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Economic and Housing Market Forecast California Community Colleges Real Estate Education Center October 27, 2006. Robert A. Kleinhenz, Ph.D. Deputy Chief Economist California Association of REALTORS®. Overview. California Housing Market Local & Regional Outlook 2006 Forecast

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Economic and Housing Market Forecast California Community Colleges Real Estate Education Center October 27, 2006

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Economic and Housing Market ForecastCalifornia Community Colleges Real Estate Education CenterOctober 27, 2006

Robert A. Kleinhenz, Ph.D.Deputy Chief EconomistCalifornia Association of REALTORS®


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Overview

  • California Housing Market

  • Local & Regional Outlook

  • 2006 Forecast

  • Market & Membership

  • Buyers & Technology


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California Real Estate Market


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Current Market Conditions

  • Sales down significantly from 2004-05 record

  • Price appreciation slowing throughout 2006

  • Higher inventories than record lows of ‘04-05


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Sales of Existing Homes & Consumer Confidence

  • California, September ‘06: 444,780 Units, Down 24.0% YTD, Down 31.7% YTY

Cons Conf Index

Sales of Homes

2+ yrs above 600,000

SOURCE: California Association of REALTORS®;

The Conference Board


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Median Price of Existing Detached Homes

  • California, September 2006: $553,050, Up 1.8% Y-T-Y

SOURCE: California Association of REALTORS®


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Median Price, Annual Percentage Change

  • California vs. U.S.

Greater Price Volatility in California than US

SOURCE: California Association of REALTORS®


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Market Drivers Little Changed in 2006

  • Rates higher but still at near-record low levels

  • Steady job & income growth

  • Equity wealth effect of repeat buyers

  • Long-run supply constraints

  • Higher inventory levels & smaller price gains


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#1- Interest Rates


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Mortgage Rates

SOURCE: Federal Home Loan Mortgage Corporation


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#2 - Economic Conditions


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National Economy 2006

  • Steady sustainable GDP growth in 3-4% range

  • Inflation ~ 3%+

  • Solid, not outstanding, job growth

  • Low unemployment rate

  • RESULT: 2006 economy looks much like 2005


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Gross Domestic Product

  • Year 2005: +3.5%; 2006 Q3: +1.6%

ANNUAL PERCENT CHANGE, CHAIN-TYPE (2000) $

Annual

Quarterly


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Unemployment Rate

  • California vs. United States

SOURCE: CA Employment Development Division


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Employment Growth, California vs. U.S.

YEAR TO YEAR % CHANGE


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Consumer Price Index August 2006: All Items 3.8% Y-T-Y; Core 2.8% Y-T-Y

PERCENT CHANGE FROM A YEAR AGO, 100=1982-1984


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#3 - Supply Conditions:

Inventory & Time on Market


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Unsold Inventory, 2000-Present

  • California, September 2006: 7.0 Months

MONTHS

Average Since 1/88: 6.9 months

SOURCE: California Association of REALTORS®


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Unsold Inventory Index, 1988-Present

MONTHS

SOURCE: California Association of REALTORS®


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Unsold Inventory Index vs. Price ChangesCalifornia, 1982-2005

Inventory below 7 mos.

13% avg price increase

SOURCE: California Association of REALTORS®


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Listings by Month, Selected Years

  • California (1982-2005 Average=100)

SOURCE: California Association of REALTORS®


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Median Time on the Market

  • CA Single-Family Homes, September ‘06: 53.9 days

DAYS ON MARKET

SOURCE: California Association of REALTORS®


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#4 - Demand Conditions:

Repeat Buyers Dominate Market


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Market Share of Repeat HomebuyersCalifornia

SOURCE: California Association of REALTORS®


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#5 - Demand Conditions:

Demand > Supply in Long Run


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New Housing Permits California, August 2006: 13,128 Units, Down 16.7% Y-T-D

Household Growth: 220,000-250,000/yr

SOURCE: Construction Industry Research Board


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Homeownership Rates

  • California Vs. U.S.

SOURCE: U.S, Census Bureau


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Market Drivers Little Changed in 2006

  • Rates higher but still at near-record low levels

  • Steady job & income growth

  • Equity wealth effect of repeat buyers

  • Long-run supply constraints

  • Higher (but less than avg) inventory levels

  • Q: So why the slowdown in 2006?


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Q: So why the slowdown in 2006?

  • Interest Rate Expectations

  • Change in Market Psychology

  • Affordability Constraints


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Interest Rate Expectations

  • 2002-2004

  • Expectations of steady/falling rates

  • Acceleration/deceleration in reaction to expected rate changes.

  • 2005-2006

  • Fed raised rates with expectations of further rate hikes.

  • Shrinking spread between short and long rates

  • Uncertainty about future direction of rates


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Federal Funds Rate vs. 10-Year T-Bond

SOURCE: Federal Home Loan Mortgage Corporation – 30-yr FRM

Federal Reserve Board – 10-Year T-Bond


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Change in Market Psychology

  • 2002-2005

    • Both buyers & sellers knew it was a boom market

    • Brisk movement in market

  • 2006

    • Buyers expecting prices to tumble because of higher inventories

    • Sellers still want $$ their neighbor received+

    • More market friction, longer time on market


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Affordability

  • 2004-2005

  • Increase in use of alternative loan products extended the duration of market upswing

  • Increased pool of potential buyers as well

  • 2006

  • Buyer purchasing power seemingly stretched to limit

  • Rates still near historic lows, but rate increases have eroded affordability (monthly payment up 20%+ year-to-year)


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First-Time Buyer Housing Affordability Index,US vs CA

% OF HOUSEHOLDS THAT CAN

AFFORD ENTRY LEVEL HOME

SOURCE: California Association of REALTORS®


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Bay Area & Surrounding Counties


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Nonfarm Employment

  • Bay Area Region

SOURCE: California Economic Development Dept.


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Sales of Existing Detached Homes and Pacific West Consumer Confidence

  • Bay Area, September 2006: 3,293 Units, Down 19.6% Y-T-D, Down 23.8% Y-T-Y

UNITS

INDEX

SOURCE: California Association of REALTORS®;

The Conference Board


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Median Price of Existing Detached Homes

  • Bay Area, September 2006: $725,870, Up 2.2% Y-T-Y

SOURCE: California Association of REALTORS®


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Sales of Existing Detached Homes

  • Bay Area Counties

SOURCE: California Association of REALTORS®


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Median Price of Existing Detached Homes

  • Bay Area Counties

SOURCE: California Association of REALTORS®


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First-time Buyer Housing Affordability

  • 2nd Quarter 2006

SOURCE: California Association of REALTORS®


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Central Valley Region


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Nonfarm Employment

  • Central Valley Region

SOURCE: California Economic Development Dept.


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Sales of Existing Detached Homes and Pacific West Consumer Confidence

  • Central Valley, September 2006 Sales: 3,189 Units, Down 32.6% Y-T-D, Down 39.7% Y-T-Y

UNITS

INDEX

SOURCE: California Association of REALTORS®;

The Conference Board


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Sales of Existing Detached Homes

  • Central Valley Region

SOURCE: California Association of REALTORS®


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Median Price of Existing Detached Homes

  • Central Valley, September 2006: $348,960, Down 3.4% Y-T-Y

SOURCE: California Association of REALTORS®


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Median Price of Existing Detached Homes

  • Central Valley Regions

SOURCE: California Association of REALTORS®


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First-time Buyer Housing Affordability

  • 2nd Quarter 2006

SOURCE: California Association of REALTORS®


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Southern California Region


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Nonfarm Employment

SOURCE: California Economic Development Dept.


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Sales of Existing Detached Homes and Pacific West Consumer Confidence

  • Southern California Sept 2006 Sales: 9,435 Units, Down 32.7% Y-T-Y, Down 22.9% Y-T-D

UNITS

INDEX

SOURCE: California Association of REALTORS®;

The Conference Board


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Sales of Existing Detached Homes

SOURCE: California Association of REALTORS®


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Median Price of Existing Detached Homes

  • Southern California, September 2006: $565,390 Up 5.2% Y-T-Y

SOURCE: California Association of REALTORS®


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Median Price of Existing Detached Homes

  • Southern California Regions

SOURCE: California Association of REALTORS®


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Unsold Inventory Index

  • Los Angeles County, September 2006: 8.3 Months

MONTHS

SOURCE: California Association of REALTORS®


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Unsold Inventory Index

  • Orange County, September 2006: 10.3 Months

MONTHS

SOURCE: California Association of REALTORS®


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Unsold Inventory Index

  • San Diego County, September 2006: 9.8 Months

MONTHS

SOURCE: California Association of REALTORS®


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First-time Buyer Housing Affordability

  • 2nd Quarter 2006

SOURCE: California Association of REALTORS®


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Economic & MarketForecast


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U.S. Economic Forecast

SOURCE: California Association of REALTORS®


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California Economic Forecast

SOURCE: California Association of REALTORS®


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California Housing Market Forecast

SOURCE: California Association of REALTORS®


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Membership vs SalesMembership follows Sales with a 2-Yr Lag

Sales Peaks: 1978, 1988, 2004-05Membership: 1980, 1990, 2006?


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Productivity & CompetitionAverage: 7.6 sides

# of Members

# of Sides Per Member

Membership declines when sides/member falls below 6

SOURCE: C.A.R. Membership Records


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Estimated Gross Commission Per Member(Inflation Adjusted)

Mem Inc > HH Inc 2006

SOURCE: California Association of REALTORS®


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Wild Cards

  • Consumer psychology/expectations regarding:

    • home prices

    • interest rates

  • Impact of non-traditional mortgages

  • Unexpected major downturn


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Mortgage Foreclosure Rates

  • California

DELINQUENCY RATE

FORECLOSURE RATE

SOURCE: Mortgage Bankers Association


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What Clients Need to Hear

  • Large/widespread price decreases not expected

  • Properties will be on the market longer

  • Stabilizing economic conditions, but mixed news

  • Little movement in rates expected

  • Buy home that meets needs & wants

  • In the long-run, California prices go up!


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Housing Cycles

  • Sales Decline, But Market is Not in the Tank!!

UNITS

SOURCE: California Association of REALTORS®


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Rates Remain Near 40 Year Lows

  • Federal Housing Finance Board Rate,1963-2007

ANNUAL AVERAGE

SOURCE: FHFB, CAR


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5-Year Rate of Return on Median Price Home

  • Purchased in Year Shown - Sold After 5 Years

Annual Average: 11.3%


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Buyers & Technology


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Introduction

  • What?

    • Client’s Use of Technology

  • Why?

    • Consumers Have Become:

      • Better Informed via Internet

      • Empowered

      • More Demanding

    • Buyer/Seller Expectations Higher

    • Need to Look Beyond Current Market Conditions and Be Aware of Forces Changing the Way People Buy/Sell Homes


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Percent of Internet Users in the U.S.

Source: Pew Internet & American Life Project


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Percent of Internet Buyers/Sellers

Share of All Homebuyers/Home Sellers Surveyed

Source: C.A.R. 2005 Internet Versus Traditional Buyer Survey and C.A.R. 2006 California Home Seller Survey


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What Web Sites are Buyers Visiting?

Q: What Internet sites did you visit as a part of your home buying process ?


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Use Of The Internet:Buyer Online Activities

Aided Responses


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Importance of Online Features For Buyers


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Web Sites Of Interest

  • Property Listing Sites:

    • Google Base

    • Propsmart.com

    • Trulia.com

  • Home Value Estimators

    • RealEstateABC.com

    • HomeValues.com

    • Zillow.com

  • Online Classified Ads Sites:

    • Craigslist

    • Oodle

    • LiveDeal


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Who Needs An Agent?


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Reason For Use of an Agent First-Time Buyers – Verbatims

  • “ Home buying is a very confusing process – the

  • paperwork, etc. I felt I needed an expert to help. ”

  • “ I wanted to feel secure in the process. “

  • “ It’s a big purchase, and it’s very stressful …”

  • “ It’s like getting a lawyer. Without one you can get

  • burned because you don’t speak the language. “


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Reason For Use of an Agent Experienced Buyers – Verbatims

  • “ I wanted someone who really knew the area and

  • understood the market conditions. “

  • “ We looked at some places on our own, and they

  • Purchased before we could make our offer. “

  • “ I think they can find a better deal than I can on my

  • own. “

  • “ I needed to make sure all of the details were

  • handled correctly. “


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Time Spent Before and After Contacting Agent


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Satisfaction With Home Buying ProcessInternet Buyers


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Satisfaction With Home Buying ProcessTraditional Buyers


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Reasons For Satisfaction With Agent


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Reasons For Dissatisfaction With Agent


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Why Client Chose a Specific Agent First-Time Buyers – Verbatims

  • “ It is all about trust and comfort. Is this person honest?

  • Do they have integrity? I also have to trust that they

  • will find me the best deal and work hard for me. “

  • “ I needed someone I could trust, rely on and has

  • high moral standards. My agent was recommended by a

  • friend of the family that I trust very much“

  • “ She sincerely seemed to want to help me and didn’t

  • rush me. “

  • “ I felt very comfortable with her. “


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Why Client Chose a Specific AgentExperienced Buyers – Verbatims

  • “My previous agent messed me around. I wanted someone could trust. “

  • “I chose him because he seemed the most familiar

  • and knowledgeable about the area I wanted to buy in.”

  • “For me it was all about competency. I wanted someone who had good ideas on how to get the best deal.”

  • “She sold my previous house, and did such a good

  • job I figured she would do so again.”


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Satisfaction With CommunicationFirst Time Buyers - Verbatims

  • “She was quick to return my calls, and communicated well and often.”

  • “If I needed to know anything she was there to explain it to me. She was a really good listener.”

  • “She always called to keep me updated.”

  • “It was great. If we heard from him any more often he would have been living with us.”


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Satisfaction with CommunicationExperienced Buyers - Verbatims

  • “She was very good at keeping us informed on what was going on, even if nothing was going on.”

  • “My agent anticipated a lot of things and communicated with me before I even asked.”

  • “We kept in close contact throughout the whole

  • process.”

  • “I was misinformed or uninformed. She didn’t do her job.”


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REALTOR® Value Proposition

  • Timely & Effective Communication

  • Negotiating Skills

  • Marketing Expertise

  • Market Knowledge

  • Knowledge of the Process

  • A Trusted Advisor!


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The End

www.car.org

robertk@car.org


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