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1. The Economic Outlook: What and Why
Economic Issues & Trends Forum
OAR 2012 Winter Conference
January 23rd 2012
Hilton Columbus at Easton
3900 Chagrin Drive
Columbus, Ohio
Jed Smith
Managing Director, Quantitative Research
National Association of REALTORS®
2. 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.
4. What is Forecasting? The Outlook: Black Swans
Major Risks: Unknown Unknowns/Unanticipated Risks
5. 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.
6. Outlook--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
7. 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 $234,500
• GDP Growth +1.7% +2.5% +3.1%
• Payroll Job Gains +1.8 million +1.9 million +2.3 million Fed
• Funds Rate 0.1% 0.1% 0.5%
• 30-yr Mortgage 4.5% 4.3% 4.9%
• Overall: A Continued Slow Recovery.
• BUT
• Subject to MANY Uncertainties.
8. The Economy—How We Got Here!
Excessive Spending, Leverage, Permissive Financial Behavior Great Recession, Slow Recovery
Key Issues: Credit, Balance Sheets, Confidence, Jobs, Nasty Disagreements, Grid Lock
May Jun July Aug Sep 2009
2008 2008 2008 2008 2008
9. 20
00
20 - J
0 a
125000
135000
145000
20 0 - n
01 Ju
20 - J l
0 a
20 1 - n
02 Ju
20 - J l
0 a
20 2 - n
03 Ju
20 - J l
0 a
20 3 - n
04 Ju
20 - J l
0 a
20 4 - n
05 Ju
20 - J l
0 a
20 5 - n
06 Ju
20 - J l
0 a
20 6 - n
07 Ju
20 - J l
0 a
20 7 - n
08 Ju
- l
The Economy
20 Ja
n
20 08-
09 Ju
- l
20 -Ja
0 n
Projected Time for Jobs Recovery: Four Years?
20 9-J
10 ul
20 -Ja
1 n
20 0-J
Total U.S. Jobs: Non-Farm, Establishment Data
11 ul
20 -Ja
11 n
-J
ul
Source: BLS
10. Household Wealth
Major Impact from the Great Recession
Financial Assets Recovering. Less Recovery in Real Estate.
Households & Nonprofit Org: Total Financial Assets Households & Nonprofit Org: Assets: Total Owner-occupied Real Estate
NSA, Bil.$ 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 01/13/12
11. Unemployment
Need an Additional 11 Million Jobs
Number Unemployed Unprecedented. Duration 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
75 80 85 90 95 00 05 10 75 80 85 90 95 00 05 10
Source: Bureau of Labor Statistics 01/10/12 Source: Bureau of Labor Statistics 01/10/12
12. A Unique Recession
Deep Dip In GDP, Jobs, Financial Assets, Consumer Confidence
Real Gross Domestic Product
% Change - Year to Year SAAR, Bil.Chn.2005$
12 12
8 8
4 4
0 0
-4 -4
-8 -8
75 80 85 90 95 00 05 10
Source: Bureau of Economic Analysis 01/10/12
14. Economic Recession Impact
Change in Value - Real GDP ($ Bil.)
0
-29.5 -26.8 -31.2
-45.1
-100 -62.7 -79
-109.4
-137.3 -131.9 -139.3
-200
-300
-400
-500
-600 -553.5
Source: BEA, NAR
15. Consumer Spending: A Real Hit
Real Personal Consumption Expenditures
% Change - Year to Year SAAR, Bil.Chn.2005$
8 8
6 6
4 4
2 2
0 0
-2 -2
-4 -4
75 80 85 90 95 00 05 10
Source: Bureau of Economic Analysis 01/10/12
16. Construction: Down Significantly
Quasi Good News for Residential
Total Construction: Nonresidential
SAAR, Mil.$
Total Construction: Residential
SAAR, Mil.$
750000 700000
675000 600000
600000 500000
525000 400000
450000 300000
375000 200000
02 03 04 05 06 07 08 09 10 11
Source: Census Bureau 01/10/12
17. Corporate Profits: Up
Corporate Profits with IVA and CCAdj
SAAR, Bil.$
2000 2000
1600 1600
1200 1200
800 800
400 400
0 0
85 90 95 00 05 10
Source: Bureau of Economic Analysis 01/10/12
18. Problem of Major Concern
“Where’s My Raise?”
Average Weekly Earnings of All Employees: Total Private
SA, 1982-84$/Week
Average Weekly Earnings: Total Private Industries
SA, $/Week
360 800
356
780
760
352
740
348
720
344
700
340 680
06 07 08 09 10 11
Source: Bureau of Labor Statistics 01/10/12
19. An International World
Imports: Goods and Services, BOP Basis
SA, Mil.$
Exports: Goods and Services, BOP Basis
SA, Mil.$
240000 200000
200000
175000
150000
160000
125000
120000
100000
80000
75000
40000 50000
95 00 05 10
Source: Census Bureau 01/10/12
20. SA, Thousands
0
100
200
300
400
500
600
700
2000 - Jan
2000 - Apr
2000 - Jul
2000 - Oct
2001 - Jan
2001 - Apr
2001 - Jul
2001 - Oct
2002 - Jan
2002 - Apr
2002 - Jul
2002 - Oct
2003 - Jan
2003 - Apr
2003 - Jul
2003 - Oct
2004 - Jan
2004 - Apr
2004 - Jul
2004 - Oct
2005 - Jan
2005 - Apr
2005 - Jul
Unemployment Ins Claims
2005 - Oct
2006 - Jan
2010 Avg: 4.5 million
Insured Unemployed: 2009 Avg: 5.8 million
2011 YTD: 3.8 million
2006 - Apr
2006 - Jul
2006 - Oct
2007 - Jan
2007 - Apr
2007 - Jul
2007 - Oct
2008 - Jan
2008 - Apr
2008 - Jul
2008 - Oct
2009 - Jan
2009 - Apr
2009 - Jul
Unemployment Rate
2009 - Oct
2010 - Jan
2010 - Apr
2010 - Jul
2010 - Oct
2011 - Jan
2011 - Apr
2011 - Jul
Unemployment Remains Elevated
0
2
4
6
8
10
12
SA, Percentage
Source: DoL, BLS
22. Washington Policy Impacts
Tremendous 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.
28. Factors Impacting Real Estate Markets
J.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.
30. 0%
20%
30%
40%
50%
60%
10%
200810
200811
200812
200901
200902
200903
200904
200905
200906
200907
200908
200909
200910
200911
200912
201001
201002
201003
Foreclosed
201004
201005
201006
Distressed Property
201007
Short Sale
201008
201009
201010
201011
201012
Currently at 32 Percent of Total Existing Home Sales
201101
201102
201103
201104
201105
201106
Major Impact--Price and Consumer Confidence
201107
201108
201109
201110
201111
Distressed Sales: 30% to 40% of Transactions
201112
31. 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.
32. Residential Markets Showing Modest Signs of
Recovery
Realtor Confidence Up Buyer and Seller Traffic Up
Single Family Market Conditions Single Family Homes
50.0 70.0
45.0
60.0
40.0
35.0 50.0
30.0
40.0
25.0
30.0
20.0
15.0 20.0
10.0
10.0
5.0
0.0
0.0
200801
200804
200807
200810
200901
200904
200907
200910
201001
201004
201007
201010
201101
201104
201107
201110
Apr08
Apr09
Apr10
Apr11
Jan08
Oct08
Jan09
Oct09
Jan10
Oct10
Jan11
Oct11
Jul08
Jul09
Jul10
Jul11
Current Confidence SF Confidence in Oulook--SF Buyer Traffic Seller Traffic
33. 10%
15%
20%
25%
0%
5%
201009
201010
201011
201012
201101
201102
Investor
201103
201104
201105
201106
Second Home
201107
201108
Investors Continue to Find
201109
Residential Markets Attractive
201110
201111
201112
10%
20%
30%
40%
50%
60%
200810 0%
200812
Up Demand
200902
200904
200906
200908
200910
200912
201002
201004
201006
First Time Buyer
201008
201010
First Time Buyer
201012
201102
201104
201106
201108
Investor Activity May be Creating Some Pent
201110
201112
34. Challenges and Opportunities
Realtors Report Apartment Rents Rising Realtors Experienced Appraisal Problems in 35%
Year-Over-Year of Contracts During Past Three Months
60% 25%
50%
20%
40%
15%
30%
10%
20%
5%
10%
0%
0% 201003
201004
201005
201006
201007
201008
201009
201010
201011
201012
201101
201102
201103
201105
201106
201107
201108
201109
201110
201111
201112
201104e
Higher Rents Lower Rents Contract Cancelled Contract Delayed Negotiated to Lower Price
39. 90.00
110.00
130.00
150.00
170.00
190.00
210.00
2000Q4
2001Q1
2001Q2
2001Q3
2001Q4
2002Q1
2002Q2
2002Q3
2002Q4
National
2003Q1
Apartments
2003Q2
2003Q3
2003Q4
2004Q1
2004Q2
2004Q3
2004Q4
2005Q1
2005Q2
2005Q3
National
Industrial
2005Q4
2006Q1
2006Q2
2006Q3
2006Q4
2007Q1
2007Q2
2007Q3
Commercial Property Price Index
Office
2007Q4
National
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
U.S. Prices by Property
2009Q3
2009Q4
Retail
2010Q1
National
2010Q2
2010Q3
2010Q4
2011Q1
2011Q2
Source: Real Capital Analytics, Moody's
40. Foreign Investments: Modest Rebound
Cross-border Investment in U.S. CRE
$14 Apartment Industrial Office Retail
Billions
$12
$10
$8
$6
$4
$2
$-
Source: Real Capital Analytics; *through 11/2011
41. Distress Moderates - Resolutions Improve
Cummulative Distress
$400
Troubled REO Restructured Resolved
Billions
$350
$300
$250
$200
$150
$100
$50
$-
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N
2008 2009 2010 2011
Source: Real Capital Analytics
42. Commercial Real Estate Financing
Public Equity
Monthly US REIT Equity Issuance ($ Mil)
14,000
12,000
10,000
8,000
6,000
4,000
2,000
-
J 06M M J S N J 07M M J S N J 08M M J S N J 09M M J S N J 10M M J S N J 11M M J S N
Source: NAREIT
43. Commercial Real Estate Financing
Public Debt
Monthly CMBS Issuance ($ Mil)
50,000
45,000
5179
40,000
4313
3734
35,000 3371
3181
2957
30,000 2694
2159
1704 1825 1830
25,000 1449 1492
1201
20,000 639 632
250 400 310
0 0 81 83 53151 156
15,000
J J A S O N D J F MAM J J A S O N D J F MAM J J A S
10 11
10,000
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 N J M M J S
06 07 08 09 10 11
Source: Commercial Mortgage Alert
44. Commercial Outlook
Realtors® 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%
45. Commercial Sector—Ohio
Outlook: Will Probably Continue to Track U.S. Experience
Rolling 12 Month Total Sales
US vs. Columbus/Cleveland/Cincinnatti/Dayton
300,000.0 3,500.0
3,000.0
250,000.0
2,500.0
200,000.0
2,000.0
150,000.0
1,500.0
100,000.0
1,000.0
50,000.0
500.0
0.0 0.0
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 '11
US Ohio
46. 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.
47. 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.
48. 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.
49. Conclusions and Implications
Educating the Client: “Just The Facts”
For More Information
• Profile of Home Buyers and Sellers
– National Survey
– Ohio Survey
• Statistics
http://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