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Local and National Economic and Real Estate Outlook Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University Topics The Economy The Real Estate Markets: National and Texas Future Prospects for Texas The Crack REC Economic and Housing Forecasting Team

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Local and National Economic and Real Estate Outlook

Dr. James P. Gaines

Research Economist

Real Estate Center

at Texas A&M University


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Topics

  • The Economy

  • The Real Estate Markets: National and Texas

  • Future Prospects for Texas


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The Crack REC Economic and Housing Forecasting Team


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Length of US Recessions 1900-Present

Average Recession is 15 months

Current Recession is 26 months and counting

Source: NBER


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Not a Typical Recession

  • We have a 0% funds rate, a $1.4 trillion budget deficit, a super-weak exchange rate, and a $2.2 trillion Fed balance sheet

  • Between one-fourth and one-third of homeowners with a mortgage have negative net equity

  • 1 in 6 are either unemployed or underemployed.

  • 1 in 7 homeowners with a mortgage either in arrears or in the foreclosure process

  • Small business failures are up 44% y/y

  • 1 in 8 Americans on food stamps and there are 239 counties where at least 25% of the population is on the program

  • A 30% slide in home prices; a 50% plunge in commercial real estate values; and a 20% mall vacancy rate nationwide


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Is There a Secular Attitudinal Change Going On Given Economy, Credit Collapse and Household Net Worth Implosion?

  • Debt

  • Savings

  • Discretionary spending patterns

  • Homeownership


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Percent Growth in Real GDP Since 2000 Seasonally Adjusted Annual Rate

First quarter of expansion averages +7% after a recession

As much as 90% of the 2.2% growth was Fed induced

Source: Bureau of Economic Analysis


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Overall Inflation Rate

November Total CPI was up 1.9% from a year earlier, due to energy increase of 7.4% (especially gasoline of more than 24%)

Core CPI was up 1.7% (new and used cars up 4.9% and 5.8%, respectively)

Source: Bureau of Labor Statistics

Yr/Yr Rate of Change in the Monthly Index, US Urban, All Items, Seasonally Adjusted


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Personal consumption represents about 70% of US economy and is showing signs of recovery

Personal Consumption Expenditures

Source: Department of Commerce, SAAR


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Corporate After-Tax Profits( SAAR Quarterly With Inventory Valuation & Capital Consumption Adjustment)

Source: Bureau of Economic Analysis


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Change in Monthly Employment

7.2 million total job losses since December 2007

Source: BLS, SAAR


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Broadest Measure of Underemployment

Percent NSA

Source: BLS, U-6 Unemployment Rate NSA


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Figuring Out the Economy Around the Ole Water Cooler


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Beginning of 2010, Where Are We?

Banks/Banking

Fin/Capital Markets

Housing

Employment

Comm. RE

Retail consumption

Business Spending

Manufacturing

Value of $1

Land

Bottomed – Probably not

Recovering – Some

Cause for Concern – Yes

Immediate Prospects – Not Good

True Recovery? Speculation & Inflated P/Es

Not on Fundamentals

Exports up because $1 is down

Heavy speculation, low value of $1, demand down

Stock Market

Commodities

Imports/Exports

Energy - gas & oil

  • Trillions spent with limited results

  • Little to no multiplier effects from $$ spent

  • Out of $$ - record deficits

  • Probably saved banks & WS, little else

  • Housing impact minimal

  • 3Q2009 GDP growth all Fed induced

  • Reckoning coming for value-less assets

  • Government Stimulus

  • Programs:

  • Following Japanese model despite claim not to

  • Long-term consequences may be significant


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Three Key Questions

  • When will recession end?

    • Already ended? End of 2009, 2010 …?

  • What shape will the recovery take?

    • V, U, W or an L ? A “jobless” recovery

  • What are the risks of a relapse?

    • Government’s exit strategy, investor speculation driving commodity prices to unreasonable levels; capital market conditions – who’s providing capital?


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What Is Holding Up A Recovery?

  • Inability of big banks to lend – credit freeze continues

  • Household’s reducing debt, not spending

  • Unemployment in double digits

  • Home prices declining – housing is not leading a general recovery as with past recessions

  • Commercial real estate drag on community and regional banks

  • State and local governments financially strapped

  • Everyone speculating on what Federal Government will do next


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The Best Case Scenario

  • Favorable corporate earnings 4Q09

  • Sustained stock market rally

  • Rise in consumer confidence and spending

  • Layoffs end by the end of the 2009

  • “Jobless recovery” in 2010

  • Higher interest rates and inflation in 2010-11


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The Worst Case Scenario

  • The securitized lending market doesn’t reopen

  • Bad banks and businesses propped up

  • No price discovery for “toxic” mortgages

  • Political risk for business stays high

  • Business / investors “sit on their hands”

  • Unemployment goes well over 10%

  • Commodity deflation and price deflation continue and get worse


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2010

  • Low interest rates for at least six months; ~ 100-200bp increase

  • Job losses decline during first half of year, then flat – little job gains of note; unemployment could reach nearly 11%

  • Some improvement in the housing market – flat to low growth despite low interest rates, low prices and tax credits – high potential for “double dip”

  • High foreclosures from high unemployment, ARM resets and re-defaults on loan workouts

  • Personal consumption up slightly during the year from pent-up demand – enough for major recovery?


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2010

  • High number of bank failures; banking system forced to “carry” CRE problem into 2011; major reckoning of low-to-no-value assets looming, can’t extend & pretend much longer

  • Government stimulus spending only what’s left of original programs with little significant improvement to overall economy

  • Minimal 2010 impacts of healthcare and cap-and-trade legislation, but potentially significant impacts into 2011

  • Deflation for at least first six months with potentially significant inflation for next several years

  • State and local governments financially strapped; schools broke


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A Thought from Maxine

"BAIL EM OUT! ????”

Wow, back in 1990, the Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it.

They failed, and it closed.

Now we are trusting the auto industry, the banking system and healthcare to the same nit-wits who couldn't make money running a whore house and selling whiskey!


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Texas Scenarios for 2010-2011

  • Texas lagged into recession, may lag coming out

  • Job losses stop and new jobs start being created, maybe

  • Flat housing market – sales and prices until economy truly recovers

  • Small and regional bank failures worked out

  • In-migration re-invigorates economic growth and housing markets


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Texas Index of Leading Indicators

(1987=100)

Source: Federal Reserve Bank of Dallas


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Annual Employment Growth Rates for US, Texas and Dallas

Dallas

Texas

US

Source: BLS, TWC, Real Estate Center at Texas A&M University


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Real Estate Markets


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The Housing Market


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Implications for Housing

  • “Tax credit” appears to have stimulated buying about 10% to 12%

  • Lower demand, foreclosures and homebuilder concessions affecting value changes

  • Appraisals are major issue in purchases

  • Lenders making purchase mortgages difficult to obtain

  • Jumbo home loans and ADC loans virtually non-existent in most of the country

  • Affordability operative market word


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New and Existing SF Home Sales U.S.

Sources: US Census Bureau , NAR, NAHB, NBER, 000s of SA units


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Monthly Foreclosure Filings

Source: RealtyTrac, Inc.

Data include Notices of Trustee Sales plus Notices of Foreclosure Sale


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Foreclosure Filings and the U.S. Unemployment Rate

Sources: BLS, RealtyTrac, Inc.

Foreclosure Filings include Notices of Trustee Sales plus Notices of Foreclosure Sale


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Foreclosure Filings and the Texas Unemployment Rate

Sources: TWC, RealtyTrac, Inc.

Foreclosure Filings include Notices of Trustee Sales plus Notices of Foreclosure Sale


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Annual U.S. Median Existing Home Price Percent Change

Through June 2009 the median existing home price was down 14.8%;

Through November 2009 the median existing home price is down 4.4%;

12-Month moving average is down 12.7%

Source: NAR


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US Median Home Prices Since 1990

National House Price Bubble

2000 Trend

The national housing boom started around January 2002 creating a house price bubble that peaked at around $230,900 in 2006

Source: NAR, Real Estate Center at Texas A&M University


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Has the Housing Market Bottomed?

Answer: maybe, hopefully, probably. But we still may not really know for sure for another several months.

  • Can the market sustain itself without massive Federal government help

  •  Foreclosures will stay high. A large number of Option-ARM and prime ARM mortgages reset starting this quarter and going through all next year and into 2011.

  • The health of the housing market, nationally and locally, depends on a general economic recovery - especially stopping the loss of jobs and preferably adding new jobs.

  • The housing market may have bottomed out, but will probably have a long, slow recovery – think 5 to 10 years, not just one or two.


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Future Home Sales Volume

Job Growth

Mortgage Rates and Credit Terms

Home Price Affordability


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Texas Single-Family Market

Source: Real Estate Center at Texas A&M University


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Annual Texas Home Sales

2007 = about 6% decline from 2006.

2008 = 16% less than ’07

2009 = sales down 10% to 15% from 2008 to 2001-2003 levels

Source: Real Estate Center at Texas A&M University


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Texas SF Building Permits

1984 82% of 1983 peak

1985 66% of 1983 peak

1986 57% of 1983 peak

1987 43% of 1983 peak

1988 35% of 1983 peak

2006 98% of 2005 peak

2007 72% of 2005 peak

2008p 48% of 2005 peak

2009e 36% of 2005 peak

Source: US Census Bureau, Real Estate Center at Texas A&M


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US and Texas Median Home Price

Texas remains a housing bargain, but not by as much.

The gap between the US and Texas median price widened to 38%, but has narrowed to 16%

U. S. Median Home Price

Texas Median Home Price

Source: NAR; Real Estate Center at Texas A&M University


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Texas Median Home Price12-Month Moving Average

Current prices are about 7% below trend

Source: Real Estate Center at Texas A&M University


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Texas Households by Highest Affordable Price and the Number of Owner-Occupied Units

4%

3%

7%

6%

10%

6%

7%

8%

20%

30%

Source: US Census Bureau 2008 American Community Survey; Real Estate Center at Texas A&M University


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Dallas Single- Family Market

Source: Real Estate Center at Texas A&M University; NTREIS

* 12-month moving average to date


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Dallas Monthly Home Sales12-Month Moving Average

Sales

Bubble

Current sales are about equal to 2000 levels

Source: Real Estate Center at Texas A&M University


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Dallas Annual Home Sales

2009 sales at pace of 45,000, an 11.5% decline from 2008.

2010 sales about the same

Source: Real Estate Center at Texas A&M University


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Dallas Median Home Price12-Month Moving Average

Moving-average Price down 1.5% from year earlier and 3.3% from November 2007 peak.

Source: Real Estate Center at Texas A&M University


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Dallas Median Home Prices

Average annual increase of 3.0% 1998-2008.

2009e flat from 2008

2010p essentially flat, maybe up 1%

Source: Real Estate Center at Texas A&M University


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Dallas Single-Family Building Permits

1983-1988 = 58% Decline

2004-2008 = -62%

-75% to 2009e ~8,000

Source: US Census Bureau, Real Estate Center at Texas A&M University


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Dallas Multi-Family Building Permits

134 permits issued in the last 5 months

Source: US Census Bureau, Real Estate Center at Texas A&M University


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Implications for Commercial Real Estate

  • Heavy downward rent pressure in industrial, office and retail

  • Cap rates revert back to pre-2002 levels

  • Potential wave of foreclosures without extend & pretend

  • No new office, retail or industrial construction until 2012 or 2013

  • FRANNIE financing led to gross overbuilding in multi-family which has fallen off significantly


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DFW Overall Office New Space & Net Absorption

Completed Space

Absorption

Source: CoStar; Real Estate Center at Texas A&M University


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DFW Overall Office Average Gross Rents and Occupancy

Source: CoStar; Real Estate Center at Texas A&M University


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DFW Warehouse New Space & Net Absorption

Completed Space

Absorption

Source: CoStar; Real Estate Center at Texas A&M University


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DFW Warehouse Rents and Occupancy

Source: CoStar; Real Estate Center at Texas A&M University


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DFW Flex R&D New Space & Net Absorption

Completed Space

Absorption

Source: CoStar; Real Estate Center at Texas A&M University


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DFW Flex R&D 3-Net Rents and Occupancy

Source: CoStar; Real Estate Center at Texas A&M University


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Future Prospects


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Texas – Poised for a 21st Century Boom

  • Population and Economic growth

  • Low cost, available labor

  • Pro Growth Attitude

  • Migration into State from elsewhere

  • Attractive Retirement Area

  • Pressure on infrastructure, government services, public finance

  • Most affordable state for land, housing and overall cost of living


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Texas Urban Triangle

58,410 square miles

Longest distances:

362 miles N-S

315 miles E-W

By 2040, 33.7 million people will live in the four principal metro areas in the triangle, a 120% increase

In 2007, 15.3 million people, about 90% of the total population in the area, lived in the four principal metro areas in the triangle


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Projected Texas Population

2000 - 2030

(000s)

At 50% 1990-2000 rate of immigration

At 2000-2007 rate of immigration

At 100% 1990-2000 rate of immigration

Between 9 and 18 million more residents between 2005 and 2030

Source: U.S. Census Bureau, Texas State Demographer 2008 Projections


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Averaging the projections results in an increase of 13.9 million people by 2030.

Over the next 25 years, equivalent of adding:

another 12-county Dallas-Ft. Worth metropolitan area, plus

another 10-county Houston

metropolitan area, plus

another 8-county San Antonio

metropolitan area, plus

anotherCorpus Christi


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Texas Age Distribution 2005-2030

Boomers

2005

2010

Boomers

2020

2030

Boomers

Boomers


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Dallas PopulationCollin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, Rockwall Counties

At 50% 1990-2000 rate of immigration

At 2000-2007 rate of immigration

At 100% 1990-2000 rate of immigration

Between 2.2 and 5.1 million more people by 2030

Source: US Census Bureau, Texas State Data Center and Demographer


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D-FW MSA PopulationCollin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, Rockwall & Johnson, Parker, Tarrant, Wise Counties

At 50% 1990-2000 rate of immigration

At 2000-2007 rate of immigration

At 100% 1990-2000 rate of immigration

Between 2.8 and 6.7 million more people by 2030

Source: US Census Bureau, Texas State Data Center and Demographer


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Local and National Economic and Real Estate Outlook

Dr. James P. Gaines

Research Economist

Real Estate Center

at Texas A&M University


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