dr yun powerpoint (january 2012)5.2 million sales in 2000 – mls sales rise 10% then existing home...
TRANSCRIPT
Economic and Housing Market
OUTLOOK
Lawrence Yun, Ph.D.Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation at New Canaan Board of REALTORS® and Mid-Fairfield County Association of REALTORS®
January 31, 2012
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 Fannie and Freddie are still reporting net 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
5,500,000
6,000,000
6,500,000
7,000,000Tax Credit Impact
3,000,000
3,500,000
4,000,000
4,500,000
5,000,000
5,500,000
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Old Data
New Data
National Existing Home Sales Measurement
• What it is– Trend based on MLS sales from a benchmarked figure• Decennial Census implied 5.2 million sales in 2000
– MLS sales rise 10% then Existing Home Sales is
• What it is not– Actual sales count from MLSs
– Actual sales count as recorded from property deeds– MLS sales rise 10% then
Existing Home Sales is presumed to have risen 10%
– But MLS sales may pick up FSBOs and Homebuilder sales that normally do not fall into MLSs
deeds
• No changes to MLS data
• No changes to local sales of MLS data counts
Homes Bought How?More People Sought Help From REALTORS®
70
80
90
100
Homebuilder Directly from owner Real estate agent
0
10
20
30
40
50
60
2005 2006 2007 2008 2009 2010 2011
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
5,000,000
6,000,000
7,000,000
8,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
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20-Metro Case-Shiller Price Index…Remarkable Stability from 2009
New York Metro vs. Miami Price Index(1990 to 2011)
150
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250
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Source: Case-Shiller
Northeast Region Activity
• Third Quarter 2011 Home Sales… up 12% from one year ago
• Fourth Quarter 2011 Home Sales … up 5% from one year ago – projection based on Oct. and November data – projection based on Oct. and November data
• Repeat Price Index on Fannie/Freddie Loans
– down 14% from peak in 2006
– down 3% from one year ago
– Up 0.7% from one quarter ago
Connecticut Markets
• CT state-wide home sales
– Down 8% in 2011
• Median Price of Transacted Homes
– Down 4% in 2011– Down 4% in 2011
• New Canaan
– Sales down 1% and prices up 9% in 2011
• Fairfield
– Sales down 14% and prices up 6% in 2011
• Source: Prudential CT Realty
Other Local Market Trends
Prices Up
• Bismarck
• Boston
• Buffalo
Prices Down
• Atlanta
• Chicago
• Las Vegas• Buffalo
• San Diego
• San Francisco
• Washington, DC
• Las Vegas
• Miami
• Phoenix
• Portland, OR
U.S. Housing Starts Lowest since the Second World War… in the past three years
1500
2000
2500
3000Long-term Average;
Long-term RequirementHousing Starts in thousands
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Connecticut Housing Permits
Existing Home Inventory(Elevated but Falling even as distressed and shadow inventory flows in)
Financial Industry Corporate Profits
300
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600 $ billions; seasonally adjusted annualized
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KBW Bank Stock Index(still down 64% from pre-crisis levels)
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2007 2008 2009 2010 2011
Federal Reserve Loose Monetary Policy
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30-year Mortgage Fed Funds
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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 58% married couplesHousehold Composition 64% married couples
18% single females
10% single males
7% unmarried couples
58% married couples
20% single females
12% 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 raisedraised
• 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• 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)
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5 %
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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 years
Item Price Index
in 1981
Price
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%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 nocash 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– 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 Mae
Vintage
Cumulative
Default Rate
after 18 months
2002 3.1%
2003 2.5%
Freddie Mac
Vintage
Cumulative
Default Rate
after 18 months
2002 2.7%
2003 1.2%
2004 4.6%
2005 4.8%
2006 11.6%
2007 28.7%
2008 12.6%
2009 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 – 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?)
600800
100012001400160018002000
0200400600
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)
6
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10
Desired Pace
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North Dakota … Jobs Everywhere(Starting Wage at McDonalds … $15 to 18 per hour)
In thousands
Michigan Payroll Jobs –Ongoing Structural Changes
In thousands
Connecticut Payroll Jobs
In thousands
CPI Inflation Retreating?(% change from one year ago)
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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 (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)
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U.S. CT
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– Rising rents and larger pool of qualified renters
– 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)
National 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%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• 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 • Fueled an unprecedented
growth of America’s
middle class
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