1. RESIDENTIAL MARKET
UPDATE 2012 Year-In-Review
January 29, 2013
Charleston Marriott
presented by
The Charleston Trident Association of Realtors®

2. Stephen Slifer
Economist
NumberNomics
Formerly of
Lehman Brothers
The Federal Reserve
www.NumberNomics.com
Facebook.com/NumberNomics
Steve@NumberNomics.com

3. The Highlights
1. GDP growth in 2013 = 2.7% (vs. 2.0% in 2012)
2. Consumers and businesses will be engines of growth.
3. Longer-term budget problems -- perspective.
4. Longer-term budget problems -- the solution.

4. 6.0% GDP (Real)
4.0%
2.0%
0.0%
-2.0%
GDP (Real)
Year-over-year
-4.0%
Slow, but steady.
-6.0% GDP growth for 2012 came in at 2.0%
2013 growth expected to be 2.7% even
with some drag from fiscal policy.
-8.0%
-10.0%
2006q1 2007q1 2008q1 2009q1 2010q1 2011q1 2012q1 2013q1

5. GDP Components
Investment
15%
Consumption
Trade
60%
10.0%
Government
15.0%

6. 100.0
Consumer Sentiment
95.0 Consumer sentiment plunged in December
as fiscal cliff fears mounted.
90.0
Recession It remained low in January as the 2% increase
in the payroll tax kicked in.
85.0
Even so, confidence remains relatively high.
80.0
75.0
70.0
65.0
60.0
55.0
50.0
Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012 Jan 2013

7. 1600
1500
S&P 500
1400
1300
1200
1100
1000
The stock market has regained all of the
900
ground it lost during the recession, and is
close to its record high level of 1561 set
back in October 2007.
800
700
600

8. $70.0
Consumer Net Worth (Trillions $)
$65.0
$60.0
$55.0
$50.0
The gain in stock prices means that consumers
$45.0 have restored most of the wealth they lost
during the recession.
$40.0 The other important component of wealth
is the value of your home.
$35.0

9. 15.0%
Consumer Debt Service Ratio
Consumers were highly leveraged at
the beginning of the recession.
14.0%
They have since paid down enormous
amounts of debt, and this debt ratio is
the lowest since 1983.
13.0%
They can quicken the pace of spending
if they so choose.
12.0%
Trend
11.0%
10.0%

10. Mortgage Rates
4.9
At 3.4% mortgage rates today
are at a record low level…
4.4
And they are going lower as
the Fed keeps buying mortgage-
backed securities.
3.9
3.4
2.9

11. Case Shiller Home Price Index
245.00
235.00
225.00
At the same time prices are 30%
215.00
lower than they were at the peak
of the housing market back in 2006.
205.00
195.00
185.00
175.00
165.00
155.00
145.00
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jul 2005
Jul 2006
Jul 2007
Jul 2008
Jul 2009
Jul 2010
Jul 2011
Jul 2012

12. Housing Affordability Index
200
Record low mortgage rates and sharply
reduced prices mean that
housing today is more affordable than
180
it has been at any time in 40 years
160
140
120
100
2007 2008 2009 2010 2011 2012

13. 1900 Housing Starts
1700
We need housing starts of 1.3 million
to keep pace with growth in the population.
Those people need a place to live.
1500
Starts have been below that pace for
5 years.
1300
Thus, demand has exceeded supply for 5 years.
1100
900
Housing Starts
Trend
700
500
Jan 2006 Jul 2006 Jan 2007 Jul 2007 Jan 2008 Jul 2008 Jan 2009 Jul 2009 Jan 2010 Jul 2010 Jan 2011 Jul 2011 Jan 2012 Jul 2012

14. Rental Vacancy Rate
10.5
9.5
8.5
7.5
That increase in demand has created
A shortage of rental properties.
6.5
Vacancy rates have fallen sharply
and are the lowest in a decade.
5.5
4.5
1980:Q1 1983:Q1 1986:Q1 1989:Q1 1992:Q1 1995:Q1 1998:Q1 2001:Q1 2004:Q1 2007:Q1 2010:Q1

15. Asking Rent -- Vacant Rentals
$740
$720
$700
$680
$660
The shortage of rental property is
beginning to push rents upwards.
$640
$620
$600
2006:Q1 2007:Q1 2008:Q1 2009:Q1 2010:Q1 2011:Q1 2012:Q1

16. 245.00
Case Shiller Home Price Index
235.00
225.00 After a big drop, home prices hit bottom
in January 2012
215.00
Since that time they have been climbing
205.00 at a 7.0% annual rate.
195.00 As prices climb, fewer homeowners
will be upside down and fence-sitters
185.00
will be encouraged to buy.
175.00
165.00
155.00
145.00
Jan 2005
Jan 2006
Jan 2007
Jan 2008
Jan 2009
Jan 2010
Jan 2011
Jan 2012
Jul 2005
Jul 2006
Jul 2007
Jul 2008
Jul 2009
Jul 2010
Jul 2011
Jul 2012

17. 1. Consumers feel confident.
2. They have restored almost all of their net worth.
3. The consumers’ debt burden is quite comfortable.
4. Interest rates are at record low levels.
5. Housing is as affordable as it has ever been.

18. GDP Components
Investment
15%
Consumption
Trade
60%
10.0%
Government
15.0%

19. CEO Confidence
64
61
58
55
CEO confidence is high and should climb in
the months ahead if the government
successfully deals with budget problems.
52
49
Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13

20. 1600
1500
S&P 500
1400
1300
1200
1100
1000
Stock prices have been climbing steadily.
900
As a result, many firms have chosen to
800 raise capital by issuing more stock.
700
600

21. $2,100
Corporate Profits with IVA and CC 65.0%
$2,000
By cutting costs and boosting
$1,900 productivity, profits have soared and
are still climbing at a healthy 6% pace. 45.0%
$1,800
$1,700
$1,600 Corporate Profits 25.0%
$1,500 Year-over-year
$1,400
5.0%
$1,300
$1,200
$1,100
-15.0%
$1,000
$900
$800 -35.0%

22. 11.0
Corporate Bond Rates
10.0
9.0
Aaa
Baa
8.0
7.0
6.0
Corporate borrowing rates are the lowest
5.0
they have been in more than 50 years.
4.0 Firms have been replacing high cost debt
with lower cost borrowing. Lowers costs.
Boosts profits. 50-year bonds anyone?
3.0

23. 25.0%
C & I Loans (%) 13.0%
15.0% 8.0%
3.0%
5.0%
-2.0%
-5.0%
C & I Loans (L)
Year-Over-Year (R) -7.0%
-15.0%
Credit is readily available via commercial -12.0%
paper and bond issuance.
-25.0%
In addition, bank loans to businesses are -17.0%
growing at a robust 13% pace.
-35.0% -22.0%
Oct 2012
Oct 2011
Jan 2012
Oct 2010
Jan 2011
Jul 2012
Jan 2010
Jul 2011
Jul 2010
Apr 2012
Apr 2011
Apr 2010

24. 10.5%
Corporate Cash / Assets (%)
Corporate cash levels have never
10.0% been higher.
They have plenty of cash available
for investment.
9.5%
9.0%
8.5%
8.0%

25. 1. CEO’s feel relatively confident.
2. Profits are soaring.
3. Interest rates are at record low levels.
4. Credit is readily available.
5. Firms have accumulated a mountain of cash.

26. Nonresidential Investment
20.0% Investment spending had been growing at a 10% rate.
But it has been gradually slowing since the
beginning of last year.
10.0%
0.0%
Why? Uncertainty.
-10.0%
Nonresidential Invest.
-20.0%
Year-over-year
-30.0%

27. 100
150
200
250
300
-50
350
0
50
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10
Jul-10
Aug-10
Sep-10 Why? Uncertainty.
Oct-10
Nov-10
That is OK, but not great.
170 thousand per month.
Dec-10
Jan-11
Feb-11
Jobs have been climbing by about
Mar-11
Apr-11
May-11
Jun-11
Jul-11
Aug-11
Sep-11
Oct-11
Nov-11
Dec-11
Private Employment
Jan-12
Feb-12
Mar-12
Apr-12
May-12
Jun-12
Jul-12
Aug-12
Sep-12
Oct-12
Nov-12
Dec-12
Jan-13
Feb-13

28. We Have a Long-Term Budget Problem

29. $400
Budget Deficit
$200
$0
-$200
-$400
-$600
We have had 4 consecutive
-$800 $1 trillion budget deficits.
To finance a $1 trillion deficit
-$1,000
need to issue $1 trillion of debt.
-$1,200
In past 4 years we have added
$5 trillion to debt outstanding.
-$1,400
-$1,600
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

30. 100.0%
Debt -- % GDP
Danger
90.0%
80.0%
As a result debt to GDP ratio
has climbed sharply.
70.0% Will reach danger level of 90%
during next 10 years.
60.0%
50.0%
Acceptable
40.0%
30.0%
20.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

31. 200.0%
Debt -- % GDP
180.0%
The real problems begin beyond 2022
because the baby boomers (born 1946-1964)
160.0% will retire between 2011-2029.
140.0% Debt to GDP ratio could reach 186%.
Think Greece.
120.0%
100.0%
Danger
80.0%
60.0%
Acceptable
40.0%
20.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

32. What Do We Do?

33. 12.0%
Deficit -- % GDP
10.0%
Projected deficits will climb to
almost 6.0% of GDP by 2022.
8.0%
Would like it to be 2.0%.
6.0%
Thus, must shrink it by 4.0%.
4.0%
2.0%
0.0%
-2.0%
-4.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

34. 22.0%
Tax Revenue % GDP
21.0%
Current revenue is 15.7% of GDP will rise to
about 18.5% as the economy improves.
20.0%
19.0%
18.0%
17.0%
16.0%
Historical average is 17.7%.
15.0% Probably not a lot of room to increase taxes.
14.0%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022

35. 26.0%
Govt. Spending % GDP
25.0%
Government spending today is 23% of GDP.
24.0%
Climbs to 24% by 2022. Historical average if 19.7%.
23.0%
Way too high!
22.0%
21.0%
20.0%
19.0%
18.0%
17.0%
16.0%
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022

36. 12.0%
Deficit -- % GDP
10.0%
Slifer solution:
8.0% Tax Revenue = 0.0%
Expenditure cuts = -4.0%
6.0% Deficit Reduction = -4.0%
Not everybody agrees.
4.0%
2.0%
0.0%
Most policy makers want a ratio of 3:1
-2.0%
of spending cuts vs. higher tax revenue.
-4.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022

37. Tax Revenue
Other = 8%
Corporate = 11%
Individual = 46%
Social Security = 35%
To boost tax revenue they must increase individual taxes and/or Social Security taxes.
Combined they account for 81% of the total.

38. Government Spending
Interest = 6%
Nondefense = 14%
Entitlements = 62%
Defense = 18%
To cut spending they must include entitlements such as Social Security, Medicare,
and Medicaid (62%). Discretionary spending is only 32% or roughly 1/3 of the pie.

39. Now We Have a Broad Plan
Revenues = 0.0%, Expenditures = -4.0%
What specific taxes will be increased?
What expenditures will be cut?

40. Erskine - Bowles Commission
The Blueprint for a Solution

41. Erskine Bowles Commission
1. Bipartisan. 18 members. Formed in 2010.
2. 9 Republicans. 9 Democrats
3. Nobody expected them to find a solution.
But they did.

42. Erskine Bowles Commission
1. Bipartisan. 18 members. Formed in 2010.
2. 9 Republicans. 9 Democrats
3. Nobody expected them to find a solution.
But they did.
4. 11 votes in favor (61%)
5. Needed 14 to formally adopt the blueprint.

43. Erskine Bowles Commission
1. Individual Taxes
Three brackets – 8%, 14%, 23% (vs. 39%)
Eliminate most tax deductions
Tax rates lower, but tax revenue rises.

44. Erskine Bowles Commission
2. Corporate taxes
Corporate tax rate – 26% (vs. 35% today)
Eliminate most tax deductions.
Tax rates lower, but tax revenue rises.

45. Erskine Bowles Commission
3. Discretionary Spending
Cut to 2008 levels quickly (pre-recession).
Allowed to grow at ½ of inflation rate.
Equal percentage cuts for security and non-
security.

46. Government Spending
Interest = 6%
Nondefense = 14%
Entitlements = 62%
Defense = 18%

47. Erskine Bowles Commission
4. Social Security
Reduce benefits, particularly for high
income individuals.
Increase retirement age gradually to 68.
Increase payroll tax max from $168
thousand to $190 thousand.

48. Erskine Bowles Commission
5. Medicare
Medigap policies -- First $500 not covered.
$500-5,000 coverage is 50% of expenditure.
Raise eligibility age to 68.

49. Debt -- % GDP
200.0%
180.0%
160.0%
Instead of debt to GDP ratio climbing to 186% by 2035,
140.0% Simpson Bowles would shrink it to 40%.
120.0%
It may take 25 years to get there, but it can be done.
100.0%
Danger
80.0%
60.0% Acceptable
40.0%
20.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
2035

50. If They Can Find A Solution…
1. Less uncertainty.
2. Higher consumer and business confidence.
3. Faster growth in investment.
4. Faster GDP growth. Faster income growth.
5. More hiring. Lower unemployment rate.
6. Stock market soars.

51. Two Important Dates
1. February 28. Government begins to sequester
money.
2. March 27. Continuing resolution expires.
Government shutdown.

52. 2013 Forecasts
2012 2013
GDP 2.0% 2.7%
Unemployment Rate 7.8% 7.3%
Inflation Rate 1.9% 1.9%
Fed Funds Rate 0.1% 0.1%
10-year Note 1.7% 1.3%
30-year Mortgage 3.4% 3.0%

53. Seize the Moment
Stephen Slifer
NumberNomics
www.NumberNomics.com

54. Joey Von Nessen, Ph.D
Research Economist
USC’s Moore School of Business
RESH Marketing & Research
www.Resh.com
@RESHMarketing
YouTube.com/RESHMarketing
joey.vonnessen@moore.sc.edu

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