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2009 Brazos Valley Economic and Real Estate Outlook College Station Hilton January 28, 2009

2009 Economic Outlook Conference. 2009 Brazos Valley Economic and Real Estate Outlook College Station Hilton January 28, 2009. Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University. Falling Economy 2009. Official Economic Recession (already a year old)

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2009 Brazos Valley Economic and Real Estate Outlook College Station Hilton January 28, 2009

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  1. 2009 Economic Outlook Conference 2009 Brazos Valley Economic and Real Estate OutlookCollege Station HiltonJanuary 28, 2009 Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University

  2. Falling Economy 2009 • Official Economic Recession (already a year old) • Soft National Housing Market • Interest Rates Low with Unsettled Capital Markets • Inflation and Consumer Spending Down • Employment falling and Unemployment up • Corporate Spending and Expansion at Standstill • Political Uncertainty But Greater Involvement • Federal Bail-out Programs Starting • Poor Buyer Psychology with “Wait and See” Attitude

  3. The New Dollar

  4. Percent Growth in Real GDP Since 1990 Seasonally Adjusted Annual Rate Source: Bureau of Economic Analysis

  5. Overall Inflation Rate Source: Bureau of Labor Statistics Yr/Yr Rate of Change in the Monthly Index, US Urban, All Items, SA

  6. Consumer Confidence Index At All-time Low Source: The Conference Board (1985=100)

  7. Percent of Banks Tightening Consumer Credit Standards Source: Federal Reserve Bank, Senior Loan Officer Survey on Bank Lending Practices

  8. Personal consumption represents about 70% of US economy and is flattening. It contributed a -2.75% to growth in GDP 3Q2008 Personal Consumption Expenditures Source: Department of Commerce

  9. Debt Service Payments as a Percent of Disposable Personal Income Households starting to lower debt obligations Source: Federal Reserve Board

  10. Monthly Change in Total Non-Farm Employment Source: BLS, Seasonally Adjusted Monthly Data

  11. Small Business Outlook“Planning To Hire People In The Next Six Months” Source: National Federation of Independent Business

  12. Corporate Hiring Plans: Next 6 Months Q4-08Q3-08 Q2-08 Q1-08 More Jobs 9% 29% 28% 30% Less Jobs 60% 32% 31% 22% Source: Business Roundtable

  13. 2009 Projected Job Growth by MSA Y/Y Percent Change Global Insight

  14. Corporate After-Tax Profits(With Inventory Valuation Adjustment & Capital Consumption Adjustment) Source: Department of Commerce, BEA

  15. What to Expect: 2009: Not a Good Year • Fed hold interest rates down • Federal bailout of the banks/financial institutions gears up in earnest – not sure about housing • Negative GDP growth first two quarters (at least) • Mortgage rates fall, but tighter underwriting • Foreclosures bottom-out by year end, maybe • Moderate inflation – possible deflation? • Significant job losses for first half, at least • Possible stock market rally • Commercial RE next “shoe to fall”

  16. What Have We Learned In 2 Millennia? The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." Cicero - 55 BC Change one word ROME for USAand the story is the same one. Scary, isn’t it?

  17. Texas Economy 2008-2009 • Running ahead of US economy • Employment steady increase • Relatively Low Unemployment • Population Growth • Housing market still relatively strong • Commercial development slow down

  18. Annual Employment Growth Rates for US, Texas and BCS Texas BCS US Source: BLS

  19. Top 10 Job-Creating States 2007-2008 Thousands of jobs created October 2007 to October 2008 Source: BLS

  20. If Texas Was A Nation 1 United States 8 Canada 2 Japan 9 Spain 3 Germany 10 Brazil 4 China 11 TEXAS 5 United Kingdom 12 Russia 6 France 13 India 7 Italy Source: World Bank and U.S. Bureau of Economic Analysis

  21. 15 Top Job-Creating MSAs in 2008 Thousands of jobs created October 2007 to October 2008 5 of top 15 MSAs are in Texas, but stay tuned for revisions Source: BLS

  22. Texas Metro Areas Ranked by Employment Growth Nov ‘07-Nov’08 Source: Texas Workforce Commission

  23. Price of West Texas Intermediate Crude per Barrel Source: Federal Reserve Bank of Dallas

  24. Texas Rotary Rig Count Rigs peaked at 1,445 in August 1981 Source: Baker Hughes, Federal Reserve Bank of Dallas

  25. Texas Index of Leading Indicators (1987=100) Source: Federal Reserve Bank of Dallas

  26. The Texas Outlook for 2009 • Economy still strongly tied to energy • Texas job growth 1.5% to 2% IF no major downsizing in energy industry • Texas housing markets generally strong but “spotty” • Fall in overall residential demand: tighter credit, less investment buying, less second home • Significant decline in commercial real estate • Still vulnerable to US conditions, especially in capital markets

  27. Current Residential Finance Conditions • 65% of US owner-occupied homes have a mortgage • 76% fixed-rate • About 12% of all mortgages are subprime loans • 75 percent of all subprime loans originated between 2003 and 2007 • About half of all subprime loans are ARMs • As many as 20% of homeowners have negative equity • Falling home prices is the key factor to defaults and foreclosures and the major contributor to the financial market problems

  28. Banks Have Little to No Capital

  29. Percent of Foreclosures Started by Type of Loan 3Q2008 Source: Mortgage Bankers Association, National Delinquency Survey, Estimates by Real Estate Center

  30. Monthly Foreclosure Filings Source: RealtyTrac, Inc. Data include Notices of Trustee Sales plus Notices of Foreclosure Sale

  31. Percent of Banks Tightening Home Mortgage Standards Subprime Prime All Mortgage Loans (series discontinued 2Q2007) Source: Federal Reserve Bank, Senior Loan Officer Survey on Bank Lending Practices (43 of 50 Banks surveyed do not originate subprime loans)

  32. The US Housing Market The “Un-Magnificent” Seven: California Florida Nevada Arizona Ohio Michigan (fill in the blank)

  33. US Median Home Prices Since 1990 National House Price Bubble Prices in 2001 stayed above trend, despite a national recession. 2001 Trend The national housing boom started around January 2002 creating a house price bubble that peaked at around $230,000 in 2006 Source: NAR, Real Estate Center at Texas A&M University

  34. US and Texas Appreciation 3Q2008 Purchase Only Index Change Year over Year California US = -6.0% Texas = 1.2% California = -25.6% Florida = -20.6% Florida US Texas Arizona down 17.9%; Wash. D. C. down 7.6% Maryland down 9.4% Michigan down 9.9% Nevada down 24.1% Rhode Island down 8.8% Virginia down 7.4% Source: FHFA

  35. Bottom 10 Job-Creating States 2007-2008 Thousands of jobs lost October 2007 to October 2008 Loss of jobs adding to the housing problems in key states Source: BLS

  36. New and Existing SF Home Sales U.S. (000s) Existing SF sales are down 37% from 2005 peak New SF sales are down 71% from 2005 peak Sources: US Census Bureau , NAR, NAHB, NBER

  37. US SF Housing Permits12-Month Moving Average (000) 2002 Trend Line Source: US Census Bureau, Real Estate Center at Texas A&M

  38. Inventory of New SF Homes For Sale (000s Units) Months Inventory Excess units plus new construction in 2008 at annual sales of around 500,000 will take several years to get back to balance. Source: US Census Bureau, NAHB

  39. Texas Housing Market

  40. Texas MSAs November 2008 Source: Real Estate Center at Texas A&M University

  41. Texas Home Sales 2008 sales equal 2003-2004 levels 2006 2007 2005 2004 2003 2008 YTD 2008 sales down 16% Source: Real Estate Center at Texas A&M University

  42. Texas Home Sales 12-Month Moving Average Source: Real Estate Center at Texas A&M University

  43. Texas Home Sales CyclesY/Y Percentage Rate of Change in 12-Month Moving Average Source: Real Estate Center at Texas A&M University

  44. Projected Texas Home Sales 2008 sales down about 15.5% from 2007 2009 sales down 10% – 15%, about equal to 2001-2003 levels! Source: Real Estate Center at Texas A&M University

  45. Texas Median Home Prices November 2008 down 5.4% Oct-Nov & Nov-Dec % Change 2007 2008 1.8% 2006 0.9% 2.5% 1.6% 1.0% 2.3% 2005 -3.7% 2004 2.9% 0.2% Source: Real Estate Center at Texas A&M University

  46. Texas Median Home Prices Essentially flat in 2008 -+0.5% to -3% in 2009. Source: Real Estate Center at Texas A&M University

  47. Texas SF Permits12-Month Moving Average 2003 Trend Line Source: US Census Bureau, Real Estate Center at Texas A&M

  48. Texas SF Building Permits 1984 82% of 1983 peak 1985 66% of 1983 peak 1986 57% of 1983 peak 1987 43% of 1983 peak 1988 35% of 1983 peak 2006 98% of 2005 peak 2007 72% of 2005 peak 2008p 48% of 2005 peak 2009e 36% of 2005 peak Source: US Census Bureau, Real Estate Center at Texas A&M

  49. Bryan - College Station Housing Market

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