Return to Normalcy

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at Macroeconomic Advisers Meeting Washington, D.C.

December 8, 2010

Existing Home Sales (Closings)

2000 - Feb 2001 - Sep 2003 - Apr 2004 - Nov 2006 - Jun 2008 - Jan 2009 - Aug3,000,000

3,500,000

4,000,000

4,500,000

5,000,000

5,500,000

6,000,000

6,500,000

7,000,000

7,500,000Tax Credit Impact

Pending Home Sales Index

2001 - Jan2002 - Apr 2003 - Jul 2004 - Oct2006 - Jan2007 - Apr 2008 - Jul 2009 - Oct60

70

80

90

100

110

120

130

140

Pre-Boom vs. Post-Boom2000

(pre-boom)2010

(post-boom)

Existing Home Sales 5.2 m 4.8 m

New Home Sales 880 K 380 K

Payroll Jobs 131.8 m 130.5 m

Household Jobs 136.9 m 139.3 m

Median Home Price $143,600 $172,500

Household Income $41,990 $49,800

Mortgage Rates 8.1% 5.1%

Affordability Index 122 173

Underwriting Standards Normal Too Tight?

Underwater Impact None 5% to 7% lower sales

Housing Affordability Index(assumes constant underwriting standards)

19701972

19741976

19781980

19821984

19861988

19901992

19941996

19982000

20022004

20062008

201060

80

100

120

140

160

180

Compelling AffordabilityMonthly Mortgage to buy a Median Priced Home

2005 Q2 2010 Q2

San Diego $ 2,833 $ 1,564

Miami $ 1,726 $ 853

Milwaukee $ 1,014 $ 797

Kansas City $ 735 $ 600

QE2 Inconsequential if Too Strict Underwriting Standards?

Fannie 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

Distressed Loans and Shadow Inventory

0

1,000

2,000

3,000

4,000

5,000

6,000

7,00020

06/Q

1

2006

/Q2

2006

/Q3

2006

/Q4

2007

/Q1

2007

/Q2

2007

/Q3

2007

/Q4

2008

/Q1

2008

/Q2

2008

/Q3

2008

/Q4

2009

/Q1

2009

/Q2

2009

/Q3

2009

/Q4

Thou

sand

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.

Underwater Homeowners and Short-Sales

• 11 million underwater homeowners – Overestimate by CoreLogic?– 75 million total homeowners

• Short-sales and Foreclosures: about 1/3 of existing home sales …1.5 million per year• Assume ½ underwater homeowners stay put by choice (and not go through

distressed sale)– 5.5 million out of pocket (CoreLogic data) … 7% lower sales– 4 million out of pocket (NAR estimate based on Fed data) … 5% lower sales

• 2010 Existing + New Home Sales are … 21% lower sales versus 2000

CoreLogic Federal Reserve

Housing Value $13 trillion $17 trillion

Mortgage Outstanding $9 trillion $10 trillion

Housing Net Worth $4 trillion $7 trillion

Homeowner Vacancy Rate(0.8% point above normal = 600,000 above normal)

1990 - Q1

1991 - Q1

1992 - Q1

1993 - Q1

1994 - Q1

1995 - Q1

1996 - Q1

1997 - Q1

1998 - Q1

1999 - Q1

2000 - Q1

2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1

2007 - Q1

2008 - Q1

2009 - Q1

2010 - Q1

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Newly Built Home Inventory

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

100

200

300

400

500

600

700

In thousands

Months Supply of Inventory and Real Price Growth

(Historic Avg. = 7.3 months and 0.5% real price anualized growth)

1982 - Jun1986 - Feb1989 - Oct1993 - Jun1997 - Feb2000 - Oct2004 - Jun2008 - Feb

-20

-15

-10

-5

0

5

10

15

20

13

Home Sale to Payroll Jobs

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

f0%

1%

2%

3%

4%

5%

6%

Home Price-to-Income Ratio

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6

Source: NAR

Home Price and Construction Cost

2000 - Feb 2001 - Mar 2002 - Apr 2003 - May 2004 - Jun 2005 - Jul 2006 - Aug 2007 - Sep 2008 - Oct80

90

100

110

120

130

140

150

160

170

NAR Price Index

PPI Residential Construction Cost Index

CPI Housing Rent Inflation

2000 - Jan 2001 - Jun2002 - Nov2004 - Apr2005 - Sep2007 - Feb 2008 - Jul 2009 - Dec

-1

0

1

2

3

4

5

Rental Owner-Equivalence

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

2008 - Oct

2008 - Dec

2009 - Feb

2009 - Apr

2009 - Jun

2009 - Aug

2009 - Oct

2009 - Dec

2010 - Feb

2010 - Apr

2010 - Jun

2010 - Aug

2010- Oct

0%

10%

20%

30%

40%

50%

60%

70%

80% Increase or Stable

Decrease

Baseline Outlook Cont.• Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012

• 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.

Commercial Real Estate

Real Estate Price

2001 - Jan 2002 - Apr 2003 - Jul 2004 - Oct 2006 - Jan 2007 - Apr 2008 - Jul 2009 - Oct1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0Residential: Case-Shiller

Commercial: MIT

-

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

$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

$140,000,000,000

U.S. Sales Volume: Properties valued over $2.5 million

Apartment Industrial Office Retail

Source: Real Capital Analytics