Economic and Housing Market Trends and Outlook Jed Smith Managing Director, Quantitative Research NATIONAL ASSOCIATION OF REALTORS ® Real Estate Broker Conference August 7 & 8, 2013 Hyatt O’Hare Chicago, Illinois

The Outlook: Forecast Slow Economic Expansion Forecast 2014 Forecast GDP Growth+1.8%+2.1%+1.8%2.7% Existing Home Sales 4.3 million4.7 million5.0 million5.2 million Housing Starts610 K780 K1.0 million1.25 million Existing Home Price Growth - 4%+ 6%+ 8%+ 5% 30-yr Mortgage Rate 4.7%3.7%4.0%4.7%

“It Was the Best Of Times, and the Worst of Times” Index Continues Below 100: Expansion Slow, Weaker than Normal

“It Was the Best Of Times, and the Worst of Times” Levels of Uncertainty Higher than Normal Economy: Slower/Weaker Expansion

U.S. Total Payroll Jobs Labor Force Participation Rate Down 3 Percent 11.8 Million Unemployed In thousands

Employment: The Major Issues Employment Lower than Normal. Unemployment Duration: Higher than Normal. Job Creation is Lagging. It’s Hard to Find a Job! Housing Market Expanding, But Could do Better. Good News—But Still Underperforming.

Housing Outlook: Annual Existing Home Sales Good News: Impending Multiyear Growth In million units

Housing Outlook: Home Prices Still Reasonable Market is Recovering—A Function of Jobs. Affordability Good, but Credit Availability Needs to Ease.

Housing Outlook: Affordability

Housing Outlook: Pending Home Sales Seasonally Adjusted 2001 = 100; Tax Credit Blips in 2010

Housing Outlook Days on Market--Down Very Significantly

Housing Outlook Distressed Sales Down

Housing Outlook Low Inventories

Housing Recovery—Why Sustainable? Housing Starts Requirement 1.1 million household formation. 0.3 million demolition and uninhabitable. (Implicitly assumes depreciation rate of more than 200 years) 0.2 million net new vacation home demand. Total New Housing Need = 1.6 million each year.

Housing Recovery—Why Sustainable? Household Formation Accelerating After Great Recession (in millions)

Housing Recovery—Why Sustainable? Quantifying Housing Shortage (2001 to 2012) Household Formation DemolitionNew Vacation Home Housing Starts 11.0 million3.6 million2.0 million15.7 million 16.6 million15.7 million This housing shortage imbalance could grow because (1) Household Formation will exceed 1 million in 2013 and beyond (2) Housing Starts need to be 1.5 million per year … Not there in 2013

Housing Recovery—Why Sustainable? Housing Starts: Long Term Demand Greater than Supply Thousand units (annualized) Long-term Average

Housing Recovery—Why Sustainable? Existing vs. New Home Prices … Big Gap (single-family homes)

Number of “Qualified” Renters (credit scores unknown and not factored) YearIncome Needed to Buy a Median Priced Home Number of Renters with necessary income Share of Renters Qualified 2000$40, million33% 2005$50, million24% 2012$31, million51% If the year 2000 is considered as normal, then 11.8 million renters had the income to buy a median priced home but chose not to. In 2012 there are about 8 million more renters with the necessary income but choosing not to be or are unable to be a homeowner.

Housing Recovery—Why Sustainable? Buyer Traffic Greater than Seller Availability--REALTOR® Survey

Price Expectations--Next 12 Months Source: REALTOR® Survey

Price Expectations for Next 12 Months As Reported by REALTORS®

Summary of Outlook: Where Are We Headed? Likely Multiyear Housing Recovery. – No Recession but Slow Economy. – Continued Job Growth and Household Formation. – Lagging Housing Starts and Continuing Housing Shortage. Home prices are primed to rise further, by 13% cumulatively in 2013 and Smooth Sailing Right Now—But Would be Better with Increased Credit Availability and Job Creation. But There are Major Risks.

Risks to Forecast—Housing Related Upside Uncertainties … Credit Availability – Housing recovery so far even with tight credit – What happens if mortgage accessibility opens up? Downside … Washington Housing Policies – Rising g-fees and FHA insurance premiums – QRM 20% down payment requirement? – Basel 3 … capital rule that punishes private mortgage with low down payment and commercial loans – Trim mortgage interest deduction? – Capital gains tax on home sale?

Credit Risks--Ready to Open Credit? (Average Credit Scores of Approved Loans) Normal2009 to 2012If Normal Fannie to Freddie to FHA to % to 20% Higher Sales Possible if Normal Conditions

FICO Scores: Unreasonably High Credit Availability: Negative Impact on Potential Homeowners

Downside Risk: Mortgage Investor Rights – Court system clogging the foreclosure process – Eminent Domain to take mortgages out of investors’ hands? (In order to restructure mortgages)

Downside Risk: Aging Baby Boomers (Live Births per 1000 population in U.S.)

Downside Risk: Student College Debt Important Issues: Are Colleges Effective, Are Expectations Realistic? ($ trillion)

Downside Risk: GDP Growth … Unimpressive How Fragile is the Recovery? Housing, Quantitative Easing, Other

Community Leaders—Thought Leadership Thought Leadership: People Look to Leaders for Ideas on Important Topics. Short Term—Recovery is Proceeding Nicely. Longer Term—There are Major Problems. The “Longer Term” Could be a Year or Two. – Problems are not Certainties. – But Problems Need to be Addressed. – And Can Show Up as a Surprise.

Major Economic Risks: Problems Not to be Ignored. For Now—Smooth Sailing. Longer Run—Avoid Surprises. Problems: just ignored. Budget Deficit. Quantitative Easing. Home Ownership Levels. Entitlements: Social Security, Medical Care, Disability, Social Welfare Programs. State/Local Government Finances. Labor Force Issues. Student Loans. Generational Split. Income Distribution. Lack of Growth. Regulation. Divisive Rancor. The iceberg: just ignored. Photographed morning April 15, 1912…smear of red paint along the base of the berg, indication that it had collided with a ship sometime in the previous twelve hours.

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