Economic and Housing Market OUTLOOK. Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS

Transcription

1 Economic and Housing Market OUTLOOK Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS Presentation at New Canaan Board of REALTORS and Mid-Fairfield County Association of REALTORS January 31, 2012

2 Strange World Great! Best Affordability Conditions National home prices have stabilized for2 years Lowest newly constructed inventory Huge Cash Reserves at Banks What the Heck? No Meaningful Pick-up in Home Sales Everyone believes home values have been falling throughout Why? Housing Starts still Dead Cash not circulating into the economy RecordHigh Profits in Financial Industry in 2010 and just as good in 2011 Federal Reserve Monetary Stimulus to encourage more lending Consumers work hard to demonstrate financial responsibility Bank stock prices in the tanks Regulation to discourage lending Somemust payhigher borrowing cost because they are jumbo

3 Strangeness Continued Great! Less risk of a further price decline after 33 percent price drop What the Heck? More risk-basedlending and added fees to protect against price declines Fannie and Freddie are making internal self-sustaining profits on new mortgages Fannie and Freddieare still reporting net losses because legacy assets Investors are seeking bargains Improving Job Market Not enough foreclosedproperties on average taking more than a year to reach the market Very Low Consumer Confidence

4 Best Affordability Conditions

5 Monthly Existing Home Sales.. Before/After Revision Same Market Characterization 7,000,000 6,500,000 Tax Credit Impact 6,000,000 5,500,000 5,000,000 Old Data 4,500,000 4,000,000 New Data 3,500,000 3,000, Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov

6 National Existing Home Sales Measurement What it is Trend based on MLS sales from a benchmarked figure Decennial Census implied 5.2 million sales in 2000 MLS sales rise 10% then Existing Home Sales is presumed to have risen 10% But MLS sales may pick up FSBOs and Homebuilder sales that normally do not fall into MLSs What it is not Actual sales count from MLSs Actual sales count as recorded from property deeds No changes to MLS data No changes to local sales of MLS data counts

7 Homes Bought How? More People Sought Help From REALTORS Homebuilder Directly from owner Real estate agent

8 Example of FSBO Impact to Home Sales Estimate Total Sales MLS Sales FSBO (For-Sale-By- Owner) Year Year % change 0.0% 12.5% invisible

9 Annual U.S. Existing Home Sales Flat Line for 4 tough years 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,

10 20-Metro Case-Shiller Price Index Remarkable Stability from 2009

11 New York Metro vs. Miami Price Index (1990 to 2011) Source: Case-Shiller

12 Northeast Region Activity Third Quarter 2011 Home Sales up 12% from one year ago Fourth Quarter 2011 Home Sales up 5% from one year ago projection based on Oct. and November data Repeat Price Index on Fannie/Freddie Loans down 14% from peak in 2006 down 3% from one year ago Up 0.7% from one quarter ago

13 Connecticut Markets CT state-wide home sales Down 8% in 2011 Median Price of Transacted Homes Down 4% in 2011 New Canaan Sales down 1% and prices up 9% in 2011 Fairfield Sales down 14% and prices up 6% in 2011 Source: Prudential CT Realty

14 Other Local Market Trends Prices Up Bismarck Boston Buffalo San Diego San Francisco Washington, DC Prices Down Atlanta Chicago Las Vegas Miami Phoenix Portland, OR

15 U.S. Housing Starts Lowest since the Second World War in the past three years Housing Starts in thousands Long-term Average; Long-term Requirement Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan

16 Connecticut Housing Permits

17 Existing Home Inventory (Elevated but Falling even as distressed and shadow inventory flows in)

18 Financial Industry Corporate Profits 600 $ billions; seasonally adjusted annualized Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

19 KBW Bank Stock Index (still down 64% from pre-crisis levels)

20 Federal Reserve Loose Monetary Policy 30-year Mortgage Fed Funds Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan

21 Banks/Regulators Restricting Credit (Average Credit Scores of Approved Loans) Normal If Normal Fannie Freddie FHA % to 20% Higher Sales

22 Demographics of Recent Buyers 2011 Profile 2010 Profile Median Age Gross Household Income $80,900 $72,200 Household Composition 64% married couples 18% single females 10% single males 7% unmarried couples Own a 2 nd Home 19% 14% 58% married couples 20% single females 12% single males 8% unmarried couples

23 Loan Limit Changes to 42 States Now, more People need to take out Jumbo Mortgages CBO Lower taxpayer risk if loan limits are raised America today Work hard, be financially responsible then you will get punished??? Conforming Rate = 3.89% Jumbo Rate = 4.43%

24 Price Decline Potential? If prices fall more underwater homeowners more default risk More risk to decline when there is a bubble Less risk to decline after a crash Many metrics suggest price decline potential is minimal with more price increase potential Yet Banks/Regulators have been pursuing easy lending during bubble and tight lending after crash

25 Home Price vs Rent Price Change Potential? (index = 100 in 1980) Rent is CPI Primary Rent and Price is NAR median price

26 CPI Rent is Rising Biggest Weight to CPI (% change from 12 month ago) 5 % Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul -1

27 In millions Annual Household Formation Future Rent Pressure? (3 separate Census data) Household Formation leads to increase ownership and renters; Could begin to return to normal of at least 1 million from 2012.

28 Home Price vs Construction Cost Price Change Potential? Price is NAR Single-family median price and Construction Cost is Census Construction Cost Weighted Price Index

29 Home Price to Income Ratio Price Change Potential? (Median single-family home price and median household income)

30 Home Value Undervaluation (Recent analysis by The Economist magazine) Metric Magnitude of Over or Undervaluation U.S. Home Prices Home Price vs. Rent 8% undervaluation U.S. Home Prices Home Price vs. Income 22% undervaluation U.K. Home Prices Home Price vs. Rent 28% overvaluation U.K. Home Prices Home Price vs. Income 20% overvaluation Ireland Home Prices Home Price vs. Rent 10% overvaluation Ireland Home Prices Home Price vs. Income Proper valuation (neither over nor under)

31 Item Cost Comparisons over 30 years Price Index in 1981 Price Index in 2011 % Change Consumer price index % Rent index % Food price index % Gasoline price index % College tuition index % Medical care index % Monthly mortgage payment on a median priced home $598 (14% mortgage rate) Same if no cash out refi Home Prices (FHFA index) % 0% (free and clear ownership)

32 Fannie/Freddie Future Disastrous Outcome as government-backed Private Corporation Perverse incentive to gamble with taxpayers money Good Outcome as government corporation Pre-1970s no problem Post-2009 no problem Government corporations generate enough internal profit for selfsustainability Assure liquidity on a very simple non-innovative mortgage product (e.g., fixed rate mortgages that meets basic underwriting standards) Grandparents 30-year mortgage same as Grandchildren s 30-year mortgage Need to pursue counter-cyclical policy less fees in downturn and more fees during boom/bubble Never trust government to produce innovative products

33 Fannie and Freddie Performance Mortgage Default after 18 months Fannie Mae Vintage % % % % % % % % Cumulative Default Rate after 18 months Freddie Mac Vintage % % % % % % % % Cumulative Default Rate after 18 months Source: Federal Housing Finance Agency

34 Investors want Deals All-cash record high at 30% to 35% of all sales Multiple bidding becoming common on foreclosed properties (though not on short-sales) Financial asset recovery helping with cash Rental income beats putting money in the bank Anticipating rising home prices Opens up lending more home sales Boost consumer confidence more home sales Further boost home prices and rate of return on investment Hedge against future inflation alternative to expensive gold Not enough foreclosed homes for sale?

35 Expensive Gold Price (Hedge against Inflation?) Will Investors shift money to alternative inflation hedge instrument to real estate?

36 Total U.S. Payroll Jobs Modest Recovery (2.6 million job creation from low point in 2010) In thousands

37 Economic Expansion (GDP growth after recession should be sustained 4% to 5% not 1.7% as occurred in 2011) 10 8 Desired Pace Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q

38 North Dakota Jobs Everywhere (Starting Wage at McDonalds $15 to 18 per hour) In thousands

39 In thousands Michigan Payroll Jobs Ongoing Structural Changes

40 In thousands Connecticut Payroll Jobs

41 CPI Inflation Retreating? (% change from one year ago) Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul

42 Broad Inflationary Pressure (Data as of November 2010) Indicator Consumer Price Index 3.4% % change from one year ago Producer Price Index (Finished Product) 5.9% Producer Price Index (Intermediate Product) 7.8% Producer Price Index (Crude Product) 15.3% Dow Jones Commodity Spot Price Index -4.0% Gold Price Off Record High Price but very high

43 Serious Delinquent Mortgages Mostly those who took out loans in bubble years (90+ days late or in foreclosure process) Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q3 U.S. CT

44 Distress Sales: 30% to 40% of Transactions Will Remain Significant for Next 2 years

45 Improving Factors for Higher Home Sales Improving Factors Job Creation (though slowly) Solid stock market recovery from 2008 Rising rents and larger pool of qualified renters Smart money chasing real estate Potential Huge Positive Lending opens up Potential Huge Negative Washington policy

46 The End of Strangeness Let the Prices Recover without obstacles If 5% gain in home price 2 million fewer underwater homeowners Bank lending opens up Consumer confidence about home buying improves Strangeness is past and back towards normalcy But what could be the obstacles QRM 20% downpayment rules, MID, Property tax deduction, capital gains, still lower loan limit Rising mortgages rates (market forces of higher inflation and high budget deficit)

47 National Forecast GDP Growth 2.0% to 2.5% 2.3% to 2.8% 3.0% to 3.5% Net New Jobs 1.8to 2.2 million 2.0 to 2.5 million 2.5 to 3.0million CPI Inflation 3.0 to 3.5% 3.0 to 3.5% 3.0% to 3.5% Rent Growth 3.0% 3.5% 3.5% Home price Growth 2.0% 3.0% 4.0% Home Sales 4.0% 6.0% 6.0% Mortgage Rate 4.5% 4.8% 5.5%

48 Presidential Quotes Franklin Delano Roosevelt: A nation of homeowners is unconquerable. Ronald Reagan We will preserve the part of the American dream which the mortgage-interest deduction symbolizes."

49 National Museum of American History 4 million no-downpayment VA mortgages for World War II veterans Fueled an unprecedented Fueled an unprecedented growth of America s middle class

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