Slide1: David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS® Economic Issues & Residential Real Estate Business Trends Forum Washington, DC -- May 2006


Five-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: NAR


Five Straight Record Years:New-Home Sales: In thousand units Source: Census Five Straight Record Years: New-Home Sales


Extraordinary Home Price Appreciation: Extraordinary Home Price Appreciation Source: NAR


Hot Markets in Past Five Years (2000 to 2005): Hot Markets in Past Five Years (2000 to 2005) Source: NAR


Rates Near Historic Lows: Rates Near Historic Lows Source: Freddie Mac 1970s 9% average 1980s 13% average 1990s 8% average 2000s 6.5% average


Lean Housing Inventory : Lean Housing Inventory Source: NAR


NAR Membership: NAR Membership Source: NAR in thousands 499,000 gain in 5 years


Real 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 estate


Overconfidence and Rising Rates Emptied the Punch Bowl: Overconfidence and Rising Rates Emptied the Punch Bowl


Rising Mortgage Rates: Rising Mortgage Rates Source: Freddie Mac


Income Not Keeping Pace With Home Prices: Income Not Keeping Pace With Home Prices Source: NAR Income and Price set to Index of 100 in 1990


Mortgage Debt Obligation to Income High in Some Markets: Mortgage Debt Obligation to Income High in Some Markets Source: NAR San Diego


Mortgage Debt Obligation to Income High in Some Markets: Mortgage Debt Obligation to Income High in Some Markets Source: NAR Miami


Too 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 income


Adjustable 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 Cleansing


Housing Inventory : Housing Inventory Source: NAR All-time High


Housing Inventory Months Supply: Housing Inventory Months Supply Source: NAR


Home Price Appreciation : Home Price Appreciation Source: NAR Percent Change


Lower Existing-Home Sales: Lower Existing-Home Sales In million units Source: NAR


Declining Mortgage Applications for Home Purchase: Declining Mortgage Applications for Home Purchase Source: Mortgage Bankers Association


Real-Time Housing Market Ticker Live Information: Real-Time Housing Market Ticker Live Information


Tale 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: NAR


Cooling Markets Booming in Jobs: Cooling Markets Booming in Jobs


Non-Boom Markets With Strong Job Growth: Non-Boom Markets With Strong Job Growth Source: BLS % One-year Job Growth Rate


Cool ’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 Backdrop


Sound Economy: Sound Economy % Source: BEA


Consumer Spending Still Healthy: Consumer Spending Still Healthy % Source: BEA


Business Spending Rebounding: Business Spending Rebounding % Source: BEA


Government SpendingProviding Support: Government Spending Providing Support % Source: BEA


Imports and Exports Remain at High Levels: Imports and Exports Remain at High Levels % Source: BEA


Corporate Profits are Strong … Will Boost Business Spending: Corporate Profits are Strong … Will Boost Business Spending Source: BEA


Stock Market Near All-time High: Stock Market Near All-time High


Steady 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: BLS


Fed Rate Hikes : Fed Rate Hikes


Risks – Three Dark Clouds: Risks – Three Dark Clouds Oil Interest Rates Housing


Oil 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 % Forecast


Sluggish 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 Outlook


Housing Outlook: Housing Outlook


Slide56: David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS® Economic Issues & Residential Real Estate Business Trends Forum Washington, DC -- May 2006