Economic Outlook in Uncertain Times

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Leadership SummitChicago, IL

August 6, 2010

Federal Reserve FOMC • Ben Bernanke (Chairman):

• “Outlook remains unusually uncertain”

• Alan Greenspan (former Chairman):• “If home prices start falling again, we could be facing a double-dip

recession”

• James Bullard (St. Louis Fed): • “The U.S. is closer to a Japanese-style deflationary outcome”

• Thomas Hoenig (Kansas City Fed): • “Too rapid money creation results in eventual high inflation”• To speak at NAR conference in New Orleans

GDP Growing, but Decelerating

1960 - Q21966 - Q41973 - Q21979 - Q41986 - Q21992 - Q41999 - Q22005 - Q4

-10

-5

0

5

10

15

20 annualized % growth rate

Sources of Economic Growth

• Consumers … more cautious– Historically 4% growth (above inflation), but expect 2%

growth in upcoming years • Federal Government … stimulus spending

– Historically 1% growth (above inflation), now strong 6%-7% growth in the past 2 years

• State/Local Government … cut back – Historically 2% growth (above inflation), now cutting by

1%-2% in the past 2 years

Sources of Economic Growth Cont.

• Net Exports … some improvement – Oil price and oil import could hold back net export gains

• Real Estate– Residential: Recovery in existing home sales but very

low new home construction– Commercial: Very low new construction

• Businesses … huge profits but not wanting to invest– Why are businesses holding on to cash ???

Construction Spending

2000 - Q2

2000 - Q4

2001 - Q2

2001 - Q4

2002 - Q2

2002 - Q4

2003 - Q2

2003 - Q4

2004 - Q2

2004 - Q4

2005 - Q2

2005 - Q4

2006 - Q2

2006 - Q4

2007 - Q2

2007 - Q4

2008 - Q2

2008 - Q4

2009 - Q2

2009 - Q4

2010 - Q2

200300400500600700800900

Residential

Commercial

$ billion

Pending Contracts on Existing Homes

2001 - Feb 2002 - Jul 2003 - Dec 2005 - May 2006 - Oct 2008 - Mar 2009 - Aug70

80

90

100

110

120

130Tax Credit Impact

Pending Contracts on New Homes

2001 - Feb 2002 - Jul 2003 - Dec 2005 - May 2006 - Oct 2008 - Mar 2009 - Aug70

270

470

670

870

1070

1270

1470

Where is the tax credit impact?

Corporate Profits and Business Spending

2000 - Q2

2000 - Q4

2001 - Q2

2001 - Q4

2002 - Q2

2002 - Q4

2003 - Q2

2003 - Q4

2004 - Q2

2004 - Q4

2005 - Q2

2005 - Q4

2006 - Q2

2006 - Q4

2007 - Q2

2007 - Q4

2008 - Q2

2008 - Q4

2009 - Q2

2009 - Q4

200

700

1200

1700

2200

2700

Business Spending

Profits

$ billion

Private Sector Job Gains(593,000 in 1st half of 2010)

1960 - Feb 1966 - Oct 1973 - Jun 1980 - Feb 1986 - Oct 1993 - Jun 2000 - Feb 2006 - Oct

-8

-6

-4

-2

0

2

4

6

8% change from one year ago

Local Job Markets• Dallas-Ft. Worth +27,000 in 12 months• Washington D.C. +15,000• Austin +10,000• Boston +9,000

• New Hampshire +1.5% in 12 months• Kentucky +1.3%• Alaska +1.2%• Indiana +1.1%• Utah +1.0%

• North Dakota 3.6% unemployment rate• South Dakota 4.5% • Nebraska 4.8%

Weekly 1st time Unemployment Claims: Need to Fall Further

2000 - Feb 2001 - Aug 2003 - Feb 2004 - Aug 2006 - Feb 2007 - Aug 2009 - Feb0

100

200

300

400

500

600

700In thousands

National Median Home Price Stabilizing(combination of price change and type of homes that are selling)

2001 - Feb 2002 - Jan 2002 - Dec 2003 - Nov 2004 - Oct 2005 - Sep 2006 - Aug 2007 - Jul 2008 - Jun 2009 - May2010 - Apr100000

120000

140000

160000

180000

200000

220000

240000

260000

280000

New Home Price

Existing Home Price

Other Home Price Measurements

2001 - Feb 2002 - Jan 2002 - Dec 2003 - Nov 2004 - Oct 2005 - Sep 2006 - Aug 2007 - Jul 2008 - Jun 2009 - May 2010 - Apr100

120

140

160

180

200

220

240

FHFA (Fannie/Freddie Loans)

Case-ShillerCore Logic

Metro Median Home Price

0

50

100

150

200

250

300

350 $ thousand

Source: NAR

Las Vegas

St. Louis

Sample Markets with Price Increases

0

2

4

6

8

10

12

14

16

San Diego Orange Cty Boston Houston Buffalo D.C. Columbia

Source: NAR

% change from one year ago

Still High Months Supply of Existing Home Inventory

2000 - Feb 2001 - Mar 2002 - Apr 2003 - May 2004 - Jun 2005 - Jul 2006 - Aug 2007 - Sep 2008 - Oct 2009 - Nov0

2

4

6

8

10

12

Pent-up Supply and Demand

Newly Built Homes on the Market

2000 - Feb 2001 - Jun 2002 - Oct 2004 - Feb 2005 - Jun 2006 - Oct 2008 - Feb 2009 - Jun0

100

200

300

400

500

600

700

Average 30-year Mortgage Rate(lowest since ?)

1971 - May 1976 - Apr 1981 - Mar 1986 - Feb 1991 - Jan 1995 - Dec 2000 - Nov 2005 - Oct02468

101214161820 %

30-year Mortgage

10-year Treasury

10-Year Treasury impacted by Inflationary Expectations

1971 - May 1976 - Apr 1981 - Mar 1986 - Feb 1991 - Jan 1995 - Dec 2000 - Nov 2005 - Oct

-5

0

5

10

15

20 %

CPI Inflation

10-year Treasury Yield

U.S. Budget Deficit

-1,600,000

-1,400,000

-1,200,000

-1,000,000

-800,000

-600,000

-400,000

-200,000

0

200,000

400,000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

Source: CBO, NAR estimate

Existing Home Sales over the Long Term(single-family sales without condos)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

19

68

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Source: NAR

1982: 18% Mortgage Rate, 40 million fewer workers

10

12

14

16

18

20

22

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: Census

People Mobility

(How many move each year?)

260 million stay put

25 million move within same county

6 million move to another county in same state

5 million move to another state (very low)

1 million move abroad

%

Investment-Rental Home Sales

0

500

1000

1500

2000

2500

2003 2004 2005 2006 2007 2008 2009

Thousand units

Source: NAR

13 Regional Vice President Reports• RVP Region 4: “stable at best … downward spiral at worst”

• RVP Region 7: “more expensive homes selling … but the underwriting process is difficult”

• REALTOR® member comments• “more active in selling vacant lots this year”• “phone hardly rings”• “buyers pay too much for appraisals”• “commercial lending needs to loosen up” • “ a lot of people looking at second homes, but won’t get off the fence”• “our rental market is going strong”

Commercial Real Estate Transactions(of those above $5 million properties)

$-

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

UnknownUser/otherPublicPrivateInstitutionalEquity FundCrossborder

Source: Real Capital Analytics

NAR Commercial Market Survey• NAR Survey … members were engaged in average transaction value

of $1.2 million

• NAR Survey shows sales down 6%

• NAR Survey shows average price down 16%

• NAR Survey shows leasing up 3%

• NAR Survey shows rental rate down 10%

Baseline Outlook

• Moderate GDP Expansion 2.5% in the next 2 years (historical average is 3%)

• 1.5 million annual job additions in the next 2 years

• Unemployment rate of 8% in 2012 … and normal 6% in 2015

Baseline Outlook Cont.• Mortgage Rates rising to 5.7% in 2011 and 6.2% in 2012 and higher

in later years

• Home values – no meaningful change in the national price in the next 2 years

• Housing Starts to rise 40% to 50% in 2011 to about 900,000 … from exceptionally low levels of the past two years (historical normal is 1.5 million)

• Home sales will struggle in the near term (after tax credit hangover) and then rise in line with job growth

• Commercial real estate coming off depressed levels but no improvements in vacancy until 2011 and in rent growth until 2012

Alternative Outlooks

• High inflation … people desire tangible investment like real estate, but interest rate will be higher

• Deflation … people hold back for better price … holds back economy• Budget deficit tipping point … higher interest rate and sharp cut

back in standard of living

• Sharp 4% to 5% GDP growth … release of pent-up housing demand (30 million more people today versus 2000 when home sales were similar) … surprisingly higher home sales and home prices