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2012 MID-YEAR MEETING Austin, Texas April 13, 2012. Economic and Real Estate Outlook. Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University. Bentley's First Law of Economics: “The only thing more dangerous than an economist is an amateur economist!” .

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economic and real estate outlook

2012 MID-YEAR MEETING

Austin, Texas

April 13, 2012

Economic and Real Estate Outlook

Dr. James P. Gaines

Research Economist

Real Estate Center at Texas A&M University

slide2

Bentley's First Law of Economics: “The only thing more dangerous than an economist is an amateur economist!”

Bentley's Second Law of Economics : "The only thing more dangerous than an amateur economist is a professional economist."

Remember:

Amateurs built the Ark

Professionals built the Titanic

economy is trying to recover but slow going
Economy is Trying to Recover, but Slow Going
  • Employment
  • Retail Sales and Consumption
  • GDP
  • Unsustainable Government deficits
  • Corporate Earnings
  • Housing

Projections for the next couple of years indicate substantive growth doesn’t occur until 2013-14

percent growth in real gdp
Percent Growth in Real GDP

The average rate of growth is 3.3% per quarter since 1947

Source: Bureau of Economic Analysis

total national debt since 1929 amount and percent of gdp
Total National Debt Since 1929Amount and Percent of GDP

National Debt as a Percentage of Annual GDP (right scale)

Ended WWII $270B

Hit $1T in 1981 @ 32% GDP

Beginning FY2012 $14.8T @ 97% GDP and 55 times 1946 debt

Total National Debt (left scale)

Source: U.S. Treasury

household debt
Household Debt

Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

households continue way over levered total hh debt as percentage of gdp
Households Continue Way Over-LeveredTotal HH Debt as Percentage of GDP

Average 2000-2010 = 88%

Average 1985-1999 = 63%

Average 1945-1984 = 39%

Average 1945-2010 = 52.5%

Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

slide12

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.”Ben BernankeJune 7, 2011, International Monetary Conference, Atlanta, Georgia

us unemployment rates
US Unemployment Rates

Source: BLS, Texas Workforce Commission; Real Estate Center at Texas A&M

2012 economic outlook
2012+ Economic Outlook
  • Most indicators positive – not robust
  • Major business, investment and political decisions postponed
  • Sluggish growth into the first quarter of 2013
  • Interest rates stay low through 2014
  • Housing cannot be counted on to help in 2012
  • Over-leverage & credit dependency remain
  • Limited government resources and spending
  • International economy highly uncertain
  • General UNCERTAINTY & Lack of CONFIDENCE
consumer confidence index
Consumer Confidence Index

Expansion

Recession

7 cycles since 1967:

Avg. during recession = 72

Avg. during an expansion = 102

Source: The Conference Board (1985=100)

u s household formation
U.S. Household Formation

Source: Current Population Survey, Census Bureau, Department of Commerce (The source of annual data is the Current Population Survey March Supplement. The quarterly data source is the monthly Current Population Survey/Housing Vacancy Survey.)

u s population groups 2011
U.S. Population Groups 2011

millions

26.1%

24.3%

21.4%

15.9%

12.2%

Echo Boom (Gen Y)

Baby Boom

Millennials (Gen I)

Baby Bust (Gen X)

Silent/Greatest

Age

16-34

0-15

47-65

35-46

66+

Source: U.S. Census Bureau; 2009 National Population Projections (Supplemental)

boomers own gen y rents
Boomers Own - Gen Y Rents

Source: FNMA National Housing Survey, 4Q2010

changing face of housing future homebuyers and sellers

2025

Changing Face of Housing:Future Homebuyers and Sellers

Racial and Ethnic Composition of Texas 2010 and 2030

Asian

4.6%

Asian

7.7%

Black

11.5%

Black

10.5%

During the next two decades, minorities will account for approximately two-thirds of household growth … and half of all first-time homebuyers

Hispanic

38.8%

Anglo

30.9%

Anglo

45.1%

Hispanic

50.9%

Source: Social Science Data Analysis Network; NAR Forecast

how bad has the housing collapse been
How Bad Has the Housing Collapse Been?
  • Home prices down ~33% since 2006 peak
  • Around $7 trillion, >50% lost equity in housing
  • ~20% households, 12 million, upside-down on mortgage – some states >50%
  • Defaults, delinquencies and foreclosures at historic levels
  • 2011 new home starts lowest in the past 60 years
  • New household formations about 25% of historical rate
  • Federal government programs have done little to help overall housing
slide24

US Homeownership Rate

(Percent)

Current rate is same as 3Q1998

1995-2005

Low interest rates and new mortgage products; Homeownership explodes from 64.1% to 69.1%

1970s

Baby Boomers enter market;

homeownership grows

Source: U.S. Census Bureau

lost wealth households equity in real estate
Lost Wealth: Households’ Equity in Real Estate

$7 trillion or 53% in lost real estate equity

Source: Federal Reserve, Flow of Funds, B-100

long term real home price index 1890 2010
Long-Term Real Home Price Index: 1890-2010

2000’s Boom

1946 to 1999 averaged 111.25

1915 to 1945 averaged 75.74

70’s

Boom

80’s

Boom

Great

Depression

WWII

WWI

1890 to 1914 averaged 100.16

2000 to 2010 averaged 156.01

Source: Robert J. Shiller, Irrational Exuberance, 2nd. Edition, Princeton University Press,2005, 2009, Broadway Books 2006, also Subprime Solution, 2008, as updated by author: http://www.econ.yale.edu/~shiller/data.htm

monthly foreclosure filings
Monthly Foreclosure Filings

Source: RealtyTrac, Inc.

Data include Notices of Trustee Sales plus Notices of Foreclosure Sale

percent of loans in foreclosure end of 4q 2011
Percent of Loans in Foreclosure End of 4Q 2011

Judicial Foreclosure States

Non-Judicial Foreclosure States

US

Source: Mortgage Bankers Association, National Delinquency Survey

slide30

High Negative Equity Concentrated in a Small Number of States

6 states > 30%

13 states > 20%

21 states > 15%

14 states < 10%

Source: CoreLogic® , Negative Equity Report, 3Q2011

seriously delinquent mortgages by origination year
Seriously Delinquent Mortgages by Origination Year

8.1%

9.5%

7.9%

7.7%

9.1%

8.7%

8.6%

7.9%

0%

0%

9%

0%

0%

11%

0%

11%

1%

1%

11%

2%

12%

12%

14%

14%

72%

71%

71%

70%

69%

68%

65%

65%

19%

18%

19%

19%

19%

19%

20%

19%

Source: Mortgage Bankers Association, 4Q2011 National Delinquency Survey

slide32

New and Existing SF Home Sales U.S.

(Existing

000s)

(New

000s)

Existing Sales

(left axis)

New Sales

(right axis)

New SF sales are down 78% from 2005 peak

Annual Average Total Sales

1980-1989 3.55 million

1990-1999 4.7 million

2000-2007 7.1 million

2008-2010 5.5 million

Sources: US Census Bureau , NAR, SAAR

slide33

Rise in Employment Beginning to Show in Sales Volume

(Home Sales

000s)

(Employed

000s)

Employment

(right axis)

Total Existing Home Sales

(left axis)

Sources: BLS. US Census Bureau , NAR, SAAR

people who plan to buy a home in the next six months
People Who Plan to Buy a Homein the Next Six Months

Average value 1977-2011 = 3.3%

US pop 2010 = 309 million; at average, 10.2 million people or 4.2 million households plan to buy a house in the next 6 months. At current rate, 5.7 million people or 2.3 million households plan to buy a house in the next 6 months.

Source: The Conference Board, Original Data

fhfa us monthly home price index
FHFA US Monthly Home Price Index

Currently equal to ~Feb 2004

Source: FHFA, SA

vacant housing units
Vacant Housing Units

Vacant For Rent

Vacant For Sale

Vacant & Off the Market: Other

Source: US Census Bureau

u s home price indexes y y percent change in index
U.S. Home Price Indexes(Y/Y Percent Change in Index)

FHFA Repeat

Sales Index

FHLMC HPI

NAR Median Price

Case-Shiller Comp 20 SA

Sources: NAR, FHFA, S&P Case-Shiller, FHLMC

slide38

Annual New Home Sales

(000, SAAR)

-77% 2005 Peak to Current

2011 less than half of “normal” level needed

-50% 1977 Peak to Trough

-28% 1986 Peak to Trough

-28% 1972 Peak to Trough

Source: US Census Bureau, NAHB, Real Estate Center

slide39

New SF Home Starts

(000s SAAR)

2011 down 75% from 2005 peak and 628,000 fewer units than 1960-2002 average per year (1.06 million)

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

slide40
Price Index of New Single-Family Houses Sold Including Value of Lot[2005 = 100 Index based on kinds of houses sold in 2005]

Source: US Census Bureau

median price of existing sf homes
Median Price of Existing SF Homes

Major declines in 2008 & 2009

2011 median down 25% from 2006 peak

Source: NAR

median existing sf home price
Median Existing SF Home Price

1968-1999 Trend Line

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

national housing affordability index
National Housing Affordability Index

Increase of 107% from July 2006 to Oct. 2011

Average 1994-2003 = 132.4

Drop of 31.5% from April 2003 to July 2006

Source: NAR Composite Index

median home prices as a multiple of median household income
Median Home Prices as a Multiple of Median Household Income

New Homes

(‘75-’00 avg. = 3.82)

Existing Homes

(‘75-’00 avg. = 3.36)

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

divergent us median hh income and median home prices
Divergent US Median HH Income and Median Home Prices

1990=100

Median Home Price

Median HH Income

Source: US Census Bureau, NAR

2010 median price median household income
2010 Median Price/Median Household Income

Most Affordable States

3.0

4.0

Least Affordable States

Source: FHFA 2Q2010 Median Prices, 2010 American Community Survey, U.S. Census Bureau

price to rent ratio monthly fhfa p o index to bls owners equivalent rent january 1991 1 0
Price-to-Rent Ratio Monthly FHFA P-O Index to BLS Owners’ Equivalent RentJanuary 1991 = 1.0

Equilibrium

Source: FHFA, BLS

why hasn t the housing market recovered
Why Hasn’t the Housing Market Recovered?
  • Employment uncertainty
  • Tight Mortgage Credit
  • Price pressure from foreclosures, distressed sales and “shadow inventory”
  • Appraisals and the Home Valuation Code of Conduct – questionable automated valuations
  • Confidence in the future
2012 housing outlook
2012 Housing Outlook

Market Headwinds

Reasons for Optimism

  • Distressed/Investor sales: ~1/3 U.S. market, ~10%-20% in Texas
  • Tight lending & low appraisals 33% cancellation rate on new and existing contracts
  • Confidence Crisis
    • No feeling of “well being”
    • Lost wealth: real estate & other assets
    • Flat income (declining real income)
    • Uncertain future: jobs, home values
  • Inventory: new wave of foreclosures to hit market in 2012
  • Move-up & move-over buyers can’t sell current home
  • Move-out still renting can’t buy
  • Political decisions, regulations and policies unknown & problematic
  • Improvement in general economy
  • Low interest rates but little impact
  • Pent up demand by those who’ve postponed housing or doubled-up
  • Markets bottomed will show statistical improvement
  • Investors buoy sales but not prices
  • Affordability: prices more in line with income
  • Rent-Own “gap” closing
  • Incentives on new homes substantial
  • Population and household growth strong in Texas
if we knew what we were doing it wouldn t be called research would it
“If we knew what we were doing, it wouldn't be called research, would it?”

Albert Einstein

economic and real estate outlook1

2012 MID-YEAR MEETING

Austin, Texas

April 13, 2012

Economic and Real Estate Outlook

Dr. James P. Gaines

Research Economist

Real Estate Center at Texas A&M University