The Economic Outlook: What and WhyEconomic Issues & Trends Forum

OAR 2012 Winter ConferenceJanuary 23rd 2012

Hilton Columbus at Easton3900 Chagrin Drive

Columbus, Ohio

Jed SmithManaging Director, Quantitative Research

National Association of REALTORS®

Economic Outlook: What, How, and Why?

• What is Forecasting?• What Is The Economic Outlook?• Why Do We Reach the Conclusions?• OAR Information: Comparing Ohio to the

National Outlook.• What are the Risks, Uncertainties?• Could It Be Different?• What Do We Do? Implications and Conclusions.

The Economic Outlook U.S. and Ohio

What is Forecasting? The Outlook: Black SwansMajor Risks: Unknown Unknowns/Unanticipated Risks

What is Forecasting?Best of Times and Worst of Times

Wisdom, Foolishness, Belief, Incredulity, Light, Darkness, Hope, Despair

• The Outlook—Subject to MANY Major Risks and Uncertainties.• Longer Term Issues and Problems--Affecting Jobs.

– State of the Economy.– Possible Structural Problem.– U.S. International Competitiveness.

• Short Term Issues and Problems: U.S. Government Actions and Policies.– Spending and Taxing.– Deficits.– Emergencies.

• Foreign Government Actions and Policies.• People Issues.

– Changing Consumer Moods: Confidence, Personal Wealth, Lingering Effects of Recession.– Basic Disagreements: The American Future.

• Economic Uncertainties– Foreclosures, Short Sales, Upside Down Homeowners, Down Payments, Credit Availability,

Mortgage Interest Deductions, GSE Reform, Proposed Regulations, European Credit Markets, Oil Prices, Risk Aversion.

Outlook--Government Spending and Tax ReceiptsMajor Area of Controversy!!!

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011200

700

1200

1700

2200

2700

3200

3700

4200

Government Receipts

Government Outlays$ billion

The Forecast

• 2011 2012 2013 • Existing Home Sales 4.25 million 4.45 million 4.68 million • New Home Sales 303,000 352,000 540,000 • Housing Starts 595,000 705,000 980,000 • Existing Home Price $165,200 $168,500 $171,800 • New Home Price $222,800 $227,000 $234,500 • GDP Growth +1.7% +2.5% +3.1% • Payroll Job Gains +1.8 million +1.9 million +2.3 million Fed • Funds Rate 0.1% 0.1% 0.5% • 30-yr Mortgage 4.5% 4.3% 4.9%

• Overall: A Continued Slow Recovery.• BUT• Subject to MANY Uncertainties.

The Economy—How We Got Here!Excessive Spending, Leverage, Permissive Financial Behavior Great Recession, Slow Recovery

Key Issues: Credit, Balance Sheets, Confidence, Jobs, Nasty Disagreements, Grid Lock

May2008

Jun 2008

July 2008

Sep 2008

2009Aug 2008

The Economy Total U.S. Jobs: Non-Farm, Establishment Data

Projected Time for Jobs Recovery: Four Years?

125000

135000

145000

Source: BLSSource: BLS

Household WealthMajor Impact from the Great Recession

Financial Assets Recovering.Less Recovery in Real Estate.

Households & Nonprofit Org: Assets: Total Owner-occupied Real EstateNSA,Bil.$

10050095908580Source: Federal Reserve Board 01/13/12

24000

20000

16000

12000

8000

4000

0

24000

20000

16000

12000

8000

4000

0

Households & Nonprofit Org: Total Financial AssetsNSA, Bil.$

10050095908580Source: Federal Reserve Board 01/13/12

60000

50000

40000

30000

20000

10000

0

60000

50000

40000

30000

20000

10000

0

UnemploymentNeed an Additional 11 Million Jobs

Number Unemployed Unprecedented. Duration Unprecedented.

Average {Mean} Duration of UnemploymentSA, Weeks

1005009590858075Source: Bureau of Labor Statistics 01/10/12

45.0

37.5

30.0

22.5

15.0

7.5

45.0

37.5

30.0

22.5

15.0

7.5

Unemployed, 16 Years & Over: 16 yr +SA, Thous

1005009590858075Source: Bureau of Labor Statistics 01/10/12

16000

14000

12000

10000

8000

6000

4000

16000

14000

12000

10000

8000

6000

4000

A Unique RecessionDeep Dip In GDP, Jobs, Financial Assets, Consumer Confidence

Real Gross Domestic Product% Change - Year to Year SAAR, Bil.Chn.2005$

1005009590858075Source: Bureau of Economic Analysis 01/10/12

12

8

4

0

-4

-8

12

8

4

0

-4

-8

Economic Activity – Post Recessions

1947 - Q1 1951 - Q3 1956 - Q1 1960 - Q3 1965 - Q1 1969 - Q3 1974 - Q1 1978 - Q3 1983 - Q1 1987 - Q3 1992 - Q1 1996 - Q3 2001 - Q1 2005 - Q3 2010 - Q1

-13000

-8000

-3000

2000

7000

12000

17000

-15

-10

-5

0

5

10

15

20GDP, Annualized % Growth Real GDP

$ Bi

llion

s

Perc

enta

ge

Source: BEA

1949

1953-54

1957-58

1960

1969-70

1973-75

1980

1981-82

1990-91

2001

2008-09

Economic Recession Impact19

48-4

9

1953

-54

1957

-58

1960

1969

-70

1973

-75

1980

1981

-82

1990

-91

2001

2008

-09

-600

-500

-400

-300

-200

-100

0-29.5-62.6999999999999-79

-45.1-26.7999999999993

-137.3 -131.9 -139.3-109.400000000001

-31.1999999999989

-553.5

Change in Value - Real GDP ($ Bil.)

Source: BEA, NAR

Consumer Spending: A Real Hit

Real Personal Consumption Expenditures% Change - Year to Year SAAR, Bil.Chn.2005$

1005009590858075Source: Bureau of Economic Analysis 01/10/12

8

6

4

2

0

-2

-4

8

6

4

2

0

-2

-4

Construction: Down SignificantlyQuasi Good News for Residential

Total Construction: NonresidentialSAAR, Mil.$

Total Construction: ResidentialSAAR, Mil.$

11100908070605040302Source: Census Bureau 01/10/12

750000

675000

600000

525000

450000

375000

700000

600000

500000

400000

300000

200000

Corporate Profits: Up

Corporate Profits with IVA and CCAdjSAAR, Bil.$

100500959085Source: Bureau of Economic Analysis 01/10/12

2000

1600

1200

800

400

0

2000

1600

1200

800

400

0

Problem of Major Concern“Where’s My Raise?”

Average Weekly Earnings of All Employees: Total PrivateSA, 1982-84$/Week

Average Weekly Earnings: Total Private IndustriesSA, $/Week

111009080706Source: Bureau of Labor Statistics 01/10/12

360

356

352

348

344

340

800

780

760

740

720

700

680

An International World

Imports: Goods and Services, BOP BasisSA, Mil.$

Exports: Goods and Services, BOP BasisSA, Mil.$

10050095Source: Census Bureau 01/10/12

240000

200000

160000

120000

80000

40000

200000

175000

150000

125000

100000

75000

50000

Unemployment Remains Elevated

2000 - Jan 2000 - Dec 2001 - Nov 2002 - Oct 2003 - Sep 2004 - Aug 2005 - Jul 2006 - Jun 2007 - May 2008 - Apr 2009 - Mar 2010 - Feb 2011 - Jan0

100

200

300

400

500

600

700

0

2

4

6

8

10

12

Unemployment Ins Claims Unemployment Rate

SA, T

hous

ands

SA, P

erce

ntag

e

Insured Unemployed: 2009 Avg: 5.8 million2010 Avg: 4.5 million2011 YTD: 3.8 million

Source: DoL, BLS

The Economy: Consumer Confidence Mediocre

Conference Board: Consumer ConfidenceSA, 1985=100

10050095908580Source: The Conference Board 01/10/12

150

125

100

75

50

25

150

125

100

75

50

25

Washington Policy ImpactsTremendous Divisions of Opinions, Uncertainties, and Ill Will

• Housing Proposals.– Raise down payment to 20%: Currently approximately 2/3 of buyers obtaining a mortgage put

down less than 20 percent. – Limit mortgage interest deduction: high income/second homes?– Conforming Loan Limits.

• Government Sponsored Enterprises.– Issues for resolution.

• Washington Now Focused on Jobs and Economy.– Potential for many bad outcomes!– Creating a Job Climate vs. Creating Jobs.– Concern over economic circumstances.– Occupy ……….

• Taxes, Benefits, Spending, Mortgages, and Uncertainties.– Who Pays Income Taxes?– Who Receives Entitlements?– Proposals for higher taxes vs. Decreased Spending.– Concern Over Deductions.– Mortgages: Fannie and Freddie model was flawed (private profit/taxpayer loss) and need a

fundamental restructuring.

Economic Outlook: National and OhioTends to Track National Experience

Economic Outlook: National and OhioUnemployment Rates Have Converged

Economic Outlook: National and Ohio Tracking National Experience but Slightly Below

Economic Outlook: National and Ohio Potential Shadow Inventory Higher

Economic Outlook: National and Ohio Employment Has Lagged—And Jobs are Key

Factors Impacting Real Estate MarketsJ.P. Morgan: “It will fluctuate, young man. It will fluctuate.”

• Employment: Jobs Jobs Jobs Jobs Jobs Jobs.• Outlook.

– Positive—Lending Opens Up, Uncertainties Resolved.– Negative—Adverse Washington Policies.

• Interest Rates.• Household Wealth.• Value of the Dollar.• Inflation Expectations.• Credit Standards.• Consumer Confidence.

Residential MarketsModest Recovery Seems To Be In Sight

Slowly Recovering Economy

Distressed Sales: 30% to 40% of Transactions Major Impact--Price and Consumer Confidence

200810

200811

200812

200901

200902

200903

200904

200905

200906

200907

200908

200909

200910

200911

200912

201001

201002

201003

201004

201005

201006

201007

201008

201009

201010

201011

201012

201101

201102

201103

201104

201105

201106

201107

201108

201109

201110

201111

2011120%

10%

20%

30%

40%

50%

60%

Distressed PropertyCurrently at 32 Percent of Total Existing Home Sales

Foreclosed Short Sale

Monthly Existing Home Sales Compare to Ten Years Ago: Any Upscale Potential?

• Have Fluctuated For Three Years, but Essentially Flat.

• Market Drivers.– Jobs the key issue.– Unemployment a problem.– Credit requirements.– Consumer Confidence an Issue.– Expectations an Issue.– Family formations.

• All Markets are Local.• Rules of Thumb.

– Existing Home Sales. • Two Sales = One Job.

– New Construction. • Two Sales = Four Jobs.

Residential Markets Showing Modest Signs of Recovery

Jan08

Apr08

Jul08Oct0

8Jan

09Apr0

9Jul09

Oct09

Jan10

Apr10

Jul10Oct1

0Jan

11Apr1

1Jul11

Oct11

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

Realtor Confidence UpSingle Family Market Conditions

Current Confidence SF Confidence in Oulook--SF

200801

200804

200807

200810

200901

200904

200907

200910

201001

201004

201007

201010

201101

201104

201107

2011100.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

Buyer and Seller Traffic UpSingle Family Homes

Buyer Traffic Seller Traffic

Investor Activity May be Creating Some Pent Up Demand

201009

201010

201011

201012

201101

201102

201103

201104

201105

201106

201107

201108

201109

201110

201111

2011120%

5%

10%

15%

20%

25%

Investors Continue to Find Residential Markets Attractive

Investor Second Home

200810

200812

200902

200904

200906

200908

200910

200912

201002

201004

201006

201008

201010

201012

201102

201104

201106

201108

201110

2011120%

10%

20%

30%

40%

50%

60%

First Time Buyer

First Time Buyer

Challenges and Opportunities

201012

201101

201102

201103

201104

201105

201106

201107

201108

201109

201110

201111

2011110%

10%

20%

30%

40%

50%

60%

Realtors Report Apartment Rents Rising Year-Over-Year

Higher Rents Lower Rents

201003

201005

201007

201009

201011

201101

201103

201105

201107

201109

2011110%

5%

10%

15%

20%

25%

Realtors Experienced Appraisal Problems in 35% of Contracts During Past Three Months

Contract Cancelled Contract DelayedNegotiated to Lower Price

Commercial SectorForecasting a Modest Recovery

U.S. Commercial Fundamentals

• Commercial Real Estate.– Stabilization of fundamentals.

– Demand turns positive.

– Vacancy Rates elevated but declining.

– Rent Growth edging up.

OFFICE 2011 2012 2013Vacancy Rate 16.6% 16.3% 15.9%

Net Absorption ('000 sq. ft.) 20,178 31,700 53,000Completions ('000 sq. ft.) 11,659 25,474 37,847

Rent Growth 1.4% 1.7% 2.4% INDUSTRIAL 2011 2012 2013

Vacancy Rate 12.4% 11.9% 11.1%

Net Absorption ('000 sq. ft.) 61,957 41,249 59,855Completions ('000 sq. ft.) 20,462 26,947 54,881

Rent Growth -0.5% 1.8% 2.3% RETAIL 2011 2012 2013

Vacancy Rate 12.9% 12.2% 11.0%

Net Absorption ('000 sq. ft.) 1,238 13,547 23,330Completions ('000 sq. ft.) 4,207 12,677 19,878

Rent Growth -0.2% 0.7% 1.4% MULTI-FAMILY 2011 2012 2013

Vacancy Rate 5.4% 4.6% 4.5%Net Absorption (Units) 238,398 126,621 102,687

Completions (Units) 38,014 88,839 93,706Rent Growth 2.5% 3.5% 3.8%

Source: NAR / REIS

U.S. Commercial Markets05

Q1

05Q

2

05Q

3

05Q

4

06Q

1

06Q

2

06Q

3

06Q

4

07Q

1

07Q

2

07Q

3

07Q

4

08Q

1

08Q

2

08Q

3

08Q

4

09Q

1

09Q

2

09Q

3

09Q

4

10Q

1

10Q

2

10Q

3

10Q

4

11Q

1

11Q

2

11Q

3

11Q

4

$0

$20,000,000,000

$40,000,000,000

$60,000,000,000

$80,000,000,000

$100,000,000,000

$120,000,000,000

$140,000,000,000

$160,000,000,000

U.S. Sales Volume

Apartment Hotel Industrial Office Retail

Source: Real Capital Analytics

U.S. Prices

2001.1 5 9 2002.1 5 9 2003.1 5 9 2004.1 5 9 2005.1 5 9 2006.1 5 9 2007.1 5 9 2008.1 5 9 2009.1 5 9 2010.1 5 9 2011.1 50.9

1.1

1.3

1.5

1.7

1.9

2.1MIT CPPI

Source: Real Capital Analytics, MIT

Down 41% from peak

U.S. Prices by Property

2000Q4

2001Q1

2001Q2

2001Q3

2001Q4

2002Q1

2002Q2

2002Q3

2002Q4

2003Q1

2003Q2

2003Q3

2003Q4

2004Q1

2004Q2

2004Q3

2004Q4

2005Q1

2005Q2

2005Q3

2005Q4

2006Q1

2006Q2

2006Q3

2006Q4

2007Q1

2007Q2

2007Q3

2007Q4

2008Q1

2008Q2

2008Q3

2008Q4

2009Q1

2009Q2

2009Q3

2009Q4

2010Q1

2010Q2

2010Q3

2010Q4

2011Q1

2011Q290.00

110.00

130.00

150.00

170.00

190.00

210.00

Commercial Property Price IndexNationalApartments

NationalIndustrial

NationalOffice

NationalRetail

Source: Real Capital Analytics, Moody's

Foreign Investments: Modest Rebound

$-

$2,000,000,000

$4,000,000,000

$6,000,000,000

$8,000,000,000

$10,000,000,000

$12,000,000,000

$14,000,000,000

Cross-border Investment in U.S. CRE

Apartment Industrial Office Retail

Source: Real Capital Analytics; *through 11/2011

Distress Moderates - Resolutions Improve

J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N2008 2009 2010 2011

$-

$50,000,000,000

$100,000,000,000

$150,000,000,000

$200,000,000,000

$250,000,000,000

$300,000,000,000

$350,000,000,000

$400,000,000,000 Cummulative Distress

Troubled REO Restructured Resolved

Source: Real Capital Analytics

Commercial Real Estate Financing

J 06 A J O

J 07 A J O

J 08 A J O

J 09 A J O

J 10 A J O

J 11 A J O

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Public Equity

Monthly US REIT Equity Issuance ($ Mil)

Source: NAREIT

J 06 A J O

J 07 A J O

J 08 A J O

J 09 A J O

J 10 A J O

J 11 A J

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Public Debt

Monthly CMBS Issuance ($ Mil)

Source: Commercial Mortgage Alert

Commercial Real Estate Financing

J J A S O N D J 10

F M A M J J A S O N D J 11

F M A M J J A S

639250

0 0 81400

1704

8353151310

18251449

632

2694

2159

2957

156

5179

3371

1201

3181

4313

3734

18301492

Commercial OutlookRealtors® Commercial Market Survey

Numbers are Flat Compared with Previous Quarters

• REALTORS® Commercial Activity – 2011.Q3

• Sales Volume Compared with Previous Quarter Down 6% • Sales Volume Compared with Previous Year Down 0.2% • Sales Prices Compared with Previous Quarter Down 8% • Sales Prices Compared with Previous Year Down 13% • Expected Inventory Availability for the Next 12 Months Up 6% • Expected Cap Rate Movement for the Next 12 Months Up 3 bps • Rental Volume Compared with Previous Quarter Down 2% • Rental Rates Compared with Previous Quarter Down 7% • Level of Rent Concessions Compared with Previous Quarter Up 2% • Business Opportunities Compared with Previous Quarter Down 3% • Volume of New Construction Compared with Previous Quarter Down 10%

Commercial Sector—OhioOutlook: Will Probably Continue to Track U.S. Experience

Q1 '08 Q2 '08 Q3 '08 Q4 '08 Q1 '09 Q2 '09 Q3 '09 Q4 '09 Q1 '10 Q2 '10 Q3 '10 Q4 '10 Q1 '11 Q2 '11 Q3 '110.0

50,000.0

100,000.0

150,000.0

200,000.0

250,000.0

300,000.0

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

Rolling 12 Month Total SalesUS vs. Columbus/Cleveland/Cincinnatti/Dayton

US Ohio

Focus on Outlook--Commercial

• Recovery Expected to be Slow.– Class A properties—some improvement, at expense of other

properties. – Terms still favorable for tenants, including concession packages,

rental rates, prospective tenants slow to sign.

• Substantial talk of market stabilizing, longer run reduced supply due to decreased building.

• Focus on value.• Jobs Issue—Unfortunately we are not

producing a lot of jobs.

Conclusions and Implications

• Positive and Negative Outlooks—Highly Dependent on Economic Policy.

• Many Uncertainties, Black Swans, and Potential Surprises.

• U.S. A Substantial Economy, but Major Problems.• Significant Division of Opinions Concerning

Entitlements, Spending, and the American Dream.• Continued Concern: Markets and Prices. • Major Issues: Confidence, Attitudes.

Conclusions and Implications

• Business Outlook: 2012 Probably a Little Better than 2011.

• Working with Clients.– Prices Probably at Bottom.– Still a substantial market—over 4 Million Sales.– Homeownership Still the Dream.– Affordability and Prudence Important.– Current Market Developments at Realtors.org.

• Marketing Is Probably the Key.– Still a Big Market.

Conclusions and ImplicationsEducating the Client: “Just The Facts”

For More Information

• Profile of Home Buyers and Sellers– National Survey– Ohio Survey

• Statisticshttp://www.ohiorealtors.org/?page_id=952

http://www.realtor.org/

• Information Sources– Facebook: http://www.facebook.com/narresearchgroup– Twitter: http://twitter.com/#!/NAR_Research

National Association of Realtors:– http://www.realtor.org/research/index.html

• State Sales and Metro Prices– http://www.realtor.org/research.nsf/pages/ehspage

• Daily Commentary and Quick Take:– http://www.realtor.org/research/research_commentary.html

• Metro and State Analysis:– http://www.realtor.org/research.nsf/pages/MetroHomePriceAnalysisReports