NAR 2006 08

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Real Estate Reality Check : 

Real Estate Reality Check David Lereah, Ph.D. Chief Economist National Association of REALTORS® NAR Leadership Summit Chicago, IL August 17 & 18, 2006

A Divided Real Estate Nation: 

A Divided Real Estate Nation Red = Expanding (31% of the country by population) Blue = Contracting (69%) Source: NAR, Existing Home Sales 2006 Q2 vs 2005 Q2

What Happened?: 

What Happened? Boom ended August 2005 Mortgage rates rose almost one point Affordability conditions deteriorated Speculative investors pulled out Homebuyer confidence plunged Resort buyers went to sidelines Trade-up buyers to sidelines First-time buyers priced out of market

The Aftermath: 

The Aftermath Sellers’ market transitioning to buyers’ market Home sales plummet, prices lag, inventories rise Cooling markets left with high percentage of exotic loans Builders offering non-price incentives Days-on-market lengthening Residential construction activity slows Home prices beginning to soften

Slide5: 

Cooling Markets (Existing-Home Sales: 2006 Q2 vs 2005 Q2) Source: NAR

Cooling Metro Markets (Existing Home Sales: 2006 Q2 vs 2005 Q2) : 

Cooling Metro Markets (Existing Home Sales: 2006 Q2 vs 2005 Q2) Source: NAR

Lengthening Days on Market: 

Lengthening Days on Market Source: NAR

Rising Months Supply: 

Rising Months Supply Source: NAR

Price Decelerations and Declines (Existing Home Sales: 2006 Q2 vs 2005 Q2) : 

Price Decelerations and Declines (Existing Home Sales: 2006 Q2 vs 2005 Q2) 26 MSAs had price declines in 2006 Q2

Still, One-third of the Country is Expanding (Existing Home Sales: 2006 Q2 vs 2005 Q2): 

Still, One-third of the Country is Expanding (Existing Home Sales: 2006 Q2 vs 2005 Q2) Source: NAR

Shortening Days on Market: 

Shortening Days on Market Source: NAR

Price Accelerations and Recovery (One-year gain in 2006 Q2 and 2005 Q2) : 

Price Accelerations and Recovery (One-year gain in 2006 Q2 and 2005 Q2)

National Existing-Home Sales: 

National Existing-Home Sales In million units Source: NAR

Home Price Appreciation : 

Home Price Appreciation Source: NAR Percent change from a year ago

Condo - Price Depreciation : 

Condo - Price Depreciation Source: NAR Percent change from a year ago

Condo – Significant Price Depreciation in West and South: 

Condo – Significant Price Depreciation in West and South Source: NAR Percent change from a year ago

Housing Inventory : 

Housing Inventory All-time High Source: NAR

Correction Necessary: 

Correction Necessary Unsustainable Growth and Growing Imbalances Create Heavy Pains Later (Better to have light pains now) Rampant Boom Creates Affordability Crisis and Workforce Housing Problems High Debt Burdens Not Healthy for Economy Adjustable and Exotic Loans Raise Risk

Income Not Keeping Pace With Home Prices: 

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

Metro Home Prices: Moderate to Unsustainable: 

Metro Home Prices: Moderate to Unsustainable Bunched Together Widened Gap Source: NAR

Home Price Distribution (2006 Q2): 

Home Price Distribution (2006 Q2) Source: NAR

Disappearing Affordable Homes - FHA Participation in California : 

Disappearing Affordable Homes - FHA Participation in California Source: HMDA

Income Required to Buy a Typical Home @ 6.6% mortgage rate and 20% downpayment: 

Income Required to Buy a Typical Home @ 6.6% mortgage rate and 20% downpayment Source: NAR

Mortgage Obligation to Income – Worrisome in the West: 

Mortgage Obligation to Income – Worrisome in the West % Source: NAR

Mortgage Obligation to Income Very High in Some Markets: 

Mortgage Obligation to Income Very High in Some Markets San Diego 45% !!! Source: NAR

Mortgage Obligation to Income Historical High in Some Markets: 

Mortgage Obligation to Income Historical High in Some Markets Miami Way Above Historical Local Norm Source: NAR

Some Markets Experiencing Very High or Rising ARMS : 

Some Markets Experiencing Very High or Rising ARMS Source: FHFB % Markets carrying more risk from interest rate changes

What Will Happen?: 

What Will Happen? 2006 corrections different from previous real estate corrections Cooling markets have healthy local economies Seller-to-buyer transitions almost complete Prices expected to fall for remainder of year Price fall will be limited due to Pent-up Demand at Lower Prices Some Local Markets are Fragile and Vulnerable to Rate Rise Soft Landing

States with Declining Home Sales, But Housing Needs/Demand Growing (June 2005 to June 2006) : 

States with Declining Home Sales, But Housing Needs/Demand Growing (June 2005 to June 2006) Source: BLS, NAR Estimates

Housing Affordability Tumbling – Helps Rental Market: 

Housing Affordability Tumbling – Helps Rental Market Source: NAR

Price Scenarios of 5% Annual Growth after few years of no growth : 

Price Scenarios of 5% Annual Growth after few years of no growth Source: NAR The number of Years of No Price Growth Median Price in 2005 = $219,600 $1,000s Near $600,000 by 2030 even in pessimistic scenario

Job Gains/Losses in the Recent 12 months: 

Job Gains/Losses in the Recent 12 months Source: BLS In thousands HOT COLD New Orleans has 178,400 fewer jobs (not included above)

U.S. Migration Trend (Top 5 vs. Bottom 5) : 

U.S. Migration Trend (Top 5 vs. Bottom 5) Source: Census

Evolving Market Trends: 

Evolving Market Trends Greater Price Volatility in Some Markets Greater Liquidity More Investors More Speculator Hedge Fund Investors Homeownership at Younger Age Increased Turnover Rate

Prices Do Decline (mostly in the late 80s or early 90s): 

Prices Do Decline (mostly in the late 80s or early 90s)

San Diego : 

San Diego Source: NAR Percent change from a year ago

New York : 

New York Source: NAR Percent change from a year ago

Honolulu : 

Honolulu Source: NAR Percent change from a year ago

Dallas : 

Dallas Source: NAR Percent change from a year ago

Las Vegas Price Growth Variability (Price growth minus historic average) : 

Las Vegas Price Growth Variability (Price growth minus historic average) Source: NAR %

Liquidity from Investors’ Appetite for Mortgages (2006 Q1) : 

Liquidity from Investors’ Appetite for Mortgages (2006 Q1) Source: Federal Reserve, NYSE, NASDAQ

More Mortgage Products: 

More Mortgage Products 15-year, 30-year, 40-year Fixed Rate Mortgages Adjustable Rate Mortgages Hybrid ARMs, Option ARMs Interest-only Loans Zero Down Loans Low-cost Refinance options Easy access to HELOC and Home Equity Loans FHA and VA Loans Fixed and ARMs Risk-based Pricing under debate

Investor Sales Historically Strong : 

Investor Sales Historically Strong Source: NAR 27% Increase 16% Increase

Second Home Purchases (2005) : 

Second Home Purchases (2005) Source: NAR

Turnover Rate Historically High (Single-family Sales relative to owner-occupied housing stock) : 

Turnover Rate Historically High (Single-family Sales relative to owner-occupied housing stock) Source: NAR

Economic Backdrop: 

Economic Backdrop

Moderating Economy: 

Moderating Economy % Source: BEA

Consumer Spending Still Healthy: 

Consumer Spending Still Healthy % Source: BEA

Business Spending Remains Strong: 

Business Spending Remains Strong % Source: BEA

Corporate Profits are Strong: 

Corporate Profits are Strong Source: BEA

Wage Growth Picking Up: 

Wage Growth Picking Up % Source: BLS

Oil Prices Exerting Inflationary Pressure : 

Oil Prices Exerting Inflationary Pressure Price per barrel

Unwelcome Inflation: 

Unwelcome Inflation % change from a year ago Source: BLS

Fed Rate Hikes to Restrain Inflation, But Need to be Mindful of … : 

Fed Rate Hikes to Restrain Inflation, But Need to be Mindful of …

Risks of Over-tightening: 

Risks of Over-tightening Sluggish Economy (Recession?) Tumbling Housing Sector Leading to rising delinquencies and foreclosures Wary Consumers (from home equity losses)

Scenarios/Probability of Popping: 

Scenarios/Probability of Popping

Weakening Housing’s Impact on Consumers and Economy: 

Weakening Housing’s Impact on Consumers and Economy Consumer Spending Supported from Housing Equity Gains $1.4 trillion in the past year $70 billion to $140 billion additional consumer spending Without Housing Equity Gain Consumer spending growth slows to 2% growth rather than 3% growth Economy weakens by 0.7% point Additional Cuts to GDP Growth from Lower Residential Construction

Economic Outlook : 

Economic Outlook

Housing Outlook: 

Housing Outlook

Real Estate Reality Check : 

Real Estate Reality Check David Lereah, Ph.D. Chief Economist National Association of REALTORS® NAR Leadership Summit Chicago, IL August 17 & 18, 2006

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