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Real Estate Reality Check

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Real Estate Reality Check

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    1. Real Estate Reality Check David Lereah, Ph.D. Chief Economist National Association of REALTORS®

    2. A Divided Real Estate Nation

    3. What Happened? Boom ended August 2005 Mortgage rates rose almost one point Affordability conditions deteriorated Speculative investors pulled out Homebuyer confidence plunged Resort buyers went to sidelines Trade-up buyers to sidelines First-time buyers priced out of market

    4. The Aftermath Sellers’ market transitioning to buyers’ market Home sales plummet, prices lag, inventories rise Cooling markets left with high percentage of exotic loans Builders offering non-price incentives Days-on-market lengthening Residential construction activity slows Home prices beginning to soften

    6. Cooling Metro Markets (Existing Home Sales: 2006 Q2 vs 2005 Q2)

    7. Lengthening Days on Market

    8. Rising Months Supply

    9. Price Decelerations and Declines (Existing Home Sales: 2006 Q2 vs 2005 Q2)

    10. Still, One-third of the Country is Expanding (Existing Home Sales: 2006 Q2 vs 2005 Q2)

    11. Shortening Days on Market

    12. Price Accelerations and Recovery (One-year gain in 2006 Q2 and 2005 Q2)

    13. National Existing-Home Sales

    14. Home Price Appreciation

    15. Condo - Price Depreciation

    16. Condo – Significant Price Depreciation in West and South

    17. Housing Inventory

    18. Correction Necessary Unsustainable Growth and Growing Imbalances Create Heavy Pains Later (Better to have light pains now) Rampant Boom Creates Affordability Crisis and Workforce Housing Problems High Debt Burdens Not Healthy for Economy Adjustable and Exotic Loans Raise Risk

    19. Income Not Keeping Pace With Home Prices

    20. Metro Home Prices: Moderate to Unsustainable

    21. Home Price Distribution (2006 Q2)

    22. Disappearing Affordable Homes - FHA Participation in California

    23. Income Required to Buy a Typical Home @ 6.6% mortgage rate and 20% downpayment

    24. Mortgage Obligation to Income – Worrisome in the West

    25. Mortgage Obligation to Income Very High in Some Markets

    26. Mortgage Obligation to Income Historical High in Some Markets

    27. Some Markets Experiencing Very High or Rising ARMS

    28. What Will Happen? 2006 corrections different from previous real estate corrections Cooling markets have healthy local economies Seller-to-buyer transitions almost complete Prices expected to fall for remainder of year Price fall will be limited due to Pent-up Demand at Lower Prices Some Local Markets are Fragile and Vulnerable to Rate Rise Soft Landing

    29. States with Declining Home Sales, But Housing Needs/Demand Growing (June 2005 to June 2006)

    30. Housing Affordability Tumbling – Helps Rental Market

    31. Price Scenarios of 5% Annual Growth after few years of no growth

    32. Job Gains/Losses in the Recent 12 months

    33. U.S. Migration Trend (Top 5 vs. Bottom 5)

    34. Evolving Market Trends Greater Price Volatility in Some Markets Greater Liquidity More Investors More Speculator Hedge Fund Investors Homeownership at Younger Age Increased Turnover Rate

    35. Prices Do Decline (mostly in the late 80s or early 90s)

    36. San Diego

    37. New York

    38. Honolulu

    39. Dallas

    40. Las Vegas Price Growth Variability (Price growth minus historic average)

    41. Liquidity from Investors’ Appetite for Mortgages (2006 Q1)

    42. More Mortgage Products 15-year, 30-year, 40-year Fixed Rate Mortgages Adjustable Rate Mortgages Hybrid ARMs, Option ARMs Interest-only Loans Zero Down Loans Low-cost Refinance options Easy access to HELOC and Home Equity Loans FHA and VA Loans Fixed and ARMs Risk-based Pricing under debate

    43. Investor Sales Historically Strong

    44. Second Home Purchases (2005)

    45. Turnover Rate Historically High (Single-family Sales relative to owner-occupied housing stock)

    46. Economic Backdrop

    47. Moderating Economy

    48. Consumer Spending Still Healthy

    49. Business Spending Remains Strong

    50. Corporate Profits are Strong

    51. Wage Growth Picking Up

    52. Oil Prices Exerting Inflationary Pressure

    53. Unwelcome Inflation

    54. Fed Rate Hikes to Restrain Inflation, But Need to be Mindful of …

    55. Risks of Over-tightening Sluggish Economy (Recession?) Tumbling Housing Sector Leading to rising delinquencies and foreclosures Wary Consumers (from home equity losses)

    56. Scenarios/Probability of Popping

    57. Weakening Housing’s Impact on Consumers and Economy Consumer Spending Supported from Housing Equity Gains $1.4 trillion in the past year $70 billion to $140 billion additional consumer spending Without Housing Equity Gain Consumer spending growth slows to 2% growth rather than 3% growth Economy weakens by 0.7% point Additional Cuts to GDP Growth from Lower Residential Construction

    58. Economic Outlook

    59. Housing Outlook

    60. Real Estate Reality Check David Lereah, Ph.D. Chief Economist National Association of REALTORS®

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