Market Overview and Trends
Dr. James P. Gaines
Research Economist recenter.tamu.edu Real Estate Center at Texas A&M University M h 25 2008
35th
REAL ESTATE CENTER
at TEXAS A&M UNIVERSITY Mays School of Business
recenter.tamu.ed
Publications
Tierra Grande
Monthly Economic Reports Technical Reports
Market Reports
RECON Newsletter
REC Website
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Topics for Discussion
• US, Texas and Local Economy • Housing Activity
– Sales – Prices – Construction – Affordability
• Mortgage and Capital Markets
– Interest Rates – Foreclosures – Regulatory Changes
• Demographic Trends
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Uncertain Economy 2008
• Definite Economic Slowdown:
– Recession? – Something More or Less?
• Soft Housing Market • Interest Rates and Capital Markets • Inflation • Consumer Spending • Corporate Spending
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Overview: National Economy
• Real GDP 4Q07 = 0.6% vs. 4.9% 3Q; 3.8% 2Q06 • Annual GDP in 2007 grew 2.5% vs. 2006 3.4% vs. 3.2% in 2005 – 2008 probably around 1.5% or less • 2007 overall inflation was 2.8% vs. 3.2% in 2006 : energy, transportation, medical care & food main increases – 2008 expected to be around 2.5%, but maybe not! • 2007 Core CPI up 2.3% vs. 2.5% in 2006 - most of the decline attributed to housing and apparel – 2008 expected to be between 2.2% and 2.5% • Employment grew 1.1% in 2007, adding average of 95,000 jobs per month. January 2008 had -17,000, essentially flat – 2008 expected to be around 0.8% to 0.9%
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Challenging Outlook
• 2008 very challenging environment • Political uncertainty – taxes, laws, regs, spending • Financial uncertainty – across the globe • “Wait and see” attitude especially in housing • $3.00+ gas sucking the life out of the consumer • Our government has been in complete denial publicly of what’s going on
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What to Expect
• Look for the Fed to cut interest rates further in spite of inflation • Oil could fall to $65-70 a barrel but won’t • Look for a massive federal bailout of the banks and financial institutions labeled as being for American consumers/borrowers • In the long run, higher inflation and higher taxes are inevitable • 2008-2009: “Stagflation?” - high inflation, low economic growth, job losses
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As income tax time approaches, did you ever notice: when you put the two words "The" and "IRS" together, it spells
“THEIRS”
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Texas Economy
• Running Ahead of US Economy • Employment Steady Increase • Low Unemployment • Personal Income Growth • Population Growth • Housing market still relatively strong
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Employment Growth Rates for US and Texas
Texas
US
Source: BLS, Texas Workforce Commission
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Top Job-Creating States in 2007
Thousands of jobs created in 2007
Source: BLS
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Job Growth Past 12 Months
Ending December, 2007
Source: Texas Workforce Commission
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Job Growth Past 12 Months
Ending December, 2007
Source: Texas Workforce
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Job Growth Past 12 Months
Ending December, 2007
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Source: Texas Workforce
Wichita Falls MSA Non-Farm Employment Percent Growth
Texas US Wichita Falls
Source: BLS, Texas Workforce Commission
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Wichita Falls MSA Employment by Sector
Source: Texas Workforce
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Wichita Falls MSA Gross Retail Sales
Source: Texas Comptrollers Office, Real Estate Center at Texas A&M
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The Housing Market
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Housing Market Boom 2001-2006
1. Historically low interest rates 2. Record home price increases in selected areas, followed by declines 3. Flood of private capital led to Wall Street dominance in the residential mortgage market 4. Extraordinary investor/speculator demand 5. Surge in second/vacation home demand 6. “Non traditional” loans removed former barriers to home ownership resulting in a leap in the homeownership rate 7. Hyper-aggressive “easy credit, easy terms” financing 8. Rise and fall of home affordability
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2007 Housing Scorecard
National
Measure Existing SF Sales Amount
4,939k 9.2 3,320k 774k 9.6 495k
Texas
Amount
271,454 5.6 133,170
YTD %
-13.0% 43.8% 13.7% -26.4% 54.8% -7.5% -0.3%
YTD %
-6.4% 12.0% 14.4%
Months Inventory SF Listings New Sales Months Inventory
New Homes For Sale
OFHEO (P-O Index 2007) (P-
3.5% $147,500 $181,000 $193,100 $171,325 112,040 84,469 4.8% 10.5% -28.4% -4.6%
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Md. Ex. Pr. (12-m avg.) (12Md. New Pr (12--m avg.) (12 Avg. Exist. Pr. (m) Avg. New Price (m)
SF Permits (2007)
Delinq./Foreclosure Properties Filed (2007)
$215,600 $242,200 $263,900 $306,500 973.3k 1,285,873
-2.8% -0.4% -2.1% 1.0% -29.4% 75.0%
3.1%
Housing Fall Off in 2006-07, 08
• Unlike past housing downturns, this one not
preceded by rising interest rates, unemployment or recession • Causes: – Falling affordability leading to lower user demand – Excess building in fast growing markets – Slowdown in appreciation – declining home prices – Fall off of speculative building and “investor” market E d f “E C dit E T ”
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(Percent)
US Homeownership Rate and the FHLMC 30-Year Fixed Rate
1980-1985 Mortgage interest rate exceeds 12%; Homeownership plummets
(Percent)
Since 1997 Low interest rate and new mortgage products; Homeownership explodes
1970s Baby Boomers enter market; homeownership grows
FHLMC 30-Year Rate (right scale)
22 Source: US Census Bureau; FHLMC (4-quarter moving average homeownership rate)
(000s)
Annual New Home Sales
Average Annual Sales by Decade: 60s 513 70s 656 80s 609 90s 698 00-06 1,056
2005-2006 = -18.1 percent 2006-2007 = -26.2% Average Annual Growth = 2.5%
Source: US Census Bureau, NAHB, Real Estate Center
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(000s)
Annual New Home Sales & Starts
Source: US Census Bureau, NAHB, Real Estate Center
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US SF Housing Permits
12-Month Moving Average
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ne d Li en 2 Tr 0
Source: US Census Bureau, Real Estate Center at Texas A&M
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(000s Units)
Inventory of New SF Homes For Sale
Excess of about 475,000 units plus new construction in 2008 at annual sales of around 700,000 will take several years to get back to balance
Months Inventory
Source: US Census Bureau, NAHB
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(000s)
New and Existing SF Home Sales U.S.
Existing SF Sales
New SF Sales
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Sources: US Census Bureau , NAR, NAHB, NBER
Annual U.S. Median Home Price Percent Change
Source: NAR
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US Median Home Prices Since 1990
National House Price Bubble Prices in 2001 stayed above trend, despite a national recession.
20
d Tren 01
The national housing boom started around January 2002 creating a house price bubble that peaked at around $230,000 in 2006
29 Source: NAR, Real Estate Center at Texas A&M University
US Median Home Prices in 2008
20
d Tren 01
At 2001 Trend, 2008 median prices should be between $185,000 and $190,000. 2007 = $217,900, if 2008 = $187,500 along trend line, down 14%; if 2008 = $200,000, down 8.5%.
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Source: NAR, Real Estate Center at Texas A&M University
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And you think you’re having a bad day!!
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Total HH Home Mortgage Borrowing
$0.5 trillion in home mortgages between 1972 and 1979; $1.5 trillion in home mortgages between 1980 and 1989; $2.12 trillion in home mortgages between 1990 and 1999; $6.15 trillion in home mortgages between 2000 and 2007
Source: Federal Reserve, Flow of Funds, D-2, 12/6/2007
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Mortgage/Capital Market Issues
• Problems in the capital and mortgage markets are more severe than anticipated – Pricing of mortgage-backed assets by public and private institutions – Capital requirements and solvency among major institutions – Loss of confidence in debt ratings and ratings services – Plethora of proposed legal/regulatory changes – Likely mergers, acquisitions and/or bankruptcies – Law suits Return to traditional mortgage loan underwriting: severe impact on home sales, prices and housing affordability Foreclosures will remain high into 2009 and probably early 2010 Mortgage delinquency/default problems are spilling over into business and consumer debt delinquencies further exacerbating credit problems 34 Plenty of liquidity in market, nobody knows how to or is willing to lend
• • •
•
Current Residential Finance Conditions
• About 65% of US owner-occupied homes have a mortgage (64% in Texas) – 76% are fixed-rate • About 7.5 million, 13%-14% of all mortgages, are subprime loans • 75 percent of all subprime loans originated since 2003 • About two-thirds of subprime loans in ‘05 and ‘06 were ARMs • Total home equity is less than 50%, and as many as 10% of homeowners have negative equity • Falling home prices in key areas is the key factor
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Mortgage Status of Owner-Occupied Homes in Texas
Number of OwnerOccupied Homes Percent of Total Units Percent with of Total Mortgage O-O Units
Total 5,291,045 Housing units with a mortgage, contract to purchase, or similar debt: 3,368,890 First Mortgage only: No second mortgage and no home equity loan 2,987,396 With either a second mortgage or home equity loan, but not both: 369,986 Second mortgage only Home equity loan only With both a second mortgage and home equity loan Housing units without a mortgage 173,269 196,717 11,508 1,922,155
63.7% 88.7% 11.0% 5.1% 5.8% 0.3% 36.3%
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Source: U.S. Census Bureau, 2006 American Community Survey
Percent of Foreclosures Started by Type of Loan 4Q2007
California and Florida have 39% of all prime ARM loans, but 47% of foreclosure starts for prime ARMS; the two states have 29% of Subprime ARMs and 36% of subprime ARM foreclosures. 4Q06-4Q07 foreclosures in FL tripled; CA doubled.
Source: Mortgage Bankers Association, National Delinquency Survey, March 6, 2008
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US Mortgage Delinquency Rates
Subprime Mortgages
All Mortgages (average = 4.7%)
Prime Mortgages (average = 2.5%)
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Source: Mortgage Bankers Association, National Delinquency Survey
US Mortgages in Foreclosure at the End of the Quarter
Subprime Loans
All Loans (average 1.24%) Prime Loans (average 0.5%)
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Source: Mortgage Bankers Association, National Delinquency Survey
Total Delinquency & Foreclosure Filings 2007
• US 2,203,295, up 75% • Texas 149,703, down 4.6% (1 of only 6 down)
– – – – – – – – – – California 481,392, up 238% Florida 279,325, up 124% 16 states Ohio 153,196, up 88% doubled Michigan 136,205, up 68% or more; Arizona 69,970, up 151% D.C. was Nevada 66,316, up 215% Virginia 24,199, up 456% up 608% Maryland 25,109, up 455% Connecticut 23,470, up 100% Massachusetts 41,487, up 161%
Source: RealtyTrac, Inc.
Data include all default, delinquency and foreclosure filings reported. The same property often has more than one filing.
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Monthly Foreclosure Filings
Source: RealtyTrac, Inc.
Data include Notices of Trustee Sales plus Notices of Foreclosure Sale
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Percent of Texas Mortgage Loans Entering Foreclosure
Subprime Foreclosures Started
All Loans Foreclosures Started
Prime Loans Foreclosures Started
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Source: Mortgage Bankers Association, National Delinquency Survey
Proposed Changes to Home Mortgage Provisions of Reg. Z for Subprime Loans
• For “high-priced mortgages” (subprime loans):
APR at least 3 percentage points greater than the yield on Treasury securities of comparable maturity for 1st lien loans, or 5 points for subordinated loans:
– Prohibit lender from engaging in pattern or practice of lending without considering borrower’s ability to repay loan from sources other than the home’s value. – Require verification of income and assets of borrower – Restrict prepayment penalties to loans that meet certain conditions, including that the penalty expire at least 60 days before any payment increase. – Require escrow account for property taxes and insurance. Borrower may opt out of escrow after one year.
Source: Board of Governors of the Federal Reserve System
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Proposed Changes to Reg. Z for High-Priced Mortgages and Most Other Loans
• For “high-priced mortgages” and most other loans:
– Prohibit “yield spread premiums” (fee to broker for higher-rate loan) that exceed what borrower agreed to in advance. – Prohibit certain servicing practices, e.g., failing to credit customer’s account upon receipt of payment; failing to provide payoff statement in timely manner; and “pyramiding” late fees. – Prohibit misleading or deceptive advertising practices for closedend loans:
• • Using the term “fixed” to describe a rate that is not fixed All applicable rates or payments must be disclosed with equal prominence as advertised introductory or “teaser” rates
– Prohibit lender or broker from coercing or encouraging an appraiser to misrepresent the value of a property. – Require truth-in-lending disclosures to borrowers early enough to use while shopping for a mortgage. No fees until borrower receives disclosures, except fee for credit report.
Source: Board of Governors of the Federal Reserve System
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Texas Housing Market
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Texas Home Sales
2007 failed to “stack” on the previous years, but ended better than 2005.
2007
2005 2004 2003 2002
2006
2007 Sales down 6.4%
46
Source: Real Estate Center at Texas A&M University
Texas Home Sales
12-Month Moving Average
Source: Real Estate Center
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Texas Home Sales Cycles
Y/Y Rate of Change in 12-Month Moving Average
Source: Real Estate Center at Texas A&M University
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Units
Texas Home Sales per 1,000 Households
Sales velocity > 20/1,000HH when the mortgage interest rate went below 8% in 1996. By 1999 velocity surged to 25 units/1,000HH and > 30 units with rates around 6%.
Percent
Annual Average FHLMC 30-yr Fixed Rate (right scale)
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Source: US Census Bureau , Real Estate Center at Texas A&M
Annual Texas Home Sales
2007 = 272,200 along the trend line, about 5% decline. YTD = 234,453, down 5%. 2008 = 260,000 (5% less) to 285,000 (trend) 2009 = 260,000 (30 sales/1,000 HH) to 296,750 (trend)
296,750 285,000
260,000
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Source: Real Estate Center at Texas A&M University
Wichita Falls Home Sales
2006
2005 2004
2007
2003
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Source: Real Estate Center at Texas A&M University
Wichita Falls Annual Home Sales
2007 Sales down 5.2% from 2006 Equal to 2004 level
Source: Real Estate Center at Texas A&M University
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Wichita Falls Home Sales
12-Month Moving Average
Source: Real Estate Center
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US, Texas and Wichita Falls Median Home Price
Texas is a housing bargain. The gap between the US and Texas median price has widened from around 25% to 33%.
U.
ian d Me S.
T
me Ho
M
rice P
e rice P
dian H e alls M F chita Wi
xas e
Hom n dia e
Price ome
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Source: NAR; Real Estate Center at Texas A&M University
US and Texas Appreciation
Purchase Only Index Change Year over Year
US average increase = 5.2% Texas average increase = 4.1% US 4Q2007 = -0.3% Texas 4Q2007 = 3.5%
US
Texas
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Source: OFHEO
US and Texas Appreciation
Purchase Only Index Change Year over Year
US average increase = 5.2% Texas average increase = 4.1% US 4Q2007 = -0.3% Texas 4Q2007 = 3.5% Wichita Falls 4Q2007 = 4%
US
Texas Wichita Falls
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Source: OFHEO
Texas Homes Appreciate !
Abilene Antonio Amarillo 2.09% 8.25% 5.25% Houston 4.79% Sherman Fort Worth 2.89% San -0.77% Austin 7.95% Killeen 6.35% Tyler 3.67% Beaumont 7.31% Laredo 9.31% Victoria 8.84% Brownsville 3.87% Longview 3.14% Waco 10.14% College Station 0.96% Lubbock 0.34% Wichita Falls 4.01% Corpus Christi 5.15% McAllen 2.13% Dallas 2.95% Midland 12.31% El Paso 6.86% Odessa 19.08%
Source: OFHEO, 4Q2007
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Texas Median Home Prices
Median Home Price of $159,000 by 2010 equals a 7.8% increase over 2007. Annual average increase of 4.4% 1990-2007; Annual increases of 1.7% in 2008 and 3% in 2009 and 2010.
Source: Real Estate Center at Texas A&M
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Wichita Falls Median Home Price
12-Month Moving Average
June 04 to July 06 increased 20.4% Jan 07 to Jan 08 increase 1.4%
Source: Real Estate Center
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Wichita Falls Median Home Prices
Source: Real Estate Center
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Percent Distribution of Home Sales
61
Source: Real Estate Center
Texas SF Permits
12-Month Moving Average
20
ne d Li en 3 Tr 0
Source: US Census Bureau, Real Estate Center at Texas A&M
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Texas SFD Building Permits
Year
2002 2003 2004 2005 2006 2007 2008p
Average Permits Per Month
10,250 11,460 12,600 13,850 13,600 9,340 8,400
-10%
-31.3%
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Source: U.S. Census Bureau, Real Estate Center at Texas A&M University
Wichita Falls MSA SF Building Permits
Source: Real Estate Center
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Demographics
US Population Growth 2007-2012 2007-2012
Source: Global Insight, Inc.
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Projected Texas Population 2000 - 2030
(000s)
At 50% 1990-2000 rate of immigration At 2000-2004 rate of immigration At 100% 1990-2000 rate of immigration
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Source: U.S. Census Bureau, Texas State Demographer
Percent Anglo and Hispanic Reverse by 2030
Source: Texas State Data Center and Demographer, Average of Projections
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Projected Wichita Falls MSA Population 2000 - 2030
At 50% 1990-2000 rate of immigration At 2000-2004 rate of immigration At 100% 1990-2000 rate of immigration
Source: U.S. Census Bureau, Texas State Demographer
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Cumulative Components of Population Change for Wichita Falls MSA: April 1, 2000 to July 1, 2007
Total Population Change* Vital Events Natural Increase Births Deaths Total Net Migration International **
County
Internal
Archer Clay
150 113
195 -47 4,333 4,481
748 708 13,640 15,096
553 755 9,307 10,615
-3 221 -7,459 -7,241
1 4 277 282
-4 217 -7,736 -7,523
Wichita -3,639 MSA -3,376
Source: U.S. Census Bureau
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Market Overview and Trends
Dr. James P. Gaines
Research Economist Real Estate Center at Texas A&M University recenter.tamu.edu March 25, 2008