1. The Real Story About Today’s Real Estate Boom David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS ® August 2005 David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS ® August 2005

2. Painting the Boom Booming Prices Record Home Sales Second Home Buying Frenzy Stretching Credit Media Frenzy Doom/Gloom Predictions Booming Prices Record Home Sales Second Home Buying Frenzy Stretching Credit Media Frenzy Doom/Gloom Predictions

3. Hot Markets in the Past 3 Years (2005 Q2 vs 2002 Q2) Source: NAR

4. Cool Markets in the Past 3 Years (2005 Q1 vs 2002 Q1) Source: NAR Under the Radar

5. Home Price Distribution (2005 Q2) Source: NAR

6. Real Home Price Growth Source: NAR All-time High Recession Impacts

7. Record Existing-Home Sales In million units Source: NAR

8. Record New Home Sales In thousand units Source: Census

9. Second-Home Buying on the Rise Source: NAR

10. Stretching Credit ARMS (33% of all loans in 2005) Interest-Only Share (23% of all loans in 2004) Low Documentation Loans Low Down Payment Loans Stretching to get a 40% larger loan –$250,000 traditional loan at 6% rate equals $1,499 per month –$350,000 interest-only loan at 5% rate equals $1,458 per month ARMS (33% of all loans in 2005) Interest-Only Share (23% of all loans in 2004) Low Documentation Loans Low Down Payment Loans Stretching to get a 40% larger loan –$250,000 traditional loan at 6% rate equals $1,499 per month –$350,000 interest-only loan at 5% rate equals $1,458 per month

11. Media Frenzy The Economist – After the Fall (from the biggest bubble in history) Fortune – Real Estate Gold Rush Businessweek – After the Housing Boom Newsweek – Real Estate Gone Wild Money – Are Home Prices Really So Crazy? Kiplinger’s – The 13 Riskiest Housing Markets The Wall Street Journal - Crash Test: Does A Housing Bust Hurt More Than A Stock Collapse? The Economist – After the Fall (from the biggest bubble in history) Fortune – Real Estate Gold Rush Businessweek – After the Housing Boom Newsweek – Real Estate Gone Wild Money – Are Home Prices Really So Crazy? Kiplinger’s – The 13 Riskiest Housing Markets The Wall Street Journal - Crash Test: Does A Housing Bust Hurt More Than A Stock Collapse?

12. Chicken Little’s Sky is Falling Robert Shiller (Yale) – predicts 50% decline in real prices in the next decade Dean Baker (Center for Economic and Policy Research) – claims Bush’s House of Card PMI Group – 6 markets with greater than 50% chance of price decline in the next 12 months Robert Shiller (Yale) – predicts 50% decline in real prices in the next decade Dean Baker (Center for Economic and Policy Research) – claims Bush’s House of Card PMI Group – 6 markets with greater than 50% chance of price decline in the next 12 months

13. The Real Story Strong Demand –Historic low rates –Second home demand –Job additions Lean Supply Demographic Shifts Little Overstretching Favorable Affordability Strong Demand –Historic low rates –Second home demand –Job additions Lean Supply Demographic Shifts Little Overstretching Favorable Affordability

14. Seismic Population Shifts Baby boomers nearing retirement – seeking retirement destinations Faster job creations in low cost “business- friendly” regions Faster job creation in new high-tech industries Immigration concentrated in few markets Baby boomers nearing retirement – seeking retirement destinations Faster job creations in low cost “business- friendly” regions Faster job creation in new high-tech industries Immigration concentrated in few markets

15. U.S. Migration Trend 2000 to 2003 -103 Ohio +108 North Carolina +140 Georgia -551 New York -277 California -238 Illinois -102 Massachusetts +146 Nevada +194 Arizona +541 Florida Net Domestic Migration (in thousands) State Source: Census

16. Doubling of Florida Florida population growing twice as fast as the U.S. Population to double by 2040 Adding more than 17 million people Equivalent to adding everyone currently in Pennsylvania and Maryland Florida population growing twice as fast as the U.S. Population to double by 2040 Adding more than 17 million people Equivalent to adding everyone currently in Pennsylvania and Maryland Source: NAR

17. Doubling of Nevada Nevada (Las Vegas) population growing the fastest – nearly four times as fast as the U.S. Population to double by 2023 Adding more than 2 million people Equivalent to adding a Seattle or Tampa- St. Petersburg Nevada (Las Vegas) population growing the fastest – nearly four times as fast as the U.S. Population to double by 2023 Adding more than 2 million people Equivalent to adding a Seattle or Tampa- St. Petersburg Source: NAR

18. Baby Boomer Retirement Northeasterners (with huge housing equity) move to Florida –FL markets may experience affordability pressures –Northeast home prices supported by minimal new home construction Midwesterners (with minimal housing equity) forced to look outside FL or just stay put –Net outflow and active building keeps prices low in the Midwest Californians head to nearby low tax states of AZ, NV, and WA –These markets may soon experience affordability pressures –California home prices supported by minimal new home construction Northeasterners (with huge housing equity) move to Florida –FL markets may experience affordability pressures –Northeast home prices supported by minimal new home construction Midwesterners (with minimal housing equity) forced to look outside FL or just stay put –Net outflow and active building keeps prices low in the Midwest Californians head to nearby low tax states of AZ, NV, and WA –These markets may soon experience affordability pressures –California home prices supported by minimal new home construction

19. Months Supply of Inventory Source: NAR

20. Low Interest Rate Decade Source: Freddie Mac 1970s 9% average 1980s 13% average 1990s 8% average 2000s 6.5% average

21. Loan-to-Value Suggests Manageable Household Balance Sheet Source: Federal Housing Finance Board

22. Adjustable Rate Mortgages High but Trending Down Source: Federal Housing Finance Board

23. Typical Homebuyer’s Mortgage Payment Source: NAR

24. Housing Affordability Still High Source: NAR Rates have to rise to 7.2% to bring Affordability to 100

25. Why a “Bubble” is not a Bubble Fundamentals Market Analysis Influencing Factors Stress Test Fundamentals Market Analysis Influencing Factors Stress Test

26. Fundamentals Local Economic Conditions (jobs, diverse economy) Population/Migration Trends Supply Conditions Affordability Investor Share Mortgage Composition Local Economic Conditions (jobs, diverse economy) Population/Migration Trends Supply Conditions Affordability Investor Share Mortgage Composition

27. Market Analysis Jobs Construction Activity Local vs. National Prices Mortgage Debt/Median Income Affordability Analysis Jobs Construction Activity Local vs. National Prices Mortgage Debt/Median Income Affordability Analysis

28. Influencing Factors Demographic Trends Population Growth Building Growth Restrictions Demographic Trends Population Growth Building Growth Restrictions

29. Stress Test Flat Rates Rising Rates Job Losses Price Increases Flat Rates Rising Rates Job Losses Price Increases

30. Sample Metro Market Analysis Washington, D.C.

31. Key Market Facts Median Price $429,200 –106% higher than national median –23% rise in 2004 and 108% rise in 5 years Solid Demand/Supply Fundamentals –110,000 net new jobs in the past two years easily beats 57,000 new single-family home construction Median Price $429,200 –106% higher than national median –23% rise in 2004 and 108% rise in 5 years Solid Demand/Supply Fundamentals –110,000 net new jobs in the past two years easily beats 57,000 new single-family home construction

32. Home Price No growth Takeoff

33. Residual-Hangover Impact (5-year job gains vs 5-year new housing units) Prices still couldn’t get on positive traction due to hangover effect Accumulating demand over supply unleashed with the fall in rates

34. Mortgage Servicing Cost to Per Capita Income Not alarming, just at long-term historical average Worrisome forecast only if rates rise to 10%

35. Current Mortgage Market Stress Low 12 Percent with LTV greater than 90% Moderately high 31 Interest-Only Average 33 ARMs Comment % of Total

36. Washington, D.C. Prices can increase 8% to 12% without undue stress if mortgage rates rise to 7% and job gains continue at recent pace Price can increase 15% to 20% without undue stress if rate remain near 6% and job gains continue at recent pace If jobs suddenly stall, then prices can increase by only 5% without undue stress Prices can increase 8% to 12% without undue stress if mortgage rates rise to 7% and job gains continue at recent pace Price can increase 15% to 20% without undue stress if rate remain near 6% and job gains continue at recent pace If jobs suddenly stall, then prices can increase by only 5% without undue stress

37. Metro Market Analysis San Diego

38. Key Market Facts Median Price $605,600 –Nearly 3 times the national average –20% appreciation in 2004 –Prices doubled in 4 years. Strong Demand/Supply Fundamentals –Job creations throughout recession; pace could weaken due to affordability problems –Limited supply help support prices, but any weakening in demand (job losses) could lead to price softening –High percentage of risky loans Median Price $605,600 –Nearly 3 times the national average –20% appreciation in 2004 –Prices doubled in 4 years. Strong Demand/Supply Fundamentals –Job creations throughout recession; pace could weaken due to affordability problems –Limited supply help support prices, but any weakening in demand (job losses) could lead to price softening –High percentage of risky loans

39. San Diego - Home Price Flat to Declining Takeoff

40. Demand/Supply Ratio (5-year job gains vs 5-year new housing units) Accumulated pent-up demand largely satisfied with new housing

41. Mortgage Servicing Cost to Per Capita Income Under 50%, relatively low Already Near Historic Highs

42. Mortgage Market Stress Very low 3 3 Percent with LTV greater than 90% High 48 Interest-Only High 67 ARMs Comment % of Total

43. Stress Test Price appreciation could remain low or flat (air coming out of balloon) for the next two years if mortgage rates rise to 7% and job gains continue at recent pace Prices can increase 5% without undue stress if rate remain near 6% Price appreciation could remain low or flat (air coming out of balloon) for the next two years if mortgage rates rise to 7% and job gains continue at recent pace Prices can increase 5% without undue stress if rate remain near 6%

44. Preliminary Observations for Metro Markets

45. The Rolling Boom 34.3%Sarasota-Bradenton-Venice, FL 36.5%Orlando, FL 40.0%Palm Bay-Melbourne-Titusville, FL 45.2%Cape Coral-Fort Myers, FL 47.0%Phoenix-Mesa-Scottsdale, AZ 2005 – Q2 30.4%Los Angeles-Long Beach-Santa Ana, CA 37.5%San Diego-Carlsbad-San Marcos, CA 38.5%Riverside-San Bernardino-Ontario, CA 38.7%Anaheim-Santa Ana, CA (Orange Co.) 52.4%Las Vegas-Paradise, NV 2004 – Q2 21.7%Barnstable Town, MA 22.0%Providence-New Bedford-Fall River, RI-MA 22.4%Glens Falls, NY 23.5%Riverside-San Bernardino-Ontario, CA 24.1%Elmira, NY 2003 – Q2

46. Highest Price Growth by Metro (2005 Q2 vs 2004 Q2) N/A 24.8% 367.6 Riverside-San Bernardino-Ontario, CA 15 5.1 25.7% 244.9 Atlantic City, NJ 14 1.9 26.2% 429.2 Washington-Arlington-Alexandria 13 2.3 28.1% 577.8 Honolulu, HI 12 N/A 28.7% 206.0 Hagerstown-Martinsburg, MD-WV 11 1.0 30.0% 228.5 Tucson, AZ 10 N/A 30.9% 198.5 Durham, NC 9 9 N/A 31.2% 194.0 Deltona-Daytona Beach-Ormond Beach, FL 8 8 2.1 31.7% 371.6 Miami-Fort Lauderdale-Miami Beach, FL 7 7 1.2 32.1% 357.4 Reno-Sparks, NV 6 6 3.7 34.3% 367.8 Sarasota-Bradenton-Venice, FL 5 5 N/A 36.5% 232.2 Orlando, FL 4 4 2.9 40.0% 204.0 Palm Bay-Melbourne-Titusville, FL 3 3 N/A 45.2% 266.8 Cape Coral-Fort Myers, FL 2 2 1.1 47.0% 243.4 Phoenix -Mesa-Scottsdale, AZ 1 1 Months Supply % Change Price

47. Established and Growing (Job centers and affordable) Low cost labor, favorable job creating climate, low home price (for now) from active home building –Dallas-Ft. Worth –Charlotte –Atlanta –Orlando –Houston –Tampa-St. Petersburg Low cost labor, favorable job creating climate, low home price (for now) from active home building –Dallas-Ft. Worth –Charlotte –Atlanta –Orlando –Houston –Tampa-St. Petersburg

48. Quality Job Centers but Declining Affordability High paying jobs with net positive migration; home prices getting expensive –Washington D.C. –San Diego –Orange County –Nassau-Suffolk High paying jobs with net positive migration; home prices getting expensive –Washington D.C. –San Diego –Orange County –Nassau-Suffolk

49. Desirable but Experiencing Affordability Issues High-paying jobs; but net negative migration due to high home prices –San Francisco –New York –Boston High-paying jobs; but net negative migration due to high home prices –San Francisco –New York –Boston

50. Young and Energetic Strong in-migration trends –Boise –Sarasota –Ft. Myers –Las Vegas –Phoenix –Jacksonville Strong in-migration trends –Boise –Sarasota –Ft. Myers –Las Vegas –Phoenix –Jacksonville

51. High-Tech Swing Cities Educated work force; quality of living on the rise Net positive migration High-tech meltdown to high-tech resurgence Educated work force; quality of living on the rise Net positive migration High-tech meltdown to high-tech resurgence –San Jose –Denver –San Jose –Denver –Seattle –Austin –Raleigh-Durham –Seattle –Austin –Raleigh-Durham

52. Not yet on Radar (up and coming and little noticed) Up and coming and little noticed ocean destinations Fewer baby boomers retirees able to go to pricey South Florida Up and coming and little noticed ocean destinations Fewer baby boomers retirees able to go to pricey South Florida –Wilmington, NC –Charleston, SC –Myrtle Beach, SC –Panama City, FL –Wilmington, NC –Charleston, SC –Myrtle Beach, SC –Panama City, FL –Pensacola, FL –Port St. Lucie, FL –Mobile, AL –Virginia Beach, VA –Pensacola, FL –Port St. Lucie, FL –Mobile, AL –Virginia Beach, VA

53. Growing Neighbors Affordable relative to its pricey neighbor Riding the high-tide of its neighbor –Riverside-San Bernardino –Baltimore –Sacramento –Providence Affordable relative to its pricey neighbor Riding the high-tide of its neighbor –Riverside-San Bernardino –Baltimore –Sacramento –Providence

54. Top Large Markets for Second-Home Purchases % Source: 2003 HMDA

55. Some Markets Accelerating % Source: NAR

56. More Acceleration % Source: NAR

57. Some Markets with Soft Landings % Source: NAR

58. More Soft Landing % Source: NAR

59. High IOs and ARMs but Low LTVs No foreclosure danger, but may get pinched from rising rates –Raleigh-Durham –San Diego –Seattle –San Francisco –Sacramento –Raleigh-Durham –San Diego –Seattle –San Francisco –Sacramento –Boston –Chicago –Denver –Las Vegas –Los Angeles –Portland –Boston –Chicago –Denver –Las Vegas –Los Angeles –Portland

60. Housing Outlook 9.3% 3.9% 5.8% 1.96 million 1.20 million 6.78 million 2004 5.2% 10.5% Existing-Home Price Growth 5.2% 4.5% 1-Year ARM 6.5% 5.9% 30-Year FRM 1.86 million 2.02 million Housing Starts 1.20 million 1.26 million New Home Sales 6.73 million 6.98 million Existing-Home Sales 2006 2005

61. The True Story About Today’s Real Estate Boom David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS ® August 2005 David Lereah, Ph.D., Chief Economist NATIONAL ASSOCIATION OF REALTORS ® August 2005