Economic and Housing Market

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at Park City Board of REALTORS®Park City, UT

February 16, 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

Tax Credit Impact

Old Data

New Data

National Existing Home Sales Measurement

• What it is– How many homes sold

in 1970, 1980, 1990, 2000 from Census data

– Apply MLS sales change … if 10% higher then Existing Home Sales is presumed to have risen 10%

• 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®

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

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20-Metro Case-Shiller Price Index…Remarkable Stability from 2009

Las Vegas vs. Greater SLC(Home Price Index: 1995 = 100)

Source: Federal Housing Finance Agency

Other Local Market Trends

Prices Up•Bismarck•Boston•Buffalo•Honolulu•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

Housing Starts in thousands

Utah Housing Permits

Greater Salt Lake City Housing Permits

Summit County Housing Permits

• 1990 to 2004 … about 500 to 600 units

• 2005 to 2007 … 800 to 1200 units

• 2008 to 2010 … 200 to 400 units

• 2011 … 100 units

Existing Home Inventory(Elevated but Falling even as distressed and shadow inventory flows

in)

Financial Industry Corporate Profits

KBW Bank Stock Index(still down 64% from pre-crisis levels)

Federal Reserve Loose Monetary Policy

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)

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?)

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

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Desired Pace

North Dakota…Jobs Everywhere(Starting Wage at McDonalds…$15 to 18 per hour)

In thousands

Michigan Payroll Jobs – Ongoing Structural Changes

3500

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In thousands

Salt Lake City Payroll Jobs

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In thousands

CPI Inflation Retreating?(% change from one year ago)

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)

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– Pent-up Release of Household Formation– 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)

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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