recovery to normalcy - colorado housing overview and forecast
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Lawrence Yun, Ph.D., Chief Economist, NATIONAL ASSOCIATION OF REALTORS® Presentation to Denver Metro REALTORS®, Denver, Colorado, November 17, 2010TRANSCRIPT
Recovery to Normalcy
Lawrence Yun, Ph.D.Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation to Denver Metro REALTORS®Denver, Colorado
November 17, 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”
Consumer Confidence about Present Conditions: Awful
Consumer Confidence about Future Conditions – Not good but not as bad
9.6% unemployment rate, but different confidence level
Business Spending shows weak confidence in relation to profits
$ billion
REALTORS’ Home Value Expectation:over the next 12 months
Increase or Stable
Decrease
REALTOR Expectation vs RealityDate % respondents saying prices will have
fallen at this time from 12 month priorCase-Shiller price change
2009.1051%
-7.3
2009.1156%
-5.4
2009.1260%
-3.1
2010.0155%
-0.7
2010.0254%
+0.7
2010.0343% (minority say falling price)
+2.3 (price did not fall)
2010.0435%
+3.8
2010.0535%
+4.6
2010.0636%
+4.2
2010.0736%
+3.2
Government Spending (Confidence)$ billion
GDP Growing, but without vigorannualized % growth rate
U.S. Private Sector Job Gains(863,000 from Jan. to Sep. 2010)
Month-to-month job gains in thousands
Total Payroll Jobs in the U.S. (same as in 2000, but with 30 million more people)
How Many Years to Get Job Market Back to Normal?
Jobs added per month Assumed new jobs needed for growing population per month
How many years?
100,000 100,000 Treading water and never back to normal
200,000 100,000 6.3 years300,000 100,000 3.2 years400,000 100,000 2.1 years
100
120
140
160
180
Source: BLS
In thousands
Total Payroll Jobs in Boulder and Ft. Collins
11001150120012501300
Source: BLS
In thousands
Total Payroll Jobs in Denver-Aurora
3500
4000
4500
5000
Source: BLS
In thousands
Total Payroll Jobs in Michigan
2000
2200
2400
2600
Source: BLS)
In thousands
Total Payroll Jobs in Washington D.C. Metro
1100
1600
2100
2600
Source: BLS
In thousands
Long-term Job Growth in Colorado (30 years)
Existing Home Sales (Closings)Tax Credit Impact
Colorado Existing Home Sales: Quarterly Change
-30
-20
-10
0
10
20% change from a year ago Tax Credit Impact
Long-term Colorado Home Sales: 30 years
0
2040
60
80100
120
140
In thousands
Median Home Price in Denver Area
0
50
100
150
200
250
300
Separate Case-Shiller Index shows Denver price gain of 2% from 18 months ago
Source: NAR
$ thousand
Distressed Loans and Shadow Inventory
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
20
06
/Q1
20
06
/Q2
20
06
/Q3
20
06
/Q4
20
07
/Q1
20
07
/Q2
20
07
/Q3
20
07
/Q4
20
08
/Q1
20
08
/Q2
20
08
/Q3
20
08
/Q4
20
09
/Q1
20
09
/Q2
20
09
/Q3
20
09
/Q4
Tho
usa
nd
s
Mortgage Payments Past Due 30-59 Days
Mortgage Payments Past Due 90+ Days
Mortgage Foreclosures Started
Mortgage Foreclosure Inventory
Bad loans are nearly always made in good times. But recently originated loans are performing very well.
Newly Built Home Inventory and Its Shadow Inventory
Depressed Housing Starts
0
500
1,000
1,500
2,000
2,500 In thousands
Housing Starts in Boulder
01,0002,0003,0004,0005,0006,000
In thousands
Housing Starts in Denver-Aurora
05,00010,00015,00020,00025,00030,00035,00040,000
In thousands
Housing Starts in Ft. Collins-Loveland
0
1,000
2,000
3,000
4,000In thousands
Return to Normalcy
• Unprecedented Boom and Bust: 2000 to 2010• Sales Boomed and Retreated • Prices Overshot and Corrected • Fundamental Back to Justifiable Levels• Long-standing Housing Policy still in place• Credit Market Bubble … out the window
29
Existing-Home Sales
In million units
30
Home Sale to Jobs
National Median Home Price
0
50,000
100,000
150,000
200,000
250,000
Source: NAR
Home Price-to-Income Ratio (No Bubble Now)
2.02.22.42.62.83.03.23.43.6
Source: NAR
Home Price and Construction Cost(No Bubble Now)
Credit Bubble DeadSubprime, Alt-A, Home Equity Mortgage Origination
0
200
400
600
800
1,000
1,200
1,400
1,600
2003 2005-2006 2009-2010
Source: NAR estimate based on Inside Mortgage Finance data
$ billion
Long Standing Housing Policy• Mortgage Interest Deduction
– If eliminated, about 15% hit to home values– Massive wealth destruction on property owners who have
saved and saved (in many cases to pass it on to the next generation)
• FHA– Self-financing without ever needing taxpayer funds (as of
yet)• Fannie and Freddie
– Made mistakes and need to be restructured
1995
1995
1998
1998
2001
2001
2004
2004
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
Renter Homeowner
2007
20072007
2007
Long-Term Path to Self Reliance may be Helped from Long-Term Housing Wealth Gains
Long-Term Path to Self Reliance may be Helped from Long-Term Housing Wealth Gains
Source: Federal Reserve, NAR estimate for 2010
Median Family Net Worth
2010
2010
Compelling AffordabilityMonthly Mortgage to buy a Median Priced Home
2005 Q2 2010 Q2
San Diego $ 2,833 $ 1,564
Miami $ 1,726 $ 853
Denver $ 1,192 $ 935
Kansas City $ 735 $ 600
Inflationary Pressure ?Indicator % change from one year ago
Consumer Price Index (CPI) 1.1%
Housing Rent Component CPI 0.2% (but heading higher?)
Producer Price Index (Finished Product) 4.0%
Producer Price Index (Intermediate Product) 5.5%
Producer Price Index (Crude Product) 20.2%
Commodity: Coffee, Cotton, Wheat, Meat Very high
Gold Price Record High Price
CPI-Housing Rent Inflation(Home price is not part of CPI because of asset/investment aspect)
Homeownership Rate
COMMERCIAL REAL ESTATE
Real Estate PriceResidential: Case-Shiller
Commercial: MIT
J 06 M M J S N
J 07 M M J S N
J 08 M M J S N
J 09 M M J S N
J 10 M M J S
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Commercial Mortgage Backed Security IssuanceMonthly CMBS Issuance ($ Mil)
Source: Commercial Mortgage Alert
2002.Q1
2002.Q3
2003.Q1
2003.Q3
2004.Q1
2004.Q3
2005.Q1
2005.Q3
2006.Q1
2006.Q3
2007.Q1
2007.Q3
2008.Q1
2008.Q3
2009.Q1
2009.Q3
2010.Q1
0
50
100
150
200
250
300
350
400 Origination Volume Index (2001 Qtr Avg=100)
Source: Mortgage Bankers Association
$0
$20,000,000,000
$40,000,000,000
$60,000,000,000
$80,000,000,000
$100,000,000,000
$120,000,000,000
$140,000,000,000U.S. Sales Volume: Properties valued over
$2.5 million
Apartment Industrial Office Retail
Source: Real Capital Analytics
2010.Q3: UP 115% Y-o-Y
2011 OUTLOOK
Baseline Outlook
• Moderate GDP Expansion 2 to 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 9% in 2011 … and normal 6% in 2015
Baseline Outlook Cont.• Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012
• People fussing about home value could miss out on low rates
• Home values – no meaningful change in the national price in the next 2 years
• Home sales to be choppy but overall improving in line with job growth … 5.2 million in 2011 (up from 4.8 m in 2010, but same as in 2000)• Affordability conditions are too compelling
• There maybe a pent-up demand. 30 million additional people from 2000 but same home sales as in 2000.
Baseline Outlook Cont.
• Commercial lending to steadily improve … because of record high bank profits
• Net absorption steadily improve … because of recovering job market
• Rents stabilize (but no meaningful increase) … because of very low newly built inventory
• Cap rate falls … price floor established and because of improved investor confidence (to move money out of low yielding Treasuries)
Alternative Possibility
• 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
Virtuous or Vicious Cycle?• Home values stabilizing scenario
– Foreclosures steadily fall– Strategic default lessens and underwater homeowners become
hopeful – FHA and Fannie/Freddie finances improve (will need less
taxpayer funds)– Consumer spending opens up– Home value stabilize further or even begin to rise …– Self-sustaining normal growth rates in sales and prices
• Home values fall meaningfully … ugly scenario