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Economic and Real Estate Outlook

2012 MID-YEAR MEETING Austin, Texas April 13, 2012. Economic and Real Estate Outlook. Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University. Bentley's First Law of Economics: “The only thing more dangerous than an economist is an amateur economist!” .

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Economic and Real Estate Outlook

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  1. 2012 MID-YEAR MEETING Austin, Texas April 13, 2012 Economic and Real Estate Outlook Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University

  2. Bentley's First Law of Economics: “The only thing more dangerous than an economist is an amateur economist!” Bentley's Second Law of Economics : "The only thing more dangerous than an amateur economist is a professional economist." Remember: Amateurs built the Ark Professionals built the Titanic

  3. US Economy in 1996

  4. US Economy in 2008

  5. US Economy in 2012

  6. Economy is Trying to Recover, but Slow Going • Employment • Retail Sales and Consumption • GDP • Unsustainable Government deficits • Corporate Earnings • Housing Projections for the next couple of years indicate substantive growth doesn’t occur until 2013-14

  7. Percent Growth in Real GDP The average rate of growth is 3.3% per quarter since 1947 Source: Bureau of Economic Analysis

  8. Debt Driven Recession

  9. Total National Debt Since 1929Amount and Percent of GDP National Debt as a Percentage of Annual GDP (right scale) Ended WWII $270B Hit $1T in 1981 @ 32% GDP Beginning FY2012 $14.8T @ 97% GDP and 55 times 1946 debt Total National Debt (left scale) Source: U.S. Treasury

  10. Household Debt Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

  11. Households Continue Way Over-LeveredTotal HH Debt as Percentage of GDP Average 2000-2010 = 88% Average 1985-1999 = 63% Average 1945-1984 = 39% Average 1945-2010 = 52.5% Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

  12. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”Ben BernankeJune 7, 2011, International Monetary Conference, Atlanta, Georgia

  13. Recovery May Take a While

  14. US Unemployment Rates Source: BLS, Texas Workforce Commission; Real Estate Center at Texas A&M

  15. 2012+ Economic Outlook • Most indicators positive – not robust • Major business, investment and political decisions postponed • Sluggish growth into the first quarter of 2013 • Interest rates stay low through 2014 • Housing cannot be counted on to help in 2012 • Over-leverage & credit dependency remain • Limited government resources and spending • International economy highly uncertain • General UNCERTAINTY & Lack of CONFIDENCE

  16. Consumer Confidence Index Expansion Recession 7 cycles since 1967: Avg. during recession = 72 Avg. during an expansion = 102 Source: The Conference Board (1985=100)

  17. U.S. Household Formation Source: Current Population Survey, Census Bureau, Department of Commerce (The source of annual data is the Current Population Survey March Supplement. The quarterly data source is the monthly Current Population Survey/Housing Vacancy Survey.)

  18. U.S. Population Groups 2011 millions 26.1% 24.3% 21.4% 15.9% 12.2% Echo Boom (Gen Y) Baby Boom Millennials (Gen I) Baby Bust (Gen X) Silent/Greatest Age 16-34 0-15 47-65 35-46 66+ Source: U.S. Census Bureau; 2009 National Population Projections (Supplemental)

  19. Boomers Own - Gen Y Rents Source: FNMA National Housing Survey, 4Q2010

  20. At Last, a Cell Phone for Seniors!

  21. 2025 Changing Face of Housing:Future Homebuyers and Sellers Racial and Ethnic Composition of Texas 2010 and 2030 Asian 4.6% Asian 7.7% Black 11.5% Black 10.5% During the next two decades, minorities will account for approximately two-thirds of household growth … and half of all first-time homebuyers Hispanic 38.8% Anglo 30.9% Anglo 45.1% Hispanic 50.9% Source: Social Science Data Analysis Network; NAR Forecast

  22. The Housing Market Needs to Mend to Help a General Economic Recovery

  23. How Bad Has the Housing Collapse Been? • Home prices down ~33% since 2006 peak • Around $7 trillion, >50% lost equity in housing • ~20% households, 12 million, upside-down on mortgage – some states >50% • Defaults, delinquencies and foreclosures at historic levels • 2011 new home starts lowest in the past 60 years • New household formations about 25% of historical rate • Federal government programs have done little to help overall housing

  24. US Homeownership Rate (Percent) Current rate is same as 3Q1998 1995-2005 Low interest rates and new mortgage products; Homeownership explodes from 64.1% to 69.1% 1970s Baby Boomers enter market; homeownership grows Source: U.S. Census Bureau

  25. Lost Wealth: Households’ Equity in Real Estate $7 trillion or 53% in lost real estate equity Source: Federal Reserve, Flow of Funds, B-100

  26. Long-Term Real Home Price Index: 1890-2010 2000’s Boom 1946 to 1999 averaged 111.25 1915 to 1945 averaged 75.74 70’s Boom 80’s Boom Great Depression WWII WWI 1890 to 1914 averaged 100.16 2000 to 2010 averaged 156.01 Source: Robert J. Shiller, Irrational Exuberance, 2nd. Edition, Princeton University Press,2005, 2009, Broadway Books 2006, also Subprime Solution, 2008, as updated by author: http://www.econ.yale.edu/~shiller/data.htm

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

  28. Percent of Distressed Home Sales Source: NAR

  29. Percent of Loans in Foreclosure End of 4Q 2011 Judicial Foreclosure States Non-Judicial Foreclosure States US Source: Mortgage Bankers Association, National Delinquency Survey

  30. High Negative Equity Concentrated in a Small Number of States 6 states > 30% 13 states > 20% 21 states > 15% 14 states < 10% Source: CoreLogic® , Negative Equity Report, 3Q2011

  31. Seriously Delinquent Mortgages by Origination Year 8.1% 9.5% 7.9% 7.7% 9.1% 8.7% 8.6% 7.9% 0% 0% 9% 0% 0% 11% 0% 11% 1% 1% 11% 2% 12% 12% 14% 14% 72% 71% 71% 70% 69% 68% 65% 65% 19% 18% 19% 19% 19% 19% 20% 19% Source: Mortgage Bankers Association, 4Q2011 National Delinquency Survey

  32. New and Existing SF Home Sales U.S. (Existing 000s) (New 000s) Existing Sales (left axis) New Sales (right axis) New SF sales are down 78% from 2005 peak Annual Average Total Sales 1980-1989 3.55 million 1990-1999 4.7 million 2000-2007 7.1 million 2008-2010 5.5 million Sources: US Census Bureau , NAR, SAAR

  33. Rise in Employment Beginning to Show in Sales Volume (Home Sales 000s) (Employed 000s) Employment (right axis) Total Existing Home Sales (left axis) Sources: BLS. US Census Bureau , NAR, SAAR

  34. People Who Plan to Buy a Homein the Next Six Months Average value 1977-2011 = 3.3% US pop 2010 = 309 million; at average, 10.2 million people or 4.2 million households plan to buy a house in the next 6 months. At current rate, 5.7 million people or 2.3 million households plan to buy a house in the next 6 months. Source: The Conference Board, Original Data

  35. FHFA US Monthly Home Price Index Currently equal to ~Feb 2004 Source: FHFA, SA

  36. Vacant Housing Units Vacant For Rent Vacant For Sale Vacant & Off the Market: Other Source: US Census Bureau

  37. U.S. Home Price Indexes(Y/Y Percent Change in Index) FHFA Repeat Sales Index FHLMC HPI NAR Median Price Case-Shiller Comp 20 SA Sources: NAR, FHFA, S&P Case-Shiller, FHLMC

  38. Annual New Home Sales (000, SAAR) -77% 2005 Peak to Current 2011 less than half of “normal” level needed -50% 1977 Peak to Trough -28% 1986 Peak to Trough -28% 1972 Peak to Trough Source: US Census Bureau, NAHB, Real Estate Center

  39. New SF Home Starts (000s SAAR) 2011 down 75% from 2005 peak and 628,000 fewer units than 1960-2002 average per year (1.06 million) Source: US Census Bureau, Real Estate Center at Texas A&M University

  40. Price Index of New Single-Family Houses Sold Including Value of Lot[2005 = 100 Index based on kinds of houses sold in 2005] Source: US Census Bureau

  41. Median Price of Existing SF Homes Major declines in 2008 & 2009 2011 median down 25% from 2006 peak Source: NAR

  42. Median Existing SF Home Price 1968-1999 Trend Line Source: NAR, Real Estate Center at Texas A&M University

  43. National Housing Affordability Index Increase of 107% from July 2006 to Oct. 2011 Average 1994-2003 = 132.4 Drop of 31.5% from April 2003 to July 2006 Source: NAR Composite Index

  44. Median Home Prices as a Multiple of Median Household Income New Homes (‘75-’00 avg. = 3.82) Existing Homes (‘75-’00 avg. = 3.36) Source: US Census Bureau, NAR, Real Estate Center at Texas A&M University

  45. Divergent US Median HH Income and Median Home Prices 1990=100 Median Home Price Median HH Income Source: US Census Bureau, NAR

  46. 2010 Median Price/Median Household Income Most Affordable States 3.0 4.0 Least Affordable States Source: FHFA 2Q2010 Median Prices, 2010 American Community Survey, U.S. Census Bureau

  47. Price-to-Rent Ratio Monthly FHFA P-O Index to BLS Owners’ Equivalent RentJanuary 1991 = 1.0 Equilibrium Source: FHFA, BLS

  48. Why Hasn’t the Housing Market Recovered? • Employment uncertainty • Tight Mortgage Credit • Price pressure from foreclosures, distressed sales and “shadow inventory” • Appraisals and the Home Valuation Code of Conduct – questionable automated valuations • Confidence in the future

  49. 2012 Housing Outlook Market Headwinds Reasons for Optimism • Distressed/Investor sales: ~1/3 U.S. market, ~10%-20% in Texas • Tight lending & low appraisals 33% cancellation rate on new and existing contracts • Confidence Crisis • No feeling of “well being” • Lost wealth: real estate & other assets • Flat income (declining real income) • Uncertain future: jobs, home values • Inventory: new wave of foreclosures to hit market in 2012 • Move-up & move-over buyers can’t sell current home • Move-out still renting can’t buy • Political decisions, regulations and policies unknown & problematic • Improvement in general economy • Low interest rates but little impact • Pent up demand by those who’ve postponed housing or doubled-up • Markets bottomed will show statistical improvement • Investors buoy sales but not prices • Affordability: prices more in line with income • Rent-Own “gap” closing • Incentives on new homes substantial • Population and household growth strong in Texas

  50. “If we knew what we were doing, it wouldn't be called research, would it?” Albert Einstein

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