Economic Update with Dr. Lawrende Yun

Real Estate and Economic Outlook

Lawrence Yun, Ph.D.Chief Economist

NATIONAL ASSOCIATION OF REALTORS®

Presentation at St. Charles County Association of REALTORS®

St. Charles, MO

February 20, 2014

Existing Home Sales20% cumulative increase over 2 years

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 20130

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

Median Home Price(Near 20% gain in 2 years)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

St. Louis Housing Statistics• Closed Sales in 2013

Up +10% from 1 year agoUp +27% from 2 years ago

• Average Price Up +9% from 1 year agoUp +10% from 2 years ago

• Dollar Volume Up +19% from a year agoUp +37% from 2 years ago

• Active Listings … shrinking for 4th straight year

St. Charles Housing Statistics• Closed Sales in 2013

Up +18% from 1 year agoUp +43% from 2 years ago

• Median Prices Up +8% from 1 year agoUp +11% from 2 years ago

• Dollar Volume Up +26% from a year agoUp +54% from 2 years ago

• Days on Market … shrinking for 2nd straight year, typically sold in 53 days

Monthly Pending Sales Index(Seasonally Adjusted)

2011 - Jan

2011 - Apr

2011 - July

2011 - Oct

2012 - Jan

2012-Apr

2012 - Jul

2012 - Oct

2013 - Jan

2013 - Apr

2013 - Jul

2013 - Oct

70.075.080.085.090.095.0

100.0105.0110.0115.0

Source: NAR

Buyer and Seller Traffic How Much from Gov’t Shutdown and Dysfunction?

2008 - Jan

2008 - May

2008 - Sep

2009 - Jan

2009 - May

2009 - Sep

2010 - Jan

2010 - May

2010 - Sep

2011 - Jan

2011 - May

2011 - Sep

2012 - Jan

2012 - May

2012 - Sep

2013 - Jan

2013 - May

2013 - Sep

01020304050607080

Buyer Seller

Mismatch Growth

2-year Growth0%2%4%6%8%

10%12%14%16%18%20% 19%

4%

Home Price Household Income

Inevitable Rise in Mortgage Rates will further hurt Affordability

(30-yr rate have been below 6% for 5 years)

2000 - Jan 2001 - Dec2003 - Nov 2005 - Oct 2007 - Sep 2009 - Aug 2011 - Jul 2013 - Jun3

4

5

6

7

8

9%

Falling Affordability to 5-year LowBut still 5th best in 40 years

1971 - Jan 1976 - Jul 1982 - Jan 1987 - Jul 1993 - Jan 1998 - Jul 2004 - Jan 2009 - Jul0

50

100

150

200

250

All-Cash Buyers Stayed High … even when mortgages were cheap

(Cash share as % of total home sales)

0%

5%

10%

15%

20%

25%

30%

35%

40%

Normal Range

Refinances will Collapse in 2014(to at least 15-year low)

Jan 14 2000 Jan 11 2002 Jan 9 2004 Jan 6 2006 Jan 4 2008 Jan 1 2010 Dec 30 20110

2000

4000

6000

8000

10000

12000

Financial Industry Profits from Low Rates and RefisNow What … Boost Purchase Apps?

2001 - Q1

2001 - Q4

2002 - Q3

2003 - Q2

2004 - Q1

2004 - Q4

2005 - Q3

2006 - Q2

2007 - Q1

2007 - Q4

2008 - Q3

2009 - Q2

2010 - Q1

2010 - Q4

2011 - Q3

2012 - Q2

2013 - Q1

-200

-100

0

100

200

300

400

500$ billion

No Increase in Mortgages for Home Purchases during 2-year Recovery; Will Rise in 2014?

Jan 7 2000 Apr 12 2002 Jul 16 2004 Oct 20 2006 Jan 23 2009 Apr 29 2011 Aug 2 20130

100

200

300

400

500

600

Market Incentive to Lend More

• Huge Cash Reserve• Refi going away … purchase should be the only

game• Loans performing outstandingly• Far fewer seriously delinquent mortgages• Home price increases lower defaults

But Will Washington Allow It?

• Washington Policies so far … Too Restrictive– Rising g-fees and FHA insurance premiums?– Uncertainty about QRM down payment

requirement? … Dodd-Frank?– Too many Lawsuits? … Runaway DOJ?

• Mortgages Have Performed Outstandingly – Not because of Washington policies– But because of home price increases

• New Restriction with PATH?

What is PATH? … Hensarling’s Ideology(Protecting American Taxpayers and Homeowners?)

• For-profit Fannie and Freddie were Arrogant • Today’s Fannie and Freddie have had reforms under government

control• Remove Government Guarantee on Mortgages• 30-yr Fixed Rate Mortgages … Hard to get and higher rates• Large Banks will do Securitization … Small Banks at Risk• Market becomes excessively pro-cyclical• Large Banks have FDIC … taxpayer risk … vulnerable to

nationalization and, if so, government credit allocation

• Global capital could decide to go elsewhere rather than the U.S. …. Other countries grow faster than the U.S.

Latest Market Trends

New Home Inventory(Newly Constructed Homes Inventory at near 50-year low)

1964 - Jan 1970 - Jul 1977 - Jan 1983 - Jul 1990 - Jan 1996 - Jul 2003 - Jan 2009 - Jul0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Existing Home Inventory(near 13-year low)

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Shadow Inventory in NY and MO(Mortgages Late 90+ day or in foreclosure process)

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

0

2

4

6

8

10

12

NY

MO

Housing Starts … Need to Reach 1.5 million soon or persistent housing shortage

2000 - Jan2001 - Oct 2003 - Jul 2005 - Apr2007 - Jan2008 - Oct 2010 - Jul 2012 - Apr0

500

1000

1500

2000

2500multifamily single-family

Thousand units (annualized)

Long-term Average

St. Louis Area Housing Permits(year-to-date)

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Phoenix and St. LouisRepeat-Transaction Home Price Index

1995 - Q1

1996 - Q1

1997 - Q1

1998 - Q1

1999 - Q1

2000 - Q1

2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1

2007 - Q1

2008 - Q1

2009 - Q1

2010 - Q1

2011 - Q1

2012 - Q1

2013 - Q1

80

130

180

230

280

330

GDP … No Fresh Recession in Sight

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

-5-4-3-2-1012345

% growth from one year ago

Consumer Spending Growth(2% growth; not 3% or 4%)

1980 - Q11984 - Q11988 - Q11992 - Q11996 - Q12000 - Q12004 - Q12008 - Q12012 - Q1

-4

-2

0

2

4

6

8

Household Net Worth

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

40000

45000

50000

55000

60000

65000

70000

75000$ billion

Business Spending Growth(2% growth; not sustained 5% to 10%)

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q4

-20

-15

-10

-5

0

5

10

15

20

25

Business Spending in relation to Corporate Profits

1980 - Q1 1984 - Q2 1988 - Q3 1992 - Q4 1997 - Q1 2001 - Q2 2005 - Q3 2009 - Q40

500

1000

1500

2000

2500

Profits Business Spending

U.S. Total Payroll Jobs(8 million lost … Almost 8 million gained)

2000 - Jan 2002 - Mar 2004 - May 2006 - Jul 2008 - Sep 2010 - Nov 2013 - Jan124000

126000

128000

130000

132000

134000

136000

138000

140000In thousands

Improvement in Unemployment Rate


2

4

6

8

10

12

No Improvement in Employment Rate


56

58

60

62

64

66

St. Louis Area Total Jobs

2000 - Jan 2001 - Jul 2003 - Jan 2004 - Jul 2006 - Jan 2007 - Jul 2009 - Jan 2010 - Jul 2012 - Jan 2013 - Jul1250

1270

1290

1310

1330

1350

1370In thousands

Forecast

Forecast #1: Inflation will be Notably Higher by 2015

• No Threatening Inflation Signs for 2014

• But Inflation rises to 3% to 6% in 2015

• Well above Fed’s preferred rate of 2%

• But not in double-digits as in 1970s

Rising Renters’ and Homeowners’ Rent Growth (the biggest weight to Consumer Price Index)

2000 - Jan 2001 - Dec2003 - Nov 2005 - Oct 2007 - Sep 2009 - Aug 2011 - Jul 2013 - Jun

-1

0

1

2

3

4

5

Owners' Equivalent Rent Renters' Rent

Forecast #2(Rising Mortgage Rates to 5.3% by end of 2014)

2014forecast

2015forecast

Existing Home Sales 0% 4%

Median Price 5% 4%

Dollar Volume Estimate

+5% +8%

Forecast #3: More Unequal Wealth Distribution

• Renters do not accumulate wealth• Renter population rising• Homeowners build wealth after buying at low

prices• Stagnant homeowner population• Tight Credit hinders ‘good’ renters from

becoming homeowners• Investors becoming increasing share of property

owners

Renter Households

1980 - Q11984 - Q21988 - Q31992 - Q41997 - Q12001 - Q22005 - Q32009 - Q425,000

27,000

29,000

31,000

33,000

35,000

37,000

39,000

41,000In thousands

Homeowner Households has not Grown since 2006 … but Primed to Grow

1980 - Q11984 - Q21988 - Q31992 - Q41997 - Q12001 - Q22005 - Q32009 - Q450,000

55,000

60,000

65,000

70,000

75,000

80,000In thousands

Wealth Distribution (Federal Reserve data on median net worth)

Renter Owner$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

199820012004200720102014

2014 Forecast by NAR

Bubble Crash

• Dodd-Frank?• PATH?• Lawsuits?• Legacy?

What Homebuyers Want?

76%Single Family

Detached House

Single Family At-tached

4%

14%Condo or Apt.

80%Single Family De-

tached House

7%

5%

Condo or Apt.

8%

Slide 43

Slightly More Preference For Condo or Apartment Living Than In 2011

Housing Type Preference (2013): Housing Type Preference (2011):

Right now, if you could choose, which of the following would you prefer to live in:

6%

Single Family Attached

Walkability and Age-Diversity Gaining in Importance

0%

10%

20%

30%

40%

50%

46% 45%

37%

28% 28%

23% 23%

45% 44%

31%

24%

36%

15%

21%

Changes in Important Factors in Deciding Where to Live

+1 +1

+6

+4 -8

+8 +2

Very Important - 2013 Very Important - 2011

Q.47 In deciding where to live, indicate how important having each of the following would be to you: very important, somewhat important, not very important, or not at all important.

What Buyers Want Most From Their Agent

Help find the right home to

purchase; 53%

Help buyer negotiate the terms of sale;

12%

Help with the price negotia-

tions; 11%

Determine what compa-rable homes were selling

for; 8%

Help with paperwork;

7%Help find and arrange

financing; 3%

REALTOR® Median Gross Income

1995 1998 2000 2002 2004 2006 2007 2008 2009 2010 2011 2012$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

How many with more than $100,000? … 200,000How many with less than $10,000? … 360,000

47

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0100,000200,000300,000400,000500,000600,000700,000800,000900,000

1,000,0001,100,0001,200,0001,300,0001,400,0001,500,000

Annual Membership(at year-end)

Commercial Market Activity

Commercial Real EstateSales Volume Recovering

Prices UpSource: Moody's/REAL National - All Property Type Aggregate Index (CPPI)

Rents Increasing

St. Louis Commercial Statistics

• Office Vacancy 18% … no rent increase

• Apartment Vacancy 5% … 2% rent increase

• Retail Vacancy 13% … 1% rent increase

REALTOR® Markets & Deal Size

< $250,000

$250,000 - $500,000

$500,000 - $1,000,000

$1,000,000 - $2,000,000

$2,000,000 - $5,000,000

$5,000,000 - $10,000,000

> $10,000,000

21%

22%

26%

17%

12%

1%

2%

2013 CRE Lending Survey: Value of most recent sales transaction

Source: NAR

REALTORS® Commercial Economic Issues & Trends Forum | May 2013 | Washington, DC

REALTOR® CRE Markets Rebound

2008.Q4

2009.Q1

2009.Q2

2009.Q3

2009.Q4

2010.Q1

2010.Q2

2010.Q3

2010.Q4

2011.Q1

2011.Q2

2011.Q3

2011.Q4

2012.Q1

2012.Q2

2012.Q3

2012.Q4

2013.Q1

2013.Q2

-100%

-50%

0%

50%

100%

150%

200%

Sales Volume (YoY % Chg)

Major CRE Markets Realtor CRE Markets

Sources: NAR, Real Capital Analytics

Deals > $2.5M

8%

17%

25%

7%

6%

4%

18%

1% 11%

3%Current sources of financing for commercial deals

National banks (“Big four”)

Regional banks

Local banks

Credit unions

Life insurance companies

REITs

Private investors

Public companies

Small Business Administration

Other, please specify

Source: NAR

Small Banks Important to REALTORS®

NAR REALTORS® Commercial Activity SurveyAs of Third Quarter 2013

• Sales Volume Compared with Previous Year: Up 11%.

• Sales Prices Compared with Previous Year: Up 4%.

• Rental Volume Compared with Previous Quarter: Up 2%.

• Rental Rates Compared with Previous Quarter: Up 1%.

• Direction of Business Opportunities Compared with Previous Quarter: Up 4%.

Cap Rates and Treasuries: Large Gap

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

10yr UST* Cap Rate

Source: Real Capital Analytics

Commercial Forecast

Forecast over the next 2 years

• GDP Growth near 3%• Net New Jobs about 2 million a year• Rising interest rates …

– 10-year Treasury to reach 4% by late 2015• Cap rates rise somewhat (narrow the gap first)• Increased occupancy and falling vacancy (new

supply lacking)• Rising rents• Overall … improving business opportunities

Washington Policy Watch onCommercial Real Estate

• Facilitate Covered Bonds to help credit flow• Raise cap on holding of commercial RE loans by

credit unions• Preserve Like-Kind Exchanges• Preserve Terrorism Insurance• Preserve capital gains status on carried interest• Depreciation Rules should match economic life• Oppose lease-accounting changes

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Economic Update with Dr. Lawrende Yun

Real Estate

Transcript of Economic Update with Dr. Lawrende Yun