Recovery to Normalcy

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation to Denver Metro REALTORS®Denver, Colorado

November 17, 2010

Federal Reserve FOMC • Ben Bernanke (Chairman):

• “Outlook remains unusually uncertain”

• Alan Greenspan (former Chairman):• “If home prices start falling again, we could be facing a double-dip

recession”

• James Bullard (St. Louis Fed): • “The U.S. is closer to a Japanese-style deflationary outcome”

• Thomas Hoenig (Kansas City Fed): • “Too rapid money creation results in eventual high inflation”

Consumer Confidence about Present Conditions: Awful

Consumer Confidence about Future Conditions – Not good but not as bad

9.6% unemployment rate, but different confidence level

Business Spending shows weak confidence in relation to profits

$ billion

REALTORS’ Home Value Expectation:over the next 12 months

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)$ billion

GDP Growing, but without vigorannualized % growth rate

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

Month-to-month job gains in thousands

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

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

100

120

140

160

180

Source: BLS

In thousands

Total Payroll Jobs in Boulder and Ft. Collins

11001150120012501300

Source: BLS

In thousands

Total Payroll Jobs in Denver-Aurora

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

1100

1600

2100

2600

Source: BLS

In thousands

Long-term Job Growth in Colorado (30 years)

Existing Home Sales (Closings)Tax Credit Impact

Colorado Existing Home Sales: Quarterly Change

-30

-20

-10

0

10

20% change from a year ago Tax Credit Impact

Long-term Colorado Home Sales: 30 years

0

2040

60

80100

120

140

In thousands

Median Home Price in Denver Area

0

50

100

150

200

250

300

Separate Case-Shiller Index shows Denver price gain of 2% from 18 months ago

Source: NAR

$ thousand

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

Depressed Housing Starts

0

500

1,000

1,500

2,000

2,500 In thousands

Housing Starts in Boulder

01,0002,0003,0004,0005,0006,000

In thousands

Housing Starts in Denver-Aurora

05,00010,00015,00020,00025,00030,00035,00040,000

In thousands

Housing Starts in Ft. Collins-Loveland

0

1,000

2,000

3,000

4,000In thousands

Return to Normalcy

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

29

Existing-Home Sales

In million units

30

Home Sale to Jobs

National Median Home Price

0

50,000

100,000

150,000

200,000

250,000

Source: NAR

Home Price-to-Income Ratio (No Bubble Now)

2.02.22.42.62.83.03.23.43.6

Source: NAR

Home Price and Construction Cost(No Bubble Now)

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

Long Standing Housing Policy• Mortgage Interest Deduction

– If eliminated, about 15% hit to home values– Massive wealth destruction on 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

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

Denver $ 1,192 $ 935

Kansas City $ 735 $ 600

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)

Homeownership Rate

COMMERCIAL REAL ESTATE

Real Estate PriceResidential: Case-Shiller

Commercial: MIT

J 06 M M J S N

J 07 M M J S N

J 08 M M J S N

J 09 M M J S N

J 10 M M J S

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Commercial Mortgage Backed Security IssuanceMonthly CMBS Issuance ($ Mil)

Source: Commercial Mortgage Alert

2002.Q1

2002.Q3

2003.Q1

2003.Q3

2004.Q1

2004.Q3

2005.Q1

2005.Q3

2006.Q1

2006.Q3

2007.Q1

2007.Q3

2008.Q1

2008.Q3

2009.Q1

2009.Q3

2010.Q1

0

50

100

150

200

250

300

350

400 Origination Volume Index (2001 Qtr Avg=100)

Source: Mortgage Bankers Association

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000U.S. Sales Volume: Properties valued over

$2.5 million

Apartment Industrial Office Retail

Source: Real Capital Analytics

2010.Q3: UP 115% Y-o-Y

2011 OUTLOOK

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 9% in 2011 … and normal 6% in 2015

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

• People fussing about home value 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 maybe a pent-up demand. 30 million additional people from 2000 but same home sales as in 2000.

Baseline Outlook Cont.

• Commercial lending to steadily improve … because of record high bank profits

• Net absorption steadily improve … because of recovering job market

• Rents stabilize (but no meaningful increase) … because of very low newly built inventory

• Cap rate falls … price floor established and because of improved investor confidence (to move money out of low yielding Treasuries)

Alternative Possibility

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

• Deflation … people hold back for better price … holds back economy• Budget deficit tipping point … higher interest rate and sharp cut

back in standard 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