Jed Smith (Sept. 2008)

Presentation to the Legislative and Regulatory Policy CommitteeMissouri Association of Realtors®

September 25, 2008Lodge of Four Seasons

Presentation to the Legislative and Regulatory Policy CommitteeMissouri Association of Realtors®

September 25, 2008Lodge of Four Seasons

Jed Smith Managing Director for Quantitative ResearchNATIONAL ASSOCIATION OF REALTORS®

Jed Smith Managing Director for Quantitative ResearchNATIONAL ASSOCIATION OF REALTORS®

The Changing Real Estate MarketTrends and Forecasts

The Changing Real Estate MarketTrends and Forecasts

Where Are We? Housing Markets: Current Status

Where Are We? Housing Markets: Current Status

• Forecasting Uncertainties--Forecasting Uncertainties--Why forecasting is difficult.Why forecasting is difficult.

– Known unknowns; unknown unknowns.Known unknowns; unknown unknowns.– National numbers relevant, but all real estate is local.National numbers relevant, but all real estate is local.

• Sales—Existing Homes.Sales—Existing Homes.– National Down 31% as of July 08 from Sept 05 peak.National Down 31% as of July 08 from Sept 05 peak.– National Down 13.2 % 12 mo ending July 08. National Down 13.2 % 12 mo ending July 08. – Missouri: -16.5% 2Missouri: -16.5% 2ndnd qtr 08 vs. 07; -12.5% qtr ending June. qtr 08 vs. 07; -12.5% qtr ending June.

• Prices.Prices.– Median National Down 7.7 % as of July 08 from July 2006 peak.Median National Down 7.7 % as of July 08 from July 2006 peak.– Median National Down 7.1 % 12 mo ending July 08. Median National Down 7.1 % 12 mo ending July 08. – Kansas City MSA Median down 3.1%, 2007Q2 to 2008Q2. Kansas City MSA Median down 3.1%, 2007Q2 to 2008Q2. – St. Louis MSA Median down 5.5%, 2007Q2 to 2008Q2. St. Louis MSA Median down 5.5%, 2007Q2 to 2008Q2.

• Sales—New Single Family Homes.Sales—New Single Family Homes.– National Down 61 % from March 2005 peak. National Down 61 % from March 2005 peak. – National Down 35 % for 12 mo ending July 08. National Down 35 % for 12 mo ending July 08.

Where Are We?Existing Home Sales

Where Are We?Existing Home Sales

• Fluctuating market in 5 million sales range—down from peak of Fluctuating market in 5 million sales range—down from peak of over 7 million. over 7 million.

• Existing Home Sales market issues.Existing Home Sales market issues.– All real estate is local: prices and sales levels.All real estate is local: prices and sales levels.– Financial Issues.Financial Issues.

• Subprime.Subprime.• Credit markets.Credit markets.

– Mood.Mood.– National Economic Outlook.National Economic Outlook.– Addressing client concerns.Addressing client concerns.

• Outlook is for a turnaround.Outlook is for a turnaround.– Favorable outlook—but delayed by unpredictable events.Favorable outlook—but delayed by unpredictable events.

Annual Existing-Home SalesIncludes Single Family, Condos, Coops

Annual Existing-Home SalesIncludes Single Family, Condos, Coops

0

2,000

4,000

6,000

8,000

Home sales have retreated back to pre-boom years, which was then considered to be at healthy levels.Home sales have retreated back to pre-boom years, which was then considered to be at healthy levels.

In thousand units

EXCESSIVE BOOM

Source: NARSource: NAR

Recent Monthly National Existing-Home Sales

SAAR: A drop from over 6 million to 5 million

Recent Monthly National Existing-Home Sales

SAAR: A drop from over 6 million to 5 million

4,000

5,000

6,000

7,000

8,000In thousand units

Soft but Stable Sales


Missouri: Existing Home SalesMissouri: Existing Home Sales

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000


Price—A Major IssueNAR, OFHEO, Case Shiller—All Different

Price—A Major IssueNAR, OFHEO, Case Shiller—All Different

• NAR. NAR. – MLS data, all transactions.MLS data, all transactions.

• OFHEO.OFHEO.– Conforming loans (Freddie/Fannie), repeat sales.Conforming loans (Freddie/Fannie), repeat sales.

• Case Shiller—Misleading.Case Shiller—Misleading.– Repeat sales, twenty major areas.Repeat sales, twenty major areas.– Heavy concentration in distressed markets. Heavy concentration in distressed markets.

• Some Confusion—What is the Clear Message?Some Confusion—What is the Clear Message?– Each local market is different: Markets/Submarkets.Each local market is different: Markets/Submarkets.– Economic Studies suggest that we are at/approaching/near Economic Studies suggest that we are at/approaching/near

the bottom in a number of markets.the bottom in a number of markets.– The Wildcard: Financial Issues.The Wildcard: Financial Issues.

Comparison of Three IndexesTrends in National Prices

Comparison of Three IndexesTrends in National Prices

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

' 1/06

' 7/06

' 1/07

' 7/07

' 1/08

' 5/08

CaseShiller OFHEO NAR

National Home Price Growth Total Homes, Median Sales Price

National Home Price Growth Total Homes, Median Sales Price

-8

-5

-2

1

4

7

10

13


% change from a year ago

Missouri Median Home Price GrowthMissouri Median Home Price Growth

-18-16-14-12-10-8-6-4-202468

101214161820222426


Source: NAR; Data for 2008 are based on first two qtrs.

NVAR Median Price Divided by Median Fairfax Household Income

NVAR Median Price Divided by Median Fairfax Household Income

0

3

6

9

Based on NVAR and BEA dataBased on NVAR and BEA data

Mortgage Obligation ManageableMedian as Percent of Income

Mortgage Obligation ManageableMedian as Percent of Income

10

15

20

25

30

Current Average


%

Mortgage Obligation to Income Historically High in Some MarketsMortgage Obligation to Income Historically High in Some Markets

0%

10%

20%

30%

1990 1995 2000 2005

debt service to buy a median priced home by a middle income family

MiamiMiami

Source: NAR

Under-Priced MarketsWith Affordable Mortgage Obligation to Income

Under-Priced MarketsWith Affordable Mortgage Obligation to Income

0%

10%

20%

30%

1990 1992 1994 1996 1998 2000 2002 2004 2006

Columbus Pittsburgh Denver

Source: NAR

U.S. Historic Average

Similar Trends in Vast Part of Middle America

Where are We Headed?What Drives the Housing Market?

Where are We Headed?What Drives the Housing Market?

• Mood.Mood.• Financial Issues, Subprime, Financial Issues, Subprime, Foreclosures.Foreclosures.

• Economy—Slowing, Uncertainties. Economy—Slowing, Uncertainties. • Impact of the Economy on Housing.Impact of the Economy on Housing.• Approaches for Addressing the Approaches for Addressing the Current Market.Current Market.

Consumer ConfidenceNegative Housing, Economic, Financial News, Uncertainties

Consumer ConfidenceNegative Housing, Economic, Financial News, Uncertainties

Conference Board: Consumer Confidence Present Situation

SA, 1985=100

050095908580

Source: The Conference Board /Haver Analytics 09/16/08

200

160

120

80

40

0

200

160

120

80

40

0

Consumer Confidence--ExpectationsSlight Upturn

Consumer Confidence--ExpectationsSlight Upturn

Conference Board: Consumer Expectations

SA, 1985=100

0807060504030201009998

Source: The Conference Board /Haver Analytics 09/17/08

120

100

80

60

40

120

100

80

60

40

Financial IssuesLoan Originations—Billions of Dollars

Financial IssuesLoan Originations—Billions of Dollars

• Over a trillion dollars Over a trillion dollars of subprime loans per of subprime loans per year in 2005 and 2006.year in 2005 and 2006.

• Subprime default and Subprime default and delinquency rates delinquency rates high.high.

• Prime—Lower default.Prime—Lower default.

• Outlook—Additional Outlook—Additional defaults?defaults?

Year Prime Loans Subprime

2001 2353 295

2002 3032 356

2003 3961 503

2004 2083 882

2005 1879 1138

2006 1548 1051

2007 1509 466

Source: Harvard Joint Center 2008

Subprime Loan ExposureSubprime Loan Exposure

Prime53%

FHA+VA6%

Sub-prime9%

Free + Clear

Homes32%

Source: NAR Estimate

Foreclosed HomesForeclosed Homes

Prime

37%

FHA+

VA

9%

Sub-

prime

53%

Source: NAR Estimate

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Prime VA FHA Sub-primeFixed

Sub-primeARM

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Prime VA FHA Sub-primeFixed

Sub-primeARM

Foreclosure Rates by Loan Type 2008 Q1

Foreclosure Rates by Loan Type 2008 Q1

%

Source: MBA

1.47

0.59

2.75

4.92

6.00

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1.47

0.59

2.75

4.92

6.00

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

Foreclosure Rate Comparisons(All Loans, 2008 Q2)

Foreclosure Rate Comparisons(All Loans, 2008 Q2)

%

Source: MBA

Financial OutlookFinancial Outlook

• Huge Loss Write Downs: Possibility of additional Huge Loss Write Downs: Possibility of additional write downs and distress in financial markets.write downs and distress in financial markets.

• Fannie/Freddie/Merrill Lynch/Lehman/AIG/and ?????Fannie/Freddie/Merrill Lynch/Lehman/AIG/and ?????• Government Agencies Involved.Government Agencies Involved.

– Federal Reserve, FDIC, FHFA, OCC.Federal Reserve, FDIC, FHFA, OCC.– Can provide liquidity.Can provide liquidity.

• Tighter credit standards.Tighter credit standards.• Money supply and interest rates.Money supply and interest rates.• Consumer/Homebuyer Confidence: A Major IssueConsumer/Homebuyer Confidence: A Major Issue• Impacts on prices and housing market.Impacts on prices and housing market.

Economic OverviewA Weakening Economy--Problems

Economic OverviewA Weakening Economy--Problems

• Recession or slow economic growth?Recession or slow economic growth?• Rising unemployment .Rising unemployment .• Stock market – roller coasting.Stock market – roller coasting.• New construction housing slowdown. New construction housing slowdown. • Credit Crunch.Credit Crunch.• Consumer Confidence.Consumer Confidence.• Wages, mounting debts, low savings rate.Wages, mounting debts, low savings rate.• Concerns over retail sales.Concerns over retail sales.• Potential for inflation.Potential for inflation.

-3.0

0.0

3.0

6.0

9.0

2000 -

Q1

2000 -

Q3

2001 -

Q1

2001 -

Q3

2002 -

Q1

2002 -

Q3

2003 -

Q1

2003 -

Q3

2004 -

Q1

2004 -

Q3

2005 -

Q1

2005 -

Q3

2006 -

Q1

2006 -

Q3

2007 -

Q1

2007 -

Q3

2008 -

Q1

-3.0

0.0

3.0

6.0

9.0

2000 -

Q1

2000 -

Q3

2001 -

Q1

2001 -

Q3

2002 -

Q1

2002 -

Q3

2003 -

Q1

2003 -

Q3

2004 -

Q1

2004 -

Q3

2005 -

Q1

2005 -

Q3

2006 -

Q1

2006 -

Q3

2007 -

Q1

2007 -

Q3

2008 -

Q1

GDP GrowthGDP Growth

% annualized growth rate

Source: BEA

National Unemployment RateNational Unemployment Rate

3

4

5

6

7 %

Source: BLSSource: BLS

Stock MarketS&P 500 Index

Stock MarketS&P 500 Index

800

1000

1200

1400

1600

Source: NYSESource: NYSE

Single-Family Housing Starts(Major fall – but, good trend to control inventory)

Single-Family Housing Starts(Major fall – but, good trend to control inventory)

0

500

1,000

1,500

2,000

Source: CensusSource: Census

In thousand units

U.S. Job Gains – Now Negative U.S. Job Gains – Now Negative

-2000

-1000

0

1000

2000

3000

4000


12-month payroll job changes in thousands

Inflation: A Potential Issue(Core CPI Inflation)

Inflation: A Potential Issue(Core CPI Inflation)

1

2

3

4

5

6

Core Overall CPI% change from a year ago

Economic OverviewA Weakening Economy--Strengths

Economic OverviewA Weakening Economy--Strengths

• Interest Rates—Favorable.Interest Rates—Favorable.• Oil Prices – Fluctuating, downwards?Oil Prices – Fluctuating, downwards?• Housing prices and availability. Housing prices and availability. • New construction down—resolution of excess New construction down—resolution of excess

supply.supply.• Resolution of uncertainties.Resolution of uncertainties.• Falling dollar/increased exports.Falling dollar/increased exports.

Mortgage RatesMortgage Rates

5.0

5.5

6.0

6.5

7.0

Existing House New House

5.0

5.5

6.0

6.5

7.0

Existing House New House

Source: FHFBSource: FHFB

Construction SpendingConstruction Spending

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Residential Commercial


$ million

Employee Compensation Employee Compensation

1

2

3

4

5

6

7

8

9

10


%


Dollar vs. EuroU.S. Exports Increasingly Competitive

Dollar vs. EuroU.S. Exports Increasingly Competitive

$0.80

$0.90

$1.00

$1.10

$1.20

$1.30

$1.40

$1.50

$1.60


Net Exports Goods and Services Some Improvement

Current Year Dollars

Net Exports Goods and Services Some Improvement

Current Year Dollars

-900

-800

-700

-600

-500

-400

-300

-200

-100

0

Net Export

Source: BEASource: BEA

Billions

Big Worry - Oil PriceEurope: Brent Spot Market

Big Worry - Oil PriceEurope: Brent Spot Market

0

20

40

60

80

100

120

140

Source: HaverSource: Haver

$ per barrel

Economic Outlook Economic Outlook

20072007 20082008 20092009

GDPGDP 2.0%2.0% 2.0%2.0% 2.0%2.0%

CPI InflationCPI Inflation 2.9%2.9% 3.8%3.8% 1.6%1.6%

Job GrowthJob Growth 1.1%1.1% -0.1%-0.1% 1%1%

Unemployment RateUnemployment Rate 4.6%4.6% 5.5%5.5% 6.0%6.0%

10-year Treasury 10-year Treasury 4.6%4.6% 4.0%4.0% 4.5%4.5%

Housing Affordability Index(Median Income/Qualifying Income) * 100

Housing Affordability Index(Median Income/Qualifying Income) * 100

50

75

100

125

150


Existing-Home Inventory(From 2 million to 4.5 million; but most are owner-occupied)

Existing-Home Inventory(From 2 million to 4.5 million; but most are owner-occupied)

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000


New Home Inventory(Already Topped Out)

New Home Inventory(Already Topped Out)

200,000

300,000

400,000

500,000

600,000


Existing Home Sales—OutlookExisting Home Sales—Outlook

• Short Run: SShort Run: Stable but at rate of 10 years ago.table but at rate of 10 years ago.

• From 1998 to 2008From 1998 to 2008

– 25 million more people, 13 million more jobs, 25 million more people, 13 million more jobs, reasonable interest rates. reasonable interest rates.

– Recovery: Affordability, Housing Stimulus Package, Higher Recovery: Affordability, Housing Stimulus Package, Higher GSE Loan Limits, Lower Inventories of New Homes, Slowing GSE Loan Limits, Lower Inventories of New Homes, Slowing Foreclosures. Foreclosures.

– Financial problems being resolved.Financial problems being resolved.– Prices down 7% this year; up 2.4% next year. Prices down 7% this year; up 2.4% next year. – Sales down 11% this year; up 7% next year.Sales down 11% this year; up 7% next year.– New Housing: 1.6 to 1.8 million houses per year. New Housing: 1.6 to 1.8 million houses per year. – Will support a substantial resale market.Will support a substantial resale market.

Pent-Up Demand ?Pent-Up Demand ?20052005 20072007 CommentComment

Total Home Total Home Sales Sales (new and existing)(new and existing)

8.4 million8.4 million 6.5 million6.5 million 5.1 million in 20085.1 million in 2008

JobsJobs

(in October)(in October)

133.7 million133.7 million 137.6 million137.6 million 137.6 million, 2137.6 million, 2ndnd quarter 2008quarter 2008

Wage + SalaryWage + Salary

(in October)(in October)

$5.7 trillion$5.7 trillion $6.4 trillion$6.4 trillion $6.6 trillion$6.6 trillion

Household Household WealthWealth

(3(3rdrd quarter) quarter)

$51 trillion$51 trillion


$59 trillion$59 trillion


$58.2 trillion, 2$58.2 trillion, 2ndnd quarter, 2008quarter, 2008

Home PricesHome Prices $219,600$219,600 $219,000$219,000 $215,000, July 2008$215,000, July 2008

Mortgage RatesMortgage Rates 5.9%5.9% 6.3%6.3% 6.2% for 20086.2% for 2008

Using Information from the Realtor® Perspective

Addressing Current Market Conditions

Using Information from the Realtor® Perspective

Addressing Current Market Conditions

• What appear to be some of the Key Issues in Addressing What appear to be some of the Key Issues in Addressing Current Market Conditions?Current Market Conditions?

– A market where prices have declined, inventories are high, A market where prices have declined, inventories are high, sales are slower.sales are slower.

– How do principles of Marketing and Economics apply?How do principles of Marketing and Economics apply?• The Realtor® StoryThe Realtor® Story

– Trusted resource for real estate informationTrusted resource for real estate information– Realtors® Add ValueRealtors® Add Value– Realtors® are Industry innovatorsRealtors® are Industry innovators– NAR is an advocate for homeownershipNAR is an advocate for homeownership– Realtors® build communitiesRealtors® build communities– Homeownership—immediate benefits and long-term valueHomeownership—immediate benefits and long-term value

From the Realtor® PerspectiveAddressing Current Market Conditions

From the Realtor® PerspectiveAddressing Current Market Conditions

• Trusted Resource for Real Estate InformationTrusted Resource for Real Estate Information– Professional Advice.Professional Advice.

– Coming off of Unusual Boom Times.Coming off of Unusual Boom Times.

– Economy favorable, significant underlying demand.Economy favorable, significant underlying demand.

– A three to five year horizon is appropriate.A three to five year horizon is appropriate.

• Adding ValueAdding Value– Marketing: Realistic Pricing, targeting, segmentation, Marketing: Realistic Pricing, targeting, segmentation,

demographics, defining needs.demographics, defining needs.

– Staging—How many times do you make a first impression?Staging—How many times do you make a first impression?

• InnovatorInnovator– Implementation of Technologies. Implementation of Technologies.

– Customer communications: boomers, GEN-X, GEN-Y.Customer communications: boomers, GEN-X, GEN-Y.

From the Realtor® PerspectiveFrom the Realtor® Perspective

• NAR an advocate for homeownership.NAR an advocate for homeownership.

• Homeownership and long-term value.Homeownership and long-term value.• Lifestyle, long term investment.Lifestyle, long term investment.

• Building CommunityBuilding Community– Establishing a presence/active in community service.Establishing a presence/active in community service.– Part of the backbone/establishment.Part of the backbone/establishment.

Business

Jed Smith (Sept. 2008)