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									   2008 Spring Industry
         Update
                Presented by:
  MetroTex Association of REALTORS® and
The State of Mortgages in Texas
       The Affiliate Forum Committee
             April 21, 2008




                            Dr. James P.
                                Gaines
                                 Research Economist
                                  Real Estate Center
                                Texas A&M University
                                  recenter.tamu.edu
     What We’ll Talk About

• Quick Economic Review and Outlook
• US and Texas Housing Markets and
  Trends
• Trends in the US and Texas Mortgage
  and Capital Markets



                                        2
Economic
Overview
           3
       2008 Very Challenging
      Economic Environment
• Significant economic slowdown – recession?
• Political uncertainty – taxes, laws,
  regulations, spending
• Financial uncertainty – credit freeze, liquidity
• “Wait and see” attitude not only in housing,
  but whole economy
• Inflation and consumer spending
• Unemployment
                                                4
         Texas Economy
•   Running ahead of US Economy
•   Employment Steady Increase
•   Low Unemployment
•   Personal Income Growth
•   Population Growth
•   Not immune to forces of national
    and international events over
    time
                                       5
Annual Employment Growth
  Rates for US and Texas

                       Texas



                        US




         Source: BLS           6
  The Texas Outlook for 2008
• US job growth less than 1%
• Texas will double the national job growth rate
• Houston, Austin and San Antonio will exceed
  the state level, Dallas and Ft. Worth likely to
  be closer to the national growth trend
• Texas housing markets generally strong but
  “spotty”
• Mortgage interest rates unlikely to change
  much
• Fall in residential demand: tighter credit, less
  investment buying, low- and high-end effects
• Rent and occupancy rates of Texas
  commercial real estate will continue to rise 7
         What to Expect
• Look for the Fed to cut interest rates further
  in spite of inflation
• Gasoline prices will continue to increase
• Massive federal bailout of the banks and
  financial institutions labeled as being for
  American consumers/borrowers
• Higher inflation and higher taxes
• 2008-2009: “Stagflation?” - high inflation,
  low economic growth, job losses
                                               8
US and Texas
  Housing
  Markets
               9
              Housing Fall Off
• Unlike past housing downturns, this one not
  preceded by rising interest rates or unemployment
• Causes:
   – Falling affordability leading to lower user
     demand
   – Excess building in fast growing markets
   – Slowdown in appreciation
   – Fall off of speculative building and “investor”
     market
   – End of “Easy Credit – Easy Terms”
                                                  10
  The Texas “100,000 foot” View
• 2006 peak of current housing cycle in Texas, not sure
  about the trough – when or how long
• Sales-transaction volumes down probably 5% to 10% by
  year end – a return to long-term “norm”
• Home prices across the state continue to rise, but
  slower
• Significant and needed decline in new home
  construction – permits down about 30% from ’06
• Period of “easy credit, easy terms” over
• Biggest current threat is recession
• Long-term outlook for Texas is substantially positive
  over next 25 years
                                                          11
(000s)
         New and Existing SF Home Sales U.S.


                                                    Existing SF Sales




                                                      New SF Sales




                                                                        12
                  Sources: US Census Bureau , NAR, NAHB, NBER
US Median Home Prices in 2008



                                                                            d
                                                                    01 Tren
                                                               20



                       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%.



                                                                                13
     Source: NAR, Real Estate Center at Texas A&M University
Divergent US Median HH Income
    and Median Home Prices
1990=100




                                           e
                                e Pric
                    an H om
           M ed i
                                         e
                               HH I ncom
                M ed i an



           Source: US Census Bureau, NAR       14
Texas Median HH Income and Median
     Home Price Also Diverging

1990=100




                                             e
                                      e Pric
                                m
                          ian Ho
                      Med

                                             me
                                      H Inco
                                 H
                          Median




   Source: US Census Bureau, Real Estate Center at Texas A&M University   15
 Number of Texas Households by
  Maximum Affordable Home
                                  Number of households by the
                                  maximum affordable home price
                                  assuming:
                                  30-Year, 85% loan at 6% fixed rate
                                  Qualifying ratio = 30%
                                  Effective property taxes = 3%
                                  Property Insurance = 0.80%
                                  Annual Utilities = 2%

                                                                   54% of Texas
                                                                   households cannot
                                                                   afford a house priced
                                                                   greater than
                                                                   $125,000




Source: US Census Bureau 2006 American Community Survey; Real Estate Center at Texas A&M University   16
Price Distribution of Texas Home Sales




                                                              17
         Source: Real Estate Center at Texas A&M University
U. S. Existing SF Sales Monthly Since
                 1990




                                   18
               Source: NAR, SAAR
            Texas Home Sales
2007 failed to “stack” on the previous years, but ended better than 2005.




                                                       2006
                   2007           2005

                                           2004



                      2007 Sales down 6.0%
        2008          YTD 2008 sales down 12.8%



                                                                            19
           Source: Real Estate Center at Texas A&M University
Texas Home Sales
12-Month Moving Average




 Source: Real Estate Center   20
Annual Texas Home Sales
                          2003 Trend

 2007 = 272,100 about 5% decline from
 2006.
 2008 = 262,000 (4% less)
 2009 = 272,000 back = 2007




                                                          21
     Source: Real Estate Center at Texas A&M University
Dallas Existing Home Sales

                              2006
                   2007
                                        2005
                         2004

           2007 MLS sales down 7.3%
           2008 YTD sales down 12.7%
    2008   Around 2004-2005 levels




           Source: Real Estate Center          22
Annual Dallas Home Sales
 2007 MLS sales down 7.3%




               Source: Real Estate Center   23
Annual U.S. Median Home Price
       Percent Change




                                24
            Source: NAR
US Median Home Prices in 2008



                                                                             d
                                                                     01 Tren
                                                                20




              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%.



                                                                                 25
      Source: NAR, Real Estate Center at Texas A&M University
Texas Median Home Prices
                              2007 Trend
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.




       2007 trend line




                                                              26
                    Source: Real Estate Center at Texas A&M
Texas Median Home Prices
                               2003 Trend
Median Home Price of $154,600 by 2010 equals a 4.8%
increase over 2007.
Annual average increase of 4.4% 1990-2007;
Annual increases of -1.3% in 2008 and 3% in 2009 and 2010.




       2003 trend line




                                                               27
                     Source: Real Estate Center at Texas A&M
  Nominal and Inflation
Adjusted Texas Land Prices
Nominal Texas land prices have increased
117% since 2000 and 111% since 1985.
Real land prices are up 87% since 2000 and
26% since 1985.




                 Nominal Prices


                     Real Prices




                                              28
                 Source: Real Estate Center
US SF Housing Permits
      12-Month Moving Average




                                                                                  ne
                                                                          en d Li
                                                                    02 Tr
                                                               20




   Source: US Census Bureau, Real Estate Center at Texas A&M                           29
           Inventory of New SF Homes For Sale
(000s Units)                                               Months Inventory




               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




                                                                   30
                          Source: US Census Bureau, NAHB
Texas SF Permits
     12-Month Moving Average




                                                      ne
                                                 d Li
                                         3   Tren
                                      200




Source: US Census Bureau, Real Estate Center at Texas A&M   31
Texas SFD Building Permits
          Average
          Permits Per
 Year     Month
  2002      10,250

  2003      11,460                                                                 -31.3%
  2004      12,600

  2005      13,850
                                                                                          -10%
  2006      13,600

  2007       9,340

  2008p      8,400




                                                                                     32
          Source: U.S. Census Bureau, Real Estate Center at Texas A&M University
 Chaos in the
 Mortgage and
Capital Markets
                  33
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;
 $6.1 trillion in home mortgages between
2000 and 2007




           Source: Federal Reserve, Flow of Funds, D-2, 3/6/2008   34
           The Residential
        Mortgage Market Chaos
Subprime
                                          Global Banks
Alt-A
                                          Sovereign Nations
Piggyback
                  The Conduits            Hedge Funds
Hybrids
                                          Pensions/Insurance
Jumbos
                                          Endowments
            •   Moody’s
Prime       •   S&P             Bond
            •   Fitch           Ratings   Money Mkt Accts
                           35
           The Residential
        Mortgage Market Chaos
Subprime
  Stop                                            ??
                                          Global Banks
Alt-A
   Stop
                                          Sovereign Nations
Piggyback
   Stop           The Conduits                   ??
                                          Hedge Funds
Hybrids
  Stop
                                          Pensions/Insurance
Jumbos
  ??
                                          Endowments
            •   Moody’s
Prime       •   S&P             Bond
            •   Fitch           Ratings   Money Mkt Accts
                                                ??
                           36
             Current Mortgage/Capital
                  Market Issues
•   Downturn in capital and mortgage markets is more severe than the
    market anticipated
     – Loss of confidence in ratings and ratings services
     – Pricing of mortgage-backed assets by institutions
     – Possible legal/regulatory changes
     – Likely mergers, acquisitions or bankruptcies among major
       institutions
     – Law suits
•   Return to traditional mortgage loan underwriting
•   Foreclosures will remain high through 2008, 2009 and into 2010
     – Subprime ARM resets significant through 2Q09
•   Mortgage delinquency/default problems are spilling over into
    consumer debt delinquencies and business loans
•   Plenty of liquidity in market, nobody knows how to lend
                                                                       37
   Current Residential Conditions
• About 65% of US owner-occupied homes have a
  mortgage – 76% are fixed-rate
• About 7.5 million, 13%-14% of all mortgages are
  subprime
• 75 percent of all Subprime loans originated since
  2003
• About two-thirds of Subprime loans in ‘05 and ‘06
  were ARMs
• Estimated 10% of homeowners have negative
  equity
• Falling home prices in key areas eliminates
                                                      38
  refinancing or selling when borrower gets behind
       Mortgage Status of Owner-
       Occupied Homes in Texas
                                                    Number of       Percent of
                                                     Owner-         Total Units Percent
                                                    Occupied           with     of Total
                                                     Homes           Mortgage O-O Units

Total                                   5,291,045
Housing units with a mortgage, contract
to purchase, or similar debt:             3,368,890                             63.7%
 First Mortgage only: No second
 mortgage and no home equity loan       2,987,396                    88.7%
   With either a second mortgage or
   home equity loan, but not both:          369,986                    11.0%
     Second mortgage only                                173,269         5.1%
     Home equity loan only                               196,717         5.8%
   With both a second mortgage and
   home equity loan                                       11,508         0.3%


 Housing units without a mortgage                   1,922,155                   36.3% 39
                 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   40
Subprime Loans in Texas MSAs
                                     Subprime         Subprime     Subprime   Subprime
                                     % Market         % Market     % Market   % Market
                MSA                   Mar-07           Dec-06       Dec-05     Dec-04
  McAllen-Edinburg                    23.9%            26.0%        25.4%      26.5%
  Brownsville-Harlingen               19.9%            21.6%        20.8%      21.6%
  Laredo                              19.6%            19.7%        15.9%      16.6%
  NATIONAL                            16.0%            14.7%        14.6%      13.1%
  Houston                             15.8%            16.7%        15.4%      15.8%
  Beaumont-Port Arthur                15.6%            16.3%        15.5%      16.1%
  Longview-Marshall                   14.8%            15.2%        13.9%      13.0%
  Brazoria                            13.4%            14.4%        13.1%      13.2%
  Galveston-Texas City                13.3%            13.7%        13.1%      13.1%
  Corpus Christi                      13.2%            13.3%        11.7%      11.6%
  El Paso                             13.1%            14.7%        13.6%      13.9%
  Fort Worth-Arlington                13.1%            13.7%        12.4%      12.0%
  Odessa-Midland                      13.0%            14.0%        13.4%      13.2%
  Texarkana                           12.8%            12.3%        10.8%      11.2%
  Sherman-Denison                     12.8%            13.1%        12.8%      12.7%
  Dallas                              12.7%            13.5%        12.4%      12.4%
  Waco                                12.2%            13.1%        11.8%      11.3%
  San Antonio                         11.4%            13.0%        12.2%      12.5%
  Tyler                               11.3%            11.8%        10.8%      10.8%
  Victoria                            11.0%            12.1%        11.2%       9.9%
  Wichita Falls                       10.0%            10.8%         9.5%       9.4%
  Killeen-Temple                       9.6%            10.5%         8.8%       8.5%
  Abilene                              9.5%             9.7%         9.6%       9.8%
  San Angelo                           9.2%             9.9%         9.7%      10.0%
  Lubbock                              8.7%             9.0%         7.8%       7.7%
  Austin-San Marcos                    7.7%             8.6%         8.8%       9.6%
  Amarillo                             6.4%             7.2%         7.0%       8.1%
  Bryan-College Station                6.0%             6.1%         6.1%       6.5%
                                                                                         41
                          Source: First American LoanPerformance
Subprime ARM Resets




   Source: First American LoanPerformance, The Market Pulse, June 2007
                                                                         42
US Mortgage Delinquency Rates



                             Subprime Mortgages




                       All Mortgages (average = 4.7%)

            Prime Mortgages (average = 2.5%)




                                                                       43
   Source: Mortgage Bankers Association, National Delinquency Survey
Texas Mortgage Delinquency Rates

                               Subprime Mortgages (average 15.0%)




                        All Mortgages (average = 6.4%)


               Prime Mortgages (average = 3.1%)




                                                                          44
      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%)




                                                                             45
   Source: Mortgage Bankers Association, National Delinquency Survey
Texas Mortgages in Foreclosure
  at the End of the Quarter
                                           Subprime Loans (average 4.5%)




                                 All Loans (average 1.1%)

                            Prime Loans (average 0.5%)




                                                                           46
     Source: Mortgage Bankers Association, National Delinquency Survey
US and Texas Appreciation
     4Q2007 HPI Percent Change Year over Year




                                           US

                                                Texas




                                                        47
                Source: OFHEO
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%
  –    Arizona 69,970, up 151%     or more;
  –    Nevada 66,316, up 215%      D.C. was
  –    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.   48
Monthly Foreclosure Filings




                       Source: RealtyTrac, Inc.                              49
    Data include Notices of Trustee Sales plus Notices of Foreclosure Sale
Percent of Banks Tightening
 Home Mortgage Standards
                                                                                       Subprime




                                                                                        Prime

                All Mortgage Loans (series discontinued 2Q2007)




                                                                                                50
  Source: Federal Reserve Bank, Senior Loan Officer Survey on Bank Lending Practices
                What to Expect
• Fed to cut interest rates further in spite of
  inflation
• Plethora of proposed laws and regulation
  changes
   –   Federal Reserve powers
   –   Reg Z changes
   –   FHA overhaul
   –   Tax incentives and borrower bailouts
• Massive federal bailout of the banks and
  financial institutions
• In the long run, higher inflation and higher taxes
                                                     51
  are inevitable
 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   52
 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
    closed-end 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                      53
                Source: Board ofshopping for Reserve System
    enough to use while         Governors of the Federal a mortgage. No fees until
   2008 Spring Industry
         Update
                Presented by:
  MetroTex Association of REALTORS® and
The State of Mortgages in Texas
       The Affiliate Forum Committee
             April 21, 2008




                            Dr. James P.
                                Gaines
                                 Research Economist
                                  Real Estate Center
                                Texas A&M University
                                  recenter.tamu.edu

								
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