The Current State and Outlook for the U.S. Economy and Residential Real Estate in 2011

2

“Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually.”

Federal Reserve Chairman Ben BernankeFOMC StatementMarch 15, 2011

What Economic Realities are Driving the Current Economic Recovery?

Household spending and business investment in equipment and software continue to expand.

However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.

Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.

Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.

3

U.S. PRODUCTION AND CONSUMPTION

4

Real GDP Growth is showing increasing strength, but remains relatively weak for a recovery…

0.9

3.22.3 2.9

‐0.7

0.6

‐4.0

‐6.8

‐4.9

‐0.7

1.6

5.03.7

1.72.6 3.1

2.13.5

‐8.0

‐6.0

‐4.0

‐2.0

0.0

2.0

4.0

6.0

5

Quarterly Change at SAAR

Source: Bureau of Economic Analysis , Macroeconomic Advisors

ForecastEstimate

…but Personal Consumption Expenditures are showing continued improvement…

6

Source: Bureau of Economic Analysis

…with continuing improvement coming in Retail Sales…

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

Retail Sales & Food ServicesRetail Sales & Food Services (excluding Motor Vehicles and Parts)

7

Source: Census Bureau

…while Personal Savings Rates are continuing to trend higher.

0

2

4

6

8

10

12

14

Rat

e

Personal Savings (NIPA)

8

Source: Bureau Economic Analysis

However, growth in Real GDP remains substantially below historical norms for this stage of a recovery.

Sources: Bureau of Economic Analysis, Blue Chip Feb. newsletter

-10

-5

0

5

10

15

20

0 3 6 9 12 15 18 21 24

Current cycle

Average of all previous postwar cycles

Range

Percent change from previous peak

Quarters from previous peak

Blue Chip forecast

NATIONAL LABOR MARKET

10

Unemployment is off its high, but remains substantially elevated…

8.8

9.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Jan-

07

Mar

-07

May

-07

Jul-

07

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-

08

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-

10

Sep

-10

Nov

-10

Jan-

11

Mar

-11

Un

emp

loym

ent

Rat

e

United States Cincinnati MSA

11

Source: Bureau of Labor Statistics, Moody’s Analytics

…with similar improvement in unemployment being seen across the Tri-state area.

8.8

10.4

9.2

0.0

2.0

4.0

6.0

8.0

10.0

12.0Ja

n-07

Mar

-07

May

-07

Jul-

07Sep

-07

Nov

-07

Jan-

08M

ar-0

8M

ay-0

8Ju

l-08

Sep

-08

Nov

-08

Jan-

09M

ar-0

9M

ay-0

9Ju

l-09

Sep

-09

Nov

-09

Jan-

10M

ar-1

0M

ay-1

0Ju

l-10

Sep

-10

Nov

-10

Jan-

11

Un

emp

loym

ent

Rat

e

IndianaKentuckyOhio

12

Source: Bureau of Labor Statistics, Moody’s Analytics

Private Sector Job growth is beginning to accelerate…

-1000

-800

-600

-400

-200

0

200

400

600

Growth in Total Nonfarm Employment

13

Source: Bureau of Labor Statistics.

…while State and Local Government Payrolls continue to decline.

12-month percent change

Local

State

Source: Bureau of Labor Statistics.

Although, there are early signs of improvement in some recent Labor Market Indicators… Private-sector employment increased by 201,000 from February to

March on a seasonally adjusted basis, according to the latest ADP National Employment Report®. Strength was evident within all major industries and across all size business tracked in the ADP Report. This month’s Report removes any remaining doubt that private nonfarm payroll employment accelerated heading into 2011. (source: ADP National Employment Report)

In the week ending March 26, the advance figure for seasonally adjusted Initial Unemployment Insurance Claims was 388,000, a decrease of 6,000 from the previous week's revised figure of 394,000. The 4-week moving average was 394,250, a increase of 3,250 from the previous week's revised average of 391,000. (source: US Dept. of Labor)

After reaching a seven-year high in 2009, Planned Layoffs in 2010 fell to its lowest level since 1997, as employers announced plans to eliminate 529,973 positions. The year came to a close with the lowest monthly job-cut total since 2000. (source: Challenger, Gray & Christmas)

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…but the number of Discouraged Workers remains high as does the Duration of Unemployment.

0

200

400

600

800

1000

1200

1400

0

5

10

15

20

25

30

Jan-

08

Mar

-08

May

-08

Jul-

08

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-

10

Sep

-10

Nov

-10

Jan-

11

Mar

-11

Tho

usa

nds

Wee

ks

Median Weeks Discouraged Workers

16

Source: Bureau of Labor Statistics

THE RESIDENTIAL REAL ESTATE MARKET

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Beige Book Summaries on Residential Real Estate Federal Reserve System

- Recent activity in residential real estate varied, but overall sales and construction remained at low levels across all Districts.

- The Richmond, Atlanta, and Chicago Districts reported a slight improvement in the level of recent activity, while Boston noted that activity was mixed across New England. New York described the housing market as stable with some pockets of improvement. Demand was unchanged according to reports from the San Francisco District. Philadelphia, Kansas City, and Dallas described recent activity as sluggish, and St. Louis noted sales continued to decline.

- Construction activity was described as flat or down by Cleveland, Atlanta, Minneapolis, and Kansas City. Philadelphia and Atlanta contacts attributed weaker buyer traffic in January to inclement weather, and Philadelphia noted a pickup in early February. Richmond, Kansas City, and Dallas also indicated an increase in buyer traffic.

- Reports on home prices were mixed. Atlanta and Kansas City observed persistent downward price pressure. Home prices continued to fall according to Philadelphia reports, but mainly at the high-end of the market. Cleveland and Chicago contacts described prices as little changed.

- The outlook for residential sales and construction improved marginally, although activity is expected to remain at low levels. Kansas City contacts anticipate a seasonal surge in sales activity this spring. Atlanta, Dallas and San Francisco also expect modest improvement, while little to no sales growth is expected among Philadelphia contacts. A slight uptick is expected in Chicago and San Francisco construction.

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Source: Federal Reserve Board of Governors, March 2, 2011 Beige Book

Beige Book Summaries on Residential Real Estate Federal Reserve Bank of Cleveland

- New home construction was generally flat at a low level during the past six weeks, with purchases mainly in the move-up buyer categories.

- A few builders noted that most of their revenues now come from remodeling work. On a year-over-year basis, sales were mainly lower.

- Contractors expect construction to remain sluggish through at least the first half of 2011.

- List prices of new homes and discounting have shown little change, while some upward pressure on the cost of building materials was reported.

- Little movement was seen in land positions or spec inventories.

- We heard many reports of subcontractors struggling to stay in business due to very thin margins.

- General contractors continue to work with lean crews, and no hiring is expected in the near term.

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Source: Federal Reserve Bank of Cleveland, March 2, 2011 Beige Book

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%Ja

n-06

Apr

-06

Jul-

06

Oct

-06

Jan-

07

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

Oct

-09

Jan-

10

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Jul-

10

Oct

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Jan-

11

12

-mon

th P

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ha

nge

House Prices are showing the possibility of a “Double Dip” at the national level…

Source: Standard & Poors/Case-Shiller 20-metro Composite Index

…due to pressure remaining from a continuing high level of foreclosures.

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.0020

05Q3

2005

Q4

2006

Q1

2006

Q2

2006

Q3

2006

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2007

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2007

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Seriously Delinquent Foreclosures

21

Source: Mortgage Bankers Association

Millions of units

Permits

Single-Family Housing Starts & Permits remain depressed…

Source: Census Bureau.

Starts

22

…while Sales have yet to consistently recover, and remain below year earlier levels…

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

12-m

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Ch

an

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Existing Home Sales New Home Sales

23

Source: National Association of Realtors, Census Bureau

…but Pending Home Sales are slowly, very slowly, showing continued signs of improvement…

0.0

20.0

40.0

60.0

80.0

100.0

120.0

24

Source: National Association of Realtors

However, the Cincinnati-Middleton MSA housing market is faring slightly better in price growth.

$129.1

$131.1

$128.0

$128.5

$129.0

$129.5

$130.0

$130.5

$131.0

$131.5

2009Q4 2010Q4

Tho

usa

nds

Median Home Prices

53.9

39.4

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2009Q4 2010Q4

Thou

san

ds, S

AA

R

Existing Home Sales

25

Source: National Assoc. of Realtors, Moody’s Analytics Estimates

1.5%Increase

26.9%Decrease

Existing Home Sales are approximately back to the level they were at the beginning of the prior decade…

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

Thou

san

ds

26

Source: National Assoc. of Realtors, Moody’s Analytics Estimates

…while Housing Affordability significantly exceeds levels seen at the beginning of the decade.

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

$80

$90

$100

$110

$120

$130

$140

$150

Med

ian

Ho

use

Pri

ces

House Price Price-to-Income Ratio

27

Source: National Assoc. of Realtors, Moody’s Analytics Estimates

REGIONAL HIGHLIGHTS ACROSS THE TRI-STATE AREA

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Highlights of the Ohio Economy…

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• The housing market has failed to turn the corner, and foreclosures represent a major downside risk to the recovery in 2011.

• The foreclosure rate is down from its 2008 peak, but this trend could change as the “robo-signing” scandal dissipates.

• A relatively large inventory of foreclosed properties, particularly in Cincinnati, Toledo and Dayton, as well as more fundamental supply and demand imbalances, will place downward pressure on prices in 2011.

• Price declines have been moderate, at 5% from peak, versus 10% nationally, based on the FHFA index.

• The forecast calls for an additional 2% decline in 2011, before recovery begins in 2012

Sources: Moody’s Analytics

Highlights of the Kentucky Economy…

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• Kentucky’s recovery has gained momentum in recent months, and the risk of a double-dip recession has abated.

• Payroll employment has climbed steadily over the past year, with job growth well above the national average.

• Personal income growth slowed in the fourth quarter but remains healthy. KY’s high concentration of manufacturing was a major weakness during the recession, but has been the primary reason the state has outperformed the U.S. over the past year as demand and hiring have picked up.

• The state’s small house price declines and low foreclosure rate have also contributed to the solid performance.

• The unemployment rate has held steady at above 10% for the past half-year.

Sources: Moody’s Analytics

Highlights of the Indiana Economy…

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• Manufacturing employment is showing strength as the national economy continues its recovery.

• Growing confidence in the recovery will help to boost spending and in the retail and leisure/hospitality sectors.

• Housing indicators are mixed. Despite improving home prices, demand for new dwellings remains weak, causing construction payrolls to fall to a new cycle low.

• Education/healthcare remains a bright spot. The industry has been adding jobs throughout most of the year, and payrolls have surpassed

• their prerecession peak.

Sources: Moody’s Analytics

Summary & Conclusions

The national economic recovery is underway, and is slowly firming.

The housing market remains a significant drag on the broader economic recovery

- Prices remain under pressure due to >2M houses in shadow inventory

- Pending sales trends are promising, but not significant enough to indicate a rapid turnaround

- Underwriting remains tight and is likely to remain as such for the near term

Employment is recovering, albeit slowly.

There is pressure on headline inflation due to growth in commodity and food prices, but core rates remain within subdued.

32