Housing Market Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at NAR Midyear Legislative MeetingsWashington, D.C.

May 12, 2011

U.S. Annual Existing Home Sales…Ready to Breakout?

Monthly Existing Home Sales

Tax Credit Impact

Improving Factors for Higher Home Sales

• First quarter at 5.1 million annualized pace … if sales can hold at current levels then 4% annual increase in 2011 … without homebuyer tax credit stimulus

• The remainder of the year looks to be better

– Job Creation

– Robust stock market recovery

– Real estate net worth stabilizing … dissipating fears of more notable price declines

– Rising rents and larger pool of qualified renters

– Buyers want distressed properties … at deep discounts

– International buyers cashing in on the weakened dollar

– Smart money chasing real estate

– Potential Huge Positive … Lending opens up

– Potential Huge Negative … Washington policy change

Total U.S. Payroll Jobs(1.3 million in the past 12 months)

6.5 million below prior peakIn thousands

Alaska Payroll Jobs – Booming

North Dakota Jobs – Outperforms Alaska

Texas Payroll Jobs – Fully Recovered

Kansas Payroll Jobs – No Recovery

Missouri Payroll Jobs – Barely Registering

Most States follow U.S. Payroll Pattern(Modest Job Recovery)

In thousands

Weekly Fresh Unemployment Claims…Not Going under 400,000

In thousands

Financial Asset at $50 trillion… Full Recovery

Source: Federal Reserve

Residential Real Estate Net Worth… Long way to recover, but not falling

Source: Federal Reserve

New Home Price vs. Existing Home Price 30% premium rather than 10-15% normal premium

12 month moving average

Existing Home Price

New Home Price

CPI Apartment Rent

Home Price vs Rent(index = 100 in 1980)

Qualified Renters who can buy a Median Priced Home

2005 2010Median Price $219,000 Median Price $173,100

Mortgage Rate 6% Mortgage Rate 5%

Down payment 10% Down payment 10%

Monthly Payment $1,180 Monthly Payment $840

Qualifying Income $56,600 Qualifying Income $40,300

How many renters have at least this

income?

7,700,000(21% of renters)

How many renters have at least this

income?

15,000,000(39% of renters)

Renter Households

In million

Distress Sales: 30% to 40% of Transactions Will Remain Significant for Next 2 years

# of Serious Delinquent Mortgages… Mostly Borrowers prior to 2009

(90+ days late or in foreclosure process)

In 2010, there were 1.5 million distressed sales… need to wait 2.7 years

One U.S. Dollar gets…

U.S. Home Price after Currency Conversion

Smart Money Buying?

• All-cash record high at 35% of all sales

– Investors want quick deals

– Investors cannot get mortgage

– Some do not want to bother with appraisals

– Financial asset recovery helping with cash

– Hedge against future inflation

– Hedge against future housing shortage?

– Empty nesters downsizing and using leftover cash for kids’ home?

• Upper-end market beginning to move

REALTORS®’ Home Value Expectation:Survey of REALTORS® regarding prices in 12 months

Increase or Stable

Decrease

Real Estate as Inflation Hedge?(single-family home price in blue vs CPI in red)

Good inflation hedge in the past before the housing bubble/bust

U.S. Housing Starts

Housing Starts in thousands

Long-Term Average

Upside Potential Surprise

Average Credit Score for Loan Origination

Normal 2009 2010 If

Fannie 720 761 762 720

Freddie 720 757 758 720

FHA 650 682 698 660

15% to 20% Higher Sales

QE2… to keep rates low… are inconsequential if too strict

underwriting standardsFannie and Freddie Backed Mortgage Loan Performance

Fannie MaeVintage

Cumulative Default Rate

after 18 months

2002 3.1%

2003 2.5%

2004 4.6%

2005 4.8%

2006 11.6%

2007 28.7%

2008 12.6%

2009 1.2%

Freddie MacVintage

Cumulative Default Rate

after 18 months

2002 2.7%

2003 1.2%

2004 2.0%

2005 1.8%

2006 6.0%

2007 22.3%

2008 13.7%

2009 1.1%

Source: Federal Housing Finance Agency

Downside Potential Surprise

Washington Policy Change?

• Going after the Middle-Class by Republicans– Raise down payment to 20% ???

– Despite no taxpayer bailout for FHA and VA program

• Going after the Rich by Democrats– Limit mortgage interest deduction for high income and second homes ???

– Crush the working class in resort areas (Yacht Tax Impact)

• Going after the Rich by Republicans– Lower conforming loan limit ???

– Income redistribution from consumers to banks

• Going after the Small Business “Tax Cheats” by Democrats– Force massive 1099 paperwork to run a business and hire IRS agents

– REPEALED !!! Thank goodness

Current Savings Rate = 6% Takes 9 years to save $20,000

based on average $2,200 per year

Economic Hurdles

• Inflation hitting pocketbooks

– Gas and Oil … daily reminder

– Food and grocery … daily reminder

• Huge pool of underemployed … everything is unaffordable even if no inflation

• Budget Deficit … no impact now but when?

• Consumer confidence … another losing election for incumbents

CPI Inflation and PPI Inflation(% change from one year ago)

Prices falling on consumer electronic products : Smartphone1 = $200 to Smartphone2 = $200 is computed as falling prices; even though your wallet did not get any relief

# Unemployed(looking but cannot find job)

Adults in the Labor Force(Rest are not looking for job and officially not included in

unemployment rate)

Government Spending and Tax Receipts

$ billion

Government Default?

U.S. 10-year Treasury Rate

Consumer Confidence Index(Under 100; incumbents in trouble)

Housing Baseline Outlook

• Moderate GDP Expansion 2.5% to 3% in the next 2 years

• 1.5 to 2 million annual job additions yearly in the next 2 years

• Mortgage Rates rising to 5.5% by year-end 2011 and 6% in 2012

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

• Home sales rise by 7% to 10% in 2011

Presidential Quotes

“A nation of homeowners is unconquerable.”

Franklin Delano Roosevelt

“We will preserve the part of the American dream which the mortgage-

interest deduction symbolizes.”Ronald Reagan