0.8 0.6 3.0Consumer Confidence 103 58 45 57 66Unemployment Pct. 4.6 5.8 9.3 9.9 9.2Housing Indicators—000 Existing Home Sales* 5,652 4,913 5,197 5,710 5.723New Single-Family Sales 776 485 377 529 664Housing Starts 1,355 904 552 758 1,064Existing Home Prices $--000 219.0 198.1 172.7 179.1 186.2New Home Prices 247.9 232.1 213.4 221.4 231.5
What is the Housing Outlook?• Home Sales—Have recovered from their lows.
– Foreclosures—are clearing the market.– Price—Stabilizing/Stabilized—depending on market.– New Attitudes towards risk, spending, expectations.
• Housing Affordability High—Interest rates, price.• Tax Credit and Higher Loan Limits
– Raised Sales by 350,000 to 400,000.– Extended to move-up market.– Outlook.
• Government Programs: Mixed Results.
Housing Outlook--Affordability: Median Mortgage Payment (Principle and Interest) as Percent of Income
10
15
20
25
30
Current Average
Source: NAR
%
Months Supply
0
4
8
12
Source: NAR
Months Supply
Prices Increasingly In Line With History(Median Home Price to Median Income Ratio)
2.02.22.42.62.83.03.23.43.63.84.0
Source: NAR
Monthly Home Price TrendsCase-Shiller, Government (FHFA), NAR
Seasonally Adjusted Data
125
150
175
200
225$ thousand
NAR
FHFA
Case-Shiller
Housing Starts: Down Significantly
0
500
1,000
1,500
2,000
2,500
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
New Units Needed
3 million more people each year … 1 to 1.4 million household formation … need to account for 300,000 demolitions …. need 1.3 to 1.7 new units
What is the Housing Outlook?Existing Home Sales
0
2,000
4,000
6,000
8,000In thousand units
Source: NAR
Housing Outlook—Median Home Prices Actual and Forecast
-14
-11
-8
-5
-2
1
4
7
10
13
Source: NAR
% change from a year ago
Commercial Market OutlookReasons for Concern
• Office– Demand drives slowdown.– Financial/other employment –
impacting downtown markets.– Rent growth – negative.
• Industrial– Import decline affects coastal
warehouse demand.– Manufacturing and storage
requirements—declining.– Warehouse demand moves inland.
• Increased transportation costs – closer to consumer
• Rail, intermodal centers
• Retail– Consumer spending – down to
necessities.– Bankruptcies – Circuit City,
General Growth Properties, Eddie Bauer.
– Space availability—plentiful.
• Multi-Family– Moderate growth ahead.– Foreclosures generally increase
rental demand.– Supply pipeline – possible
overhang.– Wide variations among markets.
0
50
100
150
200
250
300
Index = 100 in 1990
Case-ShillerMIT
2009 data is for Q2
Commercial and Residential Property Prices
Office Market Fundamentals
2008.4 2009.1 2009.2 2009.3 2009.4
-30000
-20000
-10000
0
10000
20000
30000
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Completions Absorption Vacancy
Squa
re F
eet (
'000
s)
Perc
ent (
%)
Source: NAR/TWR
Office Rent Growth
2004 2005 2006 2007 2008 2009 2010
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%National Rent Growth
Source: NAR/TWR
Commercial Market Overview
• CRE Estimated Value: $6.5 Trillion.– Estimated Debt: $3.25 Trillion – Bank Debt: $1.7 Trillion; ultimate losses of $115 to $150
Billion.– CMBS: $700 Billion; ultimate losses of $65-85 Billion.
• CRE Issues: Prices, Rents, Vacancies, Inventories, Refinancing, Credit Markets.
• Economic Outlook.– Commercial recovery a year or more away—strongly
dependent on employment.– Economic Uncertainty: Equity capital difficult to obtain.
Commercial Core Property SalesNational, Through November 2009
2001 2002 2003 2004 2005 2006 2007 2008 2009*$0
$50,000,000,000
$100,000,000,000
$150,000,000,000
$200,000,000,000
$250,000,000,000
$300,000,000,000
$350,000,000,000
$400,000,000,000
$450,000,000,000
RetailOfficeIndustrialApartment
Source: Real Capital Analytics*through November
Commercial Real EstateRefinancing—Billions of Dollars
2010 2011 2012 2013 2014 2015 2016 2017 20180
50
100
150
200
250
300
350
Commercial Real EstateAmount Due By Year
Amount
Commercial Distressed PropertyRelatively Minimal. Alternatives for Lenders
Jan07 Jan08 Jan09 $-
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
$100,000,000,000
$120,000,000,000
$140,000,000,000
$160,000,000,000 Total Distressed Commercial Property
Source: Real Capital Analytics
Prices Mixed Due to Low Sales
$0
$50
$100
$150
$200
$250
$300
$350
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000Industrial PSF Office PSF Retail PSF Apartment PPU$ / Sq. Ft. $ / Unit
Source: Real Capital Analytics*Q409 through Nov. 2009
Many Problem Loans Not ResolvedDistressed Problem Potentially Significant
Source: Real Capital Analytics
Major Changes in Funding SourcesFinancing: Sellers, Assumptions, Regional Banks
Source Real Capital Analytics
Commercial Market Outlook
• Negative Absorption, Higher Vacancies, Declining Rents.• Pricing and Financing Challenges.• CMBS—Modest recovery; insufficient to address maturing
debt. • Vacancy Rates—2010.
– Office: National 18.3%, up from 15.8%. – Industrial: National 15.2%, up from 13.2%. – Retail: 13% up from 11.9%. – Multi-Family: 7.6% up from 7.3%.
• Economic Recovery: Jobs, spending, uncertainties.• Commercial Sector--Dependent on Additional Jobs,
Consumer Spending.
Using NAR Information During A Difficult Economy
• Examples of NAR Information on Housing Markets.Local Market Reports:http://www.realtor.org/research/subscription_data/09localmarketreports Realtors Confidence Index:http://www.realtor.org/research/research/repsExisting-Home Sales Series:http://www.realtor.org/research/research/ehsdataPrices and Sales at MSA and State levels:http://www.realtor.org/research/research/metropriceLocal Market Data: http://www.realtor.org/research/research/ehsdata Commercial Real Estate Market Survey:http://www.realtor.org/research/research/cre_market_surveyCommercial Outlook:http://www.realtor.org/research/research/commercialhome
Major NAR ReportsProviding Customer Information
• NAR Profile of Home Buyers and Sellers: Extensive information on the market.
• NAR Investment and Vacation Home Buyers Survey.
• NAR Member Profile.• NAR Commercial Member Profile.• NAR Profile of Buyer’s Home Feature
Preferences.
Concluding Comments
• GDP: Weak recovery. – Major Issues: Jobs, Consumer Confidence, Consumer Balance
Sheets, Financial System/Credit Availability, Deficit.– Highly dependent on Administration/Fed actions.
• U.S. Real Estate Outlook– Residential: Distressed real estate: clearing market/lower price. – Sales—Have recovered from lows. Price: Varies by individual
market-- distressed real estate, consumer expectations/confidence.– Bifurcated Markets– Commercial: Still declining; slow markets; financing issues.– Foreign transactions: U.S. is attractive.
• Looking Forward: Consumer Confidence, risk management, addressing balance sheets, caution.
• Jobs, Jobs, Jobs!