Jed Smith, Managing Director, Quantitative Research
NATIONAL ASSOCIATION OF REALTORS®
North Carolina Real Estate Summit
Cary, North Carolina
July 16, 2013
1. Economic and Housing Market
Trends and Outlook
Jed Smith
Managing Director, Quantitative Research
NATIONAL ASSOCIATION OF REALTORS®
North Carolina Real Estate Summit
Embassy Suites, Cary, North Carolina
July 16, 2013
2. The Outlook: Forecast
Slow Economic Expansion
2011 2012 2013
Forecast
2014
Forecast
GDP Growth +1.8% +2.1% +1.8% 2.7%
Existing Home
Sales
4.3 million 4.7 million 5.0 million 5.2 million
Housing Starts 610 K 780 K 1.0 million 1.25 million
Existing Home
Price Growth
- 4% + 6% + 8% + 5%
30-yr Mortgage
Rate
4.7% 3.7% 4.0% 4.7%
3. “It Was the Best Of Times, and the Worst of Times”
Index Continues Below 100: Expansion Slow, Weaker than Normal
Conference Board: Consumer Confidence
SA, 1985=100
100500959085
Source: The Conference Board 07/02/13
150
125
100
75
50
25
150
125
100
75
50
25
4. “It Was the Best Of Times, and the Worst of Times”
Levels of Uncertainty Higher than Normal
Economy: Slower/Weaker Expansion
Economic Policy Uncertainty Index
1985-09=100
100500959085
Source: PolicyUncertainty.com 07/02/13
250
200
150
100
50
250
200
150
100
50
5. U.S. Total Payroll Jobs
Labor Force Participation Rate Down 3 Percent
11.8 Million Unemployed
124000
126000
128000
130000
132000
134000
136000
138000
140000
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
2009-Jan
2009-Jul
2010-Jan
2010-Jul
2011-Jan
2011-Jul
2012-Jan
2012-Jul
2013-Jan
2013-May
In thousands
6. Employment: The Major Issues
Unemployed, 16 Years & Over: 16 yr +
SA, Thous
100500959085
Source: Bureau of Labor Statistics 07/02/13
16000
14000
12000
10000
8000
6000
4000
16000
14000
12000
10000
8000
6000
4000
• Employment Lower than
Normal.
• Unemployment Duration:
Higher than Normal.
• Job Creation is Lagging.
• It’s Hard to Find a Job!
• Housing Market
Expanding, But Could do
Better.
• Good News—But Still
Underperforming.
7. Housing Outlook: Annual Existing Home Sales
Good News: Impending Multiyear Growth
7.08
6.52
5.02
4.12 4.34 4.18 4.26
4.66
5.00 5.22
5.7
0
1
2
3
4
5
6
7
8
2005
2006
2007
2008
2009
2010
2011
2012
2013f
2014f
2015f
In million units
8. Housing Outlook: Home Prices Still Reasonable
Market is Recovering—A Function of Jobs.
Affordability Good, but Credit Availability Needs to Ease.
0
50000
100000
150000
200000
250000
2000-Jan
2000-Sep
2001-May
2002-Jan
2002-Sep
2003-May
2004-Jan
2004-Sep
2005-May
2006-Jan
2006-Sep
2007-May
2008-Jan
2008-Sep
2009-May
2010-Jan
2010-Sep
2011-May
2012-Jan
2012-Sep
may
2014-Jan
sept
Existing Home Prices
Actual and Forecast
Home Prices, Monthly Forecast, Annual
14. Housing Recovery—Why Sustainable?
Housing Starts Requirement
• 1.1 million household formation.
• 0.3 million demolition and uninhabitable.
(Implicitly assumes depreciation rate of more than 200
years)
• 0.2 million net new vacation home demand.
• Total New Housing Need = 1.6 million each
year.
16. Housing Recovery—Why Sustainable?
Quantifying Housing Shortage
(2001 to 2012)
Household
Formation
Demolition New Vacation
Home
Housing
Starts
11.0 million 3.6 million 2.0 million 15.7 million
16.6 million 15.7 million
This housing shortage imbalance could grow because
(1) Household Formation will exceed 1 million in 2013 and beyond
(2) Housing Starts need to be 1.5 million per year … Not there in 2013
17. Housing Recovery—Why Sustainable?
Housing Starts: Long Term Demand Greater than Supply
0
500
1000
1500
2000
2500
2000
- Jan
2001
- Jan
2002
- Jan
2003
- Jan
2004
- Jan
2005
- Jan
2006
- Jan
2007
- Jan
2008
- Jan
2009
- Jan
2010
- Jan
2011
- Jan
2012
- Jan
2013
- Jan
multifamily single-family
Thousand units (annualized)
Long-term Average
18. Housing Recovery—Why Sustainable?
Existing vs. New Home Prices … Big Gap
(single-family homes)
0
50000
100000
150000
200000
250000
300000
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
2009-Jan
2009-Jul
2010-Jan
2010-Jul
2011-Jan
2011-Jul
2012-Jan
2012-Jul
2013-Jan
New
Existing
19. Number of “Qualified” Renters
(credit scores unknown and not factored)
Year Income Needed to
Buy a Median
Priced Home
Number of Renters
with necessary
income
Share of Renters
Qualified
2000 $40,300 11.8 million 33%
2005 $50,400 9.0 million 24%
2012 $31,700 20.1 million 51%
If the year 2000 is considered as normal, then 11.8 million renters had
the income to buy a median priced home but chose not to.
In 2012 there are about 8 million more renters with the necessary
income but choosing not to be or are unable to be a homeowner.
23. Summary of Outlook: Where Are We Headed?
• Likely Multiyear Housing Recovery.
– No Recession but Slow Economy.
– Continued Job Growth and Household Formation.
– Lagging Housing Starts and Continuing Housing
Shortage.
• Home prices are primed to rise further, by 13%
cumulatively in 2013 and 2014.
• Smooth Sailing Right Now—But Would be Better
with Increased Credit Availability and Job
Creation.
• But There are Major Risks.
24. Risks to Forecast—Housing Related
• Upside Uncertainties … Credit Availability
– Housing recovery so far even with tight credit
– What happens if mortgage accessibility opens up?
• Downside … Washington Housing Policies
– Rising g-fees and FHA insurance premiums
– QRM 20% down payment requirement?
– Basel 3 … capital rule that punishes private mortgage
with low down payment and commercial loans
– Trim mortgage interest deduction?
– Capital gains tax on home sale?
25. Credit Risks--Ready to Open Credit?
(Average Credit Scores of Approved Loans)
Normal 2009 to 2012 If Normal
Fannie 720 760 to 770 720
Freddie 720 760 to 770 720
FHA 650 680 to 700 660
15% to 20% Higher Sales
Possible if Normal Conditions
27. Downside Risk: Mortgage Investor Rights
–Court system clogging the foreclosure
process
–Eminent Domain to take mortgages out of
investors’ hands? (In order to restructure
mortgages)
28. Downside Risk: Aging Baby Boomers
(Live Births per 1000 population in U.S.)
0
5
10
15
20
25
30
35
Baby Boomers … now aged 49 to 68 …
Mix, Preferences, Millennial Buying Power
30. Downside Risk: GDP Growth … Unimpressive
How Fragile is the Recovery?
Housing, Quantitative Easing, Other
-6
-4
-2
0
2
4
6
8
10
1960-Q1
1962-Q2
1964-Q3
1966-Q4
1969-Q1
1971-Q2
1973-Q3
1975-Q4
1978-Q1
1980-Q2
1982-Q3
1984-Q4
1987-Q1
1989-Q2
1991-Q3
1993-Q4
1996-Q1
1998-Q2
2000-Q3
2002-Q4
2005-Q1
2007-Q2
2009-Q3
2011-Q4
GDP Growth
Percent Change, Year to Year, Constant Dollars
31. North Carolina Outlook
Employment Tracks National Trends
3500
3600
3700
3800
3900
4000
4100
4200
4300
124000
126000
128000
130000
132000
134000
136000
138000
140000
2000 -
Jan
2002 -
Jan
2004 -
Jan
2006 -
Jan
2008 -
Jan
2010 -
Jan
2012 -
Jan
Employment, Establishment Data
U.S. North Carolina
32. North Carolina Outlook
Building Permits: Recovering
0
2000
4000
6000
8000
10000
12000
0
50000
100000
150000
200000
250000
2000-Jan
2000-Sep
2001-May
2002-Jan
2002-Sep
2003-May
2004-Jan
2004-Sep
2005-May
2006-Jan
2006-Sep
2007-May
2008-Jan
2008-Sep
2009-May
2010-Jan
2010-Sep
2011-May
2012-Jan
2012-Sep
Authorized Building Permits
U.S. North Carolina
34. North Carolina Outlook
Indexes of Coincident Indicators
0
20
40
60
80
100
120
140
160
180
2000
- Jan
2001
- Jan
2002
- Jan
2003
- Jan
2004
- Jan
2005
- Jan
2006
- Jan
2007
- Jan
2008
- Jan
2009
- Jan
2010
- Jan
2011
- Jan
2012
- Jan
2013
- Jan
Index of Coincident Economic Indicators
North Carolina US
35. North Carolina Outlook
North Carolina Unemployment Rate Slightly Higher than Nation as a Whole
0
2
4
6
8
10
12
2000-Jan
2000-Aug
2001-Mar
2001-Oct
2002-May
2002-Dec
2003-Jul
2004-Feb
2004-Sep
2005-Apr
2005-Nov
2006-Jun
2007-Jan
2007-Aug
2008-Mar
2008-Oct
2009-May
2009-Dec
2010-Jul
2011-Feb
2011-Sep
2012-Apr
2012-Nov
Unemployment Rates
U.S. North Carolina
36. North Carolina Outlook
Home Prices Have Stabilized
0
50
100
150
200
250
300
350
400
FHFA Home Price Index
U.S. North Carolina
37. Community Leaders—Thought Leadership
• Thought Leadership: People Look to Leaders
for Ideas on Important Topics.
• Short Term—Recovery is Proceeding Nicely.
• Longer Term—There are Major Problems.
• The “Longer Term” Could be a Year or Two.
– Problems are not Certainties.
– But Problems Need to be Addressed.
– And Can Show Up as a Surprise.
38. Major Economic Risks: Problems Not to be Ignored.
For Now—Smooth Sailing. Longer Run—Avoid Surprises.
Problems: just ignored.
• Budget Deficit.
• Quantitative Easing.
• Home Ownership Levels.
• Entitlements: Social Security, Medical
Care, Disability, Social Welfare
Programs.
• State/Local Government Finances.
• Labor Force Issues.
• Student Loans.
• Generational Split.
• Income Distribution.
• Lack of Growth.
• Regulation.
• Divisive Rancor.
The iceberg: just ignored.
• Photographed morning April 15, 1912…smear of red
paint along the base of the berg, indication that it had
collided with a ship sometime in the previous twelve
hours.