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Premium member Presentation Transcript Slide1: David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS® Economic Issues & Residential Real Estate Business Trends Forum Washington, DC -- May 2006Five-Year Boom … Something to Remember: Five-Year Boom … Something to Remember Memories, Like the corners of my mind Misty water-colored memories Of the Way We Were… Five Straight Record Years:Existing-Home Sales : Five Straight Record Years: Existing-Home Sales In million units Source: NARFive Straight Record Years:New-Home Sales: In thousand units Source: Census Five Straight Record Years: New-Home SalesExtraordinary Home Price Appreciation: Extraordinary Home Price Appreciation Source: NARHot Markets in Past Five Years (2000 to 2005): Hot Markets in Past Five Years (2000 to 2005) Source: NARRates Near Historic Lows: Rates Near Historic Lows Source: Freddie Mac 1970s 9% average 1980s 13% average 1990s 8% average 2000s 6.5% averageLean Housing Inventory : Lean Housing Inventory Source: NAR NAR Membership: NAR Membership Source: NAR in thousands 499,000 gain in 5 yearsReal Estate Employment Surges: Real Estate Employment Surges Source: NAR, BLS * Construction jobs in the residential sector. ** Lending jobs in credit intermediation but not commercial banking. %Residential Real Estate Industry Revenue Surges: Residential Real Estate Industry Revenue Surges Source: BEA GDP excluding residential real estateOverconfidence and Rising Rates Emptied the Punch Bowl: Overconfidence and Rising Rates Emptied the Punch BowlRising Mortgage Rates: Rising Mortgage Rates Source: Freddie MacIncome Not Keeping Pace With Home Prices: Income Not Keeping Pace With Home Prices Source: NAR Income and Price set to Index of 100 in 1990Mortgage Debt Obligation to Income High in Some Markets: Mortgage Debt Obligation to Income High in Some Markets Source: NAR San DiegoMortgage Debt Obligation to Income High in Some Markets: Mortgage Debt Obligation to Income High in Some Markets Source: NAR MiamiToo Much Speculation: Too Much Speculation Flipping Pre-construction purchases / sales Long lines at sales offices and lottery purchases Long distance purchases (without seeing property) Interest-only and/or adjustable loans dominate some markets Interest-Only stretched household incomeAdjustable Mortgages(2005 Q4) : Adjustable Mortgages (2005 Q4) Source: FHFB % Interest-Only Mortgages: Interest-Only Mortgages Source: Loan Performance % Interest-Only Loans : Interest-Only Loans Stretching to get a 40% larger loan $250,000 traditional loan at 6% rate equals $1,499 per month $350,000 interest-only loan at 5% rate equals $1,458 per month Minimum Payment – Option ARMS Loans Even more stretching Even Muhammad Ali Had Limits: Even Muhammad Ali Had Limits Successive Record Years Not Sustainable Double-digit Price Gains Not Healthy or Sustainable Inevitable Rate Rise from Generational Low Mortgage Rates But Roof Not Caving: But Roof Not Caving No Bust – Just Deceleration Boom Winding Down to Expansion Inventory Building, but not Excess Price Appreciation Slowing Sales Take a Dip – but only for a year A Needed CleansingHousing Inventory : Housing Inventory Source: NAR All-time HighHousing Inventory Months Supply: Housing Inventory Months Supply Source: NARHome Price Appreciation : Home Price Appreciation Source: NAR Percent ChangeLower Existing-Home Sales: Lower Existing-Home Sales In million units Source: NARDeclining Mortgage Applications for Home Purchase: Declining Mortgage Applications for Home Purchase Source: Mortgage Bankers AssociationReal-Time Housing Market Ticker Live Information: Real-Time Housing Market Ticker Live InformationTale of Two Cities: Tale of Two Cities Boom Cities Adjusting from Seller to Buyer Market Non-Boom Cities showing Booming Tendencies Common Thread for Both Markets – Job Gains and Income Growth (excluding Michigan) Healthy Local Economy assures boom cities to land softly Healthy Local Economy assures non-boom cities to grow Days on Market Lengthening in Boom Markets : Days on Market Lengthening in Boom Markets Days on Market Shortening in Non-Boom Markets : Days on Market Shortening in Non-Boom Markets Existing-Home Sales(2006 Q1 vs 2005 Q1): Existing-Home Sales (2006 Q1 vs 2005 Q1) Source: NARCooling Markets Booming in Jobs: Cooling Markets Booming in JobsNon-Boom Markets With Strong Job Growth: Non-Boom Markets With Strong Job Growth Source: BLS % One-year Job Growth RateCool ’06 and Rise ‘07: Cool ’06 and Rise ‘07 Solid fundamentals: Low Historic Rates, Favorable Demographics, Healthy Economy Speculators Out Exotic Mortgages Out Economic Backdrop: Economic BackdropSound Economy: Sound Economy % Source: BEAConsumer Spending Still Healthy: Consumer Spending Still Healthy % Source: BEABusiness Spending Rebounding: Business Spending Rebounding % Source: BEAGovernment SpendingProviding Support: Government Spending Providing Support % Source: BEAImports and Exports Remain at High Levels: Imports and Exports Remain at High Levels % Source: BEACorporate Profits are Strong … Will Boost Business Spending: Corporate Profits are Strong … Will Boost Business Spending Source: BEAStock Market Near All-time High: Stock Market Near All-time HighSteady Job Gains2 Million in Past 12 months : Steady Job Gains 2 Million in Past 12 months Source: BLS Payroll job changes in thousands Weakness from Katrina Inflation Building: Inflation Building % change from a year ago Source: BLSFed Rate Hikes : Fed Rate Hikes Risks – Three Dark Clouds: Risks – Three Dark Clouds Oil Interest Rates HousingOil Prices Inhibiting Growth and Exerting Inflationary Pressure : Oil Prices Inhibiting Growth and Exerting Inflationary Pressure Price per barrel$100 Per Barrel Oil: $100 Per Barrel Oil 400,000 job gain rather than 2 million Inflation to 4.4% rather than 3.4% Mortgage to 8% rather than 6.7% Home sales – double digit percentage declines Home prices – possibly turn negative Interest Rates – 4-year high: Interest Rates – 4-year high % ForecastSluggish Housing Inhibits Economy: Sluggish Housing Inhibits Economy Wealth Effect Slows Unrealized Gains Slows Less Home Equity Borrowing Less Cash-out Refis Less Residential Investment Negative Multiplier/Secondary Spending Impact Impact of Unlikely Sharp Correction in Housing: Impact of Unlikely Sharp Correction in Housing Wealth Effect Turns Negative Local Governments Run Budget Deficits GDP Growth Falls 2.5% to 3.5% points Economy Enters Recession ’07 and Beyond: ’07 and Beyond Still Favorable Interest Rates Favorable Demographic Trends More Balanced Markets Back to Fundamentals Economic Outlook: Economic OutlookHousing Outlook: Housing OutlookSlide56: David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS® Economic Issues & Residential Real Estate Business Trends Forum Washington, DC -- May 2006 You do not have the permission to view this presentation. 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