Real Estate and Economic Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Leadership Team Meeting

Chicago, IL.

June 28, 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

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%

Owner-Occupancy Sales Falling(All-Cash deals hiding the current dysfunctional mortgage market)

2005 2006 2007 2008 2009 2010 20110

1000

2000

3000

4000

5000

6000 In thousands

QRM rulesRaising g-fees to fund non-housing issuesBanks hoarding cash! … from regulatory uncertainties and lawsuits?

Despite Second Home Sales Recovery

2005 2006 2007 2008 2009 2010 20110

5001000150020002500300035004000

InvestmentVacation

In thousands

Buy a condo for your college student

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

2012 First Quarter Sales: 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

Monthly Pending Home Sales IndexPoint to Strongest Second Quarter in 5 years

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

Year-over-Year Change in Pending Contracts:Up for 12 straight months

2010 - May

2010 - Jul

2010 - Sep

2010 - Nov

2011 - Jan

2011 - Mar

2011 - May

2011 - Jul

2011 - Sep

2011 - Nov

2012 - Jan

2012 - Mar

2012 - Apr

-30

-20

-10

0

10

20

30

% change from one year ago

Improving Factors for Higher Sales in 2012:

1. High Affordability2. Growing Economy and Job Creation 3. Solid stock market recovery from 20084. Rising rents and a larger pool of qualified renters5. Pent-up release of Household Formation

• Rising demand for ownership and rentals as young-adults move out of parent’s basement

6. Smart money chasing real estate (i.e., investors)7. 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

Economy out of Recession and GrowingGDP growth for 11 straight quarters

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

-10

-8

-6

-4

-2

0

2

4

6

8

10

Corporate Profits … Sky High

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

-500

0

500

1000

1500

2000

2500$ billion

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

Total U.S. Payroll Jobs Increasing

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr124000

126000

128000

130000

132000

134000

136000

138000

140000

8 million job losses

4 millionjob gains

In thousandsIn thousands

Total Payroll Jobs(Recovered half of jobs lost a few years ago, but still down by 10 million compared to

long-term projections)

1970 - Jan1971 - M

ar1972 - M

ay1973 - Jul1974 - Sep1975 - N

ov1977 - Jan1978 - M

ar1979 - M

ay1980 - Jul1981 - Sep1982 - N

ov1984 - Jan1985 - M

ar1986 - M

ay1987 - Jul1988 - Sep1989 - N

ov1991 - Jan1992 - M

ar1993 - M

ay1994 - Jul1995 - Sep1996 - N

ov1998 - Jan1999 - M

ar2000 - M

ay2001 - Jul2002 - Sep2003 - N

ov2005 - Jan2006 - M

ar2007 - M

ay2008 - Jul2009 - Sep2010 - N

ov2012 - Jan

50

60

70

80

90

100

110

120

130

140

150In millions Mind

theGAP

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

Visible Inventory of Homes(6-year low for Existing Homes and 50-year low for New Homes)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - 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 NewSource: NAR, Census

Shadow Inventory(Seriously Delinquent: 90+ days late or in foreclosure process)

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

0.0

2.0

4.0

6.0

8.0

10.0

12.0

U.S.

In millions

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

Latest Home Price Trend in early 2012(Lagging Indicator … reflects price negotiations from late 2011)

• NAR: Up in more than half of local markets

• FHFA: Up in deep-middle America, New England, South Atlantic, Mountain states

• Case-Shiller: Up in Charlotte, Dallas, Las Vegas, Miami, Minneapolis, Phoenix, Portland, San Diego, San Francisco, Tampa, Washington D.C.

• LPS and Core Logic: many markets with price gains

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

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

19982001200420072011 estimate

Data Source for Median Net Worth: Federal Reserve, NAR estimate for 2011

Producer Price Inflationary Pressure … Diminishing

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

-20

-15

-10

-5

0

5

10

15

20

Finished Intermediate%

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.

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

Housing Forecast2011History

2012Forecast

2013Forecast

Existing Home Sales 4.26 million 4.6 to 4.7 million 4.8 to 5.0 million

New Home Sales 304,000 400,000 500,000 to 600,000

Housing Starts 610,000 770,000 1 million

Existing Home Price(Growth)

$166,100(-3.9%)

$170,100(+2.4%)

$177,300(+4.2%)

GDP Growth +1.8% +2.3% +3.1%

Payroll Job Gains +1.7 million +1.8 million +2.5 million

Fed Funds Rate 0.1% 0.1% 0.1%

30-yr Mortgage 4.7% 4.0% 4.5%

Risks to Forecast

• Washington Policy– QRM 20% down payment requirement?– Other Dodd-Frank rules? Help or Hurt?– 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

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)

Method of Finance

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

Vacancy Rate 12.4% 11.9% 11.1%Net Absorption ('000 sq. ft.) 61,957 41,249 59,855

Completions ('000 sq. ft.) 20,462 26,947 54,881Rent Growth -0.5% 1.8% 2.3%

RETAIL 2011 2012 2013

Vacancy Rate 12.9% 12.2% 11.0%Net Absorption ('000 sq. ft.) 1,238 13,547 23,330

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%

International Home Buyers

Sales to International Buyers Up By 24 Percent on Yearly Basis

Twenty Seven Percent of Realtors® Reported Working with an International Client

Twelve Months Ending March 2012

32%

26%

23%

28% 28% 27%

20%22%24%26%28%30%32%34%36%38%40%

2007 2008 2009 2010 2011 2012

Perc

enta

ge o

f Res

pond

ents

Realtors® with International Clients

Residents from Most Countries Have Some Participation in U.S. Residential MarketMajor Purchasers Listed Below

International Buyers Are Throughout the U.S.But Concentrated in a Few States

Arizona California Florida Georgia Nevada New York Texas

2007 5% 16% 10% 2% 2% 4% 8%

2008 5% 11% 9% 3% 2% 4% 7%

2009 7% 13% 23% 1% 1% 2% 11%

2010 11% 12% 22% 5% 3% 4% 8%

2011 6% 12% 31% 2% 2% 3% 9%

2012 7% 11% 26% 4% 2% 4% 7%

0%

5%

10%

15%

20%

25%

30%

35%

Percent of International Sales by State

International PurchasersCash for Majority of Purchases

28%

43%46%

55%62% 62%

69%

54% 52%

44%36% 37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2007 2008 2009 2010 2011 2012

Type of Financing

All cash With mortgage financing