A Divided Real Estate Nation

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1 Real Estate Reality Check Explanation of "What Happened" from the 26 Leadership Conference Boom ended August 2 Mortgage rates rose almost one point Affordability conditions deteriorated Speculative investors pulled out Homebuyer confidence plunged Resort buyers went to sidelines Trade-up buyers to sidelines First-time buyers priced out of market NAR Leadership Summit Chicago, IL August 17 & 18, 26 A Divided Real Estate Nation Red = Expanding (31% of the country by population) Blue = Contracting (69%) These comments added by TexasGulfCoastOnline.com David Lereah, Ph.D. Chief Economist National Association of REALTORS, Existing Home Sales 26 Q2 vs 2 Q2 What Happened? Boom ended August 2 Mortgage rates rose almost one point Affordability conditions deteriorated Speculative investors pulled out Homebuyer confidence plunged Resort buyers went to sidelines Trade-up buyers to sidelines First-time buyers priced out of market The Aftermath Sellers market transitioning to buyers market Home sales plummet, prices lag, inventories rise Cooling markets left with high percentage of exotic loans Builders offering non-price incentives Days-on-market lengthening Residential construction activity slows Home prices beginning to soften 1

2 Cooling Markets (Existing-Home Sales: 26 Q2 vs 2 Q2) 3% 2% 1% % -1% -2% -3% Cooling Metro Markets (Existing Home Sales: 26 Q2 vs 2 Q2) MSA Sales Prices Las Vegas, NV -2% +6.3% Phoenix, AZ -31% Miami, FL -23% +2.% Sarasota, FL -29% +.2% Washington, DC -21% +3.3% San Diego, CA -22% +1.2% Sacramento, CA -3% +.8% Boston, MA -9% +.6% Lengthening Days on Market MSA June 2 June 26 Boston 8 18 Detroit 7 13 Las Vegas 46 Los Angeles 34 4 Miami Phoenix 21 3 Washington DC Rising Months Supply MSA 2 Q2 26 Q2 Boston Honolulu Las Vegas Miami New York Phoenix San Diego Sarasota

3 Price Decelerations and Declines (Existing Home Sales: 26 Q2 vs 2 Q2) MSA 2 Q2 26 Q2 Boston 7% 1% Cape Coral Ft. Myers 4% 2% Chicago 9% % Detroit % -8% Honolulu 28% 11% Miami 32% 2% Phoenix 47% 12% San Diego 8% 1% Washington DC 26% 3% 26 MSAs had price declines in 26 Q2 % 4% 3% 2% 1% % -1% -2% -3% Still, One-third of the Country is Expanding (Existing Home Sales: 26 Q2 vs 2 Q2) Shortening Days on Market MSA June 2 June 26 Boise 7 43 Charleston, WV Charlotte 9 82 Dallas 67 6 Raleigh Price Accelerations and Recovery (One-year gain in 26 Q2 and 2 Q2) 2 Q2 26 Q2 Baton Rouge 6% 27% Birmingham 4% 9% Charleston, SC 1% 1% Houston 2% 7% Portland 17% 19% Raleigh 7% 12% Salt Lake City % 12% 3

4 National Existing-Home Sales Home Price Appreciation 7. 7 In million units 18 1 Percent change from a year ago Price Growth (vs year ago) Condo - Price Depreciation Percent change from a year ago Price Growth (vs year ago) Condo Significant Price Depreciation in West and South West South 4 Percent change from a year ago

5 Housing Inventory Correction Necessary 4,, 3,, 2,, # total homes on the market All-time High Unsustainable Growth and Growing Imbalances Create Heavy Pains Later (Better to have light pains now) Rampant Boom Creates Affordability Crisis and Workforce Housing Problems High Debt Burdens Not Healthy for Economy Adjustable and Exotic Loans Raise Risk 1,, Income Not Keeping Pace With Home Prices Metro Home Prices: Moderate to Unsustainable 2 Income Home Price 6 Widened Gap 2 1 Income and Price set to Index of 1 in Bunched 3 Together 2 Dallas Chicago NY LA Washington Miami 1 1

6 Home Price Distribution (26 Q2) Disappearing Affordable Homes - FHA Participation in California Median Price in $ thousands 2% 1% 1% % % Source: HMDA Income Required to Buy a Typical 6.6% mortgage rate and 2% downpayment Mortgage Obligation to Income Worrisome in the West $2, 4 % South West Northeast Midwest $1, $1, 3 $, 2 $ 1 6

7 % 4% Mortgage Obligation to Income Very High in Some Markets debt service to buy a median priced home by a middle income family San Diego 4%!!! 3% Mortgage Obligation to Income Historical High in Some Markets debt service to buy a median priced home by a middle income family Way Above Historical Local Norm Miami 2% 3% 2% % Some Markets Experiencing Very High or Rising ARMS % 2 Q2 26 Q2 Markets carrying more risk from interest rate changes What Will Happen? 26 corrections different from previous real estate corrections Cooling markets have healthy local economies Seller-to-buyer transitions almost complete Prices expected to fall for remainder of year Price fall will be limited due to Pent-up Demand at Lower Prices Some Local Markets are Fragile and Vulnerable to Rate Rise Soft Landing Source: FHFB 7

8 States with Declining Home Sales, But Housing Needs/Demand Growing (June 2 to June 26) Housing Affordability Tumbling Helps Rental Market Housing affordability Job Gains Housing Unit Needs 1 3, 2, 2, 1, 1,, Source: BLS, NAR Estimates Price Scenarios of % Annual Growth after few years of no growth Median Price in 21 Median Price in 22 Median Price in 23 $1,s Median Price in 2 = $219,6 The number of Years of No Price Growth Near $6, by 23 even in pessimistic scenario U.S. Migration Trend (Top vs. Bottom ) State Net Migration from 2 to 2 Florida +1,7, Arizona +48, Nevada +27, Georgia +233, North Carolina +232, New Jersey -194, Massachusetts -236, Illinois -391, California -664, New York -1,1, Source: Census 8

9 198 - Q Q Q Q Q Q Q Q Q Q1 2 - Q Q Q Q Q Q Q Q Q1 2 - Q Q Q Q1 Evolving Market Trends Greater Price Volatility in Some Markets Greater Liquidity More Investors More Speculator Hedge Fund Investors Homeownership at Younger Age Increased Turnover Rate Prices Do Decline (mostly in the late 8s or early 9s) Peak to Trough Decline Duration Time required to climb back to original peak Boston 2% years 9 years New York 1.% 7 years 11 years Los Angeles 21.4% 7 years 9 years San Francisco 3.8% 4 years 7 years Houston 23.1% years 9 years Honolulu 24% 9 years 13 years San Diego New York Price Growth (vs year ago) Price Growth (vs year ago) 4 Percent change from a year ago 4 Percent change from a year ago

10 Q Q Q Q Q Q Q3 2 - Q Q Q Q Q Q Q Q1 2 - Q Q Q Q1 Honolulu Dallas Price Growth (vs year ago) Price Growth (vs year ago) 4 Percent change from a year ago 2 Percent change from a year ago % Las Vegas Price Growth Variability (Price growth minus historic average) Liquidity from Investors Appetite for Mortgages (26 Q1) NYSE Valuation Mortgage Debt Corporate Debt U.S. Government Debt NASDAQ Valuation -2 Source: Federal Reserve, NYSE, NASDAQ 1

11 More Mortgage Products 1-year, 3-year, 4-year Fixed Rate Mortgages Adjustable Rate Mortgages Hybrid ARMs, Option ARMs Interest-only Loans Zero Down Loans Low-cost Refinance options Easy access to HELOC and Home Equity Loans FHA and VA Loans Fixed and ARMs Risk-based Pricing under debate Investor Sales Historically Strong Investor home sales 16% Increase 27% Increase Second Home Purchases (2) Turnover Rate Historically High (Single-family Sales relative to owner-occupied housing stock) Turnover Rate 28% 12% 6% 9% 8% 7% 6% % 4% 3% 2% 1% % Primary Investment Vacation 11

12 Moderating Economy Economic Backdrop Real Gross Domestic Product (SAAR, Bil.Chn.2$) % Source: BEA Consumer Spending Still Healthy Corporate Profits are Strong % 6 Personal Consumption Expenditure (from year ago) Corporate Profits (Bil.$) Source: BEA Source: BEA 12

13 Wage Growth Picking Up Oil Prices Exerting Inflationary Pressure % % change from a year ago 8 7 Price per barrel Brent Crude Source: BLS Unwelcome Inflation Core Overall CPI % change from a year ago Fed Rate Hikes to Restrain Inflation, But Need to be Mindful of Fed Funds Target Rate (%) Source: BLS 13

14 Risks of Over-tightening Scenarios/Probability of Popping Sluggish Economy (Recession?) Tumbling Housing Sector Mortgage Rate Home Sales Change in 27 Home Price Growth in 27 Leading to rising delinquencies and foreclosures Wary Consumers (from home equity losses) 6.9% (baseline) -.4% 3.8% 7.3% -6.% 1.% 7.8% -16.% -2.% Weakening Housing s Impact on Consumers and Economy Consumer Spending Supported from Housing Equity Gains $1.4 trillion in the past year $7 billion to $14 billion additional consumer spending Without Housing Equity Gain Consumer spending growth slows to 2% growth rather than 3% growth Economy weakens by.7% point Additional Cuts to GDP Growth from Lower Residential Construction Economic Outlook GDP 3.2% 3.% 3.1% Unemployment Rate.1% 4.7% 4.8% CPI Inflation 3.4% 3.% 2.6% 3-month Treasury 3.1% 4.8% 4.8% 1-year Treasury 4.3%.1%.4% 14

15 Housing Outlook Existing-Home Sales 7.1 million 6.6 million 6.6 million New Home Sales 1.3 million 1.1 million 1. million Housing Starts 2.1 million 1.9 million 1.8 million 3-Year FRM.9% 6.6% 6.9% 1-Year ARM 4.%.7%.8% Existing-Home Price Growth 12.4% 4.3% 3.8% 1