After the BOOM
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After the BOOM. David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS® Economic Issues & Residential Real Estate Business Trends Forum Washington, DC -- May 2006. Five-Year Boom … Something to Remember. Memories,

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After the BOOM

David Lereah, Ph.D., Chief Economist


Economic Issues &

Residential Real Estate Business Trends Forum

Washington, DC -- May 2006

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Five-Year Boom … Something to Remember


Like the corners of my mind Misty water-colored memories

Of the Way We Were…

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Five Straight Record Years:Existing-Home Sales

In million units

Source: NAR

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Five Straight Record Years:New-Home Sales

In thousand units

Source: Census

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Hot Markets in Past Five Years (2000 to 2005)

Source: NAR

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Rates Near Historic Lows


9% average


13% average


8% average


6.5% average

Source: Freddie Mac

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NAR Membership

in thousands

499,000 gain in 5 years

Source: NAR

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Real Estate Employment Surges


* Construction jobs in the residential sector.

** Lending jobs in credit intermediation but not commercial banking.

Source: NAR, BLS

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Residential Real Estate Industry Revenue Surges

GDP excluding residential real estate

Source: BEA

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Rising Mortgage Rates

Source: Freddie Mac

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Income Not Keeping Pace With Home Prices

Income and Price set to Index of 100 in 1990

Source: NAR

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Too Much Speculation

  • Flipping

  • Pre-construction

    purchases / sales

  • Long lines at sales offices

    and lottery purchases

  • Long distance purchases (without seeing property)

  • Interest-only and/or adjustable loans dominate some markets

  • Interest-Only stretched household income

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Adjustable Mortgages(2005 Q4)


Source: FHFB

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Interest-Only Mortgages


Source: Loan Performance

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Interest-Only Loans

Stretched Payment

  • Stretching to get a 40% larger loan

    • $250,000 traditional loan at 6% rate equals $1,499 per month

    • $350,000 interest-only loan at 5% rate equals $1,458 per month

  • Minimum Payment – Option ARMS Loans

    • Even more stretching

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Even Muhammad Ali Had Limits

  • Successive Record Years Not Sustainable

  • Double-digit Price Gains Not Healthy or Sustainable

  • Inevitable Rate Rise from Generational Low Mortgage Rates

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But Roof Not Caving

  • No Bust –

    Just Deceleration

  • Boom Winding Down to Expansion

  • Inventory Building, but not Excess

  • Price Appreciation Slowing

  • Sales Take a Dip – but only for a year

  • A Needed Cleansing

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Housing Inventory

All-time High

Source: NAR

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Home Price Appreciation

Percent Change

Source: NAR

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Lower Existing-Home Sales

In million units

Source: NAR

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Declining Mortgage Applications for Home Purchase

Source: Mortgage Bankers Association

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Tale of Two Cities

  • Boom Cities Adjusting from Seller to Buyer Market

  • Non-Boom Cities showing Booming Tendencies

  • Common Thread for Both Markets – Job Gains and Income Growth (excluding Michigan)

  • Healthy Local Economy assures

    boom cities to land softly

  • Healthy Local Economy assures

    non-boom cities to grow

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Existing-Home Sales(2006 Q1 vs 2005 Q1)

Source: NAR

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Non-Boom Markets With Strong Job Growth

One-year Job Growth Rate


Source: BLS

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Cool ’06 and Rise ‘07

  • Solid fundamentals: Low Historic Rates, Favorable Demographics, Healthy Economy

  • Speculators Out

  • Exotic Mortgages Out

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Sound Economy


Source: BEA

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Government SpendingProviding Support


Source: BEA

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Corporate Profits are Strong … Will Boost Business Spending

Source: BEA

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Steady Job Gains2 Million in Past 12 months

Payroll job changes in thousands

Weakness from Katrina

Source: BLS

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Inflation Building

% change from a year ago

Source: BLS

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Risks – Three Dark Clouds

  • Oil

  • Interest Rates

  • Housing

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$100 Per Barrel Oil Pressure

  • 400,000 job gain rather than 2 million

  • Inflation to 4.4% rather than 3.4%

  • Mortgage to 8% rather than 6.7%

  • Home sales – double digit percentage declines

  • Home prices –

    possibly turn negative

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Interest Rates Pressure – 4-year high



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Sluggish Housing Inhibits Economy Pressure

  • Wealth Effect Slows

    • Unrealized Gains Slows

    • Less Home Equity Borrowing

    • Less Cash-out Refis

    • Less Residential Investment

  • Negative Multiplier/Secondary Spending Impact

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Impact of Unlikely Sharp Correction in Housing Pressure

  • Wealth Effect Turns Negative

  • Local Governments Run Budget Deficits

  • GDP Growth Falls 2.5% to 3.5% points

  • Economy Enters Recession

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’07 and Beyond Pressure

  • Still Favorable Interest Rates

  • Favorable Demographic Trends

  • More Balanced Markets

  • Back to Fundamentals

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Housing Outlook Pressure

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After the BOOM Pressure

David Lereah, Ph.D., Chief Economist


Economic Issues &

Residential Real Estate Business Trends Forum

Washington, DC -- May 2006