Lawrence Yun, Ph.D. Chief Economist NATIONAL ASSOCIATION OF REALTORS ®

Big Subprime Mess economyeconomy

Subprime Loan Origination Source: U.S. Treasury Department, WSJ Market Data Group, Inside Mortgage Finance $ billion

Delinquency Rates Subprime vs. Prime Delinquency Rates Subprime vs. Prime Data: Mortgage Bankers Association

Source: NAR Estimate Foreclosed Homes

Source: NAR Estimate Subprime Loan Exposure

Foreclosure Rate on All Mortgages in U.S. Source: NAR Analysis of MBA data - Today’s foreclosures are double the historic average due to sour performance of subprime loans - Foreclosure rates from all homes would be 1/3 lower because no risks from free & clear homes.

Foreclosure Rates by Loan Type 2007 Q2 Data: MBA %

High Subprime Mortgage Originations Source: HMDA 2006 These markets are experiencing double-digit price declines

Low Subprime Mortgages Source: HMDA 2006 These markets are experiencing respectable price gains

Home Price Trends in Down Markets: Big Declines in Subprime Neighborhoods Yellow – Conforming Loans Only (OFHEO) Orange – All Loans including subprime and jumbo loans (Case-Shiller) Red – Subprime Loans (NAR estimate based on subprime weight)

Location, Location, Location: Makes a Big Difference! All Real Estate is Very LocalAll Real Estate is Very Local Price declines are concentrated in metro markets with high subprime loansPrice declines are concentrated in metro markets with high subprime loans Price declines are further concentrated in neighborhoods with high subprime loansPrice declines are further concentrated in neighborhoods with high subprime loans 91% of homeowners do not have subprime loans91% of homeowners do not have subprime loans 77% of homeowners say no price decline77% of homeowners say no price decline

Wall Street Write-Downs Mortgage Loan losses associated with subprime lossesMortgage Loan losses associated with subprime losses $200 to $300 billion write-down$200 to $300 billion write-down Mark-to-Market write-downs based on assumed pessimistic default rateMark-to-Market write-downs based on assumed pessimistic default rate Actual losses could be considerably more or lessActual losses could be considerably more or less –More if price declines continue sharply –Less if prices stabilizes –Less if real estate speculators have already defaulted –Less as ARM Resets become less burdensome even as more are scheduled to reset

Subprime Problem Peaking? New homebuyers are not exposedNew homebuyers are not exposed Resetting burden dissipatingResetting burden dissipating FHA becoming more prominent (and refinancing out of subprimes)FHA becoming more prominent (and refinancing out of subprimes) “Conforming jumbo” rates improving (and refinancing out of subprimes)“Conforming jumbo” rates improving (and refinancing out of subprimes) Have most real estate speculators already defaulted? (Keys are in the Mail)Have most real estate speculators already defaulted? (Keys are in the Mail)

Fed Funds Rate

Resetting Burden Dissipating NAR Estimate based on $200,000 loan and ARM rate adjusting to LIBOR + 2.8% point margin

Resetting Payment Shock NAR Estimate

FHA Market Share for Home Purchase Source: HMDA, NAR Estimate

Fannie Mae announces plan to purchase conforming jumbo loans and traditional pricing Jumbo Loan Spread above Traditional Conforming Rate

Latest Housing Market Activity Existing Home Sales stable but trending at 10 year ago levelsExisting Home Sales stable but trending at 10 year ago levels –From 1998 to 2008 –25 million more people –13 million more jobs –Higher home prices but lower mortgage rate New home construction and new home sales fallingNew home construction and new home sales falling Inventory peakingInventory peaking Speedy price declines in markets with heavy subprime loan exposureSpeedy price declines in markets with heavy subprime loan exposure

Monthly National Existing-Home Sales Stable but at 10-year ago levels

Annual Existing-Home Sales In thousand units Exuberance Over

Housing Affordability Index Source: NAR

Forecast: Existing Home Sales Recent low sales reflectRecent low sales reflect –subprime loan disappearance –high jumbo spread –“declining market” surcharge Higher Home Sales in Second HalfHigher Home Sales in Second Half –Improving Affordability Sacramento, Ft. Myers, Las Vegas seeing rising sales from speedy reduction in pricesSacramento, Ft. Myers, Las Vegas seeing rising sales from speedy reduction in prices –FHA to become prevalent at low rates –Jumbo loans improving –Revisit “declining market” policy –Economy expected to improve –Permanently higher GSE and FHA loan limit? –Homebuyer Tax Credit?

Inventory: Existing Homes

Fresh Inventory: Existing Homes Fresh inventory = Current month inventory minus prior month inventory plus current month raw home sales count

Fresh Inventory: 12-month average

Inventory New Homes (Already Topped Out) Source: Census

U.S. Single-Family Housing Starts (Required adjustment to control inventory) Source: Census In thousand units

New Home Sales (Will fall because of falling New Construction and unrelated to Demand) Source: Census In thousand units

Long-Term New Construction Needs DEMAND 3 million more people each year3 million more people each year 1.3 to 1.5 million household formation per year1.3 to 1.5 million household formation per year 1.4 million per year was the 30-year average1.4 million per year was the 30-year averageSUPPLY 300,000 home demolition per year300,000 home demolition per year Need to build 1.6 to 1.8 million per year to keep up with population and replace demolitionNeed to build 1.6 to 1.8 million per year to keep up with population and replace demolition

Housing Starts YearHousing Starts million million million million million million million million 2008 forecast1.0 million 2009 forecast1.0 million 10-year Sum16.1 million Could lead to housing shortage?

Forecast: Home Prices Unprecedented New FactorsUnprecedented New Factors –Subprime problems are larger than the normal share of transactions in these neighborhoods and will lead to lower recorded median prices –Jumbo loan revival can uplift higher-end home sales –Timing of release of fence-sitters’ pent-up demand –Policy measure of homebuyer tax credit? –Short-term oversupply but potential long-term housing shortage –Vast Middle-America is underpriced based on fundamentals of income and mortgage rates Huge market-to-market variationsHuge market-to-market variations Huge neighborhood-to-neighborhood variationsHuge neighborhood-to-neighborhood variations

Speedy Price Declines This Time Los Angeles – slow declines over many years in early 1990s Price Change % % % % % % % Cumulative-19.5% Riverside – speedy declines in few years with most adjustments already done Price Change % % Cumulative-19.5% Speedy declines leading to rising home sales

National Median Home Price Source: NAR % change from a year ago Expect Bigger Gain if a Bigger Fall

Price Trends: Exuberant Measurement Up will Require Bigger Correction Down Question to Ponder: (1) Is Case-Shiller Price Falling Now, or Correcting for Exuberant Gains during the Boom? (2) Did Bear Sterns rely on Case-Shiller to assess underlying Collateral Value and thought the values were higher than what they really were?

Forecast Over 5-year Horizon MarketPrice Gain over 5-years from 2008 Kansas City, Cincinnati, Milwaukee20% to 30% gain Dallas, Denver, Seattle25% to 40% gain Miami, Las Vegas, Phoenix10% to 50% gain Boston, New York, Washington, San Francisco, Los Angeles Superstar Cities Defy Gravity - Automobiles replaced horse-buggy and created suburbs - Microsoft + Google - Biotech + Biofuel + Desalination + More Amazing Innovations 99% of Markets will have higher values in 5-years than today

Economic Outlook GDP2.1%1.4%2.4% CPI Inflation 2.9%3.4%2.2% Job Growth 1.3%0.2%1.1% Unemployment Rate 4.6%5.4%5.6% No Recession but Slow Growth

National Housing Outlook Existing-Home Sales 5.65 million 5.39 million 5.71 million New Home Sales 0.77 million 0.54 million 0.59 million Housing Starts 1.35 million 0.95 million.97 million 30-Year FRM 6.3%6.1%6.3% 1-Year ARM 5.6%5.1%5.1% Existing-Home Price Growth -1.4%-2.4%4.1 Huge Local Market Variations because of location, location, and location

What should consumers do? Do not buy a home if not financially ready or responsible, or planning to move in a yearDo not buy a home if not financially ready or responsible, or planning to move in a year –Sustainable homeownership and financial literacy benefits homeowners and community Market time purchase? on price and mortgage rates?Market time purchase? on price and mortgage rates? Do bargain for lower price today given buyer’s market in many localitiesDo bargain for lower price today given buyer’s market in many localities Do not market time and think 5-years outDo not market time and think 5-years out Do not market time and think of your familyDo not market time and think of your family Do consult a trusted local advisorDo consult a trusted local advisor Warren Buffet: “When everyone is greedy, be cautious; when everyone is scared, be brave”Warren Buffet: “When everyone is greedy, be cautious; when everyone is scared, be brave”

Financial Literacy on Real Estate vs Stocks Newspaper AnalysisHomeownerStock Investor Starting money$22,000 Annual appreciation (past 30 years) 5.3%9.9% Ending money$98,000$340,000 NAR AnalysisHomeownerStock Investor Starting money$22,000 down payment for a $110,000 home $22,000 Annual appreciation (past 30 years) 5.3%9.9% Ending money$491,000 home value$340,000 Living cost payments$746 per month or $268,000 over 30-years $400 per month and then rising every year or $269,000 over 30-years Net ending money$223,000$71,000 FutureNo mortgage paymentRent at $1,700 per month