Modest Recession Modest Recovery Elliott D. Pollack & Company RALLY SUCCESS Coldwell Banker Success Realty January 28th, 2003

United States Real Gross Domestic Product. Annual Growth 1970 - 2004 United States Real Gross Domestic Product* Annual Growth 1970 - 2004** Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators * Based on chained 1996 dollars. ** 2002 - 2004 are forecasts from the Blue Chip Economic Indicators, January 2003 Recession Periods

30-Year Conventional Mortgage Rates. 1972 – 2002 30-Year Conventional Mortgage Rates* 1972 – 2002** Source: Federal Reserve Bank of St. Louis Fixed-rate mortgages ** Data through December 2002 Recession Periods

U. S. Single Family Housing Starts Percent Change Year Ago 1980 - 2002 U.S. Single Family Housing Starts Percent Change Year Ago 1980 - 2002* Source: National Association of Home Builders, U.S. Census Bureau Recession Periods *Data through December 2002.

U. S. Auto and Light Truck Sales 3-Month Moving Average 1977 – 2002 U.S. Auto and Light Truck Sales 3-Month Moving Average 1977 – 2002** Source: Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics Note: Series changed from SIC to NAICS classification in January 1992. *Data through December 2002. Recession Periods

Pent up demand?

U.S. Consumer Price Index (1982-1984=100) Percent Change from Year Ago 1991 – 2002* Source: U.S. Department of Labor, Bureau of Labor Statistics * Data through December 2002.

40 years later, still depends on drugs…. But now there is a $30 co-pay!

U.S. Leading Indicators 1971 – 2002* Source: The Conference Board * Data available through December 2002. Recession Periods

Consumer

U.S. Consumer Confidence 1982 – 2002* Source: The Conference Board December 2002 = 80.3 *Data through December 2002.

U. S. Real Personal Income Percent Change Year Ago 1971 – 2002 U.S. Real Personal Income Percent Change Year Ago 1971 – 2002* Source: Bureau of Economic Analysis Recession Periods * Data through third quarter 2002

Total Debt Service Payments As a Percent of Disposable Income 1980 – 2002* Source: Board of Governors, Federal Reserve Board *Data through third quarter 2002.

U. S. Personal Savings Rate 1959 – 2002. Source: U. S U.S. Personal Savings Rate 1959 – 2002* Source: U.S. Bureau of Economic Analysis *Data through November 2002.

Bear Markets Ranking of Peak to Trough Declines S&P Composite Stock Price Index Trough October 9, 2002

U. S. Unemployment Rates. 1970 – 2002. Source: U. S U.S. Unemployment Rates* 1970 – 2002** Source: U.S. Bureau of Labor Statistics *Seasonally adjusted **Data through December 2002.

Unemployment persists…. …but some are soon rehired

Unemployment persists…. …and some remain without jobs

NBER Recession Trough = 100 U.S. Employment Index* NBER Recession Trough = 100 Source: Bureau of Labor Statistics, Elliott D. Pollack & Co. *Seasonally adjusted Indexed growth for the 12 months prior and 24 months post to a recession trough.

Mortgage Refinancing Activity MBA Market Refi Index 1990 – 2002 Mortgage Refinancing Activity MBA Market Refi Index 1990 – 2002** Source: Mortgage Bankers Association ** Data through December 2002.

Mortgage Equity Withdrawal as a share of Disposable Income U. S Mortgage Equity Withdrawal as a share of Disposable Income U.S.: 1971 – 2002* Source: Bureau of Economic Analysis * Data through third quarter 2002 Recession Periods

How Households Are Using Their Refi Money Source: Federal Reserve; Business Week, January 27, 2003 Repayment of other debt 26% Home Improvements 35% Consumer Expenditures 16% Financial Investments 11% Real Estate or Business Investment 10% Taxes 2%

Average monthly savings with refinancing is $135.

U. S. Retail Sales less Automobiles Percent Change Year Ago U.S. Retail Sales less Automobiles Percent Change Year Ago* 1979 – 2002** Source: U.S. Census Bureau Note: Series changed from SIC to NAICS classification in January 1992. *Nominal data through November 2002. Recession Periods

U. S. Auto and Light Truck Sales 3-Month Moving Average 1977 – 2002 U.S. Auto and Light Truck Sales 3-Month Moving Average 1977 – 2002** Source: Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics Note: Series changed from SIC to NAICS classification in January 1992. *Data through December 2002. Recession Periods

Retail Inventory to Sales Ratio 1990 – 2002. Source: U. S Retail Inventory to Sales Ratio 1990 – 2002* Source: U.S. Census Bureau Total Retail Excluding Motor Vehicles *Seasonally adjusted data through October 2002.

Business

Industrial Production (1992=100) Percent Change Year Ago 1980 – 2002 Industrial Production (1992=100) Percent Change Year Ago 1980 – 2002* Source: The Conference Board Data available through December 2002. Recession Periods

Capacity Utilization Rate 1970 – 2002* Source: The Conference Board * Data through December 2002. Recession Periods

Total Real Equipment & Software Spending Percent Change Year Ago 1970 – 2002* Source: Bureau of Economic Analysis Y2K * Data through third quarter 2002. Recession periods

Government

Federal Funds Rate 1961 – 2002* Source: Federal Reserve * Data through December 2002. Recession Periods

M2 Stock – Seasonally Adjusted Percent Change Year Ago 1970 – 2002 M2 Stock – Seasonally Adjusted Percent Change Year Ago 1970 – 2002* Source: Federal Reserve Bank of St. Louis, U.S. Bureau of Labor Statistics * Data available through December 2002. Recession Periods

Fiscal Stimulus $674 billion proposed by President Bush over the next decade $100 billion of that is in 2003

Fiscal Stimulus Contribution to 2003

U.S. OUTLOOK Inventory/sales favorable Pent-up housing demand ?? Pent-up auto demand ?? Business plans: capital spending recovery to be slow Consumer spending to recover slowly Business, especially high-tech, bottoming out Fiscal stimulus will help spur recovery Long-term outlook remains good

What is different this time around? Less pent-up demand for autos and housing Will interest rates decline as economy picks up steam? Most excess capacity in 18 years

Possible, but would require a shock DOUBLE DIP? Possible, but would require a shock

SHOCKS Terrorist event War in Iraq / North Korea Continued stock market decline Credit crunch Oil Price Decline in real incomes

Still the most likely scenario SLOW GROWTH Still the most likely scenario

GREATER PHOENIX OUTLOOK U.S. economy modest positive High-tech manufacturing recovery to be slow Commercial and residential real estate past peak. Big drop in commercial construction in 2002. Services sector weak – especially tourism and business services

Phoenix-Mesa Employment Growth (Ranking among all metro areas greater then 1,000,000) Source: Arizona State University, U.S. Bureau of Labor Statistics YEAR RANK # of MSAs 1990 4 22 1991 5 22 1992 4 24 1993 2 24 1994 1 24 1995 1 24 1996 1 24 1997 3 25 1998 1 26 1999 2 27 2000 10 30 2001 10 31 2002* 18 30 *Data through November 2002

Arizona 33rd in Job Growth (Percent Growth November 2002) 49 10 9 3 11 10 13 13 4 8 14 1 5 48 9 6 7 33 5 36 States In Red Lost Jobs 50 2 Alaska 12

Recession & 9/11 Effects on Phoenix Housing Commercial construction Commercial aviation Tourism Semiconductors

Phoenix-Mesa MSA Employment. Annual Percent Change 1972–2004 Phoenix-Mesa MSA Employment* Annual Percent Change 1972–2004** Source: Arizona Department of Economic Security *Non-agricultural wage & salary employment ** 2003-2004 forecasts are from Elliott D. Pollack & Company. = National recessions

Phoenix-Mesa MSA Employment. Annual Change 1975–2004 Phoenix-Mesa MSA Employment* Annual Change 1975–2004** Source: Arizona Department of Economic Security Thousands *Non-agricultural wage & salary employment ** 2003 – 2004 forecasts are from Elliott D. Pollack & Company. = National recessions

Year-over-year comparisons easier after October 2002.

Phoenix-Mesa MSA Employment Index* NBER Recession Trough = 100 Source: Bureau of Labor Statistics, Elliott D. Pollack & Co. *Seasonally adjusted Indexed growth for the 12 months prior and 24 months post to a recession trough.

Phoenix-Mesa MSA Manufacturing Employment Phoenix-Mesa MSA Manufacturing Employment* Annual Percent Change 1975–2002** Source: Arizona Department of Economic Security *Non-agricultural wage & salary employment ** Year-to-date through December 2002. = National recessions

Maricopa County 42.5% Arizona 37.2% United States 14.6% HIGH-TECH MANUFACTURING EMPLOYMENT 2002* As a Percent of Total Manufacturing Employment Source: Arizona Department of Economic Security and U.S. Department of Labor Statistics Maricopa County 42.5% Arizona 37.2% United States 14.6% *Year-to-date through second quarter 2002

Phoenix-Mesa MSA Construction Employment Phoenix-Mesa MSA Construction Employment* Annual Percent Change 1972–2002** Source: Arizona Department of Economic Security *Non-agricultural wage & salary employment ** Year-to-date through December 2002. = National recessions

FACTORS AFFECTING GREATER PHOENIX Construction of commercial and residential real estate is past a peak. Significant decline in commercial construction in 2002 and 2003.

Maricopa County Retail Sales Annual Percent Change 1982–2004 Maricopa County Retail Sales Annual Percent Change 1982–2004* Source: Arizona Department of Revenue ** 2002 – 2004 forecasts from the Greater Phoenix Blue Chip = National recessions

Arizona 2nd in Population Growth for 9th Year 9 1 7 6 10 2 5 8 4 ALASKA 3 Percent Change 2002

States Ranked by Domestic Migration: 2001 - 2002 8 3 10 7 MARYLAND 6 2 9 5 4 Lost Domestic Population 1

Domestic Migration: 2002 Five States Attracted About 2/3 of All Domestic Migrants Florida 177,000 Arizona 67,000 Nevada 43,000 Texas 41,000 Georgia 36,000

International Migration: 2001 - 2002 States Ranked by International Migration: 2001 - 2002 3 6 1 5 10 9 8 7 Alaska 2 4 Bottom Ten

Population Rank: 2002 2nd in Domestic Migration 2nd Fastest Growth Rate 2nd in Domestic Migration 8th in International Migration 20th Largest State

Single Family Permits Maricopa County 1975–2004 Single Family Permits Maricopa County 1975–2004* Source: Phoenix Metropolitan Housing Study # Permits Note: Data does not include townhouses and condominiums * 2002 - 2004 are forecasts from the Greater Phoenix Blue Chip

Single Family Median Price Maricopa County 1986–2002 Single Family Median Price Maricopa County 1986–2002* Source: Phoenix Metropolitan Housing Study Total Resale Note: Total includes new and resale units. * Data through third quarter 2002.

Single Family Units Sold Maricopa County 1986–2002 Single Family Units Sold Maricopa County 1986–2002* Source: Phoenix Metropolitan Housing Study Total Resale Note: Total includes new and resale units. *Four quarters ending the third quarter 2002.

4 Factors Affecting Housing Population flows Interest rates Demographics Investment value appreciation

Every time the population increases by 2 Every time the population increases by 2.8 people, a new housing unit is needed.

Greater Phoenix Population Annual Percent Change 1970–2004 Greater Phoenix Population Annual Percent Change 1970–2004* Source: Arizona State University & Arizona Department of Economic Security * 2003-2004 forecasts are from the Greater Phoenix Blue Chip = National recessions

Greater Phoenix Population Annual Change 1970–2004 Greater Phoenix Population Annual Change 1970–2004* Source: Arizona State University & Arizona Department of Economic Security Thousands * 2003-2004 forecasts are from Elliott D. Pollack & Company

30-Year Conventional Mortgage Rates. 1972 – 2002 30-Year Conventional Mortgage Rates* 1972 – 2002** Source: Federal Reserve Bank of St. Louis Fixed-rate mortgages ** Data through December 2002. Recession Periods

30-Year Conventional Mortgage Rates 30-Year Conventional Mortgage Rates* 1974-75 Recession Source: Federal Reserve Bank of St. Louis Fixed-rate mortgages Recession Periods

30-Year Conventional Mortgage Rates 30-Year Conventional Mortgage Rates* 1980 and 1982 Recession Source: Federal Reserve Bank of St. Louis Fixed-rate mortgages Recession Periods

30-Year Conventional Mortgage Rates 30-Year Conventional Mortgage Rates* 1991 Recession Source: Federal Reserve Bank of St. Louis Fixed-rate mortgages Recession Periods

30-Year Conventional Mortgage Rates 30-Year Conventional Mortgage Rates* 2001 Recession Source: Federal Reserve Bank of St. Louis Fixed-rate mortgages Recession Periods

While the appreciation in housing prices is expected to slow over the next few years….

…it is still likely to be positive, and….

…at the present time, there appears to be no bubble in the Greater Phoenix market.

Housing is a market of markets. Remember Housing is a market of markets. What happens in San Diego, New York City or San Jose has nothing to do with what is going on in Phoenix

Cost of a $100,000 Mortgage Interest Rate Payment 2000 8.5% $769 1991 10% $878 2000 8.5% $769 2002 6.05% $603

Housing Affordability in Maricopa County Mortgage that can be afforded % of Median Payment today Income . 1991 $878 $143,000 34.2% 2000 $769 $125,000 20.4% 2002 $603 $100,000 15.1%

Arizona Population by Age Net Change 2000 - 2010 Source: Arizona Department of Economic Security Thousands

Starter Home Buying Cycle Net Change in Population Ages 25 to 34 Maricopa County: 1991 – 2030 Source: Arizona Department of Economic Security

Trade-Up Home Buying Cycle Net Change in Population Ages 35 to 44 Maricopa County: 1991 – 2030 Source: Arizona Department of Economic Security

Vacation Home Buying Cycle Net Change in Population Ages 45 to 54 Maricopa County: 1991 – 2030 Source: Arizona Department of Economic Security

Retirement Home Buying Cycle Net Change in Population Ages 55 to 69 Maricopa County: 1991 – 2030 Source: Arizona Department of Economic Security

Single Family Median Price Maricopa County 1986–2002 Single Family Median Price Maricopa County 1986–2002* Source: Phoenix Metropolitan Housing Study Note: Includes new and resale units. * Data through third quarter 2002.

Single Family Median Price Percent Change Year Ago Source: Phoenix Metro Housing Study

Investment Return Housing vs. Stock Market Housing Stock Market 1998 5.0% 26.7% 1999 6.5% 19.5% 2000 5.3% -10.1% 2001 5.5% -13.0% 2002* 4.2% -20.5% * Year-to-date through November 2002. ^ Based on S&P 500 Source: Phoenix Metro Housing Study; FreeLunch.com

The long-term dynamics of have not changed.

GREATER PHOENIX OUTLOOK Greater Phoenix is at the end employment recession. Manufacturing employment up in 2003. Construction employment to be under pressure. Services employment to recover slowly Population growth No rebound from housing. Slow recovery in tourism. OVERALL, THE RATE OF GROWTH WILL SLOWLY ACCELERATE…

Greater Phoenix Forecast 2001 - 2004 2001 2002 2003 2004 POPULATION 3.6% 2.7% 2.7% 2.8% EMPLOYMENT 1.1% -1.0% 2.9% 3.6% HOUSING PERMITS SINGLE FAMILY 32,867 31,700 31,775 31,471 MULTI-FAMILY 7,201 5,050 4,839 5,688 PERSONAL INCOME 5.4% 4.4% 6.0% 6.6% RETAIL SALES 1.5% 3.2% 5.7% 5.8% Source: AZ DES; AZ Dept of Revenue; Greater Phoenix Blue Chip; Elliott D. Pollack & Co.

ELLIOTT D. POLLACK & Company WWW.ARIZONAECONOMY.COM INFO @ EDPCO.COM Economic and Real Estate Consulting WWW.ARIZONAECONOMY.COM INFO @ EDPCO.COM 7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251 480-423-9200 P 480-423-5942 F www.arizonaeconomy.com