1. Dr. James P. Gaines Research Economist Real Estate Center Texas A&M University recenter.tamu.edu 2010 Convention

2. Topics General Economy Housing Market – Currently – Prospects for Future 2

3. Weve Spent a Lot of Time Around the Ole Water Cooler 3

4. Characteristics of This Recession 4 A 0% funds rate, $1.4 trillion budget deficit and a $2.2 trillion Fed balance sheet Nearly one-third of homeowners have negative equity 1 in 6 are either unemployed or underemployed. 1 in 7 homeowners either delinquent or in the foreclosure process Small business failures are up 44% y/y 30% slide in home prices 50% plunge in commercial real estate values

5. Economy is Trying to Recover, but Slow Going Employment Final Retail Sales GDP Inventories Corporate Earnings Projections for the next couple of years indicate substantive growth doesnt occur until 2012 5

6. Is There a Secular Attitudinal Change Going On Given Economy, Credit Collapse and Household Net Worth Implosion? Debt Savings Discretionary spending patterns Homeownership 6

7. Percent Growth in Real GDP Since 2000 Seasonally Adjusted Annual Rate 7 Source: Bureau of Economic Analysis An uninspired 2.7% increase during first half of 2010

8. Total National Debt and Debt as a Percentage of GDP 8 Sources: Federal Reserve Flow of Funds, BEA Billions

9. Annual Employment Growth Rate 9 Source: BLS, Real Estate Center at Texas A&M University

10. Change in Monthly Employment Source: BLS, SAAR Thousands of Jobs

11. Measures of Un- and Underemployment 11 Source: BLS Percent U-6, the broadest measure Headline Rate

12. Unemployment Rate by Level of Education June 2010 Source: BLS, 25-years old +; Seasonally adjusted rates

13. Recovery May Take a While 13

14. Personal Consumption Expenditures Source: Department of Commerce, SAAR Personal consumption represents about 70% of US economy and is showing signs of recovery

15. Source: The Conference Board (1985=100) Consumer Confidence Index 15 7 cycles since 1967: Avg. during recession = 72 Avg. at end of recession = 71.5; Avg. during an expansion = 102

16. Corporate After-Tax Profits (Quarterly With Inventory Valuation & Capital Consumption Adjustment) 16 Source: Bureau of Economic Analysis

17. Wow, back in 1990, the Government seized the Mustang Ranch brothel in Nevada for tax evasion and, as required by law, tried to run it. They failed, and it closed. A Thought from Maxine "BAIL EM OUT! ???? Now we are trusting the auto industry, the banking system and healthcare to the same nit- wits who couldn't make money running a whore house and selling whiskey! 17

18. Looking Ahead to the Next Couple of Years 18

19. Major Hurdles for 2010 & 2011 1.State, local and school districts falling revenues 2.Credit contraction continues – business, consumer credit, mortgages 3.Jobs, income and spending 4.Pending changes in laws, regulations and taxes – capital gains tax; cap and trade; financial institutions & banking regs – UNCERTAINTY! 5.Extend & Pretend in banking system 6.Foreclosure-gate 7.Psychological malaise 19

20. 20 The Housing Market

21. Our Last Economic and Housing Forecasting Staff Meeting 21

22. Current Housing Issues Tax credit stimulated buying about 10% to 12% Lower demand, foreclosures and homebuilder concessions affecting value changes Foreclosures continue to add to inventory Appraisals are major issue in purchases Lenders making mortgages difficult to obtain Jumbo loans and ADC loans virtually non- existent in most of the country Affordability operative market word 22

23. FHLMC 30-Year Fixed Rate 23 Source: FHLMC

24. 24 US Homeownership Rate Source: US Census Bureau; FHLMC (4-quarter moving average homeownership rate) 1970s Baby Boomers enter market; homeownership grows 1995-2005 Low interest rates and new mortgage products; Homeownership explodes from 64.1% to 69.1% (Percent) Current rate is same as 1Q2000

25. Lost Wealth: Households Equity in Real Estate Source: Federal Reserve, Flow of Funds, B-100 $6.2 trillion or 47% in lost real estate equity RE Equity about where it was in 1999-2000

26. Total HH Home Mortgage Borrowing Source: Federal Reserve, Flow of Funds, D-2 $0.5 trillion between 1972 and 1979; $1.5 trillion between 1980 and 1989; $2.1 trillion between 1990 and 1999; $6.1 trillion between 2000 and 2007 26

28. Monthly Foreclosure Filings Source: RealtyTrac, Inc. Data include Notices of Trustee Sales plus Notices of Foreclosure Sale 28

29. Foreclosure Filings and the U.S. Unemployment Rate 29 Sources: BLS, RealtyTrac, Inc. Foreclosure Filings include Notices of Trustee Sales plus Notices of Foreclosure Sale

30. 30 Sources: US Census Bureau, NAR, NAHB (000s) Existing SF sales are down 21% from 2005 peak New SF sales are down 78% from 2005 peak New and Existing SF Home Sales U.S. Annual Average Total Sales 1980-1989 3.55 million 1990-1999 4.7 million 2000-2006 7.15 million 2007-1H2010 4.3 million Existing Sales (left axis) New Sales (right axis)

31. Future Home Sales Volume Job Growth Mortgage Rates and Credit Terms Home Price Affordability Federal Government Actions 31

32. Distressed Home Sales 32 Source: NAR Foreclosures Short Sales Total Distressed Sales

33. First-Time Home Buyers (Percent of Total Home Buyers) 33 Source: NAR, 2009 Profile of Home Buyers and Sellers

34. US Total Housing Starts Total Units & 12-Month Moving Average 34 Source: US Census Bureau, Real Estate Center at Texas A&M Monthly Units 12-Month Moving Avg.

35. 35 Source: NAR, Real Estate Center at Texas A&M University US Median Home Prices Since 1990 National House Price Bubble 1990-2000 Trend 12-Month Moving Average Since 2001

36. U.S. Home Price Percent Change Y/Y Percent Change in Quarterly Estimates 36 Source: NAR, FHFA PO Index, Case Shiller, CoreLogic HPI FHFA Repeat Sales Index NAR Median Price Case Shiller Comp 20 NSA CoreLogic HPI

37. Percent Change in House Prices in Selected States as of 3Q2010 37 Source: FHFA, SA, P-O Index

38. Median Asking Rents 38 Source: Census Bureau

39. Has the Housing Market Bottomed? Answer: maybe, hopefully, probably. But we still may not really know for sure for another several months. Can the market sustain itself without massive Federal government help Foreclosures will stay high. A large number of Option-ARM and prime ARM mortgages reset starting this quarter and going through all next year and into 2011. The health of the housing market, nationally and locally, depends on a general economic recovery - especially stopping the loss of jobs and preferably adding new jobs. The housing market may have bottomed out, but will probably have a long, slow recovery – think 5 to 10 years, not just one or two. 39

40. Number of Housing Units Vacant and Held Off Market Other 40 Source: US Census Bureau

41. Average Annual Home Sales History New Home SaleExisting Home SalesTotal Sales 1980-1989609,0002,940,0003,549,000 1990-1999698,0003,993,0004,691,000 2000-20061,055,0006,092,0007,146,000 2007-2009545,0005,240,0005,785,000 41 Estimated Inventory of Available Homes (000s) Number of Homes New + Existing Listings3,500,000 Other Vacant3,500,000 90+ Days Delinquent or In Foreclosure4,100,000 REOs900,000 Total Potential Inventory to Clear9,000,000 – 12,000,000 When and How Does the Housing Market Go Back to Normal?

42. Number of Years to Clear Available Inventory Annual Avg. SalesEstimated Inventory to Clear 9,000,00010,000,00011,000,00012,000,000 4,500,000 2.02.22.42.7 5,000,000 1.82.02.22.4 5,530,000* 1.61.82.02.2 6,000,0001.51.71.82.0 6,500,0001.41.51.71.8 42 * 2009 annual sales level Somewhere between mid-2012 and 2014 When and How Does the Housing Market Go Back to Normal?

43. What to Expect Fed to stop cutting interest rates after QE2 Gasoline prices will continue to increase Federal bailout of the banks and financial institutions Mortgage interest rates unlikely to change much, for now Higher inflation and higher taxes inevitable in future 2011-2012: higher inflation, low economic growth, modest job gains, low but increasing interest rates 43

44. THERE IS STILL GOING TO BE DEMAND FOR HOUSING 44

45. Live Births in the U.S. 45 Source: National Center for Health Statistics Millions Echo Boomers Entering mid-20s Baby Boomers Entering 60s Millen- nium Babies Enter- ing School Pre-War Babies Entering mid-80s Baby Bust Entering 40s

46. Leading State Population Increases 2000-2009 State Total Population IncreaseNatural Foreign Immigration Domestic Immigration Texas 3,930,4842,124,124933,083848,702 California 3,090,0162,878,4821,816,633-1,509,708 Florida 2,555,130479,586851,2601,182,974 Georgia 1,642,430684,445281,998567,135 Arizona 1,465,171464,238272,410714,354 North Carolina 1,334,478457,927214,573675,016 46 Source: U.S. Census Bureau Table 5. Estimates of the Components of Population Change for the United States, Regions, and States:

47. Top Growth MSAs 2000-2009 47 Source: U.S. Census Bureau

48. 48 US Population Growth 2007-2012 Source: Global Insight, Inc.

49. Annual Household Formation 49 Source: Census Bureau Average annual household formation since 1960 = 1.315 million

50. Total Housing Units Owned vs. Rented 50 Source: US Census Bureau Thousands of Units

51. Dr. James P. Gaines Research Economist Real Estate Center Texas A&M University recenter.tamu.edu 2010 Convention