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The 2008 Economy: What it Means for Real Estate Dr. Mark G. Dotzour Chief Economist Real Estate Center Texas A&M University College Station, Texas Today’s Topics • • • • • • The U.S. Economy The Mortgage Market The Housing Market The Land Market The Commercial Real Estate Market The Texas Economy Weakening U.S. Consumer Mortgage Loan Delinquency Increasing • The number of insured borrowers falling more than 60 days late on payments jumped 35% to 61,033 in Nov, 2007 from 45,325 in Nov, 2006 Source: Mortgage Insurance Companies of America Weakening U.S. Consumer Mortgage Loan Delinquency Increasing • The Mortgage Bankers Association last month reported that the delinquency rate on mortgage loans rose 47 basis points from the previous quarter, to 5.59 percent, the highest rate since 1986. • The delinquency rate on subprime loans was nearly three times higher -- 16.31 percent, an increase of 149 basis points. Source: Mortgage Bankers Association and CNNMOney.com Jan 3, 2008 Weakening U.S. Consumer Bankruptcy Filings Increasing • The number of Americans filing for consumer bankruptcy increased by nearly 40 percent in 2007. • The number of overall consumer bankruptcy filings reached 801,840 last year, compared to 573,203 in 2006. • "The roughly 40 percent spike in consumer bankruptcies during 2007 presages [an] even higher [number of] filings this year, as the heavy consumer debt load is made worse by the home mortgage crisis," predicted ABI Executive Director Samuel J. Gerdano. Source: American Bankruptcy Institute and CNNMOney.com Jan 3, 2008 Weakening U.S. Consumer Consumer Loan Delinquency Increasing • The American Bankers Association reported that the delinquency rate on a composite of consumer loans increased to 2.44 percent in the July-to-September quarter. That was up sharply from 2.27 percent in the previous quarter and was the highest late-payment rate since the second quarter of 2001, when the economy was suffering through a recession. Home Equity Loans Property Improvement Loans Mobile Home Loans 2.28%, up from 1.99% 1.60%, up from 1.46% 2.87%, up from 2.61% Source: CNNMoney.com Jan 3, 2008 ABA Consumer Credit Delinquency Bulletin` Insured Mortgage Delinquency at record levels and increasing • More than 61,000 insured mortgage holders were at least 60 days late on their payments in November, the highest number ever recorded, according to statistics from the Mortgage Insurance Cos. of America. • The November tally of insured mortgages 60 days late was 34.7% higher than a year ago, and 2.9% higher than October. Source: Nashville Business Journal Jan 2, 2008 Major Themes: Regulatory Uncertainty at the Fed • In the minutes, the Fed said that "some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit" and added that "such an adverse development could require a substantial further easing of policy." Source: Fed minutes from Dec 11, 2007 meeting Major Themes: Regulatory Uncertainty at the Fed • Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain," the minutes said. Source: Fed minutes from Dec 11, 2007 meeting Major Themes: Falling House Prices • Starting in May 2006, the CME set up futures contracts for 10 metro markets • By the end of 2006 those futures indicated price declines between 5 and 7 percent • The index ended Oct down 6.7% • Those futures today are foreseeing an additional 4 percent to 14 percent drop in prices over the next year. Source: CnnMoney.com Jan 2, 2008 Major Themes: Falling House Prices • Professor Robert Shiller, co-founder of the index and an economics academic at Yale University, said: “No matter how you look at these data, it is obvious that the state of the single-family housing market remains grim.” Source: The Times Online Dec 27, 2007 S&P Case/Shiller Housing Index Composite of 10 Composite of 20 • • • • • • • • • • Boston Chicago Denver Las Vegas LA Miami New York San Diego San Francisco Washington - 3.6% - 3.2% - 1.8% -10.7% - 8.8% -12.4% - 4.1% -11.1% - 6.2% -7.0% Atlanta Charlotte Cleveland Dallas Detroit Minneapolis Phoenix Portland Seattle Tampa - .7% 4.3% - 4.5% - .1% -11.2% - 5.5% -10.6% 1.9% 3.3% -11.8% Both the 10-city and 20-city composite S&P/Case declined 1.4% in October from September. The 10 th t th l t d li Mortgage Application Volume Purchase Index • • • • • • Dec 1, Mar 2, Jun 1, Sep 28, Dec 21, Dec 29, 2006 2007 2007 2007 2007 2007 426 405 433 411 394 360 Source: Mortgage Bankers Association March 16, 1990 = 100 Risk Premium on Mortgage Rises Mortgage Risk Premium Increases Current is 2.0% Average is 1.62% Major Themes: Falling House Prices • The Commerce Department reported that new home sales in November dropped 9% from October, to the lowest levels in 12 yrs. • Meanwhile, the national existing home price in November declined 3.3% from the previous year. • It was the fifth biggest annual decline on record. Source: Forbes.com Dec 31, 2007 Residential Housing Investment and Recession in the U.S. Major Themes: Inflation Fears Rising ? • The price of gold jumped $23.30 to $861.30 per ounce by mid-day Wednesday • "With global uncertainties, a big rise in crude prices and stocks wobbling, people are having memories of 1980,” • Gold prices reached a record high of $825.50 in January of 1980 Source: CnnMoney.com Jan 2, 2008 Major Themes The National Housing Market • • • • • • • Inventory levels continue to rise Prices likely to continue to fall Foreclosure rates will continue to increase How far do prices have to fall to get the affordability back in line? Homebuilding will continue to fall in 2008 Watch for bankruptcies in homebuilders and developers Regional banks will see non-performing RE loans increase Major Themes The Land Market • • • • • Prices are still escalating Transaction volume has dropped significantly Land may be the best hedge against future inflation Foreign buying could increase due to cheap U.S. dollar Stocks could attract interest from real estate in next few years Major Themes Commercial Real Estate • • • • • • Foreign buyers like U.S. real estate when the dollar is cheap Values likely to remain firm due to strong demand Fundamentals of commercial real estate are still strong Owners will be aggressively trying to increase rent rates New construction will come to a virtual halt without credit Absorption will likely slow due to slowing economy Weakness in financial services will impact office Weakness in consumer spending will impact retail WalMart and Target scaling back new construction • Defaults on commercial mortgages will double or triple Currently virtually no default in commercial mortgages Silly lending underwriting in 2007 will impact defaults Employment Growth Rates Job Growth Past 12 Months Ending November, 2007 Source: Texas Workforce Commission Job Growth Past 12 Months Ending November, 2007 Source: Texas Workforce Commission Job Growth Past 12 Months Ending November, 2007 Source: Texas Workforce Commission