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Economic Outlook for Central Texas Real Estate

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  1. Economic Outlook for Central Texas Real Estate Dr. James P. Gaines Research Economist Real Estate Center Texas A&M University jpgaines@tamu.edu

  2. News Publications RECON Newsletter Data Market Reports Tierra Grande is our quarterly magazine with timely research and analysis of the trends and events shaping Texas real estate today. Experts on appraisal, housing , finance, law, demography, economics, investment and other areas share insights unavailable anywhere else. Building permitsEmploymentHome SalesHousing AffordabilityPopulationRural Land You'll be an insider – if you subscribe to our electronic newsletter RECON. RECON is an acronym for Real Estate Center Online News. It's a twice-weekly briefing on Texas real estate news. Currently more than 20,000 subscribers worldwide are signed on. Best of all, RECON is free. Planning to invest in Texas real estate? Are you looking for local real estate market information for Texas cities? Click here for extensive data for every metro area in the Lone Star state. Our reports include employment trends, population, residential, multi-family, office, industrial and retail information. RECONNews ReleasesEvents CalendarVideosTRECI Index Events Calendar Happy New Year! The staff of the Real Estate Center wish you and yours a happy and prosperous new year! This year marks the 35th anniversary of the Real Estate Center. In 1971, Gov. Preston Smith signed legislation creating the Texas Real Estate Research Center and placed it at Texas A&M University. Instructor Training Courses, May 18-19, College Station, Texas. The Legal Update and Ethics instructor training courses include credit for the required 3-hour Legal Update course and the required 3-hour Ethics course. In addition, each instructor training course will include a brief orientation to the teacher’s manuals for each course as well as a discussion of training issues. REAL ESTATE CENTER at TEXAS A&M UNIVERSITY Mays School of Business http://recenter.tamu.edu

  3. We’ve Spent a Lot of Time Around the Ole Water Cooler

  4. Summary of the “Great Recession” • A 0% funds rate, $1.4 trillion annual deficit and a $2.2 trillion Fed balance sheet • Approximately $3.5 Trillion in total government stimulus • Nearly one-third of homeowners have negative equity • 1 in 6 are either unemployed or underemployed. • 1 in 7 homeowners either delinquent or in the foreclosure process • Small business failures are up 44% y/y • 20% - 30% slide in home prices • 50% plunge in commercial real estate values

  5. Percent Growth in Real GDP Since 2000 Seasonally Adjusted Annual Rate An uninspired 2.7% increase during first half of 2010 Source: Bureau of Economic Analysis

  6. Personal consumption represents about 70% of US economy and is showing signs of recovery Personal Consumption Expenditures Source: Department of Commerce, SAAR

  7. Consumer Confidence Index 7 cycles since 1967: Avg. during recession = 72 Avg. at end of recession = 71.5; Avg. during an expansion = 102 Source: The Conference Board (1985=100)

  8. Annual Employment Growth Rates for US and Texas Texas US Source: BLS

  9. Annual Employment Growth Rates for US, Texas and Austin MSA Austin Texas US Source: BLS, TWC, Real Estate Center at Texas A&M University

  10. Measures of Un- and Underemployment Percent SA U-6, the broadest measure Headline Rate Source: BLS

  11. Measures of Un- and Underemployment Percent SA U-6, the broadest measure Headline Rate Austin Source: BLS

  12. Unemployment Rate by Level of EducationJune 2010 Source: BLS , 25-years old +; Seasonally adjusted rates

  13. Small Business Outlook“Planning To Hire People In The Next Six Months” Source: National Federation of Independent Business

  14. Are There Secular Changes Going On Given Economy, Credit Collapse and Household Net Worth Implosion? • Debt & Savings • Discretionary spending patterns • Homeownership • Financial System & Banks

  15. 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!

  16. Looking Ahead to 2010 & 2011

  17. Our Last Economic and Housing Forecasting Staff Meeting

  18. Major Hurdles for 2010 & 2011 • State, local and school districts’ falling revenues • Credit contraction continues – business, consumer credit, mortgages • Jobs, income and spending • Pending changes in laws, regulations and taxes – capital gains tax; cap and trade; financial institutions & banking regs – UNCERTAINTY! • “Extend & Pretend” in banking system • “Foreclosure-gate” • Psychological malaise

  19. Texas Scenarios for 2010-2011 • Texas lagged into recession may be leading out • Expect job losses to stop and new jobs to start being created, 1.5% maybe 2% job growth in 2010 • Natural gas prices and activity just as important as oil prices • Flat housing sales and prices until economy truly recovers • Small and regional bank problems to work out • State, local and school districts financial problems just really starting • In-migration should reinvigorate economic growth and housing markets

  20. Texas Index of Leading Indicators (1987=100) Source: Federal Reserve Bank of Dallas

  21. Texas Retail Sales MonthlySEASONALLY ADJUSTED , BILLIONS OF DOLLARS Source: Federal Reserve Bank of Dallas

  22. The Housing Market

  23. Current Housing Trends • Tax credit & direct subsidies over • Household creation very slow; generational housing preferences changing • Purchase mortgages much more difficult to obtain – tight underwriting • Renting a more viable option • Appraisals are major issue in purchases • Jumbo home loans and ADC loans difficult • Housing deflationary expectations

  24. Lost Wealth: Households’ Equity in Real Estate $6.2 trillion or 47% in lost real estate equity RE Equity about where it was in 1999-2000 Source: Federal Reserve, Flow of Funds, B-100

  25. Total HH Home Mortgage Borrowing $0.5 trillion between 1972 and 1979; $1.5 trillion between 1980 and 1989; $2.1 trillion between 1990 and 1999; $6.1 trillion between 2000 and 2007 Source: Federal Reserve, Flow of Funds, D-2

  26. First-Time Home Buyers (Percent of Total Home Buyers) Top Four Reasons for First-Time Buyers: Desire to Own (62%) Current Affordability (10%) Change in Family Situation (8%) Tax Credit (6%) Source: NAR, 2009 Profile of Home Buyers and Sellers

  27. US Mortgage Delinquency Rates US mortgage delinquency rate set all time high in 4Q2009 Subprime Mortgages All Mortgages Prime Mortgages Source: Mortgage Bankers Association, National Delinquency Survey

  28. Monthly Foreclosure Filings Texas foreclosures have been far more stable than US Source: RealtyTrac, Inc. Data include Notices of Trustee Sales plus Notices of Foreclosure Sale

  29. New and Existing SF Home Sales U.S. (000s) Existing SF sales are down 21% from 2005 peak 1980-1989 3.55 million per year 1990-1999 4.7 million per year 2000-2006 7.15 million per year 2007-1H2010 4.3 million per year New SF sales are down 78% from 2005 peak Sources: US Census Bureau , NAR, NAHB, NBER

  30. Distressed Home Sales Total Distressed Sales Foreclosures Short Sales Source: NAR

  31. Number of Housing Units Vacant and Held Off Market Total inventory of vacant units may be closer to 9 million, including condos, foreclosures and other properties effectively vacant Source: US Census Bureau

  32. Annual U.S. Median Existing Home Price Percent Change Since 2005, median price of a SF home is down 23.5% Source: NAR

  33. US Median Home Prices Since 1990 National House Price Bubble 12-Month Moving Average Since 2001 1990-2000 Trend Source: NAR, Real Estate Center at Texas A&M University

  34. National Housing Affordability Index Average 1994-2003 = 132.4 Drop of 31.5% from April 2003 to July 2006 Source: NAR Composite Index

  35. US Total Housing StartsTotalUnits & 12-Month Moving Average Monthly Units 12-Month Moving Avg. Source: US Census Bureau, Real Estate Center at Texas A&M

  36. 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.

  37. Number of Years to Clear Available Inventory When and How Does the Housing Market Go Back to “Normal”? * 2009 annual sales level Somewhere between mid-2012 and 2014

  38. Texas & Austin Housing Markets

  39. Texas Single- Family Market Source: Real Estate Center at Texas A&M University; NTREIS * 12-month moving average to date; # 3Q2009 vs. 3Q2010

  40. Texas Single-Family Market3Q2010 Source: Real Estate Center at Texas A&M University

  41. Annual Texas Home Sales 2009 = sales down 8% from 2008 levels 2010 should be relatively flat about equal to 2001-2003 levels Source: Real Estate Center at Texas A&M University

  42. Texas Home Sales 12-Month Moving Average Source: Real Estate Center at Texas A&M University

  43. Texas Months Inventory of Homes For Sale and FHFA Appreciation Rate Months Inventory Appreciation Rate Average Annual Appreciation = 3.9% FHFA Appreciation Rate Source: FHFA, Real Estate Center at Texas A&M University

  44. Texas Median Home Prices Essentially flat in 2008 & 2009 2010 should hold steady Source: Real Estate Center at Texas A&M University

  45. Texas Median Home Price12-Month Moving Average Current prices are about 8% below trend Source: Real Estate Center at Texas A&M University

  46. Texas SF Building Permits 1984 82% of 1983 peak 1985 66% of peak 1986 57% of peak 1987 43% of peak 1988 35% of peak 2006 98% of 2005 peak 2007 72% of peak 2008 49% of peak 2009 41% of peak 2010p 42% of peak Source: US Census Bureau, Real Estate Center at Texas A&M

  47. Texas Monthly SF Permits12-Month Moving Average 2003 Trend Line Source: US Census Bureau, Real Estate Center at Texas A&M

  48. Austin Single- Family Market Source: Real Estate Center at Texas A&M University; NTREIS * 12-month moving average to date ; # 3Q2009 vs. 3Q2010

  49. Austin Single-Family Market3Q2010 Source: Real Estate Center at Texas A&M University

  50. Austin Annual Home Sales 2009 down 7% 2010 Flat ~ 2003-2004 levels Source: Real Estate Center at Texas A&M University