The State of the Nation s Housing 2007: A Sneak Peek

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1 The State of the Nation s Housing 2007: A Sneak Peek Eric Belsky Remodeling Futures Conference April 10, 2007 Do Not Distribute Embargoed Until June 11,

2 The Homebuilding Correction

3 Different day same story low interest rates and tight inventories spark unprecedented price appreciation markets overheat, demand inflates (speculation, pulled forward demand) and builders meet demand 2006 markets do about face affordability too eroded, creative finance runs out of steam, sales fall, prices soften, demand softens more as it deflates Builders try to pull out of nose dive but too late inventories balloon and month s supply increases

4 Affordability Eroded in Both Rapidly and Slowly Appreciating Markets After 2003 $2,000 Change in Monthly Mortgage Cost to Buy a Median-Priced Home $1,500 $1,000 $500 $0 -$500 National Chicago Phoenix New York Washington DC Miami Los Angeles Note: Monthly mortgage costs based on 30-year fixed mortgage assuming a 10% down payment. Source: National Association of Realtors 2006 Median Existing Single-Family House Price, adjusted by the Freddie Mac Conventional Mortgage Home Price Index and the Bureau of Labor Statistics' CPI-UX for All Items.

5 Top Ten Decliners in Number of Investor and Second Home Loans Est. Investor Loans Second Home Total Phoenix-Mesa, AZ -10,045-6,929-16,973 Las Vegas, NV-AZ Riverside-San Bernardino, CA Fort Lauderdale, FL Washington, DC-MD-VA-WV Tampa-St. Petersburg-Clearwater, FL Sarasota-Bradenton, FL West Palm Beach-Boca Raton, FL Fort Myers-Cape Coral, FL Miami, FL -4,278-4,017-8,295-3,944-2,549-6,494-3,753-2,083-5,837-5, ,764-3,210-2,099-5,308-2,433-2,396-4,829-2,502-1,857-4,359-1,441-2,490-3,932-2,205-1,616-3,821 Source: Loan Performance 2005 and 2006 (2006 is Jan-Oct multiplied by 1.2 to estimate full year)

6 While Starts Fell Faster than Sales... 9 Seasonally Adjusted Annual Rate Home Sales (Millions) Housing Starts (Millions) Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan Total Home Sales Single Family Starts Source: US Census Bureau and the National Association of Realtors.

7 House Prices Have Only Begun to Correct $240,000 Nominal Median House Price $220,000 $200,000 $180,000 $160,000 $140,000 $120,000 $100,000 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Source: National Association of Realtors.

8 In Many States, Permits Declined More Than 20 Percent in 2006 Source: JCHS tabulations of the US Census Bureau Survey of Construction. Change in Permits Issued in 2006 Decrease of 20% or more Decrease of % Decrease of 5-9.9% Decrease of 0-4.9% Increase of 0-4.9% Increase of 5% or more

9 And Production is Being Taken Down Even Faster Now 2005 vs Latest Qtr - (Dec-Jan-Feb) Arizona California Colorado Florida Illinois Nevada North Carolina Texas Virginia US Total Source: US Census C-404 Total Monthly Permits (NSA)

10 With Completions Slower to Respond Than Sales and Starts... 20% Percent Change From Same Quarter of Prior Year 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% Dec- Feb05 Mar- May05 Jun- Aug05 Sept- Nov05 Dec- Feb06 Mar- May06 Jun- Aug06 Sept- Nov06 Dec- Feb07 Total Housing Starts Existing SF Home Sales Total Housing Completions New SF Home Sales Note: Home sales include total existing home sales plus new single family home sales. Sources: US Census Bureau, New Residential Construction and Economy.com.

11 Unsold Inventory Rose Significantly Months Supply of Single-Family Homes For Sale Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07 Feb-07 Existing Homes New Homes Source: US Census Bureau and the National Association of Realtors.

12 After Contributing Significantly to the Economy, Housing Investment Became a Drag on Growth in Real Percent Change Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Residential Fixed Investment as a Share of GDP Gross Domestic Product Note: Periods are half years and changes are compared to same six-month period in prior year. Sources: Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.6, and US Census Bureau.

13 Despite the Housing Downturn, Home Equity Cashed Out Remained at Peak Levels 500 Billions of 2006 Dollars (E) Cash-Out Refinances Equity Cashed Out at Sale Net New Second Mortgage Debt Sources: National Association of Realtors, Freddie Mac and Federal Reserve Board. Note: Adjusted for inflation by the Bureau of Labor Statistics' CPI-UX for All Items.

14 And After Years of Climbing, the Single-Family Vacancy Rate Has Leveled Off and Multifamily Markets Have Tightened 12 Percent Vacant Number of Units in Structure 1 2 or more 5 or more Source: US Census Bureau, Housing Vacancy Survey.

15 Apartment Revenues Once Again Are Rising in Line with Values 15 Annual Percent Change Apartment Property Prices Net Operating Income Source: National Council of Real Estate Investment Fiduciaries.

16 The Home Building Outlook

17 The Recent Run-up in Vacancies is More Modest than at the Beginning of the Downturn, But May Continue 3.5 Percent of Total Occupied Stock For Rent For Sale Only Seasonal/Occasional Use/URE/Other Source: US Census Bureau, Housing Vacancy Survey.

18 As Affordability Mortgage Products Gained in Popularity, Their Delinquency Rate Rose Sharply 40 Percent 3 Share of Originations Day Deliquency Rate 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Share of Originations 60+ Day Delinquency Rate Source: First American LoanPerformance. Note: Affordability products include interest-only and negative-amortization loans.

19 While Troubled Prime Loans are Holding Steady, Troubled Subprime Loans are Increasing 800 Loans in Foreclosure or 60+ Days Delinquent (Thousands) Q3 2002Q4 2003Q1 2003Q2 2003Q3 2003Q4 2004Q1 2004Q2 2004Q3 2004Q4 2005Q1 2005Q2 2005Q3 2005Q4 2006Q1 2006Q2 2006Q3 2006Q4 Prime Subprime Source: Mortgage Bankers Association, National Delinquency Survey.

20 Subprime Loans Originated in 2006 Are Off to a Very Poor Start 12 Share of Subprime Loans 60+ Days Delinquent or in Foreclosure by Origination Year Performance After 6 Months Performance After 12 Months Fixed Adjustable Source: First American LoanPerformance.

21 Short-Term Outlook Even if stabilize at avg. Dec-Feb run rates, total starts will be 15 percent below 2006 (1.51 mil), single-family starts 19 percent (1.20 mil), new homes sales 12 percent (925K), and existing home sales -0.2 percent (6.5 mil) Risks weighted to further slowing from tightening credit standards and large overhang still not worked off Total production would need to fall to 1.65 million and starts to 1.55 million if overbuilding is about 500,000 Phoenix, Las Vegas, DC and Florida are bellweathers Dallas, Denver, and Atlanta subprime lending canaries California and Florida are affordability product canaries What carnage Detroit and Ohio? Beware a recession down the road

22 Demographic Drivers

23 Immigrants Are Moving Out Beyond Traditional Destinations Distribution of Immigrant Population (%) 1990 California New York Florida Texas New Jersey Illinois Massachusetts Rest of States 2005 California New York Florida Texas New Jersey Illinois Massachusetts Rest of States Sources: JCHS tabulations of the 1990 Decennial Census and 2005 American Community Survey.

24 Foreign-Born Population Growth Has Shifted Towards the Suburbs and Away from Traditional Gateways Change in Foreign-Born Population (000s) 3,500 3,000 2,500 2,000 1,500 1, Central City Suburb Traditional Gateways Central City Suburb Emerging Gateways Rest of US 1980s 1990s Source: Audrey Singer, "The Rise of New Immigrant Gateways," The Brookings Institution, Center on Urban and Metropolitan Policy, February 2004, Appendix A and Appendix B.

25 Immigrants and Their Children Are Adding Dramatically to Housing Demand Males Females Males Females Millions Foreign-Born Second Generation All Others Millions Source: JCHS tabulations of the 1970 and 2005 Current Population Surveys. Note: Second generation refers to native-born children of immigrants.

26 Minorities Have Come to Dominate Household Growth Share of Household Growth (%) Northeast Midwest South West White Black Hispanic Asian/Others Note: Whites, Blacks, and Asian/Others are non-hispanic. Hispanics my be of any race. Asian/Others includes Aleuts, Native Americans and Pacific Islanders. Source: JCHS tabulations of the 1976, 1986 and 1996 Current Population Surveys.

27 Minorities Will Contribute Importantly to Household Growth Across Age Groups 5 Household Growth (Millions) Age of Household Head White All Minority Hispanic Note: Minority householders are all non-white householders, including Hispanics. Source: George S. Masnick and Eric S. Belsky, Addendum to Research Note N06-1: Hispanic Household Projections Including Additional Tenure Projection Detail by Age and Broad Family Type for Non-Hispanic White and Total Minority Households, JCHS Research Note N06-4, December 2006.

28 The Baby Bust Generation Is Leading Urban Revitalization in Large Metros Number of Metros with Generational Growth, Distance from City Center (Miles) Baby Bust Baby Boom Older Generations 8 Notes: The Baby Bust generation was age in 1990 and age in 2000; The Baby Boom generation was age in 1990 and age in 2000; Older generations were age in 1990 and in Metros are the 100 largest metro areas by population in 2000, with aggregation of adjacent metros in the New York, Los Angeles and San Francisco areas, resulting in 91 large metro regions of at least 500,000 people. Distance calculated from central business district in the primary city of each metro region. Source: JCHS tabulations of 1990 and 2000 Decennial Census Microdata.

29 Recent Income Losses Have Not Been Enough to Wipe Out Gains from the Late 1990s 20 Percent Change in Real Median Household Income Bottom Tenth Top Tenth Income Deciles One Year Five Years Ten Year Fifteen Year Note: Income deciles are equal tenths of households sorted by pre-tax income. Source: JCHS tabulations of 1980, 1985, 1990, 1995, 2000, 2005 and 2006 Current Population Surveys.

30 But Growth in Severely Cost-Burdened Households Has Accelerated Across Incomes 700 Growth (Thousands of Households) 14 Incidence (Millions of Households) Bottom Lower Middle Upper Middle Top 0 Bottom Lower Middle Upper Middle Top Quartile Quartile Average Annual Growth Growth Note: Severe housing cost burden is defined as spending more than 50% of household income on housing costs. Income quartiles are equal fourths of all households sorted by pre-tax income. Source: JCHS tabulations of the 2001, 2004 and 2005 American Community Surveys.

31 And Even Fully Phased In, the New Federal Minimum Wage Would Not Cover Today's Rent on A Modest Apartment Housing Wage $ $ $21.75 or more Note: Housing wage is the hourly wage required to afford a modest two-bedroom apartment renting for the Fair Market Rent at 30% of pretax income. Income ranges are multiples of the Federal Minimum Wage at full roll out, expected in Source: US Department of Housing and Urban Development.

32 Long-Term Outlook Still see about 2 more million households formed in than (12.6 v million) Out past the turmoil, second home demand should strengthen aging of boomers all else equal alone should lift second demand by 1 million Aging housing and more urban teardowns should lift replacement demand Total production should average about 1.95 of 2004 per year perhaps less inventory that must be worked off