Real Estate Reality Check

1
Real Estate Reality Check
NAR Leadership Summit Chicago, IL August 17 18,
2006

• David Lereah, Ph.D.
• Chief Economist
• National Association of REALTORS

2
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
3
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

4
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

5
Cooling Markets (Existing-Home Sales 2006 Q2 vs
2005 Q2)
Source NAR
6
Cooling Metro Markets (Existing Home Sales 2006
Q2 vs 2005 Q2)
Source NAR
7
Lengthening Days on Market
Source NAR
8
Rising Months Supply
Source NAR
9
Price Decelerations and Declines (Existing Home
Sales 2006 Q2 vs 2005 Q2)
26 MSAs had price declines in 2006 Q2
10
Still, One-third of the Country is Expanding
(Existing Home Sales 2006 Q2 vs 2005 Q2)
Source NAR
11
Shortening Days on Market
Source NAR
12
Price Accelerations and Recovery (One-year gain
in 2006 Q2 and 2005 Q2)
13
National Existing-Home Sales
In million units
Source NAR
14
Home Price Appreciation
Percent change from a year ago
Source NAR
15
Condo - Price Depreciation
Percent change from a year ago
Source NAR
16
Condo Significant Price Depreciation in West
and South
Percent change from a year ago
Source NAR
17
Housing Inventory
All-time High
Source NAR
18
Correction Necessary

• Unsustainable Growth and Growing Imbalances
  Create Heavy Pains Later
• (Better to have light pains now)
• Rampant Boom Creates Affordability Crisis and
  Workforce Housing Problems
• High Debt Burdens Not Healthy for Economy
• Adjustable and Exotic Loans Raise Risk

19
Income Not Keeping Pace With Home Prices
Income and Price set to Index of 100 in 1990
Source NAR
20
Metro Home PricesModerate to Unsustainable
Widened Gap
Bunched Together
Source NAR
21
Home Price Distribution (2006 Q2)
Source NAR
22
Disappearing Affordable Homes -FHA Participation
in California
Source HMDA
23
Income Required to Buy a Typical Home_at_ 6.6
mortgage rate and 20 downpayment
Source NAR
24
Mortgage Obligation to Income Worrisome in the
West

Source NAR
25
Mortgage Obligation to Income Very High in Some
Markets
45 !!!
San Diego
Source NAR
26
Mortgage Obligation to Income Historical High in
Some Markets
Way Above Historical Local Norm
Miami
Source NAR
27
Some Markets Experiencing Very High or Rising
ARMS

Markets carrying more risk from interest rate
changes
Source FHFB
28
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

29
States with Declining Home Sales, But Housing
Needs/Demand Growing(June 2005 to June 2006)
Source BLS, NAR Estimates
30
Housing Affordability Tumbling Helps Rental
Market
Source NAR
31
Price Scenarios of 5 Annual Growth after few
years of no growth
1,000s
Median Price in 2005 219,600
Near 600,000 by 2030 even in pessimistic scenario
The number of Years of No Price Growth
Source NAR
32
Job Gains/Losses in the Recent 12 months
In thousands
HOT
COLD
New Orleans has 178,400 fewer jobs (not included
above)
Source BLS
33
U.S. Migration Trend(Top 5 vs. Bottom 5)
Source Census
34
Evolving Market Trends

• Greater Price Volatility in Some Markets
• Greater Liquidity
• More Investors
• More Speculator
• Hedge Fund Investors
• Homeownership at Younger Age
• Increased Turnover Rate

35
Prices Do Decline(mostly in the late 80s or
early 90s)
36
San Diego
Percent change from a year ago
Source NAR
37
New York
Percent change from a year ago
Source NAR
38
Honolulu
Percent change from a year ago
Source NAR
39
Dallas
Percent change from a year ago
Source NAR
40
Las Vegas Price Growth Variability (Price growth
minus historic average)

Source NAR
41
Liquidity from Investors Appetite for Mortgages
(2006 Q1)
Source Federal Reserve, NYSE, NASDAQ
42
More Mortgage Products

• 15-year, 30-year, 40-year Fixed Rate Mortgages
• Adjustable Rate Mortgages
• Hybrid ARMs, Option ARMs
• Interest-only Loans
• Zero Down Loans
• Low-cost Refinance options
• Easy access to HELOC and Home Equity Loans
• FHA and VA Loans
• Fixed and ARMs
• Risk-based Pricing under debate

43
Investor Sales Historically Strong
16 Increase
27 Increase
Source NAR
44
Second Home Purchases(2005)
Source NAR
45
Turnover Rate Historically High(Single-family
Sales relative to owner-occupied housing stock)
Source NAR
46
Economic Backdrop
47
Moderating Economy

Source BEA
48
Consumer Spending Still Healthy

Source BEA
49
Business Spending Remains Strong

Source BEA
50
Corporate Profits are Strong
Source BEA
51
Wage Growth Picking Up

Source BLS
52
Oil Prices Exerting Inflationary Pressure
Price per barrel
53
Unwelcome Inflation
change from a year ago
Source BLS
54
Fed Rate Hikes to Restrain Inflation, But Need to
be Mindful of
55
Risks of Over-tightening

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

56
Scenarios/Probability of Popping
57
Weakening Housings Impact on Consumers and
Economy

• Consumer Spending Supported from Housing Equity
  Gains
• 1.4 trillion in the past year
• 70 billion to 140 billion additional consumer
  spending
• Without Housing Equity Gain
• Consumer spending growth slows to 2 growth
  rather than 3 growth
• Economy weakens by 0.7 point
• Additional Cuts to GDP Growth from Lower
  Residential Construction

58
Economic Outlook
59
Housing Outlook
60
Real Estate Reality Check
NAR Leadership Summit Chicago, IL August 17 18,
2006

• David Lereah, Ph.D.
• Chief Economist
• National Association of REALTORS