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Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University.

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Presentation on theme: "Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University."— Presentation transcript:

1 Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University

2 2 Bentley's First Law of Economics: The only thing more dangerous than an economist is an amateur economist! Bentley's Second Law of Economics : "The only thing more dangerous than an amateur economist is a professional economist." Remember: Amateurs built the Ark Professionals built the Titanic

3 US Economy in 1996

4 US Economy in 2008

5 US Economy in 2012

6 Economy is Trying to Recover, but Slow Going Employment Retail Sales and Consumption GDP Unsustainable Government deficits Corporate Earnings Housing Projections for the next couple of years indicate substantive growth doesnt occur until

7 Percent Growth in Real GDP 7 Source: Bureau of Economic Analysis The average rate of growth is 3.3% per quarter since 1947

8 Debt Driven Recession 8

9 Total National Debt Since 1929 Amount and Percent of GDP 9 National Debt as a Percentage of Annual GDP (right scale) Total National Debt (left scale) Ended WWII $270B Hit $1T in 32% GDP Beginning FY % GDP and 55 times 1946 debt Source: U.S. Treasury

10 Household Debt 10 Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

11 Households Continue Way Over-Levered Total HH Debt as Percentage of GDP 11 Average = 52.5% Average = 39% Average = 63% Average = 88% Sources: Fed Flow of Funds, Real Estate Center at Texas A&M University

12 Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established. Ben Bernanke June 7, 2011, International Monetary Conference, Atlanta, Georgia 12

13 Recovery May Take a While 13

14 US Unemployment Rates 14 Source: BLS, Texas Workforce Commission; Real Estate Center at Texas A&M

15 2012+ Economic Outlook Most indicators positive – not robust Major business, investment and political decisions postponed Sluggish growth into the first quarter of 2013 Interest rates stay low through 2014 Housing cannot be counted on to help in 2012 Over-leverage & credit dependency remain Limited government resources and spending International economy highly uncertain General UNCERTAINTY & Lack of CONFIDENCE

16 Source: The Conference Board (1985=100) Consumer Confidence Index Expansion Recession 7 cycles since 1967: Avg. during recession = 72 Avg. during an expansion = 102

17 U.S. Household Formation Source: Current Population Survey, Census Bureau, Department of Commerce (The source of annual data is the Current Population Survey March Supplement. The quarterly data source is the monthly Current Population Survey/Housing Vacancy Survey.)

18 U.S. Population Groups 2011 Source: U.S. Census Bureau; 2009 National Population Projections (Supplemental) Silent/Greatest Baby Boom Baby Bust (Gen X) Echo Boom (Gen Y) millions Millennials (Gen I) Age 24.3% 12.2% 15.9% 26.1% 21.4%

19 Boomers Own - Gen Y Rents 19 Source: FNMA National Housing Survey, 4Q2010

20 At Last, a Cell Phone for Seniors!

21 Changing Face of Housing: Future Homebuyers and Sellers Racial and Ethnic Composition of Texas 2010 and 2030 During the next two decades, minorities will account for approximately two-thirds of household growth … and half of all first- time homebuyers Source: Social Science Data Analysis Network; NAR Forecast Hispanic 50.9% Anglo 30.9% Black 10.5% Asian 7.7% Anglo 45.1% Hispanic 38.8% Asian 4.6% Black 11.5%

22 The Housing Market Needs to Mend to Help a General Economic Recovery

23 How Bad Has the Housing Collapse Been? Home prices down ~33% since 2006 peak Around $7 trillion, >50% lost equity in housing ~20% households, 12 million, upside-down on mortgage – some states >50% Defaults, delinquencies and foreclosures at historic levels 2011 new home starts lowest in the past 60 years New household formations about 25% of historical rate Federal government programs have done little to help overall housing

24 24 US Homeownership Rate Source: U.S. Census Bureau 1970s Baby Boomers enter market; homeownership grows Low interest rates and new mortgage products; Homeownership explodes from 64.1% to 69.1% (Percent) Current rate is same as 3Q1998

25 Lost Wealth: Households Equity in Real Estate Source: Federal Reserve, Flow of Funds, B-100 $7 trillion or 53% in lost real estate equity

26 Long-Term Real Home Price Index: Source: Robert J. Shiller, Irrational Exuberance, 2nd. Edition, Princeton University Press,2005, 2009, Broadway Books 2006, also Subprime Solution, 2008, as updated by author: WWI Great Depression WWII 70s Boom 80s Boom 2000s Boom 1890 to 1914 averaged to 1945 averaged to 1999 averaged to 2010 averaged

27 Monthly Foreclosure Filings Source: RealtyTrac, Inc. Data include Notices of Trustee Sales plus Notices of Foreclosure Sale 27

28 Percent of Distressed Home Sales Source: NAR

29 Percent of Loans in Foreclosure End of 4Q Source: Mortgage Bankers Association, National Delinquency Survey Judicial Foreclosure States Non-Judicial Foreclosure States US

30 6 states > 30% 13 states > 20% 21 states > 15% 14 states < 10% Source: CoreLogic®, Negative Equity Report, 3Q2011 High Negative Equity Concentrated in a Small Number of States

31 Seriously Delinquent Mortgages by Origination Year 31 Source: Mortgage Bankers Association, 4Q2011 National Delinquency Survey 9.5% 9.1%8.7%8.6% 8.1% 7.9% 7.7% 19% 72% 9% 0% 2% 1% 14% 12% 11% 65% 68% 69% 70% 71% 19%20%19% 18%

32 32 Sources: US Census Bureau, NAR, SAAR New SF sales are down 78% from 2005 peak New and Existing SF Home Sales U.S. Annual Average Total Sales million million million million Existing Sales (left axis) New Sales (right axis) (New 000s) (Existing 000s)

33 Sources: BLS. US Census Bureau, NAR, SAAR (Home Sales 000s) Rise in Employment Beginning to Show in Sales Volume Total Existing Home Sales (left axis) (Employed 000s) Employment (right axis)

34 People Who Plan to Buy a Home in the Next Six Months Source: The Conference Board, Original Data Average value = 3.3% US pop 2010 = 309 million; at average, 10.2 million people or 4.2 million households plan to buy a house in the next 6 months. At current rate, 5.7 million people or 2.3 million households plan to buy a house in the next 6 months.

35 FHFA US Monthly Home Price Index Source: FHFA, SA Currently equal to ~Feb 2004

36 Vacant Housing Units Source: US Census Bureau Vacant For Sale Vacant For Rent Vacant & Off the Market: Other

37 U.S. Home Price Indexes (Y/Y Percent Change in Index) Sources: NAR, FHFA, S&P Case-Shiller, FHLMC FHFA Repeat Sales Index NAR Median Price Case-Shiller Comp 20 SA FHLMC HPI

38 Annual New Home Sales Source: US Census Bureau, NAHB, Real Estate Center (000, SAAR) -50% 1977 Peak to Trough -28% 1986 Peak to Trough -77% 2005 Peak to Current -28% 1972 Peak to Trough 2011 less than half of normal level needed

39 New SF Home Starts Source: US Census Bureau, Real Estate Center at Texas A&M University (000s SAAR) 2011 down 75% from 2005 peak and 628,000 fewer units than average per year (1.06 million)

40 Price Index of New Single-Family Houses Sold Including Value of Lot [2005 = 100 Index based on kinds of houses sold in 2005] Source: US Census Bureau

41 Median Price of Existing SF Homes Source: NAR Major declines in 2008 & median down 25% from 2006 peak

42 Median Existing SF Home Price Source: NAR, Real Estate Center at Texas A&M University Trend Line

43 National Housing Affordability Index Source: NAR Composite Index Average = Drop of 31.5% from April 2003 to July 2006 Increase of 107% from July 2006 to Oct. 2011

44 Median Home Prices as a Multiple of Median Household Income New Homes (75-00 avg. = 3.82) Existing Homes (75-00 avg. = 3.36) Source: US Census Bureau, NAR, Real Estate Center at Texas A&M University

45 Divergent US Median HH Income and Median Home Prices Source: US Census Bureau, NAR Median Home Price Median HH Income 1990=100

46 2010 Median Price/Median Household Income Source: FHFA 2Q2010 Median Prices, 2010 American Community Survey, U.S. Census Bureau Most Affordable States Least Affordable States

47 Price-to-Rent Ratio Monthly FHFA P-O Index to BLS Owners Equivalent Rent January 1991 = 1.0 Source: FHFA, BLS Equilibrium

48 Why Hasnt the Housing Market Recovered? Employment uncertainty Tight Mortgage Credit Price pressure from foreclosures, distressed sales and shadow inventory Appraisals and the Home Valuation Code of Conduct – questionable automated valuations Confidence in the future

49 2012 Housing Outlook Distressed/Investor sales: ~1/3 U.S. market, ~10%-20% in Texas Tight lending & low appraisals 33% cancellation rate on new and existing contracts Confidence Crisis No feeling of well being Lost wealth: real estate & other assets Flat income (declining real income) Uncertain future: jobs, home values Inventory: new wave of foreclosures to hit market in 2012 Move-up & move-over buyers cant sell current home Move-out still renting cant buy Political decisions, regulations and policies unknown & problematic Improvement in general economy Low interest rates but little impact Pent up demand by those whove postponed housing or doubled-up Markets bottomed will show statistical improvement Investors buoy sales but not prices Affordability: prices more in line with income Rent-Own gap closing Incentives on new homes substantial Population and household growth strong in Texas Reasons for OptimismMarket Headwinds

50 If we knew what we were doing, it wouldn't be called research, would it? Albert Einstein

51 Dr. James P. Gaines Research Economist Real Estate Center at Texas A&M University

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