1. Economic and Real Estate Outlook
2012 MID-YEAR MEETING
Austin, Texas
April 13, 2012
Economic and Real Estate Outlook
Dr. James P. Gaines
Research Economist
Real Estate Center at Texas A&M University

2. Professionals built the Titanic
Bentley's First Law of Economics: “The only thing more dangerous than an economist is an amateur economist!”
Bentley's Second Law of Economics : "The only thing more dangerous than an amateur economist is a professional economist."
Remember:
Amateurs built the Ark
Professionals built the Titanic

3. US Economy in 1996

4. US Economy in 2008

5. US Economy in 2012

6. Economy is Trying to Recover, but Slow Going
Employment
Retail Sales and Consumption
GDP
Unsustainable Government deficits
Corporate Earnings
Housing
Projections for the next couple of years indicate substantive growth doesn’t occur until

7. Percent Growth in Real GDP
The average rate of growth is 3.3% per quarter since 1947
Annualized change = Q-Q rate change * 4
Source: Bureau of Economic Analysis

8. Debt Driven Recession

9. Total National Debt Since 1929 Amount and Percent of GDP
National Debt as a Percentage of Annual GDP (right scale)
Ended WWII $270B
Hit $1T in 32% GDP
Beginning FY % GDP and 55 times 1946 debt
1940 debt = 43B; 1946 debt = 270B; by 1970 only 371B; 1981 = 1T; 1995 = 5T; 2005 = 8T; 2009 = 12T
Total National Debt (left scale)
Source: U.S. Treasury

10. Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University
Household Debt
Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

11. Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University
Households Continue Way Over-Levered Total HH Debt as Percentage of GDP
Average = 88%
Average = 63%
Average = 39%
Average = 52.5%
Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

12. “Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.” Ben Bernanke June 7, 2011, International Monetary Conference, Atlanta, Georgia
Last paragraph of speech

13. Recovery May Take a While

14. US Unemployment Rates
Source: BLS, Texas Workforce Commission; Real Estate Center at Texas A&M

15. 2012+ Economic Outlook Most indicators positive – not robust
Major business, investment and political decisions postponed
Sluggish growth into the first quarter of 2013
Interest rates stay low through 2014
Housing cannot be counted on to help in 2012
Over-leverage & credit dependency remain
Limited government resources and spending
International economy highly uncertain
General UNCERTAINTY & Lack of CONFIDENCE
Total HH debt 3Q2011= GDP 3Q2011 = ratio =

16. Consumer Confidence Index
Expansion
Recession
7 cycles since 1967:
Avg. during recession = 72
Avg. during an expansion = 102
Update this once a month, on 28th.
Update the data chart with the newest number and revised last-month number (if revised).
Update the comment also.
Source: The Conference Board (1985=100)

17. U.S. Household Formation
Source: Current Population Survey, Census Bureau, Department of Commerce (The source of annual data is the Current Population Survey March Supplement. The quarterly data source is the monthly Current Population Survey/Housing Vacancy Survey.)

18. U.S. Population Groups 2011 Echo Boom (Gen Y) Baby Boom
millions
26.1%
24.3%
21.4%
15.9%
12.2%
Echo Boom (Gen Y)
Baby Boom
Millennials (Gen I)
Population Estimates/National/Projected Pop xls
Baby Bust (Gen X)
Silent/Greatest
Age
66+
47-65
35-46
16-34
0-15
Source: U.S. Census Bureau; 2009 National Population Projections (Supplemental)

19. Boomers Own - Gen Y Rents
ULI/Lachman Assoc found Gen Y 2% mobile homes; 6% college dorms; 20% with parents; 37% rent; 35% own
Source: FNMA National Housing Survey, 4Q2010

20. At Last, a Cell Phone for Seniors!

21. Changing Face of Housing: Future Homebuyers and Sellers
Racial and Ethnic Composition of Texas 2010 and 2030
Asian
4.6%
Asian
7.7%
Black
11.5%
Black
10.5%
2025
During the next two decades, minorities will account for approximately two-thirds of household growth … and half of all first-time homebuyers
Hispanic
38.8%
Anglo
30.9%
Anglo
45.1%
Hispanic
50.9%
Source: Social Science Data Analysis Network; NAR Forecast

22. The Housing Market Needs to Mend to Help a General Economic Recovery

23. How Bad Has the Housing Collapse Been?
Home prices down ~33% since 2006 peak
Around $7 trillion, >50% lost equity in housing
~20% households, 12 million, upside-down on mortgage – some states >50%
Defaults, delinquencies and foreclosures at historic levels
2011 new home starts lowest in the past 60 years
New household formations about 25% of historical rate
Federal government programs have done little to help overall housing

24. Baby Boomers enter market;
US Homeownership Rate
(Percent)
Current rate is same as 3Q1998
Low interest rates and new mortgage products; Homeownership explodes from 64.1% to 69.1%
1970s
Baby Boomers enter market;
homeownership grows
Source: U.S. Census Bureau

25. Lost Wealth: Households’ Equity in Real Estate
$7 trillion or 53% in lost real estate equity
Source: Federal Reserve, Flow of Funds, B-100

26. Long-Term Real Home Price Index: 1890-2010
2000’s Boom
1946 to 1999 averaged
1915 to 1945 averaged 75.74
70’s
Boom
80’s
Boom
Great
Depression
WWI
WWII
1890 to 1914 averaged
2000 to 2010 averaged
Source: Robert J. Shiller, Irrational Exuberance, 2nd. Edition, Princeton University Press,2005, 2009, Broadway Books 2006, also Subprime Solution, 2008, as updated by author:

27. Monthly Foreclosure Filings
WSJ April 15 Headline: Banks Ramp Up Foreclosures moratoriums are over; id’ing whose eligible for Fed pgms and who isn’t and moving forward on those that aren’t. May also be part of cleansing balance sheet for stress tests being applied to banks.
Source: RealtyTrac, Inc.
Data include Notices of Trustee Sales plus Notices of Foreclosure Sale

28. Percent of Distressed Home Sales
Source: NAR

29. Percent of Loans in Foreclosure End of 4Q 2011
Judicial Foreclosure States
Non-Judicial Foreclosure States US
Source: Mortgage Bankers Association, National Delinquency Survey

30. High Negative Equity Concentrated in a Small Number of States
Source: CoreLogic® , Negative Equity Report, 3Q2011

31. Seriously Delinquent Mortgages by Origination Year
9.5%
9.1%
8.7%
8.6%
8.1%
7.9%
7.9%
7.7% 0% 0% 9% 0% 0%
11%
11% 0%
11% 1% 1% 2%
12%
12%
14%
14%
72%
71%
71%
70%
69%
68%
65%
65%
19%
18%
19%
19%
19%
19%
20%
19%
Source: Mortgage Bankers Association, 4Q2011 National Delinquency Survey

32. New and Existing SF Home Sales U.S.
Existing Sales
(left axis)
New Sales
(right axis)
New SF sales are down 78% from 2005 peak
Annual Average Total Sales
million
million
million
million
Recessions
Peak month Year Trough Year
Month
November October
July May
August April
April February
December November 1970
November March
January July
July November
July March
March November
Source: National Bureau of Economic Research, Inc.,
Sources: US Census Bureau , NAR, SAAR

33. Rise in Employment Beginning to Show in Sales Volume
(Home Sales
000s)
(Employed
000s)
Employment
(right axis)
Total Existing Home Sales
(left axis)
Recessions
Peak month Year Trough Year
Month
November October
July May
August April
April February
December November 1970
November March
January July
July November
July March
March November
Source: National Bureau of Economic Research, Inc.,
Sources: BLS. US Census Bureau , NAR, SAAR

34. People Who Plan to Buy a Home in the Next Six Months
Average value = 3.3%
US pop 2010 = 309 million; at average, 10.2 million people or 4.2 million households plan to buy a house in the next 6 months. At current rate, 5.7 million people or 2.3 million households plan to buy a house in the next 6 months.
Source: The Conference Board, Original Data

35. FHFA US Monthly Home Price Index
Currently equal to ~Feb 2004
Source: FHFA, SA

36. Vacant Housing Units Vacant For Rent Vacant For Sale
Vacant & Off the Market: Other
Source: US Census Bureau

37. U.S. Home Price Indexes (Y/Y Percent Change in Index)
FHFA Repeat
Sales Index
FHLMC HPI
NAR Median Price
Case-Shiller Comp 20 SA
Sources: NAR, FHFA, S&P Case-Shiller, FHLMC

38. Source: US Census Bureau, NAHB, Real Estate Center
Annual New Home Sales
(000, SAAR)
-77% 2005 Peak to Current
2011 less than half of “normal” level needed
-50% 1977 Peak to Trough
-28% 1986 Peak to Trough
-28% 1972 Peak to Trough
Average Annual Sales by Decade:
60s
70s
80s
90s
00s
Source: US Census Bureau, NAHB, Real Estate Center

39. Source: US Census Bureau, Real Estate Center at Texas A&M University
New SF Home Starts
(000s SAAR)
2011 down 75% from 2005 peak and 628,000 fewer units than average per year (1.06 million)
Source: US Census Bureau, Real Estate Center at Texas A&M University

40. Price Index of New Single-Family Houses Sold Including Value of Lot [2005 = 100 Index based on kinds of houses sold in 2005]
Source: US Census Bureau

41. Median Price of Existing SF Homes
Major declines in 2008 & 2009
2011 median down 25% from 2006 peak
Source: NAR

42. Median Existing SF Home Price
Trend Line
Source: NAR, Real Estate Center at Texas A&M University

43. National Housing Affordability Index
Increase of 107% from July 2006 to Oct. 2011
Average = 132.4
Drop of 31.5% from April 2003 to July 2006
Source: NAR Composite Index

44. Median Home Prices as a Multiple of Median Household Income
New Homes
(‘75-’00 avg. = 3.82)
Existing Homes
(‘75-’00 avg. = 3.36)
Source: US Census Bureau, NAR, Real Estate Center at Texas A&M University

45. Divergent US Median HH Income and Median Home Prices
1990=100
Median Home Price
Median HH Income
Source: US Census Bureau, NAR

46. 2010 Median Price/Median Household Income
Most Affordable States
3.0
2010 ACS housing Data.xlsx
4.0
Least Affordable States
Source: FHFA 2Q2010 Median Prices, 2010 American Community Survey, U.S. Census Bureau

47. Price-to-Rent Ratio Monthly FHFA P-O Index to BLS Owners’ Equivalent Rent January 1991 = 1.0
FHFA price index/OER index ratio indexed to Jan 91
Equilibrium
Source: FHFA, BLS

48. Why Hasn’t the Housing Market Recovered?
Employment uncertainty
Tight Mortgage Credit
Price pressure from foreclosures, distressed sales and “shadow inventory”
Appraisals and the Home Valuation Code of Conduct – questionable automated valuations
Confidence in the future

49. 2012 Housing Outlook Market Headwinds Reasons for Optimism
Distressed/Investor sales: ~1/3 U.S. market, ~10%-20% in Texas
Tight lending & low appraisals 33% cancellation rate on new and existing contracts
Confidence Crisis
No feeling of “well being”
Lost wealth: real estate & other assets
Flat income (declining real income)
Uncertain future: jobs, home values
Inventory: new wave of foreclosures to hit market in 2012
Move-up & move-over buyers can’t sell current home
Move-out still renting can’t buy
Political decisions, regulations and policies unknown & problematic
Improvement in general economy
Low interest rates but little impact
Pent up demand by those who’ve postponed housing or doubled-up
Markets bottomed will show statistical improvement
Investors buoy sales but not prices
Affordability: prices more in line with income
Rent-Own “gap” closing
Incentives on new homes substantial
Population and household growth strong in Texas

50. Albert Einstein
“If we knew what we were doing, it wouldn't be called research, would it?”

51. Economic and Real Estate Outlook
2012 MID-YEAR MEETING
Austin, Texas
April 13, 2012
Economic and Real Estate Outlook
Dr. James P. Gaines
Research Economist
Real Estate Center at Texas A&M University