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Wichita Area Economic Outlook Conference October 1, 2009 Dr. Stanley D. Longhofer Director, WSU Center for Real Estate
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The recent housing market downturn has been unprecedented in the post-WWII era Deep declines in: ▪ Existing home sales (-35% from peak) ▪ New home sales (-75% from peak) ▪ Construction (-80% from peak) Nationwide in scope ▪ Past downturns have been regional
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Source: National Association of Realtors
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Source: U.S. Bureau of the Census
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In some ways, it wasn’t While sales and construction have declined nationwide, price movements have varied across the country Local market conditions drive local market outcomes In this downturn, however, most local markets were heavily impacted by a “national” factor: The relaxation and subsequent tightening of mortgage credit standards
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Source: Board of Governors of the Federal Reserve System
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The average decline nationwide has been much smaller than most believe Many markets (including most in Kansas) have continued to appreciate during the downturn In the worst markets, existing home price measures probably overstate the true magnitude of value declines
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Sources: FHFA and Standard & Poors -30% from peak -6% from peak
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Both indexes are designed to provide a “constant quality” measure of house price changes Differences in the indexes: Case-Shiller index is “value weighted” FHFA index includes both home sales and mortgage refinancings Case-Shiller index is heavily influenced by distressed sales Case-Shiller index is biased toward large, coastal markets
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Sources: WSU Center for Real Estate using data from FHFA and NAR –8% from peak –2% from peak –9% from peak
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43% of markets (166 out of 383) have seen prices increase over the past two years Both Wichita and Kansas as a whole have seen modest appreciation over this time frame Only 22 markets have seen price declines in excess of 30% over the past two years Other than Las Vegas (41% cumulative decline), all of these markets are in California or Florida
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The markets with the largest measured price declines are markets with a large number of distressed sales Poorly maintained properties Lenders pressured to get REO off their books Does a distressed sale really reflect the market value of non-distressed properties?
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Source: “Recent Trends in Home Prices: Differences across Mortgage and Borrower Characteristics,” OFHEO Research Paper, August 2008 Homes in Central California that were purchased by high-risk borrowers have seen greater price declines than homes purchased by low-risk borrowers, holding all else constant.
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Measured by sales and construction activity, this real estate downturn is unprecedented in the modern era Price declines, while widespread, have not been as deep as is popularly believed With home sales and construction having fallen so far, should we expect a strong rebound when the markets recover?
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Source: WSU Center for Real Estate using data from NAR and U.S. Bureau of the Census Historical Averages: KS = 46 US = 39
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Source: WSU Center for Real Estate using data from U.S. Bureau of the Census Historical Averages: KS = 7 US = 10
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Sources: National Association of Realtors and U.S. Bureau of the Census
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There is no reason to expect that sales activity will make a dramatic rebound Sales are not abnormally “low” Employment growth may be slow Financial markets have not fully normalized A new era of thrift?
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There is still excess inventory in many markets There was clearly overbuilding in “boom” markets Distressed properties are still supply on the market and compete with non-distressed homes Construction activity will be especially slow Irrelevant inventory doesn’t matter
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Prices have likely bottomed Most markets never saw steep declines The “worst” markets may rebound as distressed sales become less common Remember: All real estate markets are local
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