2012 Year in Review Charleston Realtors Market Update
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RESIDENTIAL MARKET UPDATE 2012 Year-In-Review January 29, 2013 Charleston Marriott
presented by
The Charleston Trident Association of Realtors®
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Stephen Slifer Economist NumberNomics Formerly of Lehman Brothers The Federal Reserve
Facebook.com/NumberNomics
www.NumberNomics.com
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The Highlights
1. GDP growth in 2013 = 2.7% (vs. 2.0% in 2012) 2. Consumers and businesses will be engines of growth. 3. Longer-term budget problems -- perspective. 4. Longer-term budget problems -- the solution.
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-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1
GDP (Real)
Year-over-year
GDP (Real)
Slow, but steady. GDP growth for 2012 came in at 2.0% 2013 growth expected to be 2.7% even with some drag from fiscal policy.
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Consumption 60%
Government 15.0%
Trade 10.0%
Investment 15%
GDP Components
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50.0
55.0
60.0
65.0
70.0
75.0
80.0
85.0
90.0
95.0
100.0
Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013
Consumer Sentiment
Recession
Consumer sentiment plunged in December as fiscal cliff fears mounted. It remained low in January as the 2% increase in the payroll tax kicked in. Even so, confidence remains relatively high.
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600
700
800
900
1000
1100
1200
1300
1400
1500
1600
S&P 500
The stock market has regained all of the ground it lost during the recession, and is close to its record high level of 1561 set back in October 2007.
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$35.0
$40.0
$45.0
$50.0
$55.0
$60.0
$65.0
$70.0Consumer Net Worth (Trillions $)
The gain in stock prices means that consumers have restored most of the wealth they lost during the recession. The other important component of wealth is the value of your home.
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10.0%
11.0%
12.0%
13.0%
14.0%
15.0%
Consumer Debt Service Ratio
Trend
Consumers were highly leveraged at the beginning of the recession. They have since paid down enormous amounts of debt, and this debt ratio is the lowest since 1983. They can quicken the pace of spending if they so choose.
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2.9
3.4
3.9
4.4
4.9
Mortgage Rates
At 3.4% mortgage rates today are at a record low level… And they are going lower as the Fed keeps buying mortgage- backed securities.
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145.00
155.00
165.00
175.00
185.00
195.00
205.00
215.00
225.00
235.00
245.00
Jan
2005
Jul 2
005
Jan
2006
Jul 2
006
Jan
2007
Jul 2
007
Jan
2008
Jul 2
008
Jan
2009
Jul 2
009
Jan
2010
Jul 2
010
Jan
2011
Jul 2
011
Jan
2012
Jul 2
012
Case Shiller Home Price Index
At the same time prices are 30% lower than they were at the peak of the housing market back in 2006.
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100
120
140
160
180
200
2007 2008 2009 2010 2011 2012
Housing Affordability Index
Record low mortgage rates and sharply reduced prices mean that housing today is more affordable than it has been at any time in 40 years
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500
700
900
1100
1300
1500
1700
1900
Jan 2006 Jul 2006 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012
Housing Starts
Trend
Housing Starts
We need housing starts of 1.3 million to keep pace with growth in the population. Those people need a place to live. Starts have been below that pace for 5 years. Thus, demand has exceeded supply for 5 years.
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4.5
5.5
6.5
7.5
8.5
9.5
10.5
1980:Q1 1983:Q1 1986:Q1 1989:Q1 1992:Q1 1995:Q1 1998:Q1 2001:Q1 2004:Q1 2007:Q1 2010:Q1
Rental Vacancy Rate
That increase in demand has created A shortage of rental properties. Vacancy rates have fallen sharply and are the lowest in a decade.
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$600
$620
$640
$660
$680
$700
$720
$740
2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1
Asking Rent -- Vacant Rentals
The shortage of rental property is beginning to push rents upwards.
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145.00
155.00
165.00
175.00
185.00
195.00
205.00
215.00
225.00
235.00
245.00Ja
n 20
05
Jul 2
005
Jan
2006
Jul 2
006
Jan
2007
Jul 2
007
Jan
2008
Jul 2
008
Jan
2009
Jul 2
009
Jan
2010
Jul 2
010
Jan
2011
Jul 2
011
Jan
2012
Jul 2
012
Case Shiller Home Price Index
After a big drop, home prices hit bottom in January 2012 Since that time they have been climbing at a 7.0% annual rate. As prices climb, fewer homeowners will be upside down and fence-sitters will be encouraged to buy.
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1. Consumers feel confident.
2. They have restored almost all of their net worth.
3. The consumers’ debt burden is quite comfortable.
4. Interest rates are at record low levels.
5. Housing is as affordable as it has ever been.
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Consumption 60%
Government 15.0%
Trade 10.0%
Investment 15%
GDP Components
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49
52
55
58
61
64
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13
CEO Confidence
CEO confidence is high and should climb in the months ahead if the government successfully deals with budget problems.
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600
700
800
900
1000
1100
1200
1300
1400
1500
1600
S&P 500
Stock prices have been climbing steadily. As a result, many firms have chosen to raise capital by issuing more stock.
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-35.0%
-15.0%
5.0%
25.0%
45.0%
65.0%
$800
$900
$1,000
$1,100
$1,200
$1,300
$1,400
$1,500
$1,600
$1,700
$1,800
$1,900
$2,000
$2,100 Corporate Profits with IVA and CC
Corporate Profits
Year-over-year
By cutting costs and boosting productivity, profits have soared and are still climbing at a healthy 6% pace.
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3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
11.0
Corporate Bond Rates
Aaa
Baa
Corporate borrowing rates are the lowest they have been in more than 50 years. Firms have been replacing high cost debt with lower cost borrowing. Lowers costs. Boosts profits. 50-year bonds anyone?
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-22.0%
-17.0%
-12.0%
-7.0%
-2.0%
3.0%
8.0%
13.0%
-35.0%
-25.0%
-15.0%
-5.0%
5.0%
15.0%
25.0%
Jan
2010
Apr 2
010
Jul 2
010
Oct
201
0
Jan
2011
Apr 2
011
Jul 2
011
Oct
201
1
Jan
2012
Apr 2
012
Jul 2
012
Oct
201
2
C & I Loans (L)
Year-Over-Year (R)
C & I Loans (%)
Credit is readily available via commercial paper and bond issuance. In addition, bank loans to businesses are growing at a robust 13% pace.
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8.0%
8.5%
9.0%
9.5%
10.0%
10.5%
Corporate Cash / Assets (%)
Corporate cash levels have never been higher. They have plenty of cash available for investment.
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1. CEO’s feel relatively confident.
2. Profits are soaring.
3. Interest rates are at record low levels.
4. Credit is readily available.
5. Firms have accumulated a mountain of cash.
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-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
Nonresidential Invest.
Year-over-year
Nonresidential Investment Investment spending had been growing at a 10% rate. But it has been gradually slowing since the beginning of last year.
Why? Uncertainty.
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-50
0
50
100
150
200
250
300
350Ja
n-10
Feb-
10M
ar-1
0Ap
r-10
May
-10
Jun-
10Ju
l-10
Aug-
10Se
p-10
Oct
-10
Nov
-10
Dec-
10Ja
n-11
Feb-
11M
ar-1
1Ap
r-11
May
-11
Jun-
11Ju
l-11
Aug-
11Se
p-11
Oct
-11
Nov
-11
Dec-
11Ja
n-12
Feb-
12M
ar-1
2Ap
r-12
May
-12
Jun-
12Ju
l-12
Aug-
12Se
p-12
Oct
-12
Nov
-12
Dec-
12Ja
n-13
Feb-
13
Private Employment Jobs have been climbing by about 170 thousand per month. That is OK, but not great. Why? Uncertainty.
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We Have a Long-Term Budget Problem
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-$1,600
-$1,400
-$1,200
-$1,000
-$800
-$600
-$400
-$200
$0
$200
$400
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Budget Deficit
We have had 4 consecutive $1 trillion budget deficits. To finance a $1 trillion deficit need to issue $1 trillion of debt. In past 4 years we have added $5 trillion to debt outstanding.
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20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Debt -- % GDP
Acceptable
Danger
As a result debt to GDP ratio has climbed sharply. Will reach danger level of 90% during next 10 years.
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20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Debt -- % GDP
Danger
Acceptable
The real problems begin beyond 2022 because the baby boomers (born 1946-1964) will retire between 2011-2029. Debt to GDP ratio could reach 186%. Think Greece.
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What Do We Do?
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-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Deficit -- % GDP
Projected deficits will climb to almost 6.0% of GDP by 2022. Would like it to be 2.0%. Thus, must shrink it by 4.0%.
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14.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Tax Revenue % GDP
Current revenue is 15.7% of GDP will rise to about 18.5% as the economy improves.
Historical average is 17.7%. Probably not a lot of room to increase taxes.
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16.0%
17.0%
18.0%
19.0%
20.0%
21.0%
22.0%
23.0%
24.0%
25.0%
26.0%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
Govt. Spending % GDP
Government spending today is 23% of GDP. Climbs to 24% by 2022. Historical average if 19.7%. Way too high!
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-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Deficit -- % GDP Slifer solution: Tax Revenue = 0.0% Expenditure cuts = -4.0% Deficit Reduction = -4.0% Not everybody agrees.
Most policy makers want a ratio of 3:1 of spending cuts vs. higher tax revenue.
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Tax Revenue
Individual = 46%
Social Security = 35%
Corporate = 11%
Other = 8%
To boost tax revenue they must increase individual taxes and/or Social Security taxes. Combined they account for 81% of the total.
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Government Spending
Entitlements = 62%
Nondefense = 14%
Interest = 6%
Defense = 18%
To cut spending they must include entitlements such as Social Security, Medicare, and Medicaid (62%). Discretionary spending is only 32% or roughly 1/3 of the pie.
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Now We Have a Broad Plan
Revenues = 0.0%, Expenditures = -4.0%
What specific taxes will be increased?
What expenditures will be cut?
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Erskine - Bowles Commission
The Blueprint for a Solution
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Erskine Bowles Commission
1. Bipartisan. 18 members. Formed in 2010. 2. 9 Republicans. 9 Democrats 3. Nobody expected them to find a solution.
But they did.
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Erskine Bowles Commission
1. Bipartisan. 18 members. Formed in 2010. 2. 9 Republicans. 9 Democrats 3. Nobody expected them to find a solution.
But they did. 4. 11 votes in favor (61%) 5. Needed 14 to formally adopt the blueprint.
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Erskine Bowles Commission
1. Individual Taxes Three brackets – 8%, 14%, 23% (vs. 39%) Eliminate most tax deductions Tax rates lower, but tax revenue rises.
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Erskine Bowles Commission
2. Corporate taxes Corporate tax rate – 26% (vs. 35% today) Eliminate most tax deductions. Tax rates lower, but tax revenue rises.
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Erskine Bowles Commission
3. Discretionary Spending
Cut to 2008 levels quickly (pre-recession). Allowed to grow at ½ of inflation rate. Equal percentage cuts for security and non-
security.
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Government Spending
Entitlements = 62%
Nondefense = 14%
Interest = 6%
Defense = 18%
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Erskine Bowles Commission
4. Social Security
Reduce benefits, particularly for high income individuals.
Increase retirement age gradually to 68. Increase payroll tax max from $168
thousand to $190 thousand.
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Erskine Bowles Commission
5. Medicare
Medigap policies -- First $500 not covered. $500-5,000 coverage is 50% of expenditure. Raise eligibility age to 68.
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20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
200.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035
Debt -- % GDP
Danger
Acceptable
Instead of debt to GDP ratio climbing to 186% by 2035, Simpson Bowles would shrink it to 40%. It may take 25 years to get there, but it can be done.
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If They Can Find A Solution…
1. Less uncertainty. 2. Higher consumer and business confidence. 3. Faster growth in investment. 4. Faster GDP growth. Faster income growth. 5. More hiring. Lower unemployment rate. 6. Stock market soars.
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Two Important Dates
1. February 28. Government begins to sequester money. 2. March 27. Continuing resolution expires. Government shutdown.
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2013 Forecasts
2012 2013 GDP 2.0% 2.7% Unemployment Rate 7.8% 7.3% Inflation Rate 1.9% 1.9% Fed Funds Rate 0.1% 0.1% 10-year Note 1.7% 1.3% 30-year Mortgage 3.4% 3.0%
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Seize the Moment
Stephen Slifer NumberNomics www.NumberNomics.com
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Joey Von Nessen, Ph.D Research Economist USC’s Moore School of Business RESH Marketing & Research
YouTube.com/RESHMarketing
www.Resh.com
@RESHMarketing
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