Dr. James P. GainesResearch EconomistReal Estate Center

Texas A&M University

recenter.tamu.edu

2010 Convention

TopicsTopics

• General Economy• Housing Market

– Currently– Prospects for Future

2

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

3

Characteristics of This Characteristics of This RecessionRecession

4

• A 0% funds rate, $1.4 trillion budget deficit and a $2.2 trillion Fed balance sheet

• 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

• 30% slide in home prices

• 50% plunge in commercial real estate values

Economy is Trying to Economy is Trying to Recover, but Slow GoingRecover, but Slow Going

• Employment• Final Retail Sales• GDP• Inventories• Corporate Earnings

Projections for the next couple of years indicate substantive growth doesn’t occur until 2012

5

Is There a Secular Is There a Secular Attitudinal Change Going Attitudinal Change Going On Given Economy, Credit On Given Economy, Credit

Collapse and Household Net Collapse and Household Net Worth Implosion?Worth Implosion?

• Debt• Savings• Discretionary spending patterns• Homeownership

6

Percent Growth in Real GDP Percent Growth in Real GDP Since 2000Since 2000

Seasonally Adjusted Annual Rate Seasonally Adjusted Annual Rate

7Source: Bureau of Economic Analysis

An uninspired 2.7% increase during first half of 2010

Total National Debt and Debt as a Total National Debt and Debt as a Percentage of GDPPercentage of GDP

8Sources: Federal Reserve Flow of Funds, BEA

Billions

Annual Employment Growth Annual Employment Growth RateRate

9Source: BLS, Real Estate Center at Texas A&M University

Change in Monthly Change in Monthly EmploymentEmployment

Source: BLS, SAAR

Th

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Measures of Un- and Measures of Un- and UnderemploymentUnderemployment

11Source: BLS

Percent

U-6, the broadest measure

Headline Rate

Unemployment Rate by Level of Unemployment Rate by Level of EducationEducation

June 2010June 2010

Source: BLS , 25-years old +; Seasonally adjusted rates

Recovery May Take a WhileRecovery May Take a While

13

Personal Consumption Personal Consumption ExpendituresExpenditures

Source: Department of Commerce, SAAR

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

Source: The Conference Board (1985=100)

Consumer Confidence Consumer Confidence IndexIndex

15

7 cycles since 1967:Avg. during recession = 72Avg. at end of recession = 71.5; Avg. during an expansion = 102

Corporate After-Tax Corporate After-Tax ProfitsProfits

(Quarterly With Inventory Valuation & Capital Consumption Adjustment)(Quarterly With Inventory Valuation & Capital Consumption Adjustment)

16Source: Bureau of Economic Analysis

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.

A Thought from Maxine

"BAIL EM OUT! ????”

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!

17

Looking Ahead Looking Ahead to the Next to the Next

Couple of YearsCouple of Years

18

Major Hurdles for 2010 Major Hurdles for 2010 & 2011& 2011

1. State, local and school districts’ falling revenues

2. Credit contraction continues – business, consumer credit, mortgages

3. Jobs, income and spending

4. Pending changes in laws, regulations and taxes – capital gains tax; cap and trade; financial institutions & banking regs – UNCERTAINTY!

5. “Extend & Pretend” in banking system

6. “Foreclosure-gate”

7. Psychological malaise

19

20

The Housing The Housing MarketMarket

The Housing The Housing MarketMarket

Our Last Economic and Housing Forecasting Staff Meeting

21

Current Housing IssuesCurrent Housing Issues• Tax credit stimulated buying about 10% to 12%• Lower demand, foreclosures and homebuilder

concessions affecting value changes• Foreclosures continue to add to inventory• Appraisals are major issue in purchases• Lenders making mortgages difficult to obtain• Jumbo loans and ADC loans virtually non-

existent in most of the country• Affordability operative market word

22

FHLMC 30-Year Fixed RateFHLMC 30-Year Fixed Rate

23Source: FHLMC

24

US Homeownership RateUS Homeownership Rate

Source: US Census Bureau; FHLMC (4-quarter moving average homeownership rate)

1970sBaby Boomers enter market;

homeownership grows

1995-2005Low interest rates and new mortgage

products; Homeownership explodes from

64.1% to 69.1%

(Percent)

Current rate is same as 1Q2000

Lost Wealth: Households’ Lost Wealth: Households’ Equity in Real EstateEquity in Real Estate

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

$6.2 trillion or 47% in lost real estate equity

RE Equity about where it was in 1999-2000

Total HH Home Mortgage Total HH Home Mortgage BorrowingBorrowing

Source: Federal Reserve, Flow of Funds, D-2

$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

26

Monthly Foreclosure Monthly Foreclosure Filings Filings

Source: RealtyTrac, Inc. Data include Notices of Trustee Sales plus Notices of Foreclosure Sale

28

Foreclosure Filings and the Foreclosure Filings and the U.S. Unemployment RateU.S. Unemployment Rate

29Sources: BLS, RealtyTrac, Inc. Foreclosure Filings include Notices of Trustee Sales plus Notices of Foreclosure Sale

30Sources: US Census Bureau , NAR, NAHB

(000s)

Existing SF sales are down 21% from 2005 peak

New SF sales are down 78% from 2005 peak

New and Existing SF Home Sales U.S.New and Existing SF Home Sales U.S.

Annual Average Total Sales1980-1989 3.55 million1990-1999 4.7 million2000-2006 7.15 million2007-1H2010 4.3 million

Existing Sales(left axis)

New Sales(right axis)

Future Home Sales Future Home Sales VolumeVolume

Job Growth

Mortgage Rates and Credit Terms

Home Price Affordability

Federal Government Actions31

Distressed Home SalesDistressed Home Sales

32Source: NAR

Foreclosures

Short Sales

Total Distressed Sales

First-Time Home Buyers First-Time Home Buyers (Percent of Total Home Buyers)(Percent of Total Home Buyers)

33Source: NAR, 2009 Profile of Home Buyers and Sellers

US Total Housing US Total Housing StartsStarts

TotalTotal UnitsUnits & & 12-Month Moving Average12-Month Moving Average

34Source: US Census Bureau, Real Estate Center at Texas A&M

Monthly Units

12-MonthMoving Avg.

35Source: NAR, Real Estate Center at Texas A&M University

US Median Home Prices Since 1990US Median Home Prices Since 1990National House

Price Bubble

1990-2000 Trend

12-Month Moving Average

Since 2001

U.S. Home Price Percent U.S. Home Price Percent ChangeChange Y/Y Percent Change in Quarterly Estimates Y/Y Percent Change in Quarterly Estimates

36Source: NAR, FHFA PO Index, Case Shiller, CoreLogic HPI

FHFA Repeat Sales Index

NAR Median Price

Case Shiller Comp 20 NSA

CoreLogic HPI

Percent Change in House Percent Change in House Prices in Selected States as Prices in Selected States as

of 3Q2010of 3Q2010

37Source: FHFA, SA, P-O Index

Median Asking RentsMedian Asking Rents

38Source: Census Bureau

Has the Housing Market Has the Housing Market Bottomed? 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.

39

Number of Housing Units Number of Housing Units Vacant and Held Off Market Vacant and Held Off Market

“Other”“Other”

40Source: US Census Bureau

Average Annual Home Sales History

New Home Sale Existing Home Sales Total Sales

1980-1989 609,000 2,940,000 3,549,000

1990-1999 698,000 3,993,000 4,691,000

2000-2006 1,055,000 6,092,000 7,146,000

2007-2009 545,000 5,240,000 5,785,000

41

Estimated Inventory of Available Homes (000s)

Number of Homes

New + Existing Listings 3,500,000

“Other” Vacant 3,500,000

90+ Days Delinquent or In Foreclosure 4,100,000

REOs 900,000

Total Potential Inventory to Clear 9,000,000 – 12,000,000

When and How Does the When and How Does the Housing Market Go Back to Housing Market Go Back to

“Normal”?“Normal”?

Number of Years to Clear Number of Years to Clear Available InventoryAvailable Inventory

Annual Avg. Sales Estimated Inventory to Clear

9,000,000 10,000,000 11,000,000 12,000,0004,500,000 2.0 2.2 2.4 2.7

5,000,000 1.8 2.0 2.2 2.4

5,530,000* 1.6 1.8 2.0 2.2

6,000,000 1.5 1.7 1.8 2.0

6,500,000 1.4 1.5 1.7 1.8

42

* 2009 annual sales level

Somewhere between mid-2012 and 2014

When and How Does the When and How Does the Housing Market Go Back Housing Market Go Back

to “Normal”?to “Normal”?

What to ExpectWhat to Expect• Fed to stop cutting interest rates after QE2• Gasoline prices will continue to increase• Federal bailout of the banks and financial

institutions • Mortgage interest rates unlikely to change much,

for now• Higher inflation and higher taxes inevitable in

future• 2011-2012: higher inflation, low economic growth,

modest job gains, low but increasing interest rates 43

THERE IS STILL THERE IS STILL GOING TO BE GOING TO BE DEMAND FOR DEMAND FOR

HOUSINGHOUSING

44

Live Births in the U.S.Live Births in the U.S.

45

Source: National Center for Health Statistics

Millions

Echo BoomersEntering mid-20’s

Baby BoomersEntering

60’s

Millen-nium BabiesEnter-ing School

Pre-WarBabies

Entering mid-80’s

BabyBust

Entering40’s

Leading State Population Leading State Population Increases 2000-2009Increases 2000-2009

State

Total Population

Increase NaturalForeign

ImmigrationDomestic

Immigration

Texas 3,930,484 2,124,124 933,083 848,702

California 3,090,016 2,878,482 1,816,633 -1,509,708

Florida 2,555,130 479,586 851,260 1,182,974

Georgia 1,642,430 684,445 281,998 567,135

Arizona 1,465,171 464,238 272,410 714,354

North Carolina

1,334,478 457,927 214,573 675,016

46Source: U.S. Census Bureau

Table 5. Estimates of the Components of Population Change for the United States, Regions, and States:

Top Growth MSAs 2000-Top Growth MSAs 2000-20092009

47

Source: U.S. Census Bureau

48

US Population Growth 2007-US Population Growth 2007-20122012

US Population Growth 2007-US Population Growth 2007-20122012

Source: Global Insight, Inc.

Annual Household Annual Household FormationFormation

49Source: Census Bureau

Average annual household formation since 1960 = 1.315 million

Total Housing Units Owned vs. Total Housing Units Owned vs. RentedRented

50Source: US Census Bureau

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Dr. James P. GainesResearch EconomistReal Estate Center

Texas A&M University

recenter.tamu.edu

2010 Convention