The Real Story About Todays Real Estate Boom

1
The Real Story About Todays Real Estate Boom

• David Lereah, Ph.D., Chief Economist
• NATIONAL ASSOCIATION OF REALTORS
• August 2005

2
Painting the Boom

• Booming Prices
• Record Home Sales
• Second Home Buying Frenzy
• Stretching Credit
• Media Frenzy
• Doom/Gloom Predictions

3
Hot Markets in the Past 3 Years(2005 Q2 vs 2002
Q2)
Source NAR
4
Cool Markets in the Past 3 Years(2005 Q1 vs 2002
Q1)
Under the Radar
Source NAR
5
Home Price Distribution(2005 Q2)
Source NAR
6
Real Home Price Growth
All-time High
Recession Impacts
Source NAR
7
Record Existing-Home Sales
In million units
Source NAR
8
Record New Home Sales
In thousand units
Source Census
9
Second-Home Buying on the Rise
Source NAR
10
Stretching Credit

• ARMS (33 of all loans in 2005)
• Interest-Only Share (23 of all loans in 2004)
• Low Documentation Loans
• Low Down Payment Loans
• Stretching to get a 40 larger loan
• 250,000 traditional loan at 6 rate equals
  1,499 per month
• 350,000 interest-only loan at 5 rate equals
  1,458 per month

11
Media Frenzy

• The Economist After the Fall (from the biggest
  bubble in history)
• Fortune Real Estate Gold Rush
• Businessweek After the Housing Boom
• Newsweek Real Estate Gone Wild
• Money Are Home Prices Really So Crazy?
• Kiplingers The 13 Riskiest Housing Markets
• The Wall Street Journal - Crash Test Does A
  Housing Bust Hurt More Than A Stock Collapse?

12
Chicken Littles Sky is Falling

• Robert Shiller (Yale) predicts 50 decline in
  real prices in the next decade
• Dean Baker (Center for Economic and Policy
  Research) claims Bushs House of Card
• PMI Group 6 markets with greater than 50
  chance of price decline in the next 12 months

13
The Real Story

• Strong Demand
• Historic low rates
• Second home demand
• Job additions
• Lean Supply
• Demographic Shifts
• Little Overstretching
• Favorable Affordability

14
Seismic Population Shifts

• Baby boomers nearing retirement seeking
  retirement destinations
• Faster job creations in low cost business-
  friendly regions
• Faster job creation in new high-tech industries
• Immigration concentrated in few markets

15
U.S. Migration Trend2000 to 2003
Net Domestic Migration (in thousands)
State
541
Florida
194
Arizona
146
Nevada
140
Georgia
108
North Carolina
-102
Massachusetts
-103
Ohio
-238
Illinois
-277
California
Source Census
-551
New York
16
Doubling of Florida

• Florida population growing twice as fast as the
  U.S.
• Population to double by 2040
• Adding more than 17 million people
• Equivalent to adding everyone currently in
  Pennsylvania and Maryland

Source NAR
17
Doubling of Nevada

• Nevada (Las Vegas) population growing the fastest
  nearly four times as fast as the U.S.
• Population to double by 2023
• Adding more than 2 million people
• Equivalent to adding a Seattle or Tampa-St.
  Petersburg

Source NAR
18
Baby Boomer Retirement

• Northeasterners (with huge housing equity) move
  to Florida
• FL markets may experience affordability pressures
• Northeast home prices supported by minimal new
  home construction
• Midwesterners (with minimal housing equity)
  forced to look outside FL or just stay put
• Net outflow and active building keeps prices low
  in the Midwest
• Californians head to nearby low tax states of AZ,
  NV, and WA
• These markets may soon experience affordability
  pressures
• California home prices supported by minimal new
  home construction

19
Months Supply of Inventory
Source NAR
20
Low Interest Rate Decade
1970s 9 average
2000s 6.5 average
1980s 13 average
1990s 8 average
Source Freddie Mac
21
Loan-to-Value Suggests Manageable Household
Balance Sheet
Source Federal Housing Finance Board
22
Adjustable Rate Mortgages High but Trending Down
Source Federal Housing Finance Board
23
Typical Homebuyers Mortgage Payment
Source NAR
24
Housing Affordability Still High
Rates have to rise to 7.2 to bring Affordability
to 100
Source NAR
25
Why a Bubble is not a Bubble

• Fundamentals
• Market Analysis
• Influencing Factors
• Stress Test

26
Fundamentals

• Local Economic Conditions (jobs, diverse economy)
• Population/Migration Trends
• Supply Conditions
• Affordability
• Investor Share
• Mortgage Composition

27
Market Analysis

• Jobs
• Construction Activity
• Local vs. National Prices
• Mortgage Debt/Median Income
• Affordability Analysis

28
Influencing Factors

• Demographic Trends
• Population Growth
• Building Growth Restrictions

29
Stress Test

• Flat Rates
• Rising Rates
• Job Losses
• Price Increases

30
Sample Metro Market AnalysisWashington, D.C.
31
Key Market Facts

• Median Price 429,200
• 106 higher than national median
• 23 rise in 2004 and 108 rise in 5 years
• Solid Demand/Supply Fundamentals
• 110,000 net new jobs in the past two years easily
  beats 57,000 new single-family home construction

32
Home Price
Takeoff
No growth
33
Residual-Hangover Impact(5-year job gains vs
5-year new housing units)
Accumulating demand over supply unleashed with
the fall in rates
Prices still couldnt get on positive traction
due to hangover effect
34
Mortgage Servicing Cost to Per Capita Income
Worrisome forecast only if rates rise to 10
Not alarming, just at long-term historical average
35
Current Mortgage Market Stress
36
Washington, D.C.

• Prices can increase 8 to 12 without undue
  stress if mortgage rates rise to 7 and job gains
  continue at recent pace
• Price can increase 15 to 20 without undue
  stress if rate remain near 6 and job gains
  continue at recent pace
• If jobs suddenly stall, then prices can increase
  by only 5 without undue stress

37
Metro Market AnalysisSan Diego
38
Key Market Facts

• Median Price 605,600
• Nearly 3 times the national average
• 20 appreciation in 2004
• Prices doubled in 4 years.
• Strong Demand/Supply Fundamentals
• Job creations throughout recession pace could
  weaken due to affordability problems
• Limited supply help support prices, but any
  weakening in demand (job losses) could lead to
  price softening
• High percentage of risky loans

39
San Diego - Home Price
Takeoff
Flat to Declining
40
Demand/Supply Ratio(5-year job gains vs 5-year
new housing units)
Accumulated pent-up demand largely satisfied
with new housing
41
Mortgage Servicing Cost to Per Capita Income
Already Near Historic Highs
Under 50, relatively low
42
Mortgage Market Stress
43
Stress Test

• Price appreciation could remain low or flat (air
  coming out of balloon) for the next two years if
  mortgage rates rise to 7 and job gains continue
  at recent pace
• Prices can increase 5 without undue stress if
  rate remain near 6

44
Preliminary Observations for Metro Markets
45
The Rolling Boom
46
Highest Price Growth by Metro(2005 Q2 vs 2004 Q2)
47
Established and Growing(Job centers and
affordable)

• Low cost labor, favorable job creating climate,
  low home price (for now) from active home
  building
• Dallas-Ft. Worth
• Charlotte
• Atlanta
• Orlando
• Houston
• Tampa-St. Petersburg

48
Quality Job Centers but Declining Affordability

• High paying jobs with net positive migration
  home prices getting expensive
• Washington D.C.
• San Diego
• Orange County
• Nassau-Suffolk

49
Desirable but Experiencing Affordability Issues

• High-paying jobs but net negative migration due
  to high home prices
• San Francisco
• New York
• Boston

50
Young and Energetic

• Strong in-migration trends
• Boise
• Sarasota
• Ft. Myers
• Las Vegas
• Phoenix
• Jacksonville

51
High-Tech Swing Cities

• Educated work force quality of living on the
  rise
• Net positive migration
• High-tech meltdown to high-tech resurgence

• San Jose
• Denver

• Seattle
• Austin
• Raleigh-Durham

52
Not yet on Radar(up and coming and little
noticed)

• Up and coming and little noticed ocean
  destinations
• Fewer baby boomers retirees able to go to pricey
  South Florida

• Wilmington, NC
• Charleston, SC
• Myrtle Beach, SC
• Panama City, FL

• Pensacola, FL
• Port St. Lucie, FL
• Mobile, AL
• Virginia Beach, VA

53
Growing Neighbors

• Affordable relative to its pricey neighbor
• Riding the high-tide of its neighbor
• Riverside-San Bernardino
• Baltimore
• Sacramento
• Providence

54
Top Large Markets for Second-Home Purchases

Source 2003 HMDA
55
Some Markets Accelerating

Source NAR
56
More Acceleration

Source NAR
57
Some Markets with Soft Landings

Source NAR
58
More Soft Landing

Source NAR
59
High IOs and ARMs but Low LTVs

• No foreclosure danger, but may get pinched from
  rising rates

• Raleigh-Durham
• San Diego
• Seattle
• San Francisco
• Sacramento

• Boston
• Chicago
• Denver
• Las Vegas
• Los Angeles
• Portland

60
Housing Outlook
61
The True Story About Todays Real Estate Boom

• David Lereah, Ph.D., Chief Economist
• NATIONAL ASSOCIATION OF REALTORS
• August 2005