Housing Market and Housing Market and Economic OutlookEconomic Outlook

Lawrence Yun, Ph.D.Lawrence Yun, Ph.D.Chief EconomistChief Economist

NATIONAL ASSOCIATION OF REALTORS®NATIONAL ASSOCIATION OF REALTORS®

Presentation at JP Morgan Chase Event & Chicago Association of REALTORS ®Presentation at JP Morgan Chase Event & Chicago Association of REALTORS ®Chicago, ILChicago, IL

July 21, 2011July 21, 2011

U.S. Annual Existing Home Sales …Ready to Breakout?

Monthly Existing Home SalesMonthly Existing Home Sales

Tax Credit ImpactTax Credit Impact

Pending Existing Home Sales Index2010 to 2011

Tax Credit ImpactTax Credit Impact

Activity in Chicagoland• First Quarter Sales (no tax credit in 2011 vs. tax credit in 2010)

– Cook County down 12% from 2010 Q1– DuPage County down 1%– Kane County down 2%– Lake County down 7%– McHenry County down 16%

• First Quarter Prices– Chicagoland MLS data down 7.3% from 2010 Q1– Federal Housing Finance down 5.0%– Case-Shiller down 7.5%

• Source: IAR and Case-Shiller, FHFA

Midwest Weather Impact

Solid Gains of 30% or more (from one year ago among major markets)

» Austin» Baltimore» Chicago» Hartford» Houston» Indianapolis» Kansas City» Portland, OR» San Antonio» Seattle

New Home Sales (Pending contracts, not Closings)

In thousands

U.S. Housing Starts

Housing Starts in thousands

Chicago MSA Housing Permits

Newly Built Home InventoryNewly Built Home Inventory

In thousands

New Home Price vs. Existing Home Price 30% premium rather than 10-15% normal premium

12 month moving average

Existing Home Price

New Home Price

Improving Factors for Higher Home Sales

• First quarter at 5.1 million annualized pace … if sales can hold at current levels then 4% annual increase in 2011 … without homebuyer tax credit stimulus

• The remainder of the year looks to be better– Job Creation– Robust stock market recovery from 2008– Rising rents and larger pool of qualified renters– Buyers want distressed properties … at deep discounts– International buyers cashing in on the weakened dollar– Smart money chasing real estate– Potential Huge Positive … Lending opens up– Potential Huge Negative … Washington policy change

Total U.S. Payroll Jobs – Modest RecoveryIn thousands 7 million

below prior peakIn thousands

North Dakota Jobs

In thousands

Texas Payroll Jobs – Fully RecoveredIn thousands

Chicagoland Payroll Jobs – Recovery?In thousands

Weekly Fresh Unemployment Claims …Not Going under 400,000

In thousandsIn thousands

Financial Asset at $50 trillion … Full Recovery

Source: Federal Reserve

Realtors Reporting Rising Apartment Rents

CPI Apartment Rent

Home Price vs Rent(index = 100 in 1980)

# of Serious Delinquent Mortgages … Mostly Borrowers prior to 2009

(90+ days late or in foreclosure process)

In 2010, there were 1.5 million distressed sales … need to wait 2.7 years

Distress Sales: 30% to 40% of Transactions

Will Remain Significant for Next 2 years

One U.S. Dollar gets …

U.S. Home Price after Currency Conversion

Smart Money Buying?

• All-cash record high at 35% of all sales– Investors want quick deals– Investors cannot get mortgage– Some do not want to bother with appraisals – Financial asset recovery helping with cash– Hedge against future inflation– Hedge against future housing shortage?– Empty nesters downsizing and using leftover cash for

kids’ home?• Upper-end market beginning to move

Real Estate as Inflation Hedge?(single-family home price in blue vs CPI in red)

Good inflation hedge in the past before the housing bubble/bust

Upside Potential Surprise

Average Credit Score for Loan Origination

Normal 2009 2010 If

Fannie 720 761 762 720

Freddie 720 757 758 720

FHA 650 682 698 660

15% to 20% Higher Sales

QE2 … to keep rates low … are inconsequential if too strict

underwriting standardsFannie and Freddie Backed Mortgage Loan Performance

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

Downside Potential Surprise

Washington Policy Change?• Going after the Middle-Class by Republicans

– Raise down payment to 20% ???– Despite no taxpayer bailout for FHA and VA program

• Going after the Rich by Democrats– Limit mortgage interest deduction for high income and second

homes ???– Crush the working class in resort areas (Yacht Tax Impact)

• Going after the Rich by Republicans– Lower conforming loan limit ???– Income redistribution from consumers to banks

• Going after the Small Business “Tax Cheats” by Democrats– Force massive 1099 paperwork to run a business and hire IRS agents– REPEALED !!!

• Fannie and Freddie model was flawed (private profit/taxpayer loss) and need a fundamental restructuring

Current Savings Rate = 6% Takes 9 years to save $20,000 based on average $2,200 per

yearTakes 14 years to save $32,000 (20% of today’s median price)

Economic Hurdles

• Inflation hitting pocketbooks– Gas and Oil … daily reminder – Food and grocery … daily reminder

• Huge pool of underemployed … everything is unaffordable even if no inflation

• Budget Deficit … no impact now but when?• Consumer confidence … another losing

election for incumbents

CPI Inflation and PPI Inflation(% change from one year ago)

Prices falling on consumer electronic products :

Smartphone1 = $200 to Smartphone2 = $200 is computed as falling prices; even though your wallet did not get any relief

Broad Inflationary PressureIndicator % change from one year ago

Consumer Price Index 3.4%

Producer Price Index (Finished Product) 7.0%

Producer Price Index (Intermediate Product) 11.0%

Producer Price Index (Crude Product) 25.5%

Dow Jones Commodity Spot Price Index 38.1%

Gold Price Around Record High Price

# Unemployed(looking but cannot find job)

Adults in the Labor Force(Rest are not looking for job and officially not included in unemployment rate)

Government Spending and Tax ReceiptsGovernment Spending and Tax Receipts$ billion$ billion

Government Default?

Consumer Confidence Index

Housing Baseline OutlookHousing Baseline Outlook• Moderate GDP Expansion 1.5% to 2.5% in the next 2 years Moderate GDP Expansion 1.5% to 2.5% in the next 2 years

• 1.2 to 1.7 million annual job additions yearly in the next 2 years1.2 to 1.7 million annual job additions yearly in the next 2 years

• Mortgage Rates rising to 5.5% by year-end 2011 and 6% in 2012 Mortgage Rates rising to 5.5% by year-end 2011 and 6% in 2012

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

• Chicago Market ??? Chicago Market ???

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."

For More Information

• realtors.org/research– Research data and analysis– facebook, twitter for daily economic updates