1. Economic Report December 2016
Prepared for Commerce National Bank & Trust By Jett Lazarus
Disclaimer: All information in this report is for general information and educational purposes only, and should not be taken as financial advice.

2. The 2008 Great Recession
On December 1st of 2008, the National Bureau of Economic Research announced that we had been in recession since December of By the time our government declared recession, it was too late. Home prices had already fallen 37% and our economy was in shambles. We can’t rely on the government to tell us when the economy is shifting gears. However, we have four leading indicators that may be useful in predicting the next recession.

3. The Recovery Since the financial crisis: Real estate has recovered
Historically low interest rates
Steady increase in employment
Reasonable home affordability
Low inventory
A surge in cross-borders investment in U.S. real estate
Rising home prices
The stock market at an all-time high
Rise in corporate profits since 2009
Consumer Optimism highest level since 2001
Extreme optimism on Trump’s election
Market rally of 10% since November
Confidence that Trump will create and keep jobs
and remove business regulations, which may spur growth

4. Overview Section 1 – Leading Indicators Section 2 – Economic Update
Section 3 – Appendix

5. Leading Indicators Section 1
The strength of the economy is determined by several factors such as GDP growth, wages, the unemployment rate, business and consumer spending, interest rates, and government policy, just to name a few.
There are hundreds of economic indicators which make it difficult to determine which ones to follow. Yet much of this data is noise; it fails to provide an accurate forecast of the next downturn.
Here are 4 leading indicators that I find useful in forecasting the future direction and condition of the economy and real estate:
10 / 2 Year Treasury Yield Spread (Warning indicator, 2 – 3 years)
The Unemployment Rate (Confirmation indicator)
Months Supply of Housing Inventory (for Orlando real estate)
Housing Affordability Index (for Orlando real estate)

6. 1) 10-2 Year Treasury Yield Spread
10 year treasury rate – 2 year treasury rate
A measure of “monetary tightness”
What determines these rates?
10 year rate determined by the bond market
2 year rate set by the Federal Reserve
When the 2 year treasury yield exceeds that of the 10 year, the spread has become ‘inverted’.
An inversion of the yield spread results from:
The bond market forecasting a future downturn in the economy
The Fed raising short-term interest rates to control market conditions (tightens money supply to fight inflation)

7. 10-2 Year Treasury Yield Spread (Pt. 2)
0.25 %
0 %
Difference in % Yield
U.S. recessions indicated in red. l l l l 7
Year
If spread falls below 0.25% (horizontal red line), a recession is expected in 2-3 years.
An inverted yield spread has preceded the past four recessions.
1.33%
(12/22/2016)

8. 2) Unemployment
An increase in unemployment often occurs in a recession, as seen in both the 2008 Great Recession and The Great Depression of the 1930’s.
The U-3 unemployment is used in this report, which does not include discouraged and part time workers. This figure is used because there is more historical data.
UPDATE: As of November 2016, the unemployment figure is still falling, which indicates that the economy is still in its expansion phase.

9. Unemployment – Early 2000s Recession (Pt. 2)
Historically, a rise in unemployment (3 months in a row, year over year) has indicated the start of a recession.
Red = recession Green = Recovery
July 17, 2003
November 26, 2001
National Unemployment Rate
National Unemployment Rate
The Great Recession
Rising unemployment indicated a recession on April of 2001.
Falling unemployment indicated a recovery on February of 2004.

10. Unemployment – The Great Recession (Pt. 3)
Historically, a rise in unemployment (3 months in a row, year over year) has indicated the start of a recession.
Red = recession Green = recovery
December 2008.
September
National Unemployment Rate
National Unemployment Rate
The Great Recession
Rising unemployment indicated a recession on December of 2007.
Falling unemployment indicated a recovery on September of 2010.

11. 3) Real Estate Inventory
This measure is calculated by dividing the existing number of homes for sale by the average number of sales per month.
The average figure for Orlando is 6 months of inventory.
At this level, the market is considered at equilibrium, and it would take 6 months to deplete the market’s supply of real estate if no new homes were listed.
UPDATE: As of November 2016, the Orlando market has 3.74 months of inventory, which is low.
This data suggests that real estate is not overbought, and will likely appreciate until inventory exceeds 7 months supply.

12. Real Estate Inventory (Pt. 2)
7 months or more of inventory indicates an oversupply of real estate, which could lead to future price decreases in Orlando/Winter Park. 6 months is considered balanced for this market.
Excess inventory signaled real estate devaluation on October, 2006.

13. Orlando Realtor Association – Monthly Sales & Inventory Reports
3) Real Estate Inventory (Pt. 3)
When inventory falls below 5 months of inventory, real estate is in short supply.
Prices are expected to rise.
Orlando Realtor Association – Monthly Sales & Inventory Reports
Current Data:
Low inventory signaled a recovery in real estate on June, 2011.

14. 3) Real Estate Inventory (Pt. 3)
3.78 months of inventory as of November, 2016 indicates a stable real estate market in Orlando.
R = -.834
Orlando Median Home Prices
(October of each year)
Provided by Orlando Realtor Association
Median Home Price
Orlando Housing Inventory
Provided by Orlando Realtor Association
Months Supply of Inventory

15. 4) Housing Affordability Index
The HAI measures whether the typical family could qualify for a mortgage on a typical home.
Formula
HAI = Median Family Income / Qualifying Income * 100

16. 4) Housing Affordability Index (HAI)
Orlando
A value of 110% or less indicates residential real estate is overvalued.
Updated Monthly

17. Summary of Leading Indicators 12/5/16
2-3 Years Leading
1-2 Years Leading
10Yr/2Yr Treasury Yield
Current
1.33%
Alert
0.25%
Housing Affordability
Nov, 2016
160.37%
Alert
Below 110%
Housing Inventory
3.73 months
above 7 months
Confirmation
U-3 Unemployment
Sep-16
5.0%
15-Sep
5.1%
Oct-16
4.9%
15-Oct
Nov-16
4.6%
15-Nov
Alert
3 consecutive, month-over month increases from previous year
Last Update
12/2/2016
No real estate collapse anticipated in the next 2 years.
No recession anticipated in the next 2 years. 17

18. 2016 Report U.S. Federal Debt Student Loan Debt vs. Starting Salaries
Section 2
U.S. Federal Debt
Student Loan Debt vs. Starting Salaries
Health Care Costs
Home Ownership Rate
Statistics, 2007 vs vs. 2016

19. U.S. Federal Debt https://fred.stlouisfed.org/series/GFDEGDQ188S
Updated Quarterly
Largest Contributors:
Healthcare Programs - $940B
Social Security $882B
National Defense $718B

20. Student Loan Debt & Starting Salaries
Average Debt Per Borrower In Each Year’s Graduating Class
7 in 10 seniors graduate with debt
In 2000, debt averaged $17,268.80
In 2016, debt averaged $37,
About $1.2 trillion in student loan debt
Majority owned by federal government (80%+)
11.3% of student borrowers default on these loans.
A 53% increase after inflation adjustment
Updated Quarterly

21. Student Loan Debt (Pt. 2) http://tinyurl.com/gqorp8d
As college costs rise, starting salaries remain stagnant.
As of April, 2016 : over 40% of students are not making payments
They are behind on $200 billion owed.
2016
WSJ

22. Health Care Costs http://tinyurl.com/kl38vt4 Aging US Population
Huffington Post
WSJ
Aging US Population
Obamacare
Rising obesity
Physician shortage
Slow approval of generic medicine

23. Home Ownership Rate since 1960s
Number of U.S. Households vs. Age of Homeowner
*Includes homeowners of all ages
Falling affordability
Rising house prices
Stagnant wages
Tighter Lending Qualifications
Increasing student loan debt
Updated Monthly

24. Statistics: 2007 & 2008 vs. November, 2016
 National
9/2007
9/2008
11/ 2016
Employment to Population Ratio
62.9
61.9
59.7
Unemployment Rate
4.70%
6.1%
4.6%
Real Median Income
$57,423
$55,376
$57,616
Poverty
12.50%
13.20%
12.40%
Debt to GDP Ratio
61.83%
73.54%
104%
Home Ownership, Southern U.S.
68.2%
67.9%
63.5%
Orlando Real Estate
11/2016
Interest Rate
(30-Year Fixed)
6.38%
6.04%
4.13%
Median Home Value
$235,000
$181,995
$205,000
Median Home Value Change from Previous Year
-6%
-23%
+13.95%
Months Supply of Inventory (LT Avg: 6)
27.2
17.7
3.74
Change in Default Rate of First Mortgages from Previous Year
+72%
+83%
-21.2%
Orlando Home Affordability Index
92.4%
123.74%
160.37%

25. Appendix Section 3 Key Leading Indicators (Pages 26 – 27) Unemployment
(Pages 28– 29) Real Estate Inventory
Other Useful Data
(Pages 30 –31) Real Estate Prices
(Page 32) Delinquency Rate of Residential Mortgages
(Page 33) Household Debt Payments
(Page 34) 90 Day Auto Loan Delinquency
(Page 35) Effective Fed Funds Rate
(Page 36) Possible Causes of Next U.S. Recession

26. Historical Unemployment Rate, 1980 to 2016 (BLS.gov)
(Shaded indicates recession)
Updated Monthly by BLS

27. Historical Unemployment Rate, 2000 to 2016
6 = LT average
Updated Monthly by Trading Economics

28. US Monthly Inventory since 1960’s
(Shaded indicates recession)
Updated Monthly

29. U.S. Real Estate Housing Inventory
Hyper supply
Updated Monthly

30. Real Estate Prices
In Orlando, Real Estate prices have rebound sharply since 2011.
Recently, the median price of single family homes in Winter Park has reached its 2007 nominal peak. However, if adjusted for inflation, Winter Park housing prices are still 12% below the previous market high. Low interest rates, housing inventory, and mortgage default rate highlight this very healthy market.

31. Prices vs. Rents, 1994 to Q4 2015 http://tinyurl.com/cfoya2w
This index compares global house prices against rents.
‘100’ represents the long term average.
Updated N/A

32. Delinquency Rate of Residential Mortgages
Compares the prices of the same single family homes over time. Base index value = 100.
(Shaded indicates recession)
Delinquency rate on single-family residential mortgages.
Updated Quarterly

33. Household Debt Service Payments as a Percent of Disposable Personal Income
Updated Quarterly
This index tracks a ratio of household debt payments to
total disposable income.
Updated quarterly

34. 90 Days Auto Loan Delinquency
Updated Monthly
This index tracks late auto payments.

35. Effective Federal Funds Rate, Since 1955
Updated Monthly

36. The Next U.S. Recession Possible Causes: Personal Debt Crisis
Inflated mortgage payments due to higher home prices & interest rates
Rising student debt
Lack of wage increases
Backfire of Fed Monetary Policy
The economy has expanded due to artificially low rates
The stock market has reached an all-time high
Since December 2015, rates are on the rise
A Second Housing Crisis
Real estate appreciation may continue to outpace wage growth
Rising mortgage rates
Further speculation of prices & selloff of investment property