Real Estate Trends and Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Broker Summit

Atlanta, GA

August 7, 2014

GDP Rebound … 4% !!!in 2014 Q2

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

2014 - Q1

-10

-8

-6

-4

-2

0

2

4

6

GDP Annualized Growth Rate

But Still not Robust … Below 3%

19501953

19561959

19621965

19681971

19741977

19801983

19861989

19921995

19982001

20042007

20102013

-4

-2

0

2

4

6

8

10

GDP Annual Growth Rate

Sluggish Growth + Gap after Great Recession

($1.5 trillion gap … $4,700 per person)

1998 - Q1

1998 - Q3

1999 - Q1

1999 - Q3

2000 - Q1

2000 - Q3

2001 - Q1

2001 - Q3

2002 - Q1

2002 - Q3

2003 - Q1

2003 - Q3

2004 - Q1

2004 - Q3

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

10000

11000

12000

13000

14000

15000

16000

17000

18000

GDP in 2009 Dollars

Real GDP Real GDP W/O Recession

3% Growth Line

2.2% Growth Line

GDP Growth = Job Creations(8 million lost … 8+ million gained)

2000 - Jan 2002 - Mar 2004 - May 2006 - Jul 2008 - Sep 2010 - Nov 2013 - Jan124000

126000

128000

130000

132000

134000

136000

138000

140000In thousands

Unemployment Rate

2000 - Jan 2001 - Dec2003 - Nov 2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun0

2

4

6

8

10

12

Employment Rate

2000 - Jan 2001 - Dec2003 - Nov 2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun54

56

58

60

62

64

66

Job Market Comparisons by StateFast Growing States 1-year Growth Rate

North Dakota 4.5

Nevada 3.7

Texas 3.4

Florida 2.9

Utah 2.9

Colorado 2.8

Oregon 2.7

Delaware 2.6

West Virginia 2.5

California 2.2

Slow Moving States 1-year Growth Rate

Michigan 0.7

Alabama 0.6

Wyoming 0.6

South Dakota 0.3

Virginia 0.3

New Jersey 0.1

Illinois 0.0

Alaska 0.0

New Mexico -0.1

Vermont -0.2

Jobs in North Dakota

2000 - Jan 2001 - Dec2003 - Nov2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun300

320

340

360

380

400

420

440

460

480In thousands

Jobs in Georgia

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan3800

3850

3900

3950

4000

4050

4100

4150

4200In thousands

Jobs in New Jersey

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan3800

3850

3900

3950

4000

4050

4100

4150In thousands

Existing Home Sales20% cumulative increase over 2 years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

Monthly Pending Sales Index … Hits Speed Bump

(Seasonally Adjusted)

2011 - Jan

2011 - Mar

2011 - May

2011 - July

2011 - Sep

2011 - Nov

2012 - Jan

2012- Mar

2012 - May

2012 - Jul

2012 - Sep

2012 - Nov

2013 - Jan

2013 - Mar

2013 - May

2013 - Jul

2013 - Sep

2013 - Nov

2014 - Jan

2014 - Mar

2014 - May

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

115.0

Source: NAR

Two and Out?Or Multi-year Expansion?

(Single-Family Existing Home Sales Only)

19681971

19741977

19801983

19861989

19921995

19982001

20042007

20102013

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

Causes of Recent Sales Slowdown

• Bad winter– Only delayed sales not cancellation

• Home prices rose too fast in relation to income– Showing signs of slowing

• Lack of inventory– Steadily more inventory coming to market

• Mortgage rates jumped … then declined – Trouble ?

• Mortgage credit difficulties– New Qualified Mortgage Rules– Surely cannot get worse!

Mismatch Growth

2-year Growth0%2%4%6%8%

10%12%14%16%18%20% 19%

4%

Home Price Household Income

Change in Home Price(% change from one year ago)

2011 - Jan

2011 - Mar

2011 - May

2011 - Jul

2011 - Sep

2011 - Nov

2012 - Jan

2012 - Mar

2012 - May

2012 - Jul

2012 - Sep

2012 - Nov

2013 - Jan

2013 - Mar

2013 - May

2013 - Jul

2013 - Sep

2013 - Nov

2014 - Jan

2014 - Mar

2014 - May

-10

-5

0

5

10

15

NAR Case-Shiller CoreLogic

30-Year Fixed Rate Mortgage and

1-year Adjustable Rate Mortgage

2000 - Jan 2001 - Dec2003 - Nov2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun0

1

2

3

4

5

6

7

8

9

Repeat Price Index(Des Moines and Las Vegas )

1995 - Q1

1996 - Q1

1997 - Q1

1998 - Q1

1999 - Q1

2000 - Q1

2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1

2007 - Q1

2008 - Q1

2009 - Q1

2010 - Q1

2011 - Q1

2012 - Q1

2013 - Q1

2014 - Q1

0

50

100

150

200

250

300

Inventory of Homes for Sale

2007 - Jan

2007 - Jun

2007 - Nov

2008 - Apr

2008 - Sep

2009 - Feb

2009 - Jul

2009 - Dec

2010 - May

2010 - Oct

2011 - Mar

2011 - Aug

2012 - Jan

2012 - Jun

2012 - Nov

2013 - Apr

2013 - Sep

2014 - Feb

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Shadow Inventory

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

0

1

2

3

4

5

6

% of mortgages in foreclosure process or seriously delinquent

Shadow Inventory – AZ and CA

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

0

2

4

6

8

10

12

14

% of mortgages in foreclosure process or seriously delinquent

Shadow Inventory – NJ and NY

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

0

2

4

6

8

10

12

14

% of mortgages in foreclosure process or seriously delinquent

Forecast #1:Higher Inflation … Higher Interest Rates

• Federal Reserve “Quantitative Easing” finishes by the year end 2014

• Fed Funds Rate … hike in 2015 Q1• Earlier Move to Tighten because of Inflation

Pressure• Long-term Steady State Rate (2016 onwards) ..

10 year Treasury at 5.0%

Rising Renters’ and Homeowners’ Rent Growth (On the Way to 3%)

2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul 2012 - Jan 2013 - Jul

-1

0

1

2

3

4

5

Owners' Equivalent Rent Renters' Rent

REALTOR® Rent Survey – Shows Rent Pressure

2010 - Dec

2011 - Feb

2011 - Apr

2011 - Jun

2011 - Aug

2011 - Oct

2011 - Dec

2012 - Feb

2012 - Apr

2012 - Jun

2012 - Aug

2012 - Oct

2012 - Dec

2013 - Feb

2013 - Apr

2013 - Jun

2013 - Aug

2013 - Oct

2013 - Dec

2014 - Feb

2014 - Apr

2014 - Jun

0

10

20

30

40

50

60

Falling Rising

Economic Forecast2013 2014

forecast2015

forecastGDP Growth 1.9% 1.9% 2.7%

Job Growth 1.7% 1.7% 1.8%

CPI Inflation 1.4% 2.5% 3.5%

Consumer Confidence

73 82 86

10-year Treasury 2.5% 2.8% 3.6%

Forecast #2Multi-year Housing Expansion – Broadly Speaking

• Pent-Up Demand– Population Growth– Job Growth

• Some underperformance, however, from lock-in effect

• Inevitable Growth in housing starts add inventory

• Vacation home sales growth

U.S. Population

19681970

19721974

19761978

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20120

50

100

150

200

250

300

350In millions

Pent Up Demand2000 2013

Existing Home Sales 5.2 m 5.1 m

New Home Sales 880 K 430 K

Mortgage Rates 8.0% 4.0%

Payroll Jobs 132.0 m 136.4 m

Population 282 m 316 m

Locked-in Effect of Low Rates?

• Housing cannot get back to normal in a hurry• People move even in high interest rate

environment• Many unplanned landlords

– Take advantage of rising rents while rates are low and fixed

• Potential future lock from longer holding period for capital gains tax exclusion

Reasons Why Sellers MoveReason Percentage

Home is too small or large 29%Job relocation or closer to current job

20%

Want to move closer to friends .. Better neighborhood

13%

Neighborhood has become less desirable

10%

Marriage, Divorce, Birth 8%Moving due to retirement 6%Upkeep is too difficult 4%Cannot afford the mortgage and other expenses of owning

3%

Household Net Worth

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

40000

45000

50000

55000

60000

65000

70000

75000$ billion

Vacation Home Sales

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -

200

400

600

800

1,000

1,200

In thousands

Housing Starts Rising … More InventoryBut Needs to Reach 1.5 million

2000 - Jan 2001 - Dec2003 - Nov 2005 - Oct 2007 - Sep 2009 - Aug 2011 - Jul 2013 - Jun0

500

1000

1500

2000

2500multifamily single-family

Thousand units (annualized)

Long-term Average

Time to Sell a New Spec Homes(in months)

2000 - Jan 2001 - Dec2003 - Nov2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun0

2

4

6

8

10

12

14

16

Sluggish Recovery in Housing Starts

• Cost of Construction Rising Faster than CPI

• Labor Shortage for construction work

• Construction loan difficulty for small local homebuilders … Dodd-Frank financial regulations?

National Housing Forecast2013 2014

forecast2015

forecast

Housing Starts 925,000 1.1 million 1.4 million

New Home Sales 430,000 Near 500,000 Near 700,000

Existing Home Sales 5.1 million 4.9 million 5.3 million

Median Price Growth

+ 11.5% + 5% to 6% + 3% to 5%

30-year Rate 4.0% 4.4% 5.4%

First-time Buyer Share

2008 - Oct

2009 - Feb

2009 - Jun

2009 - Oct

2010 - Feb

2010 - Jun

2010 - Oct

2011 - Feb

2011 - Jun

2011 - Oct

2012 - Feb

2012 - Jun

2012 - Oct

2013 - Feb

2013 - Jun

2013 - Oct

2014 - Feb

2014 - Jun

0

10

20

30

40

50

60

Young Adult Homeownership Rate(under 35 years old)

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

30

32

34

36

38

40

42

44

46

Millennial Housing Demand Returns

• Austin

• Dallas-Ft. Worth

• Denver

• Des Moines

• Grand Rapids

• Minneapolis

• New Orleans

• Ogden

• Salt Lake City

• Settle-Tacoma

Forecast #3: More Unequal Wealth Distribution

• Renters do not accumulate wealth• Renter population rising• Homeowners build wealth after buying at low

prices• Stagnant homeowner population• Tight Credit hinders ‘good’ renters from

becoming homeowners• Investors becoming increasing share of property

owners

Renter Households

1980 - Q11984 - Q21988 - Q31992 - Q41997 - Q12001 - Q22005 - Q32009 - Q425,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000In thousands

Homeowner Households has not Grown since 2006 … but Primed to Grow

1980 - Q11984 - Q21988 - Q31992 - Q41997 - Q12001 - Q22005 - Q32009 - Q450,000

55,000

60,000

65,000

70,000

75,000

80,000In thousands

Wealth Distribution (Federal Reserve data on median net worth)

Renter Owner$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

199820012004200720102014

2014 Forecast by NAR

Bubble Crash

What Homebuyers Want?

76%Single Family

Detached House

Single Family At-tached

4%

14%Condo or Apt.

80%Single Family De-

tached House

7%

5%

Condo or Apt.

8%

Slide 47

Slightly More Preference For Condo or Apartment Living Than In 2011

Housing Type Preference (2013): Housing Type Preference (2011):

Right now, if you could choose, which of the following would you prefer to live in:

6%

Single Family Attached

What Buyers Want Most From Their Agent

Help find the right home to

purchase; 53%

Help buyer negotiate the terms of sale;

12%

Help with the price negotia-

tions; 11%

Determine what compa-rable homes were selling

for; 8%

Help with paperwork;

7%Help find and arrange

financing; 3%

Where Clients Come From• From Members:

– 21 percent repeat business from past clients– 21 percent referrals from past clients– 3 percent off member website (of those with a website)

• From Buyers:– 54 percent use an agent that was referred to them or they

had worked with before– 9 percent found agent online

• From Sellers:– 64 percent use an agent that was referred to them or they

had worked with before– 4 percent found agent online

• 2/3rds of buyers/sellers only contact 1 agent

Commercial Market Activity

Commercial Investment Sales of Large Properties(Properties valued at $2.5 million and over)

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

130

212

362423

571

174

67

147

233299

355400 420 430

Commercial Sales in $Billions

Green Street Price IndexCharting New Highs

2000 - Jan 2001 - Dec2003 - Nov 2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun0

20

40

60

80

100

120

Price Increases Supported by Rising Rents and Low Interest Rates

Cap Rates and Treasuries: Large Gap

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

10yr UST* Cap Rate

REALTOR® Markets & Deal Size(Not $2.5 million Properties)

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

$1,000,000 - $2,000,000

$2,000,000 - $5,000,000

$5,000,000 - $10,000,000

> $10,000,000

21%

22%

26%

17%

12%

1%

2%

2013 CRE Lending Survey: Value of most recent sales transaction

Source: NAR

8%

17%

25%

7%

6%

4%

18%

1% 11%

3%Current sources of financing for commercial deals

National banks (“Big four”)

Regional banks

Local banks

Credit unions

Life insurance companies

REITs

Private investors

Public companies

Small Business Administration

Other, please specify

Source: NAR

Small Banks Important to REALTORS®

Prices Accelerate in REALTOR® Markets

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Sales Prices (YoY % Chg)

Moody’s/RCA CPPI - Major MarketsRealtor CRE Markets

Sources: NAR, Real Capital Analytics

REALTOR® CRE Markets Rebound

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

-100%

-50%

0%

50%

100%

150%

200%

Sales Volume (YoY % Chg)

Major CRE Markets Realtor CRE Markets

Sources: NAR, Real Capital Analytics

Deals > $2.5M

Commercial ForecastOFFICE 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 16.0% 15.9% 15.7% 15.6% 15.6% 15.9% 15.7%Net Absorption ('000 sq. ft.) 10,268 6,310 8,955 8,440 13,128 33,973 42,349Completions ('000 sq. ft.) 7,220 7,275 6,030 5,494 8,598 26,019 30,986Rent Growth 0.6% 0.6% 0.7% 0.7% 0.7% 2.6% 2.8%

 INDUSTRIAL 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 9.6% 9.5% 9.5% 9.4% 9.2% 9.5% 9.0%

Net Absorption ('000 sq. ft.) 24,354 21,919 38,966 36,531 20,695 121,770 103,475Completions ('000 sq. ft.) 12,643 13,448 8,787 8,362 18,849 43,241 64,467Rent Growth 0.5% 0.6% 0.5% 0.7% 0.6% 2.3% 2.6%

 RETAIL 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 10.7% 10.6% 10.6% 10.5% 10.4% 10.6% 10.1%Net Absorption ('000 sq. ft.) 4,297 2,865 1,910 2,865 5,899 11,935 16,387Completions ('000 sq. ft.) 1,981 1,712 1,923 1,964 3,328 7,580 12,735Rent Growth 0.2% 0.3% 0.5% 0.5% 0.5% 1.5% 2.1%

 MULTI-FAMILY 2013 I 2013 II 2013 III 2013 IV 2014 I 2013 2014Vacancy Rate 4.0% 3.9% 3.9% 3.8% 3.9% 3.9% 4.0%Net Absorption (Units) 64,954 67,661 56,835 81,193 60,759 270,643 253,161Completions (Units) 31,851 40,457 36,945 39,205 36,251 148,458 168,962Rent Growth 1.0% 1.1% 1.2% 1.3% 1.2% 4.6% 4.7%

Sources: National Association of REALTORS® / Reis, Inc.

Forecast over the next 2 years

• GDP Growth near 3%• Net New Jobs about 2 million a year• Rising interest rates …

– 10-year Treasury to reach 4% by late 2015• Cap rates rise somewhat (narrow the gap first)• Increased occupancy and falling vacancy (new supply

lacking)• Rising rents … can offset rising rates to support

property values • Overall … improving business opportunities

Washington Policy Watch onCommercial Real Estate

• Facilitate Covered Bonds to help credit flow• Raise cap on holding of commercial RE loans by

credit unions• Preserve Like-Kind Exchanges• Preserve Terrorism Insurance• Preserve capital gains status on carried interest• Depreciation Rules should match economic life• Oppose lease-accounting changes

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