2012 Midyear Charleston Residential Real Estate Market Update

Real Estate and Economic Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at Charleston Trident Association of REALTORS®

August 15, 2012

Annual Existing Home Sales:A Tough, Flat 4 years

2005 2006 2007 2008 2009 2010 20110

1

2

3

4

5

6

7

8

7.086.52

5.02

4.12 4.34 4.18 4.26

In million units

Despite Second Home Sales Recovery

2005 2006 2007 2008 2009 2010 20110

5001000150020002500300035004000

InvestmentVacation

In thousands

53% of REALTOR® members own a residential investment property29% own a commercial property19% own a vacation home

Owner-Occupancy Sales Falling

2005 2006 2007 2008 2009 2010 20110

1000

2000

3000

4000

5000

6000 In thousands

2012 First Half: Strongest in 5 years

Q1 Q2 Q3 Q40

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

20082009201020112012

Charleston Region Housing Statistics

• Closing Sales of 10,748 in July 2012 (12-month total) … Up 19% from July, 2011

• Median price … up 3.4% from one year ago

• Inventory … down 26%

• Months Supply … 7.1 (from 11.4 one year ago)

Source: Charleston Trident MLS

Monthly Pending Home Sales Index(Seasonally Adjusted)

2007 - Jan

2007 - Apr

2007 - Jul

2007 - Oct

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 - July

2011 - Oct

2012 - Jan

2012-Apr

70

75

80

85

90

95

100

105

110

115

Homebuyer Tax Credit

Source: NAR

REALTOR® Member Market Survey

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

0.010.020.030.040.050.060.070.0

Buyer Traffic Seller Traffic

10

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

1,000,0001,100,0001,200,0001,300,0001,400,0001,500,000

Annual Membership(NRDS count at year-end)

Improving Factors for Higher Sales in 2012:

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

Rent Growth (Component from Consumer Price Index)

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

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: Big Declines from 2006 to 2008

Small Declines from 2009 to 2011(index set at 100 from 2000)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul100

120

140

160

180

200

220

Case-Shiller FHFA

Home Prices Index

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

100

150

200

250

300

350

Phoenix

Charleston

Source: Federal Housing Finance Agency

Home PricesMetric % change from one year ago Comment

NAR + 7.9% Mix of homes impact price … fewer distressed sales recently

Case-Shiller - 1.9% Lagging indicator … one month 1.3% jump in April

FHFA + 3.0% 3 straight monthly increase to April

Core Logic + 2.0% 3 straight monthly increase to May

FNC - 1.8% 3 straight monthly increase to May

Radar Logic - 0.2% 3 straight monthly increase to April

Equity and Underwater HomeownersPositive Equity Homeowners

Negative Equity Homeowners

Early 2012 About 65 million

Of which 25 million have no mortgages

11 to 12 million

After 5% price appreciation

67 million 9 million

After 10% price appreciation

69 million 7 million

Source: Census, Federal Reserve, CoreLogic, NAR estimates

15% of Homeowners are Underwater

15%

85%

Homeowners

UnderwaterAbovewater

Inventory in Months Supply(Around 6 months is normal)

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

2

4

6

8

10

12

14

Visible Housing Inventory(Existing inv. At 6-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(Seriously delinquent mortgage + homes in foreclosure process)

million units

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

0.00.51.01.52.02.53.03.54.04.55.0

Shadow Inventory can be defined as those distressed properties not yet on the market but will at some point appear given the serious delinquency situation.

Latest and Forecast: Shadow inventory admittedly is still high, but it is about 1 million fewer than two years ago and is anticipated to steadily diminish over time. The falling share of distressed properties over time will lead to the median price of all homes that gets transacted to be higher.

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

Charleston Housing Permits

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

0

2000

4000

6000

8000

10000

12000

Owner Occupied Housing Units

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

Rental Occupied Housing Units

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

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%

Wealth Distribution(Federal Reserve data on median net worth, with 2011 NAR estimate)

Renter Owner$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

19982001200420072010

Data Source for Median Net Worth: Federal Reserve

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 Real GDP

2005 2006 2007 2008 2009 2010 2011 2012 forecast

2013 forecast

-4

-3

-2

-1

0

1

2

3

4%

Residential Investment Spending Growth

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

-40

-30

-20

-10

0

10

20

30Home Buyer Tax Credit

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%

Labor Force Participation Rate

1948 - Jan 1956 - Jul 1965 - Jan 1973 - Jul 1982 - Jan 1990 - Jul 1999 - Jan 2007 - Jul0

102030405060708090

100%

Source: BLS

Men

Women

Charleston Payroll Jobs

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr200

220

240

260

280

300

320 In thousands

Charleston Payroll Jobs from 1940

1970 - Jan1975 - Jul1981 - Jan1986 - Jul1992 - Jan1997 - Jul2003 - Jan2008 - Jul0

50

100

150

200

250

300

350 In thousands

Unemployment Rate(Average during the Year)

2005 2006 2007 2008 2009 2010 2011 2012 forecast

2013 forecast

0

2

4

6

8

10

12 %

Need to add 250,000 jobs each month for the next 8 years to bring the unemployment rate down to 5%.

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

2005 2006 2007 2008 2009 2010 2011 2012 forecast

2013 forecast

-1

0

1

2

3

4

5

Rent All Items Core%

Prepare for Early Move (2014) by Federal Reserve

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.

Forecast Summary2011History

2012Forecast

2013Forecast

Existing Home Sales 4.26 million 4.6 million 5.0 million

New Home Sales 301,000 390,000 630,000

Housing Starts 611,000 770,000 1,150,000

Existing Home Price $166,100 $173,000 $182,000

GDP Growth +1.7% +2.0% +2.9%

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?– Other Dodd-Frank rules? Help or Hurt?– 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

U.S. Federal Budget Deficit

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

-1600000

-1400000

-1200000

-1000000

-800000

-600000

-400000

-200000

0

200000

400000

$ million; 12-month Total

World Report CardCountry 10-Year Borrowing Rate

Switzerland 0.5%

Germany 1.3%

Singapore 1.3%

United States 1.4%

United Kingdom 1.5%

Canada 1.6%

France 2.2%

Brazil 2.9%

Italy 6.0%

Spain 6.8%

Greece 26.0%

Source: Bloomberg as of July 26, 2012

State Report CardState 10-year Borrowing Rate above

Benchmark (% points)

Average State borrowing costs Around 3.5%

Rhode Island Benchmark + 0.5%

Michigan Benchmark + 0.7%

Nevada Benchmark + 0.7%

California Benchmark + 0.9%

Illinois Benchmark + 1.6%

Source: WSJ

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)

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

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

20.0Completions Net Absorption Vacancy

Source: NAR/REIS

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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2012 Midyear Charleston Residential Real Estate Market Update

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