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!