Slide oresentation by National Association of REALTORS Chief Economist Dr. Lawrence Yun to members and friends of the St. Charles County Association of REALTORS

1. Economic and Housing Market
OUTLOOK
Lawrence Yun, Ph.D.
Chief Economist
NATIONAL ASSOCIATION OF REALTORS®
Presentation at St. Louis Association of REALTORS® and
St. Charles County Association of REALTORS®
February 3, 2012

2. Strange World
Great! What the Heck?
Best Affordability Conditions No Meaningful Pick-up in Home Sales
National home prices have stabilized for 2 Everyone believes home values have been
years falling throughout … Why?
Lowest newly constructed inventory Housing Starts still Dead
Huge Cash Reserves at Banks Cash not circulating into the economy
Record High Profits in Financial Industry in Bank stock prices in the tanks
2010 and just as good in 2011
Federal Reserve Monetary Stimulus to Regulation to discourage lending
encourage more lending
Consumers work hard to demonstrate Some must pay higher borrowing cost …
financial responsibility because they are “jumbo”

3. Strangeness Continued
Great! What the Heck?
Less risk of a further price decline after 33 More risk-based lending and added fees
percent price drop to protect against price declines
Fannie and Freddie are making “internal Fannie and Freddie are still reporting net
self-sustaining” profits on new mortgages losses because legacy assets
Investors are seeking bargains Not enough foreclosed properties … on
average taking more than a year to reach
the market
Improving Job Market Very Low Consumer Confidence

4. Best Affordability Conditions

5. 4,500,000
5,000,000
5,500,000
6,000,000
6,500,000
7,000,000
3,000,000
3,500,000
4,000,000
2008 - Jan
2008 - Mar
2008 - May
Old Data
New Data
2008 - Jul
2008 - Sep
2008 - Nov
2009 - Jan
2009 - Mar
2009 - May
2009 - Jul
2009 - Sep
2009 - Nov
2010 - Jan
2010 - Mar
2010 - May
Tax Credit Impact
2010 - Jul
2010 - Sep
Same Market Characterization
2010 - Nov
2011 - Jan
2011 - Mar
2011 - May
2011 - Jul
2011 - Sep
Monthly Existing Home Sales .. Before/After Revision
2011 - Nov

6. National Existing Home Sales Measurement
• What it is • What it is not
– Trend based on MLS sales – Actual sales count from
from a benchmarked figure MLSs
• Decennial Census implied – Actual sales count as
5.2 million sales in 2000 recorded from property
– MLS sales rise 10% then deeds
Existing Home Sales is
presumed to have risen
10%
– But MLS sales may pick up • No changes to MLS data
FSBOs and Homebuilder • No changes to local sales
sales that normally do not of MLS data counts
fall into MLSs

7. Homes Bought How?
More People Sought Help From REALTORS®
Homebuilder Directly from owner Real estate agent
100
90
80
70
60
50
40
30
20
10
0
2005 2006 2007 2008 2009 2010 2011

8. Example of FSBO Impact to Home Sales Estimate
Total Sales MLS Sales FSBO
(For-Sale-By-
Owner)
Year 1 100 80 20
Year 2 100 90 10
% change 0.0% 12.5% invisible

9. Annual U.S. Existing Home Sales …
Flat Line for 4 tough years
8,000,000
7,000,000
6,000,000
5,000,000
4,000,000
3,000,000
2,000,000
1,000,000
0
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011

10. 20-Metro Case-Shiller Price Index…
Remarkable Stability from 2009

11. St. Louis Metro vs. Miami Price Index
(1990 to 2011)
450
400
350
300
250
200
150
100
50
0
Source: Federal Housing Finance Agency

12. St. Louis Area Markets
(STL City and 5 surrounding counties)
• Home sales
– Down in early months and then up in late months
of 2011
– Up 3.5% in Dec. 2011 from 12 months ago
• Median Price of Transacted Homes
– Down 13% in Dec. 2011 from 12 months ago
• Median Listing Price
– Up 10% in Dec. 2011 from 12 months ago
• Source: MORE REALTORS®

13. Other Local Market Trends
Prices Up Prices Down
• Bismarck • Atlanta
• Boston • Chicago
• Buffalo • Las Vegas
• San Diego • Miami
• San Francisco • Phoenix
• Washington, DC • Portland, OR

14. 0
500
1500
2000
2500
1000
3000
1959 - Jan
1961 - Jan
1963 - Jan
1965 - Jan
1967 - Jan
1969 - Jan
1971 - Jan
1973 - Jan
1975 - Jan
1977 - Jan
Housing Starts in thousands
1979 - Jan
1981 - Jan
1983 - Jan
1985 - Jan
1987 - Jan
1989 - Jan
1991 - Jan
1993 - Jan
U.S. Housing Starts
1995 - Jan
1997 - Jan
1999 - Jan
2001 - Jan
Long-term Average;
2003 - Jan
2005 - Jan
Long-term Requirement
2007 - Jan
2009 - Jan
Lowest since the Second World War… in the past three years
2011 - Jan

15. St. Louis Area Housing Permits
(4 years of suppression)
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0

16. Existing Home Inventory
(Elevated but Falling even as distressed and shadow inventory flows in)

17. -100
0
100
200
300
400
500
600
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
$ billions; seasonally adjusted annualized
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
2009 - Q1
2009 - Q3
2010 - Q1
Financial Industry Corporate Profits
2010 - Q3
2011 - Q1
2011 - Q3

18. KBW Bank Stock Index
(still down 64% from pre-crisis levels)
120
100
80
60
40
20
0
2007 2008 2009 2010 2011

19. 0
1
2
3
4
5
6
7
8
9
2000 - Jan
2000 - Jul
2001 - Jan
2001 - Jul
2002 - Jan
2002 - Jul
2003 - Jan
2003 - Jul
2004 - Jan
2004 - Jul
2005 - Jan
2005 - Jul
2006 - Jan
30-year Mortgage
2006 - Jul
2007 - Jan
2007 - Jul
Federal Reserve
2008 - Jan
2008 - Jul
Loose Monetary Policy
2009 - Jan
Fed Funds
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul
2012 - Jan

20. Banks/Regulators
Restricting Credit
(Average Credit Scores of Approved Loans)
Normal 2009 2010 If Normal
Fannie 720 761 762 720
Freddie 720 757 758 720
FHA 650 682 698 660
15% to 20% Higher Sales

21. Demographics of Recent Buyers
2011 Profile 2010 Profile
Median Age 43 39
Gross Household $80,900 $72,200
Income
Household Composition 64% married couples 58% married couples
18% single females 20% single females
10% single males 12% single males
7% unmarried couples 8% unmarried couples
Own a 2nd Home 19% 14%

22. Loan Limit Changes to 42 States
• Now, more People need to take out Jumbo
Mortgages
• CBO … Lower taxpayer risk if loan limits are
raised
• America today … Work hard, be financially
responsible … then you will get punished ???
• Conforming Rate = 3.89%
• Jumbo Rate = 4.43%

23. Price Decline Potential?
• If prices fall … more underwater homeowners
… more default risk
• More risk to decline when there is a bubble
• Less risk to decline after a crash
• Many metrics suggest price decline potential
is minimal with more price increase potential
• Yet Banks/Regulators have been pursuing …
easy lending during bubble and tight lending
after crash

24. Home Price vs Rent …
Price Change Potential?
(index = 100 in 1980)
Rent is CPI Primary Rent and Price is NAR median price

25. 0
1
2
3
4
-1
5 %
2000 - Jan
2000 - Jul
2001 - Jan
2001 - Jul
2002 - Jan
2002 - Jul
2003 - Jan
2003 - Jul
2004 - Jan
2004 - Jul
2005 - Jan
2005 - Jul
2006 - Jan
2006 - Jul
2007 - Jan
2007 - Jul
2008 - Jan
CPI Rent is Rising…
(% change from 12 month ago)
Biggest Weight to CPI
2008 - Jul
2009 - Jan
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul

26. Annual Household Formation…
Future Rent Pressure?
(3 separate Census data)
In millions
Household Formation leads to increase ownership and renters;
Could begin to return to normal of at least 1 million from 2012.

27. Home Price vs Construction Cost …
Price Change Potential?
Price is NAR Single-family median price and Construction Cost is Census Construction Cost Weighted Price Index

28. Home Price to Income Ratio …
Price Change Potential ?
(Median single-family home price and median household income)

29. Home Value Undervaluation
(Recent analysis by The Economist magazine)
Metric Magnitude of Over or
Undervaluation
U.S. Home Prices Home Price vs. Rent 8% undervaluation
U.S. Home Prices Home Price vs. Income 22% undervaluation
U.K. Home Prices Home Price vs. Rent 28% overvaluation
U.K. Home Prices Home Price vs. Income 20% overvaluation
Ireland Home Prices Home Price vs. Rent 10% overvaluation
Ireland Home Prices Home Price vs. Income Proper valuation
(neither over nor under)

30. Cost Comparisons over 30 years
Item Price Index Price % Change
in 1981 Index in
2011
Consumer price index 87.2 226.3 160%
Rent index 84.7 254.3 200%
Food price index 91.6 229.6 150%
Gasoline price index 103.6 308.4 197%
College tuition index 75.8 601.3 693%
Medical care index 78.6 401.4 410%
Monthly mortgage payment on a $598 Same if no 0%
median priced home (14% mortgage cash out (free and clear
rate)
refi ownership)
Home Prices (FHFA index) 100 319 219%

31. Fannie/Freddie Future
• Disastrous Outcome as government-backed Private Corporation
– Perverse incentive to gamble with taxpayers money
• Good Outcome as government corporation
– Pre-1970s … no problem
– Post-2009 … no problem
– Government corporations generate enough internal profit for self-
sustainability
– Assure liquidity on a very simple non-innovative mortgage product
(e.g., fixed rate mortgages that meets basic underwriting standards)
• Grandparents 30-year mortgage same as Grandchildren’s 30-year mortgage
– Need to pursue counter-cyclical policy … less fees in downturn and
more fees during boom/bubble
– Never trust government to produce innovative products

32. Fannie and Freddie Performance
Mortgage Default after 18 months
Fannie Mae Cumulative Freddie Mac Cumulative
Vintage Default Rate Vintage Default Rate
after 18 months after 18 months
2002 3.1% 2002 2.7%
2003 2.5% 2003 1.2%
2004 4.6% 2004 2.0%
2005 4.8% 2005 1.8%
2006 11.6% 2006 6.0%
2007 28.7% 2007 22.3%
2008 12.6% 2008 13.7%
2009 1.2% 2009 1.1%
Source: Federal Housing Finance Agency

33. Investors want Deals
• All-cash record high at 30% to 35% of all sales
– Multiple bidding becoming common on foreclosed
properties (though not on short-sales)
– Financial asset recovery helping with cash
– Rental income … beats putting money in the bank
– Anticipating rising home prices
• Opens up lending … more home sales
• Boost consumer confidence … more home sales
• Further boost home prices and rate of return on investment
– Hedge against future inflation … alternative to
expensive gold
– Not enough foreclosed homes for sale?

34. 0
200
400
800
1000
1200
1400
1800
2000
600
1600
1975 - Jan
1977 - Jan
1979 - Jan
1981 - Jan
1983 - Jan
1985 - Jan
1987 - Jan
1989 - Jan
1991 - Jan
1993 - Jan
1995 - Jan
1997 - Jan
1999 - Jan
Expensive Gold Price
2001 - Jan
2003 - Jan
(Hedge against Inflation?)
2005 - Jan
2007 - Jan
2009 - Jan
Will Investors shift money to alternative inflation hedge instrument … to real estate?
2011 - Jan

35. Total U.S. Payroll Jobs
– Modest Recovery
(2.6 million job creation from low point in 2010)
In thousands

36. -8
-6
-4
-2
10
0
2
4
6
8
-10
2000 - Q1
2000 - Q3
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
2005 - Q1
2005 - Q3
2006 - Q1
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
Economic Expansion
2008 - Q3
2009 - Q1
2009 - Q3
(GDP growth after recession should be
2010 - Q1
2010 - Q3
2011 - Q1
sustained 4% to 5% … not 1.7% as occurred in 2011)
2011 - Q3
Desired Pace

37. North Dakota … Jobs Everywhere
(Starting Wage at McDonalds … $15 to 18 per hour)
In thousands

38. Michigan Payroll Jobs –
Ongoing Structural Changes
In thousands

39. 1200
1220
1240
1260
1280
1300
1320
1360
1380
1400
1340
2000 -…
2000 -…
2001 -…
In thousands
2001 -…
2002 -…
2002 -…
2003 -…
2003 -…
2004 -…
2004 -…
2005 -…
2005 -…
2006 -…
2006 -…
2007 -…
2007 -…
2008 -…
2008 -…
2009 -…
St. Louis Area Payroll Jobs
2009 -…
2010 -…
2010 -…
2011 -…
2011 -…

40. -2
-1
1
2
3
4
5
6
0
2000 - Jan
2000 - Jul
2001 - Jan
2001 - Jul
2002 - Jan
2002 - Jul
2003 - Jan
2003 - Jul
2004 - Jan
2004 - Jul
2005 - Jan
2005 - Jul
2006 - Jan
2006 - Jul
2007 - Jan
2007 - Jul
2008 - Jan
2008 - Jul
(% change from one year ago)
2009 - Jan
CPI Inflation Retreating?
2009 - Jul
2010 - Jan
2010 - Jul
2011 - Jan
2011 - Jul

41. Broad Inflationary Pressure
(Data as of November 2010)
Indicator % change from one year ago
Consumer Price Index 3.4%
Producer Price Index (Finished Product) 5.9%
Producer Price Index (Intermediate Product) 7.8%
Producer Price Index (Crude Product) 15.3%
Dow Jones Commodity Spot Price Index -4.0%
Gold Price Off Record High Price … but very
high

42. 0.0
2.0
4.0
6.0
8.0
10.0
12.0
2000 - Q1
2000 - Q3
2001 - Q1
2001 - Q3
2002 - Q1
2002 - Q3
2003 - Q1
2003 - Q3
2004 - Q1
2004 - Q3
U.S.
2005 - Q1
2005 - Q3
2006 - Q1
MO
2006 - Q3
2007 - Q1
2007 - Q3
2008 - Q1
2008 - Q3
(90+ days late or in foreclosure process)
2009 - Q1
Serious Delinquent Mortgages …
2009 - Q3
2010 - Q1
2010 - Q3
Mostly those who took out loans in bubble years
2011 - Q1
2011-Q3

43. Distress Sales: 30% to 40% of
Transactions
Will Remain Significant for Next 2 years

44. Improving Factors for Higher Home Sales
• Improving Factors
– Job Creation (though slowly)
– Solid stock market recovery from 2008
– Rising rents and larger pool of qualified renters
– Smart money chasing real estate
• Potential Huge Positive … Lending opens up
• Potential Huge Negative … Washington policy

45. The End of Strangeness
• Let the Prices Recover without obstacles
• If 5% gain in home price
– 2 million fewer underwater homeowners
– Bank lending opens up
– Consumer confidence about home buying improves
– Strangeness is past and back towards normalcy
• But what could be the obstacles
– QRM 20% downpayment rules, MID, Property tax
deduction, capital gains, still lower loan limit
– Rising mortgages rates (market forces of higher
inflation and high budget deficit)

46. National Forecast
2012 2013 2014
GDP Growth 2.0% to 2.5% 2.3% to 2.8% 3.0% to 3.5%
Net New Jobs 1.8 to 2.2 million 2.0 to 2.5 million 2.5 to 3.0 million
CPI Inflation 3.0 to 3.5% 3.0 to 3.5% 3.0% to 3.5%
Rent Growth 3.0% 3.5% 3.5%
Home price Growth 2.0% 3.0% 4.0%
Home Sales 4.0% 6.0% 6.0%
Mortgage Rate 4.5% 4.8% 5.5%

47. Presidential Quotes
• Franklin Delano Roosevelt:
“A nation of homeowners is unconquerable.”
• Ronald Reagan
“We will preserve the part of the American
dream which the mortgage-interest deduction
symbolizes."

48. National Museum of American History
• 4 million no-down-
payment VA mortgages
for World War II veterans
• Fueled an unprecedented
growth of America’s
middle class

49. For Daily Update and Analysis
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