The Economy… Real Estate Outlook and Risks

Federal Home Loan Bank of Chicago MPF Advisory Council Meeting

Presentation, April 18, 2012Four Seasons Hotel

120 East Delaware PlaceChicago, Illinois

Jed SmithManaging Director, Quantitative Research

National Association of Realtors®

The Economy: Where and Why?Looking At NAR’s Economic and Housing Outlook

• Forecasting: Some Comments.• The Economic Outlook.• How Do We Reach Our Conclusions?• Forecast Risks and Uncertainties.• How Likely Are We Correct! WHY?

Forecasting: Some Comments

• Projections: Based on Economic Relationships, Best Available Data.

• Assumptions.• Uncertainties.• Risk Analysis.• Black Swans! Unknown

Unknowns.

ECONOMIC OUTLOOK How We Got Here, Where We Are, Where We Are Headed

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

Economic Outlook: A Gradual RecoveryMuch Slower and Weaker than Other Recessions

A Slow RecoveryEconomic 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

$ Billion

s

Percentage

Source: BEA

1949

1953-54

1957-58

1960

1969-70

1973-75

1980

1981-82

1990-91

2001

2008-09

Economic Outlook, Home Sales: Actual and ForecastMarket Appears to be Recovering

Median Prices: Expected to Stabilize Prices Recovering from the Great Recession

HOW DO WE REACH OUR CONCLUSIONS?

Problems in a Variety of Sectors: Look at the Drivers.

The Economy: Total Jobs: Non-Farm, Establishment DataRecession is Over. Where are the Jobs?

Projected Time for Jobs Recovery: Four Years?

 

125000

135000

145000

Source: BLSSource: BLS

Home Inventories: Approaching 6 MonthsThe Shadow: Potentially 5 Million Homes

Some Areas Experiencing Low Inventories—Could Sell More

Household Wealth: Impact of Great RecessionLost Approximately $14 Trillion in Assets

Financial Assets: Recovering. Real Estate: Recovery Still to Come.

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

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

10050095908580Source:  Federal Reserve Board 02/08/12

24000

20000

16000

12000

8000

4000

0

24000

20000

16000

12000

8000

4000

0

UnemploymentNeed an Additional 11 Million Jobs

Number Unemployed: Unprecedented. Time to find a job: Unprecedented.

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

10050095908580Source:  Bureau of Labor Statistics 02/08/12

16000

14000

12000

10000

8000

6000

4000

16000

14000

12000

10000

8000

6000

4000

Average {Mean} Duration of UnemploymentSA, Weeks

10050095908580Source:  Bureau of Labor Statistics 02/08/12

45.0

37.5

30.0

22.5

15.0

7.5

45.0

37.5

30.0

22.5

15.0

7.5

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

Percent of Homes Underwater by StateSource:  Fannie Mae/Core Logic

Mortgages Past DueShadow Inventory Includes Foreclosures, Short Sales, and Some Percentage of Past

Due

FORECAST RISKS AND UNCERTAINTIES

Does An Economist EVER Reach A Conclusion?A Comment from Harry Truman

The Good

• Home Prices: Seem to be Stabilizing. Emotional, psychological, confidence issues. Price to Income Ratios favorable.

• Affordability: Very High.• Interest Rates: Low IF you can get the mortgage.• Stress Tests.• Pent Up Demand: Possibly 500,000 or more per year.• Demographics: Millennial Generation is large;

favorable attitudes towards housing; delayed household formation.

Residential Markets: The OutlookIndications that Recovery is Underway

• A Recovery is Underway—Short Term Issues.– Highly Dependent on Economic Policy.– Many Uncertainties, Black Swans, and Potential

Surprises. – Confidence, Attitudes.

• A Recovery is Underway—Longer Term.– Significant Division of Opinions Concerning

Entitlements, Spending, and the American Dream.– Competitive Position, Economic Trends.

Residential Markets Showing Modest Signs of Recovery

Jan08Apr08Jul08Oct08Jan09Apr09Jul09Oct09Jan10Apr10Jul10Oct10Jan11Apr11Jul11Oct11Jan12

0.0

10.0

20.0

30.0

40.0

50.0

60.0

REALTOR Confidence in Market Outlook

Single Family Townhouses Condos

Investor Activity And Pent-Up Demand

Challenges and Opportunities

Rents Appraisal Problems Down Slightly

The BadCredit Availability and Financial Issues, Consumer Confidence, Jobs

Situation

FICO and Mortgages: Unrealistic Some Major Issues

• Jobs: Lack of demand or technological change? How long and how much?

• Wages: Intense pressure for a lot of people.

• Downsizing the Dream: Car, House, Job, Life.

• Financial Issues: Stress Tests, Liquidity, Portfolio Problems, Liquidity Issues.

Consumer ConfidenceContinues at Mediocre Level

Conference Board: Consumer Confidence

SA, 1985=100

100500959085Source:  The Conference Board 03/30/12

150

125

100

75

50

25

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

Problems of Major Concern!“DUDE--Where’s My Raise, My Job?”

Major Jobs Problems

Median Usual Wkly Earnings: Full Time Wage & Salary WkrsSA, 1982-84 CPI-U Adj$

Full Time Wage and Salary WorkersSA, Thous

10050095908580Source:  Bureau of Labor Statistics 02/07/12

345.0

337.5

330.0

322.5

315.0

307.5

112500

105000

97500

90000

82500

75000

67500

The Ugly: Uncertainties and the Outlook

• Longer Term Issues and Problems--Affecting Jobs.– Competitive Position– Tax and Incentive Structures– Possible Structural Problem.– U.S. International Competitiveness.

• Short Term Issues and Problems.– Recovering from Great Recession– Government Spending and Taxing.– Deficits.– International Financial and Governmental Actions and Policies.

• People Issues.– Consumer Moods: Confidence, Personal Wealth, Lingering Effects of Recession.– Basic Disagreements: The American Future, Who Pays Taxes, Role of Government.

• 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.

Washington Policy ImpactsOpinions, 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. – Mortgage Interest Deduction: high income/second homes?– Conforming Loan Limits.– Refinancing/Upside Down/Distressed.

• Government Sponsored Enterprises.– Issues for resolution. – Mortgages: Fannie and Freddie model was flawed (private profit/taxpayer loss).

• Washington Now Focused on Jobs and Economy.– Potential for many bad outcomes!– Creating a Job Climate vs. Creating Jobs.– Concern over economic circumstances.– Oil Prices, International economic developments—may have major impact. – Taxes, Benefits, Spending, Mortgages, and Uncertainties.– Who Pays Income Taxes?– Who Receives Entitlements?– Higher Taxes vs. Decreased Spending vs. What?– Concern Over Deductions.

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

05Q2

05Q3

05Q4

06Q1

06Q2

06Q3

06Q4

07Q1

07Q2

07Q3

07Q4

08Q1

08Q2

08Q3

08Q4

09Q1

09Q2

09Q3

09Q4

10Q1

10Q2

10Q3

10Q4

11Q1

11Q2

11Q3

11Q4

$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

How Likely Are We To Be Correct?There Are Major Risks

• A Recovery is Underway—Short Term Issues.– Highly Dependent on Economic Policy.– Many Uncertainties, Black Swans, and Potential

Surprises. – Confidence, Financial Issues, Attitudes.

• Short Term—Favorable Outlook. – Residential Prices Probably At or Near Bottom.– A substantial market appears to be headed up.– Homeownership Still the American Dream.– Affordability and Prudence– Current Market Developments at www.Realtors.org

How Likely Are We To Be Correct?There Are Major Risks

• A Recovery is Underway—Longer Term.– Significant Division of Opinions Concerning

Entitlements, Spending, and the American Dream.– Competitive Position, Economic Trends.

• Risks: Short Term and Longer Term.– Some major issues with major risks—unresolved. – Political Risks, Expectations, Foreign Economies, Financial

Sectors.• My “ONE ARM” Assessment

– We are in recovery and should see expansion for the next several years.

NAR: A Source for Housing Informationwww.realtor.org

For More Information

• Profile of Home Buyers and Sellers– National Survey

• Statistics: 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

• Economists Outlook• http://economistsoutlook.blogs.realtor.org/

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