Dr Lawrence Yun's Recovery to Normalcy Presentation
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Powerpoint slides that accompanied the video played at FCBR's November 2010 membership meeting. To view the presentation visit http://link.brightcove.com/services/player/bcpid663859696001?bclid=643064958001&bctid=661851442001
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Dr Lawrence Yun's Recovery to Normalcy Presentation
- 1. Recovery to NormalcyRecovery to NormalcyRecovery to NormalcyRecovery to Normalcy Lawrence Yun, Ph.D.Lawrence Yun, Ph.D. Chief EconomistChief Economist NATIONAL ASSOCIATION OF REALTORS®NATIONAL ASSOCIATION OF REALTORS® Presentation to or at ???Presentation to or at ??? City, StateCity, Statey,y, November ??, 2010November ??, 2010
- 2. Federal Reserve FOMC Federal Reserve FOMC •• Ben Bernanke Ben Bernanke (Chairman): (Chairman): •• “Outlook remains unusually uncertain”“Outlook remains unusually uncertain”yy •• Alan Greenspan Alan Greenspan (former Chairman):(former Chairman): •• “If home prices start falling again, we could be facing a double“If home prices start falling again, we could be facing a double‐‐dipdipIf home prices start falling again, we could be facing a doubleIf home prices start falling again, we could be facing a double dip dip recession” recession” •• James Bullard James Bullard (St. Louis Fed)(St. Louis Fed): : •• “The U.S. is closer to a Japanese“The U.S. is closer to a Japanese‐‐style deflationary outcome”style deflationary outcome” •• Thomas Thomas HoenigHoenig (Kansas City Fed)(Kansas City Fed): : gg ( y )( y ) •• “Too rapid money creation results in eventual high inflation”“Too rapid money creation results in eventual high inflation”
- 3. Consumer Confidence about Consumer Confidence about P t C diti A f lP t C diti A f lPresent Conditions: AwfulPresent Conditions: Awful 200 100 150 0 50 980 ‐Jan 981 ‐Apr 1982 ‐Jul 983 ‐Oct 985 ‐Jan 986 ‐Apr 1987 ‐Jul 988 ‐Oct 990 ‐Jan 991 ‐Apr 1992 ‐Jul 993 ‐Oct 995 ‐Jan 996 ‐Apr 1997 ‐Jul 998 ‐Oct 000 ‐Jan 001 ‐Apr 2002 ‐Jul 003 ‐Oct 005 ‐Jan 006 ‐Apr 2007 ‐Jul 008 ‐Oct 010 ‐Jan 19 19 1 19 19 19 1 19 19 19 1 19 19 19 1 19 20 20 2 20 20 20 2 20 20
- 4. Consumer Confidence about Consumer Confidence about Future ConditionsFuture Conditions Not good but not as badNot good but not as badFuture Conditions Future Conditions –– Not good but not as badNot good but not as bad 120 140 60 80 100 120 0 20 40 9.6% unemployment rate, but different confidence level 980 ‐Jan 981 ‐Apr 1982 ‐Jul 983 ‐Oct 985 ‐Jan 986 ‐Apr 1987 ‐Jul 988 ‐Oct 990 ‐Jan 991 ‐Apr 1992 ‐Jul 993 ‐Oct 995 ‐Jan 996 ‐Apr 1997 ‐Jul 998 ‐Oct 000 ‐Jan 001 ‐Apr 2002 ‐Jul 003 ‐Oct 005 ‐Jan 006 ‐Apr 2007 ‐Jul 008 ‐Oct 010 ‐Jan 19 19 1 19 19 19 1 19 19 19 1 19 19 19 1 19 20 20 2 20 20 20 2 20 20
- 5. Business Spending shows weak confidence Business Spending shows weak confidence in relation to profitsin relation to profitsin relation to profitsin relation to profits 2200 2700 Business InvestmentBusiness Investment $ billion$ billion 1200 1700 2200 Business Investment Business Investment 200 700 1200 Corporate ProfitsCorporate Profits 200 000 ‐Q2 000 ‐Q4 001 ‐Q2 001 ‐Q4 002 ‐Q2 002 ‐Q4 003 ‐Q2 003 ‐Q4 004 ‐Q2 004 ‐Q4 005 ‐Q2 005 ‐Q4 006 ‐Q2 006 ‐Q4 007 ‐Q2 007 ‐Q4 008 ‐Q2 008 ‐Q4 009 ‐Q2 009 ‐Q4 010 ‐Q2 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Business Investment = private fixed investment in GDP accountingBusiness Investment = private fixed investment in GDP accounting
- 6. REALTORS’ Home Value Expectation:REALTORS’ Home Value Expectation: h hh hover the next 12 monthsover the next 12 months 70% 80% Increase or Stable 30% 40% 50% 60% 0% 10% 20% 30% t v c b r r y g p t v c b r r y g p Decrease 2008 ‐Oct 008 ‐Nov 008 ‐Dec 2009 ‐Jan 2009 ‐Feb 009 ‐Mar 2009 ‐Apr 009 ‐May 2009 ‐Jun 2009 ‐Jul 009 ‐Aug 2009 ‐Sep 2009 ‐Oct 009 ‐Nov 009 ‐Dec 2010 ‐Jan 2010 ‐Feb 010 ‐Mar 2010 ‐Apr 010 ‐May 2010 ‐Jun 2010 ‐Jul 010 ‐Aug 2010 ‐Sep 2 20 2 2 2 20 2 20 2 20 2 2 20 2 2 2 20 2 20 2 20 2
- 7. REALTOR Expectation vs Reality Date % respondents saying prices will have fallen at this time from 12 month prior Case‐Shiller price change 2009.10 51% ‐7.3 2009.11 56% ‐5.4 2009.12 60% ‐3.1 2010.01 0 72010.01 55% ‐0.7 2010.02 54% +0.7 2010.03 43% (minority say falling price) +2.3 (price did not fall) 43% (minority say falling price) 2010.04 35% +3.8 2010.05 35% +4.6 2010.06 36% +4.2 2010.07 36% +3.2
- 8. Government Spending (Confidence)Government Spending (Confidence)p g ( )p g ( ) 3200 3700 Government OutlayGovernment Outlay $ billion$ billion 2200 2700 3200 Government OutlayGovernment Outlay 1200 1700 2200 Government ReceiptGovernment Receipt 200 700 1200 200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
- 10. U.S. U.S. PrivatePrivate Sector Job GainsSector Job Gains (863 000 f J t S 2010)(863 000 f J t S 2010)(863,000 from Jan. to Sep. 2010)(863,000 from Jan. to Sep. 2010) 1500 MonthMonth‐‐toto‐‐month job gains in thousandsmonth job gains in thousands 1000 0 500 ‐500 0 80 ‐Jan 81 ‐Apr 82 ‐Jul 83 ‐Oct 85 ‐Jan 86 ‐Apr 87 ‐Jul 88 ‐Oct 90 ‐Jan 91 ‐Apr 92 ‐Jul 93 ‐Oct 95 ‐Jan 96 ‐Apr 97 ‐Jul 98 ‐Oct 00 ‐Jan 01 ‐Apr 02 ‐Jul 03 ‐Oct 05 ‐Jan 06 ‐Apr 07 ‐Jul 08 ‐Oct 10 ‐Jan ‐1000 198 198 19 198 198 198 19 198 199 199 19 199 199 199 19 199 200 200 20 200 200 200 20 200 201
- 11. Total Payroll Jobs in the U.S. Total Payroll Jobs in the U.S. ( i 2000 b t ith 30 illi l )( i 2000 b t ith 30 illi l )(same as in 2000, but with 30 million more people)(same as in 2000, but with 30 million more people) 138000 140000 132000 134000 136000 138000 126000 128000 130000 132000 124000 126000 ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul ‐Jan ‐Jul 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010
- 12. How Many Years to Get Job Market B k t N l?Back to Normal? Jobs added per month Assumed new jobs needed for growing population per month How many years? 100,000 100,000 Treading water and never back to normal 200,000 100,000 6.3 years 300,000 100,000 3.2 years 400,000 100,000 2.1 years
- 18. Existing Home Sales (Closings)Existing Home Sales (Closings)g ( g )g ( g ) 7000000 7500000 Tax Credit ImpactTax Credit Impact 5000000 5500000 6000000 6500000 3000000 3500000 4000000 4500000 00 ‐Feb 00 ‐Aug 01 ‐Feb 01 ‐Aug 02 ‐Feb 02 ‐Aug 03 ‐Feb 03 ‐Aug 04 ‐Feb 04 ‐Aug 05 ‐Feb 05 ‐Aug 06 ‐Feb 06 ‐Aug 07 ‐Feb 07 ‐Aug 08 ‐Feb 08 ‐Aug 09 ‐Feb 09 ‐Aug 10 ‐Feb 10 ‐Aug 20 200 20 200 20 200 20 200 20 200 20 200 20 200 20 200 20 200 20 200 20 201
- 21. Median Home Price in Denver AreaMedian Home Price in Denver Area 250 300 $ thousand$ thousand 150 200 50 100 Separate Case‐Shiller Index shows Denver price gain of 2% from 18 months ago 0 Separate Case Shiller Index shows Denver price gain of 2% from 18 months ago Source: Source: NARNAR
- 22. Distressed Loans and Shadow Inventory 6,000 7,000 Mortgage Payments Past Due 30‐59 Days Bad loans are nearly always made in goodBad loans are nearly always made in good times. But recently originated loans aretimes. But recently originated loans are f i llf i ll 4,000 5,000 Thousands Mortgage Payments Past Due 90+ Days performing very well.performing very well. 2,000 3,000 Past Due 90+ Days Mortgage 0 1,000 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 g g Foreclosures Started 2006/Q 2006/Q 2006/Q 2006/Q 2007/Q 2007/Q 2007/Q 2007/Q 2008/Q 2008/Q 2008/Q 2008/Q 2009/Q 2009/Q 2009/Q 2009/Q Mortgage Foreclosure Inventory
- 23. Newly Built Home Inventory and Newly Built Home Inventory and Its Shadow InventoryIts Shadow InventoryIts Shadow InventoryIts Shadow Inventory 600 700 300 400 500 100 200 300 0 ‐Feb 0 ‐Jul ‐Dec ‐May ‐Oct ‐Mar ‐Aug 3 ‐Jan ‐Jun ‐Nov ‐Apr ‐Sep ‐Feb 5 ‐Jul ‐Dec ‐May ‐Oct ‐Mar ‐Aug 8 ‐Jan ‐Jun ‐Nov ‐Apr ‐Sep ‐Feb 0 ‐Jul 2000 2000 2000 2001 ‐ 2001 2002 ‐ 2002 2003 2003 2003 2004 2004 2005 2005 2005 2006 ‐ 2006 2007 ‐ 2007 2008 2008 2008 2009 2009 2010 2010
- 28. Return to Normalcyy • Unprecedented Boom and Bust: 2000 to 2010 • Sales Boomed and Retreated P i O h t d C t d• Prices Overshot and Corrected • Fundamental Back to Justifiable Levels • Long‐standing Housing Policy still in place d k bbl h d• Credit Market Bubble … out the window
- 33. Home Price and Construction Cost (No Bubble Now)(No Bubble Now) 160 170 NAR Price Index 120 130 140 150 NAR Price Index 90 100 110 120 PPI Residential Construction Cost Index 80 000 ‐Feb 000 ‐May 000 ‐Aug 000 ‐Nov 001 ‐Feb 001 ‐May 001 ‐Aug 001 ‐Nov 002 ‐Feb 002 ‐May 002 ‐Aug 002 ‐Nov 003 ‐Feb 003 ‐May 003 ‐Aug 003 ‐Nov 004 ‐Feb 004 ‐May 004 ‐Aug 004 ‐Nov 005 ‐Feb 005 ‐May 005 ‐Aug 005 ‐Nov 006 ‐Feb 006 ‐May 006 ‐Aug 006 ‐Nov 007 ‐Feb 007 ‐May 007 ‐Aug 007 ‐Nov 008 ‐Feb 008 ‐May 008 ‐Aug 008 ‐Nov 009 ‐Feb 009 ‐May 2 20 20 20 2 20 20 20 2 20 20 20 2 20 20 20 2 20 20 20 2 20 20 20 2 20 20 20 2 20 20 20 2 20 20 20 2 20
- 34. Credit Bubble DeadCredit Bubble Dead Subprime AltSubprime Alt‐‐A Home Equity Mortgage OriginationA Home Equity Mortgage OriginationSubprime, AltSubprime, Alt A, Home Equity Mortgage OriginationA, Home Equity Mortgage Origination 1 400 1,600 $ billion$ billion 1,000 1,200 1,400 400 600 800 0 200 400 2003 2005-2006 2009-2010 Source: NAR estimate based on Inside Mortgage Finance dataSource: NAR estimate based on Inside Mortgage Finance data
- 35. Long Standing Housing Policy • Mortgage Interest Deduction – If eliminated about 15% hit to home valuesIf eliminated, about 15% hit to home values – Massive wealth destruction on property owners who have saved and saved (in many cases to pass it on to the nextsaved and saved (in many cases to pass it on to the next generation) • FHA – Self‐financing without ever needing taxpayer funds (as of yet) • Fannie and Freddie – Made mistakes and need to be restructured
- 36. Long‐Term Path to Self Reliance may be Helped from Long‐Term Path to Self Reliance may be Helped from $300,00020072007 Long‐Term Housing Wealth Gains Long‐Term Housing Wealth Gains 1998 2001 2004 $200,000 $250,000 2007 Median Family Net Worth 2010 1995 $100,000 $150,000 1995 1998 2001 2004 $0 $50,000 Renter Homeowner 2007 2010 Renter Homeowner Source: Federal Reserve, NAR estimate for 2010
- 37. Compelling Affordability hl bMonthly Mortgage to buy a Median Priced Home 2005 Q2 2010 Q2 S Di $ 2 833 $ 1 564San Diego $ 2,833 $ 1,564 Miami $ 1,726 $ 853 Denver $ 1,192 $ 935 Kansas City $ 735 $ 600
- 38. Inflationary Pressure ? Indicator % change from one year ago Consumer Price Index (CPI) 1.1% Housing Rent Component CPI 0.2% (but heading higher?) Producer Price Index (Finished Product) 4.0% Producer Price Index (Intermediate Product) 5.5% Producer Price Index (Crude Product) 20.2% Commodity: Coffee Cotton Wheat Meat Very highCommodity: Coffee, Cotton, Wheat, Meat Very high Gold Price Record High Price
- 39. CPICPI‐‐Housing Rent InflationHousing Rent Inflation ( f b f / )( f b f / )(Home price is not part of CPI because of asset/investment aspect)(Home price is not part of CPI because of asset/investment aspect) 5 % 3 4 fl 1 2 Housing Rent Inflation 0 1 an Apr Jul Oct an Apr Jul Oct an Apr Jul Oct an Apr Jul Oct an Apr Jul Oct an Apr Jul ‐1 2005 ‐Ja 2005 ‐A 2005 ‐J 2005 ‐O 2006 ‐Ja 2006 ‐A 2006 ‐J 2006 ‐O 2007 ‐Ja 2007 ‐A 2007 ‐J 2007 ‐O 2008 ‐Ja 2008 ‐A 2008 ‐J 2008 ‐O 2009 ‐Ja 2009 ‐A 2009 ‐J 2009 ‐O 2010 ‐Ja 2010 ‐A 2010 ‐J
- 42. Real Estate Price 1 8 2.0 Residential: Case-Shiller 1.4 1.6 1.8 1.0 1.2 v r p b c y t r g v r p b c y t r Commercial: MIT 2001 ‐Jan 2001 ‐Jun 001 ‐Nov 2002 ‐Apr 2002 ‐Sep 2003 ‐Feb 2003 ‐Jul 003 ‐Dec 004 ‐May 2004 ‐Oct 005 ‐Mar 005 ‐Aug 2006 ‐Jan 2006 ‐Jun 006 ‐Nov 2007 ‐Apr 2007 ‐Sep 2008 ‐Feb 2008 ‐Jul 008 ‐Dec 009 ‐May 2009 ‐Oct 010 ‐Mar 2 2 20 2 2 2 2 20 2 20 20 2 2 20 2 2 2 2 20 2 20
- 43. Commercial Mortgage Backed Security Issuance 40,000 45,000 50,000 Monthly CMBS Issuance ($ Mil) 25,000 30,000 35,000 10,000 15,000 20,000 ‐ 5,000 J M M J S N J M M J S N J M M J S N J M M J S N J M M J S 06 07 08 09 10 Source: Commercial Mortgage Alert
- 45. $140 U.S. Sales Volume: Properties valued over $2.5 million $100 $120 $140 Billions Apartment Industrial Office Retail $60 $80 $100 2010.Q3: UP 115% Y‐o‐Y $20 $40 $60 $0 $20 Source: Real Capital Analytics
- 47. Baseline OutlookBaseline Outlook •• Moderate GDP Expansion 2 to 2.5% in the next 2 Moderate GDP Expansion 2 to 2.5% in the next 2 years (historical average is 3%)years (historical average is 3%) •• 1.5 million annual job additions in the next 2 1.5 million annual job additions in the next 2 yearsyearsyears years •• Unemployment rate of 9% in 2011 … and normal Unemployment rate of 9% in 2011 … and normal 6% in 20156% in 2015
- 48. Baseline Outlook Cont.Baseline Outlook Cont. •• Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012 Mortgage Rates rising to 5.0% in 2011 and 5.9% in 2012 •• People fussing about home value could miss out on low ratesPeople fussing about home value could miss out on low rates •• Home values Home values –– no meaningful change in the national price in the no meaningful change in the national price in the next 2 yearsnext 2 years •• Home sales to be choppy but overall improving in line with job Home sales to be choppy but overall improving in line with job growth … 5.2 million in 2011 (up from 4.8 m in 2010, but same as in growth … 5.2 million in 2011 (up from 4.8 m in 2010, but same as in 2000)2000)2000)2000) •• Affordability conditions are too compellingAffordability conditions are too compelling •• There maybe a pentThere maybe a pent‐‐up demand 30 million additional people from 2000 butup demand 30 million additional people from 2000 but•• There maybe a pentThere maybe a pent‐‐up demand. 30 million additional people from 2000 but up demand. 30 million additional people from 2000 but same home sales as in 2000.same home sales as in 2000.
- 49. Baseline Outlook Cont.Baseline Outlook Cont. •• Commercial lending to steadily improve … because of Commercial lending to steadily improve … because of record high bank profitsrecord high bank profits •• Net absorption steadily improve … because of Net absorption steadily improve … because of recovering job marketrecovering job marketg jg j •• Rents stabilize (but no meaningful increase) … Rents stabilize (but no meaningful increase) … because of very low newly built inventorybecause of very low newly built inventorybecause of very low newly built inventorybecause of very low newly built inventory •• Cap rate falls … price floor established and because of Cap rate falls … price floor established and because of i d i t fid (t t fi d i t fid (t t fimproved investor confidence (to move money out of improved investor confidence (to move money out of low yielding Treasuries)low yielding Treasuries)
- 50. Alternative PossibilityAlternative Possibility •• High inflation … people desire tangible investment like real estate, but High inflation … people desire tangible investment like real estate, but interest rate will be higherinterest rate will be higher •• Deflation … people hold back for better price … holds back economyDeflation … people hold back for better price … holds back economy •• Budget deficit tipping point … higher interest rate and sharp cut back in Budget deficit tipping point … higher interest rate and sharp cut back in standard of livingstandard of livingstandard of livingstandard of living •• Sharp 4% to 5% GDP growth … release of pentSharp 4% to 5% GDP growth … release of pent‐‐up housing demand (30up housing demand (30Sharp 4% to 5% GDP growth … release of pentSharp 4% to 5% GDP growth … release of pent up housing demand (30 up housing demand (30 million more people today versus 2000 when home sales were similar) million more people today versus 2000 when home sales were similar) … surprisingly higher home sales and home prices… surprisingly higher home sales and home prices
- 51. Virtuous or Vicious Cycle? • Home values stabilizing scenario – Foreclosures steadily fall – Strategic default lessens and underwater homeowners become hopeful FHA and Fannie/Freddie finances improve (will need less– FHA and Fannie/Freddie finances improve (will need less taxpayer funds) – Consumer spending opens upConsumer spending opens up – Home value stabilize further or even begin to rise … – Self‐sustaining normal growth rates in sales and pricesg g p • Home values fall meaningfully … ugly scenario