Economic and Housing Market
Lawrence Yun, Ph.D.Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation at St. Louis Association of REALTORS® and St. Charles County Association of REALTORS®
February 3, 2012
OUTLOOK
Strange World
Great! What the Heck?Best Affordability Conditions No Meaningful Pick-up in Home Sales
National home prices have stabilized for 2 years
Everyone believes home values have been falling throughout … Why?
Lowest newly constructed inventory Housing Starts still Dead
Huge Cash Reserves at Banks Cash not circulating into the economy
Record High Profits in Financial Industry in 2010 and just as good in 2011
Bank stock prices in the tanks
Federal Reserve Monetary Stimulus to encourage more lending
Regulation to discourage lending
Consumers work hard to demonstrate financial responsibility
Some must pay higher borrowing cost … because they are “jumbo”
Strangeness Continued
Great! What the Heck?
Less risk of a further price decline after 33 percent price drop
More risk-based lending and added fees to protect against price declines
Fannie and Freddie are making “internal self-sustaining” profits on new mortgages
Fannie and Freddie are still reporting net losses because legacy assets
Investors are seeking bargains Not enough foreclosed properties … on average taking more than a year to reach the market
Improving Job Market Very Low Consumer Confidence
Best Affordability Conditions
Monthly Existing Home Sales .. Before/After Revision Same Market Characterization
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
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 Tax Credit Impact
Old Data
New Data
National Existing Home Sales Measurement
• What it is– Trend based on MLS sales
from a benchmarked figure• Decennial Census implied
5.2 million sales in 2000
– MLS sales rise 10% then Existing Home Sales is presumed to have risen 10%
– But MLS sales may pick up FSBOs and Homebuilder sales that normally do not fall into MLSs
• What it is not– Actual sales count from
MLSs– Actual sales count as
recorded from property deeds
• No changes to MLS data• No changes to local sales
of MLS data counts
Homes Bought How?More People Sought Help From REALTORS®
2005 2006 2007 2008 2009 2010 20110
102030405060708090
100
Homebuilder Directly from ownerReal estate agent
Example of FSBO Impact to Home Sales Estimate
Total Sales MLS Sales FSBO (For-Sale-By-Owner)
Year 1 100 80 20
Year 2 100 90 10
% change 0.0% 12.5% invisible
Annual U.S. Existing Home Sales … Flat Line for 4 tough years
01,000,0002,000,0003,000,0004,000,0005,000,0006,000,0007,000,0008,000,000
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
20-Metro Case-Shiller Price Index…Remarkable Stability from 2009
St. Louis Metro vs. Miami Price Index(1990 to 2011)
1991 - Q1
1991 - Q4
1992 - Q3
1993 - Q2
1994 - Q1
1994 - Q4
1995 - Q3
1996 - Q2
1997 - Q1
1997 - Q4
1998 - Q3
1999 - Q2
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
0
50
100
150
200
250
300
350
400
450
Source: Federal Housing Finance Agency
St. Louis Area Markets(STL City and 5 surrounding counties)
• Home sales– Down in early months and then up in late months
of 2011– Up 3.5% in Dec. 2011 from 12 months ago
• Median Price of Transacted Homes– Down 13% in Dec. 2011 from 12 months ago
• Median Listing Price– Up 10% in Dec. 2011 from 12 months ago
• Source: MORE REALTORS®
Other Local Market Trends
Prices Up• Bismarck• Boston• Buffalo• San Diego• San Francisco• Washington, DC
Prices Down• Atlanta• Chicago• Las Vegas• Miami• Phoenix• Portland, OR
U.S. Housing Starts Lowest since the Second World War… in the past three years
1959 - Jan 1967 - Jan 1975 - Jan 1983 - Jan 1991 - Jan 1999 - Jan 2007 - Jan0
500
1000
1500
2000
2500
3000Long-term Average;Long-term Requirement
Housing Starts in thousands
St. Louis Area Housing Permits(4 years of suppression)
19801982
19841986
19881990
19921994
19961998
20002002
20042006
20082010
02000400060008000
100001200014000160001800020000
Existing Home Inventory(Elevated but Falling even as distressed and shadow inventory flows
in)
Financial Industry Corporate Profits
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
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
-100
0
100
200
300
400
500
600$ billions; seasonally adjusted annualized
KBW Bank Stock Index(still down 64% from pre-crisis levels)
2007 2008 2009 2010 20110
20
40
60
80
100
120
Federal Reserve Loose Monetary Policy
2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul0
1
2
3
4
5
6
7
8
9
30-year Mortgage Fed Funds
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
Demographics of Recent Buyers
2011 Profile 2010 Profile
Median Age 43 39
Gross Household Income
$80,900 $72,200
Household Composition 64% married couples 18% single females10% single males 7% unmarried couples
58% married couples20% single females12% single males 8% unmarried couples
Own a 2nd Home 19% 14%
Loan Limit Changes to 42 States
• Now, more People need to take out Jumbo Mortgages
• CBO … Lower taxpayer risk if loan limits are raised
• America today … Work hard, be financially responsible … then you will get punished ???
• Conforming Rate = 3.89% • Jumbo Rate = 4.43%
Price Decline Potential?
• If prices fall … more underwater homeowners … more default risk
• More risk to decline when there is a bubble
• Less risk to decline after a crash
• Many metrics suggest price decline potential is minimal with more price increase potential
• Yet Banks/Regulators have been pursuing … easy lending during bubble and tight lending after crash
Home Price vs Rent … Price Change Potential?
(index = 100 in 1980)
Rent is CPI Primary Rent and Price is NAR median price
CPI Rent is Rising…Biggest Weight to CPI(% change from 12 month ago)
2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul
-1
0
1
2
3
4
5%
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 Price vs Construction Cost …Price Change Potential?
Price is NAR Single-family median price and Construction Cost is Census Construction Cost Weighted Price Index
Home Price to Income Ratio … Price Change Potential ?
(Median single-family home price and median household income)
Home Value Undervaluation(Recent analysis by The Economist magazine)
Metric Magnitude of Over or Undervaluation
U.S. Home Prices Home Price vs. Rent 8% undervaluation
U.S. Home Prices Home Price vs. Income 22% undervaluation
U.K. Home Prices Home Price vs. Rent 28% overvaluation
U.K. Home Prices Home Price vs. Income 20% overvaluation
Ireland Home Prices Home Price vs. Rent 10% overvaluation
Ireland Home Prices Home Price vs. Income Proper valuation(neither over nor under)
Cost Comparisons over 30 yearsItem Price Index
in 1981Price Index in 2011
% Change
Consumer price index
87.2 226.3 160%
Rent index
84.7 254.3 200%
Food price index
91.6 229.6 150%
Gasoline price index
103.6 308.4 197%
College tuition index
75.8 601.3 693%
Medical care index
78.6 401.4 410%
Monthly mortgage payment on a median priced home
$598(14% mortgage rate)
Same if no cash out refi
0%(free and clear ownership)
Home Prices (FHFA index) 100 319 219%
Fannie/Freddie Future
• Disastrous Outcome as government-backed Private Corporation
– Perverse incentive to gamble with taxpayers money
• Good Outcome as government corporation
– Pre-1970s … no problem
– Post-2009 … no problem
– Government corporations generate enough internal profit for self-sustainability
– Assure liquidity on a very simple non-innovative mortgage product (e.g., fixed rate mortgages that meets basic underwriting standards)
• Grandparents 30-year mortgage same as Grandchildren’s 30-year mortgage
– Need to pursue counter-cyclical policy … less fees in downturn and more fees during boom/bubble
– Never trust government to produce innovative products
Fannie and Freddie PerformanceMortgage Default after 18 months
Fannie MaeVintage
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 MacVintage
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
Investors want Deals
• All-cash record high at 30% to 35% of all sales
– Multiple bidding becoming common on foreclosed properties (though not on short-sales)
– Financial asset recovery helping with cash
– Rental income … beats putting money in the bank
– Anticipating rising home prices
• Opens up lending … more home sales
• Boost consumer confidence … more home sales
• Further boost home prices and rate of return on investment
– Hedge against future inflation … alternative to expensive gold
– Not enough foreclosed homes for sale?
Expensive Gold Price(Hedge against Inflation?)
1975 - Jan 1980 - Jan 1985 - Jan 1990 - Jan 1995 - Jan 2000 - Jan 2005 - Jan 2010 - Jan0
200400600800
100012001400160018002000
Will Investors shift money to alternative inflation hedge instrument … to real estate?
Total U.S. Payroll Jobs – Modest Recovery
(2.6 million job creation from low point in 2010)
In thousands
Economic Expansion(GDP growth after recession should be
sustained 4% to 5% … not 1.7% as occurred in 2011)
-10
-8
-6
-4
-2
0
2
4
6
8
10
2000
- Q
120
00 -
Q3
2001
- Q
120
01 -
Q3
2002
- Q
120
02 -
Q3
2003
- Q
120
03 -
Q3
2004
- Q
120
04 -
Q3
2005
- Q
120
05 -
Q3
2006
- Q
120
06 -
Q3
2007
- Q
120
07 -
Q3
2008
- Q
120
08 -
Q3
2009
- Q
120
09 -
Q3
2010
- Q
120
10 -
Q3
2011
- Q
120
11 -
Q3
Desired Pace
North Dakota … Jobs Everywhere(Starting Wage at McDonalds … $15 to 18 per hour)
In thousands
Michigan Payroll Jobs – Ongoing Structural Changes
In thousands
St. Louis Area Payroll Jobs
2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul12001220124012601280130013201340136013801400 In thousands
CPI Inflation Retreating?(% change from one year ago)
2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul
-2
-1
0
1
2
3
4
5
6
Broad Inflationary Pressure(Data as of November 2010)
Indicator % change from one year ago
Consumer Price Index 3.4%
Producer Price Index (Finished Product) 5.9%
Producer Price Index (Intermediate Product) 7.8%
Producer Price Index (Crude Product) 15.3%
Dow Jones Commodity Spot Price Index -4.0%
Gold Price Off Record High Price … but very high
Serious Delinquent Mortgages … Mostly those who took out loans in bubble years
(90+ days late or in foreclosure process)
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
0.0
2.0
4.0
6.0
8.0
10.0
12.0
U.S. MO
Distress Sales: 30% to 40% of Transactions Will Remain Significant for Next 2 years
Improving Factors for Higher Home Sales
• Improving Factors– Job Creation (though slowly)– Solid stock market recovery from 2008– Rising rents and larger pool of qualified renters– Smart money chasing real estate
• Potential Huge Positive … Lending opens up• Potential Huge Negative … Washington policy
The End of Strangeness
• Let the Prices Recover without obstacles
• If 5% gain in home price
– 2 million fewer underwater homeowners
– Bank lending opens up
– Consumer confidence about home buying improves
– Strangeness is past and back towards normalcy
• But what could be the obstacles
– QRM 20% downpayment rules, MID, Property tax deduction, capital gains, still lower loan limit
– Rising mortgages rates (market forces of higher inflation and high budget deficit)
National Forecast
2012 2013 2014
GDP Growth 2.0% to 2.5% 2.3% to 2.8% 3.0% to 3.5%
Net New Jobs 1.8 to 2.2 million 2.0 to 2.5 million 2.5 to 3.0 million
CPI Inflation 3.0 to 3.5% 3.0 to 3.5% 3.0% to 3.5%
Rent Growth 3.0% 3.5% 3.5%
Home price Growth 2.0% 3.0% 4.0%
Home Sales 4.0% 6.0% 6.0%
Mortgage Rate 4.5% 4.8% 5.5%
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."
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
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