1. The Economy… Real Estate Outlook and Risks
Federal Home Loan Bank of Chicago
MPF Advisory Council Meeting
Presentation, April 18, 2012
Four Seasons Hotel
120 East Delaware Place
Chicago, Illinois
Jed Smith
Managing Director, Quantitative Research
National Association of Realtors®
2. 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?
3. Forecasting: Some Comments
• Projections: Based on
Economic
Relationships, Best
Available Data.
• Assumptions.
• Uncertainties.
• Risk Analysis.
• Black Swans! Unknown
Unknowns.
10. HOW DO WE REACH OUR CONCLUSIONS?
Problems in a Variety of Sectors: Look at the Drivers.
11. 20
00
20 - J
0 a
125000
135000
145000
20 0 - n
01 Ju
20 - J l
0 a
20 1 - n
02 Ju
20 - J l
0 a
20 2 - n
03 Ju
20 - J l
0 a
20 3 - n
04 Ju
The Economy:
20 - J l
0 a
20 4 - n
05 Ju
20 - J l
0 a
20 5 - n
06 Ju
20 - J l
0 a
20 6 - n
07 Ju
20 - J l
0 a
20 7 - n
08 Ju
l
20 - Ja
n
20 08-
09 Ju
- l
20 -Ja
0 n
Recession is Over. Where are the Jobs?
Projected Time for Jobs Recovery: Four Years?
20 9-J
10 ul
20 -Ja
1 n
20 0-J
11 ul
20 -Ja
1 n
20 1-J
12 ul
-J
Total Jobs: Non-Farm, Establishment Data
an
Source: BLS
12. Home Inventories: Approaching 6 Months
The Shadow: Potentially 5 Million Homes
Some Areas Experiencing Low Inventories—Could Sell More
13. Household Wealth: Impact of Great Recession
Lost Approximately $14 Trillion in Assets
Financial Assets: Recovering. Real Estate: Recovery Still to Come.
Households & Nonprofit Org: Total Financial Assets Households & Nonprofit Org: Assets: Total Owner-occupied Real Estate
NSA, Bil.$ NSA,Bil.$
60000 60000 24000 24000
50000 50000 20000 20000
40000 40000 16000 16000
30000 30000 12000 12000
20000 20000 8000 8000
10000 10000 4000 4000
0 0 0 0
80 85 90 95 00 05 10 80 85 90 95 00 05 10
Source: Federal Reserve Board 01/13/12 Source: Federal Reserve Board 02/08/12
14. Unemployment
Need an Additional 11 Million Jobs
Number Unemployed: Unprecedented. Time to find a job: Unprecedented.
Unemployed, 16 Years & Over: 16 yr + Average {Mean} Duration of Unemployment
SA, Thous SA, Weeks
16000 16000 45.0 45.0
14000 14000 37.5 37.5
12000 12000
30.0 30.0
10000 10000
22.5 22.5
8000 8000
15.0 15.0
6000 6000
4000 4000 7.5 7.5
80 85 90 95 00 05 10 80 85 90 95 00 05 10
Source: Bureau of Labor Statistics 02/08/12 Source: Bureau of Labor Statistics 02/08/12
15. Distressed Sales: 30% to 40% of Transactions
Major Impact--Price and Consumer Confidence
16. Percent of Homes Underwater by State
Source: Fannie Mae/Core Logic
17. Mortgages Past Due
Shadow Inventory Includes Foreclosures, Short Sales, and Some Percentage of Past Due
18. FORECAST RISKS AND UNCERTAINTIES
Does An Economist EVER Reach A Conclusion?
A Comment from Harry Truman
19. 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.
20. Residential Markets: The Outlook
Indications 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.
21. Residential Markets Showing Modest Signs of Recovery
REALTOR Confidence in Market Outlook
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Apr08
Jul08
Apr09
Jul09
Apr10
Jul10
Apr11
Jul11
Jan08
Jan09
Jan10
Jan11
Jan12
Oct08
Oct09
Oct10
Oct11
Single Family Townhouses Condos
24. The Bad
Credit 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.
25. Consumer Confidence
Continues at Mediocre Level
Conference Board: Consumer Confidence
SA, 1985=100
150
125
100
75
50
25
85 90 95 00 05 10
Source: The Conference Board 03/30/12
26. Government Spending and Tax Receipts
Major Area of Controversy!!!
$ billion
4200
Government Outlays
3700
3200
2700
2200
1700 Government Receipts
1200
700
200
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
27. Problems of Major Concern!
“DUDE--Where’s My Raise, My Job?”
Major Jobs Problems
Median Usual Wkly Earnings: Full Time Wage & Salary Wkrs
SA, 1982-84 CPI-U Adj$
Full Time Wage and Salary Workers
SA, Thous
345.0 112500
337.5
105000
97500
330.0
90000
322.5
82500
315.0
75000
307.5 67500
80 85 90 95 00 05 10
Source: Bureau of Labor Statistics 02/07/12
28. 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.
29. Washington Policy Impacts
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.
– 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.
33. 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
34. 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.
35. NAR: A Source for Housing Information
www.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