Current and Future Real Estate Trends

1
Current and Future Real Estate Trends
Prepared for Senate Banking, Housing and Urban
Affairs Subcommittee on Housing Transportation
and Subcommittee on Economic Policy
David A. LereahSenior Vice President and Chief
Economist

• National Association of REALTORS

Phone [phone]
September 13, 2006
2
Cooling National SalesExisting-Homes
In million units
Source NAR
3
Housing Inventory
All-time High
Source NAR
4
Home Price Appreciation
Percent change from a year ago
Source NAR
5
Condo Significant Price Depreciation in West
and South
Percent change from a year ago
Source NAR
6
Cooling Markets (Existing-Home Sales 2006 Q2 vs
2005 Q2)
Source NAR
7
Price Decelerations and Declines (Existing Home
Sales 2006 Q2 vs 2005 Q2)
26 MSAs had price declines in 2006 Q2
8
Lengthening Days on Market
Source NAR
9
Still, One-third of the Country is Expanding
(Existing Home Sales 2006 Q2 vs 2005 Q2)
Source NAR
10
Price Accelerations and Recovery (One-year gain
in 2006 Q2 and 2005 Q2)
11
Shortening Days on Market
Source NAR
12
A Divided Real Estate Nation
Red Expanding (31 of the country by
population) Blue Contracting (69)
Source NAR, Existing Home Sales 2006 Q2 vs 2005
Q2
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What Happened?

• Boom ended August 2005
• Mortgage rates rose almost one point
• Affordability conditions deteriorated
• Speculative investors pulled out
• Homebuyer confidence plunged
• Resort buyers went to sidelines
• Trade-up buyers to sidelines
• First-time buyers priced out of market

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The Aftermath

• Sellers market transitioning to buyers market
• Home sales plummet, prices lag, inventories rise
• Cooling markets left with high percentage of
  exotic loans
• Builders offering non-price incentives
• Days-on-market lengthening
• Residential construction activity slows
• Home prices beginning to soften

15
Income Not Keeping Pace With Home Prices
Income and Price set to Index of 100 in 1990
Source NAR
16
Metro Home PricesModerate to Unsustainable
Widened Gap
Bunched Together
Source NAR
17
Las Vegas Price Growth Variability (Price growth
minus historic average)

Source NAR
18
Home Price Distribution (2006 Q2)
Source NAR
19
Income Required to Buy a Typical Home_at_ 6.6
mortgage rate and 20 downpayment
Source NAR
20
Mortgage Obligation to Income Worrisome in the
West

Source NAR
21
Mortgage Obligation to Income Very High in Some
Markets
45 !!!
San Diego
Source NAR
22
Mortgage Obligation to Income Historical High in
Some Markets
Way Above Historical Local Norm
Miami
Source NAR
23
Some Markets Experiencing Very High or Rising
ARMS

Markets carrying more risk from interest rate
changes
Source FHFB
24
Disappearing Affordable Homes -FHA Participation
in California
Source HMDA
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What Will Happen?

• 2006 corrections different from previous real
  estate corrections
• Cooling markets have healthy local economies
• Seller-to-buyer transitions almost complete
• Prices expected to fall for remainder of year
• Price fall will be limited due to Pent-up Demand
  at Lower Prices
• Some Local Markets are Fragile and Vulnerable to
  Rate Rise
• Soft Landing

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Risks of Over-tightening

• Sluggish Economy (Recession?)
• Tumbling Housing Sector
• Leading to rising delinquencies and foreclosures
• Wary Consumers (from home equity losses)

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Scenarios/Probability of Popping
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Past Notable Price Declines(mostly in the late
80s or early 90s)
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Economic Outlook
30
Housing Outlook