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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

five year boom something to remember
Five-Year Boom … Something to Remember


Like the corners of my mind Misty water-colored memories

Of the Way We Were…

five straight record years new home sales
Five Straight Record Years:New-Home Sales

In thousand units

Source: Census

rates near historic lows
Rates Near Historic Lows


9% average


13% average


8% average


6.5% average

Source: Freddie Mac

nar membership
NAR Membership

in thousands

499,000 gain in 5 years

Source: NAR

real estate employment surges
Real Estate Employment Surges


* Construction jobs in the residential sector.

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

Source: NAR, BLS

residential real estate industry revenue surges
Residential Real Estate Industry Revenue Surges

GDP excluding residential real estate

Source: BEA

rising mortgage rates
Rising Mortgage Rates

Source: Freddie Mac

income not keeping pace with home prices
Income Not Keeping Pace With Home Prices

Income and Price set to Index of 100 in 1990

Source: NAR

too much speculation
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
interest only mortgages
Interest-Only Mortgages


Source: Loan Performance

interest only loans
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
even muhammad ali had limits
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
but roof not caving
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
housing inventory
Housing Inventory

All-time High

Source: NAR

home price appreciation
Home Price Appreciation

Percent Change

Source: NAR

lower existing home sales
Lower Existing-Home Sales

In million units

Source: NAR

declining mortgage applications for home purchase
Declining Mortgage Applications for Home Purchase

Source: Mortgage Bankers Association

tale of two cities
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

non boom markets with strong job growth
Non-Boom Markets With Strong Job Growth

One-year Job Growth Rate


Source: BLS

cool 06 and rise 07
Cool ’06 and Rise ‘07
  • Solid fundamentals: Low Historic Rates, Favorable Demographics, Healthy Economy
  • Speculators Out
  • Exotic Mortgages Out
sound economy
Sound Economy


Source: BEA

steady job gains 2 million in past 12 months
Steady Job Gains2 Million in Past 12 months

Payroll job changes in thousands

Weakness from Katrina

Source: BLS

inflation building
Inflation Building

% change from a year ago

Source: BLS

risks three dark clouds
Risks – Three Dark Clouds
  • Oil
  • Interest Rates
  • Housing
100 per barrel oil
$100 Per Barrel Oil
  • 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

sluggish housing inhibits economy
Sluggish Housing Inhibits Economy
  • Wealth Effect Slows
    • Unrealized Gains Slows
    • Less Home Equity Borrowing
    • Less Cash-out Refis
    • Less Residential Investment
  • Negative Multiplier/Secondary Spending Impact
impact of unlikely sharp correction in housing
Impact of Unlikely Sharp Correction in Housing
  • Wealth Effect Turns Negative
  • Local Governments Run Budget Deficits
  • GDP Growth Falls 2.5% to 3.5% points
  • Economy Enters Recession
07 and beyond
’07 and Beyond
  • Still Favorable Interest Rates
  • Favorable Demographic Trends
  • More Balanced Markets
  • Back to Fundamentals

After the BOOM

David Lereah, Ph.D., Chief Economist


Economic Issues &

Residential Real Estate Business Trends Forum

Washington, DC -- May 2006