Recovery to Normalcy

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Annual MeetingsNew Orleans, LA

November 5, 2010

Consumer Confidence on Present Conditions: Awful

1980 - Jan 1984 - Jan 1988 - Jan 1992 - Jan 1996 - Jan 2000 - Jan 2004 - Jan 2008 - Jan0

20406080

100120140160180200

Consumer Confidence on Future Conditions:

Not Good but Not as Bad

1980 - Jan 1984 - Jan 1988 - Jan 1992 - Jan 1996 - Jan 2000 - Jan 2004 - Jan 2008 - Jan0

20

40

60

80

100

120

140

9.6% unemployment rate, but different confidence level

Business Spending Shows Weak Confidence in Relation to Profits

2000 - Q2

2000 - Q4

2001 - Q2

2001 - Q4

2002 - Q2

2002 - Q4

2003 - Q2

2003 - Q4

2004 - Q2

2004 - Q4

2005 - Q2

2005 - Q4

2006 - Q2

2006 - Q4

2007 - Q2

2007 - Q4

2008 - Q2

2008 - Q4

2009 - Q2

2009 - Q4

2010 - Q2

200

700

1200

1700

2200

2700

Corporate Profits

Business Investment

Business Investment = private fixed investment in GDP accounting

$ billion

REALTORS’ Home Value Expectation:over the next 12 months

2008 - Oct

2008 - Dec

2009 - Feb

2009 - Apr

2009 - Jun

2009 - Aug

2009 - Oct

2009 - Dec

2010 - Feb

2010 - Apr

2010 - Jun

2010 - Aug

0%10%20%30%40%50%60%70%80%

Increase or Stable

Decrease

REALTOR Expectation vs RealityDate % respondents saying prices will have

fallen at this time from 12 month priorCase-Shiller price change

2009.1051%

-7.3

2009.1156%

-5.4

2009.1260%

-3.1

2010.0155%

-0.7

2010.0254%

+0.7

2010.0343% (minority say falling price)

+2.3 (price did not fall)

2010.0435%

+3.8

2010.0535%

+4.6

2010.0636%

+4.2

2010.0736%

+3.2

Government Spending (Confidence)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010200

700

1200

1700

2200

2700

3200

3700

Government Receipt

Government Outlay

$ billion

GDP Growing, but Without Vigor

1980 - Q1 1984 - Q1 1988 - Q1 1992 - Q1 1996 - Q1 2000 - Q1 2004 - Q1 2008 - Q1

-10

-5

0

5

10

15 annualized % growth rate

U.S. Private Sector Job Gains(863,000 from Jan. to Sep. 2010)

1980 - Jan1984 - Jan1988 - Jan1992 - Jan1996 - Jan2000 - Jan2004 - Jan2008 - Jan

-1000

-500

0

500

1000

1500Month-to-month job gains in thousands

Total Payroll Jobs in the U.S. (same as in 2000, but with 30 million more people)

2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul124000

126000

128000

130000

132000

134000

136000

138000

140000

How Many Years to Get Job Market Back to Normal?

Jobs added per month Assumed new jobs needed for growing population per month

How many years?

100,000 100,000 Treading water and never back to normal

200,000 100,000 6.3 years300,000 100,000 3.2 years400,000 100,000 2.1 years

3500

4000

4500

5000

Source: BLS

In thousands

Total Payroll Jobs in Michigan

2000

2200

2400

2600

Source: BLS)

In thousands

Total Payroll Jobs in Washington D.C. Metro

Weekly 1st time Unemployment Claims: Need to Fall Further

2000 - Feb2001 - Aug2003 - Feb2004 - Aug2006 - Feb2007 - Aug2009 - Feb2010 - Aug0

100

200

300

400

500

600

700 In thousands

Existing Home Sales (Closings)

2000 - Feb 2001 - Sep 2003 - Apr 2004 - Nov 2006 - Jun 2008 - Jan 2009 - Aug3000000

3500000

4000000

4500000

5000000

5500000

6000000

6500000

7000000

7500000Tax Credit Impact

New Home Sales (Contracts)

2001 - Feb2002 - Jun 2003 - Oct2005 - Feb2006 - Jun 2007 - Oct2009 - Feb2010 - Jun70

270

470

670

870

1070

1270

1470

Where is the tax credit impact?

High Existing Home Inventory

2000 - Feb 2001 - Apr 2002 - Jun 2003 - Aug 2004 - Oct 2005 - Dec 2007 - Feb 2008 - Apr 2009 - Jun 2010 - Aug02468

101214

Months Supply

Total homes on the market(in millions)

Distressed Loans and Shadow Inventory

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

20

06

/Q1

20

06

/Q2

20

06

/Q3

20

06

/Q4

20

07

/Q1

20

07

/Q2

20

07

/Q3

20

07

/Q4

20

08

/Q1

20

08

/Q2

20

08

/Q3

20

08

/Q4

20

09

/Q1

20

09

/Q2

20

09

/Q3

20

09

/Q4

Tho

usa

nd

s

Mortgage Payments Past Due 30-59 Days

Mortgage Payments Past Due 90+ Days

Mortgage Foreclosures Started

Mortgage Foreclosure Inventory

Bad loans are nearly always made in good times. But recently originated loans are performing very well.

Newly Built Home Inventory and Its Shadow Inventory

2000 - Feb 2001 - Jun 2002 - Oct 2004 - Feb 2005 - Jun 2006 - Oct 2008 - Feb 2009 - Jun0

100

200

300

400

500

600

700

Depressed Housing Starts

0

500

1,000

1,500

2,000

2,500 In thousands

Return to Normalcy

• Unprecedented Boom and Bust: 2000 to 2010• Sales Boomed and Retreated • Prices Overshot and Corrected • Fundamentals Back to Justifiable Levels• Long-standing Housing Policy still in place• Credit Market Bubble … out the window

22

Existing-Home Sales

In million units

23

Home Sale to Jobs

National Median Home Price

0

50,000

100,000

150,000

200,000

250,000

Source: NAR

Metro Median Home Price

0

50

100

150

200

250

300

350$ thousand

Source: NAR

Las Vegas

Columbia

National Median Home Price Stabilizing(Combination of price change and type of homes that are selling)

2001 - Feb 2002 - Feb 2003 - Feb 2004 - Feb 2005 - Feb 2006 - Feb 2007 - Feb 2008 - Feb 2009 - Feb 2010 - Feb100000

120000

140000

160000

180000

200000

220000

240000

260000

280000

New Home Price

Existing Home Price

Other Home Price Measurements also Showing Price Stabilization

Home Price-to-Income Ratio (No Bubble)

2.02.22.42.62.83.03.23.43.6

Source: NAR

Home Price and Construction Cost(No Bubble)

2000 - Feb 2001 - Jan 2001 - Dec 2002 - Nov 2003 - Oct 2004 - Sep 2005 - Aug 2006 - Jul 2007 - Jun 2008 - May 2009 - Apr80

90

100

110

120

130

140

150

160

170

NAR Price Index

PPI Residential Construction Cost Index

Long Standing Housing Policy• Mortgage Interest Deduction

– If eliminated, there will be about a 15% hit to home values– Massive wealth destruction for property owners who have

saved and saved (in many cases to pass it on to the next generation)

• FHA– Self-financing without ever needing taxpayer funds (as of

yet)• Fannie and Freddie

– Made mistakes and need to be restructured

Credit Bubble DeadSubprime, Alt-A, Home Equity Mortgage Origination

0

200

400

600

800

1,000

1,200

1,400

1,600

2003 2005-2006 2009-2010

Source: NAR estimate based on Inside Mortgage Finance data

$ billion

1995

1995

1998

1998

2001

2001

2004

2004

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

Renter Homeowner

2007

20072007

2007

Long-Term Path to Self Reliance May be Helped from Long-Term Housing Wealth Gains

Long-Term Path to Self Reliance May be Helped from Long-Term Housing Wealth Gains

Source: Federal Reserve, NAR estimate for 2010

Median Family Net Worth

2010

2010

Compelling AffordabilityMonthly Mortgage to buy a Median Priced Home

2005 Q2 2010 Q2

San Diego $ 2,833 $ 1,564

Miami $ 1,726 $ 853

Milwaukee $ 1,014 $ 797

Kansas City $ 735 $ 600

Economists Expect Price Increases in Upcoming Years

• Macromarkets, a firm associated with Professor Robert Shiller, surveys about 100 economists about home price outlook.

• The consensus forecast as of August 2010 (which can be found from Macromarkets or from news media stories such as Wall Street Journal) are for

• 0.78% price increase in 2011• 2.43% price increase in 2012• 3.20% price increase in 2013• 3.69% price increase in 2014• No forecast for 2015 and beyond

10-Year Treasury impacted by Inflationary Expectations

1971 - May 1976 - Apr 1981 - Mar 1986 - Feb 1991 - Jan 1995 - Dec 2000 - Nov 2005 - Oct

-5

0

5

10

15

20 %

CPI Inflation

10-year Treasury Yield

Inflationary Pressure ?Indicator % change from one year ago

Consumer Price Index (CPI) 1.1%

Housing Rent Component CPI 0.2% (but heading higher?)

Producer Price Index (Finished Product) 4.0%

Producer Price Index (Intermediate Product) 5.5%

Producer Price Index (Crude Product) 20.2%

Commodity: Coffee, Cotton, Wheat, Meat Very high

Gold Price Record High Price

CPI-Housing Rent Inflation(Home price is not part of CPI because of asset/investment aspect)

-1

0

1

2

3

4

5 %

Housing Rent Inflation

Baseline Outlook

• Moderate GDP Expansion 2 to 2.5% in the next 2 years (historical average is 3%)

• 1.5 million annual job additions in the next 2 years

• Unemployment rate of 8% in 2012 … and normal 6% in 2015

Baseline Outlook Cont’d• Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012

• People fussing about home values could miss out on low rates

• Home values – no meaningful change in the national price in the next 2 years

• Home sales to be choppy, but overall improving, in line with job growth … 5.2 million in 2011 (up from 4.8 m in 2010, but same as in 2000)• Affordability conditions are too compelling

• There may be some pent-up demand. 30 million additional people compared to 2000, but same number of home sales as in 2000.

Alternative Possibility

• High inflation: people desire tangible investment like real estate, but interest rate will be higher

• Deflation: people hold back for better price, which holds back economy

• Budget deficit tipping point: higher interest rate and sharp cut backs in standards of living

• Sharp 4% to 5% GDP growth … release of pent-up housing demand (30 million more people today versus 2000 when home sales were similar) … surprisingly higher home sales and home prices

Virtuous or Vicious Cycle?• Home values stabilizing scenario

– Foreclosures steadily fall– Strategic default lessens and underwater homeowners become

hopeful – FHA and Fannie/Freddie finances improve (will need less

taxpayer funds)– Consumer spending opens up– Home value stabilize further or even begin to rise …– Self-sustaining normal growth rates in sales and prices

• Home values fall meaningfully … ugly scenario