The Economic Outlook 2007

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					The Economic Outlook:
        2007


   Dr. Mark G. Dotzour
       Chief Economist
      Real Estate Center
    Texas A&M University
      dotzour@tamu.edu



 Presented in San Antonio
    November 7, 2006
           Today’s Topics
• The outlook for the national economy

• The outlook for the residential market

• The outlook for commercial real estate
                                   Corporate Profits
(With Inventory Valuation Adjustment & Capital Consumption Adjustment)

            $1,300
            $1,200
            $1,100
            $1,000
             $900
 Billions




             $800
             $700
             $600
             $500
             $400
             $300
             $200
                     Jan-90
                              Jan-91
                                       Jan-92
                                                Jan-93
                                                         Jan-94
                                                                  Jan-95
                                                                           Jan-96
                                                                                    Jan-97
                                                                                             Jan-98
                                                                                                      Jan-99
                                                                                                               Jan-00
                                                                                                                        Jan-01
                                                                                                                                 Jan-02
                                                                                                                                          Jan-03
                                                                                                                                                   Jan-04
                                                                                                                                                            Jan-05
                                                                                                                                                                     Jan-06
                                                            Source: Department of Commerce
% Planning to Increase Employment
                                       Small Business Outlook
                    30
 % of Respondents




                    20


                    10


                    0
                     Jan-98

                              Jan-99

                                        Jan-00

                                                 Jan-01

                                                          Jan-02

                                                                   Jan-03

                                                                            Jan-04

                                                                                     Jan-05

                                                                                              Jan-06
                                       National Federation of Independent Business
       Corporate Hiring Plans
                  Next 6 Months


        Q3-2006        Q2-2006              Q1-2006   Q4-2005


More Jobs   32%             41%                 43%     40%


Less Jobs   29%             20%                 15%     19%



                  Source: Business Roundtable
        Major Business Risk

• Will the flattening yield curve result in a
  recession in 2007?
                  Yield Curve in the 2000’s
                  Upward slope to stimulate a recovery
          5

          4

          3
Percent




          2
                                           June, 2003
          1

          0
          Funds




                             2-Yr




                                                           5-Yr




                                                                      10-Yr
           Fed




                          Source: Federal Reserve Bank of St. Louis
                  Yield Curve in the 2000’s
                   Flat yield curve can lead to recession

          5
                     August 24, 2006
          4
Percent




          3

          2
                                            June, 2003
          1

          0
          Funds




                                 2-Yr




                                                             5-Yr




                                                                       10-Yr
           Fed




                           Source: Federal Reserve Bank of St. Louis
               The Yield Curve

• “An inverted yield curve has often been a
  precursor to a recession occurring within a
  year.”

  – Harvey Rosenblum, Director of Research
                      Dallas Fed



    Source: Federal Reserve Bank of Dallas, Southwest Economy, Jan/Feb 2006.
              The Yield Curve

• “The yield curve has turned inverted prior
  to each of the last eight recessions, while
  giving only one false signal”.




    Source: Federal Reserve Bank of Dallas, Southwest Economy, Nov/Dec 2005.
                                  Builders Reporting That
                                  Current Sales Are Good
                   100
                    90
% of Respondents




                    80
                    70
                    60
                    50
                    40
                    30
                    20
                         Jan-98

                                   Jan-99

                                                Jan-00

                                                         Jan-01

                                                                  Jan-02

                                                                           Jan-03

                                                                                    Jan-04

                                                                                             Jan-05

                                                                                                      Jan-06
                                            Source: National Association of Home Builders
                  House Price Appreciation
             Annualized Percentage Change from Previous Quarter

          20.00
          18.00
          16.00
          14.00
          12.00
Percent




          10.00
           8.00
           6.00
           4.00
           2.00
           0.00
            95

            96

            96

            97

            98

            99

            99

            00

            01

            02

            02

            03

            04

            05

            05
          2Q

          1Q

          4Q

          3Q

          2Q

          1Q

          4Q

          3Q

          2Q

          1Q

          4Q

          3Q

          2Q

          1Q

          4Q
                                   Annual Appreciation


                               Source: OFHEO and Federal Reserve System
  US Residential Building Permits
160,000
150,000
140,000
130,000
120,000
                                                                         2005
110,000
100,000
 90,000
                                    2006
 80,000
          Jan

                Feb

                      Mar

                            Apr

                                  May

                                         Jun

                                                Jul

                                                      Aug

                                                            Sept

                                                                   Oct

                                                                         Nov

                                                                               Dec
                              Source: Real Estate Center
Apartment Occupancy Rates
96%
95%
94%
93%
92%
91%
90%
89%
88%
87%
86%
      Austin    Fort    El Paso   Dallas   Houston    San
               Worth                                 Antonio

                       Aug-05        Aug-06

               Source: Apartment MarketData Research, LLC
                       Inventory of Unsold Homes
                              San Antonio
         12
         11
         10
          9
          8
          7
          6
Months




          5
          4
          3
          2
          1
          0
              Jul-95


                        Jul-96

                                 Jul-97


                                          Jul-98


                                                       Jul-99


                                                                Jul-00

                                                                         Jul-01


                                                                                  Jul-02


                                                                                           Jul-03

                                                                                                    Jul-04


                                                                                                             Jul-05


                                                                                                                      Jul-06
                                                   July, 1995 to present
                                                   Source: Real Estate Center
                         1Q




                                   -3
                                        -2
                                             -1
                                                  0
                                                      1
                                                          2
                                                              3
                                                                  4
                                                                       5
                                                                            6
                                                                                7
                                                                                     8
                              91                                                                                            1Q




                                                                                                                                      -4
                                                                                                                                           -2
                                                                                                                                                0
                                                                                                                                                    2
                                                                                                                                                        4
                                                                                                                                                                6
                                                                                                                                                                    8
                                                                                                                                                                        10
                                                                                                                                                                             12
                         1Q                                                                                                      91
                              92                                                                                            1Q
                         1Q                                                                                                      92
                              93                                                                                            1Q
                         1Q                                                                                                      93
                              94                                                                                            1Q
                         1Q                                                                                                      94
                              95                                                                                            1Q
                                                                                                                                 95
                         1Q
                              96                                                                                            1Q
                                                                                                                                 96
                         1Q
                              97                                                                                            1Q
                                                                                                                                 97
                         1Q
                              98                                                                                            1Q
                                                                                                                                 98
                         1Q                                                                                                 1Q
                              99                                                                                                 99
                         1Q




                DFW
                              00                                                                                            1Q
                                                                                                                                 00




                                                                                                              San Antonio
                         1Q                                                                                                 1Q
                              01                                                                                                 01
                         1Q                                                                                                 1Q
                              02                                                                                                 02
                         1Q                                                                                                 1Q
                                                                                                                                                                              San Antonio




                              03                                                                                                 03
                         1Q                                                                                                 1Q




                                                                                         Dallas/Ft. Worth
                              04                                                                                                 04
                         1Q                                                                                                 1Q
                              05                                                                                                 05
                         1Q                                                                                                 1Q
                              06                                                                                                 06




                         1Q                                                                                                 1Q
                                                                                                                                      -4
                                                                                                                                           -2
                                                                                                                                                0
                                                                                                                                                    2
                                                                                                                                                            4
                                                                                                                                                                    6
                                                                                                                                                                        8
                                                                                                                                                                             10




                                   -2
                                        0
                                              2
                                                  4
                                                          6
                                                              8
                                                                  10
                                                                       12
                                                                            14
                                                                                    16




Source: OFHEO
                              91                                                                                                 91
                         1Q                                                                                                 1Q
                              92                                                                                                 92
                         1Q                                                                                                 1Q
                              93                                                                                                 93
                         1Q                                                                                                 1Q
                              94                                                                                                 94
                         1Q                                                                                                 1Q
                              95                                                                                                 95
                         1Q                                                                                                 1Q
                              96                                                                                                 96
                         1Q                                                                                                 1Q
                              97                                                                                                 97
                         1Q                                                                                                 1Q
                              98                                                                                                 98
                         1Q                                                                                                 1Q
                                                                                                                                                                                            Price Change from Year Earlier




                              99                                                                                                 99
                         1Q                                                                                                 1Q
                Austin
                                                                                                            Houston




                              00                                                                                                 00
                         1Q                                                                                                 1Q
                              01                                                                                                 01
                                                                                     Austin




                         1Q                                                                                                 1Q
                                                                                                                                                                              Houston




                              02                                                                                                 02
                                                                                                                                                                                                                             House Price Appreciation




                         1Q                                                                                                 1Q
                              03                                                                                                 03
                         1Q                                                                                                 1Q
                              04                                                                                                 04
                         1Q                                                                                                 1Q
                              05                                                                                                 05
                         1Q                                                                                                 1Q
                              06                                                                                                 06
   Real Estate Still Preferred by
             Investors
• 24% of investors believe that stocks are a
  better investment than real estate.
• 69% of investors believe that real estate is a
  a better investment than stocks.




           Source: Roper Public Affairs survey for TIAA-CREF in 2005,
           Published in BALANCE, Winter 2006.
   Real Estate Still Preferred by
             Investors
• 51% of American investors believe that recent
  corporate scandals are “just the tip of the iceberg.”
  Same as 2004.
• Only 9% of investors say financial services
  companies in general are “very trustworthy,”
  down from 14% in 2004.
• Only 13% of investors find the largest public
  accounting firms to be “very trustworthy.”


            Source: Roper Public Affairs survey for TIAA-CREF in 2005,
            Published in BALANCE, Winter 2006.
 Investor Confidence Continues
        To Wane in 2006

• Only 39% of investors said they were
  confident that CEOs practice ethical
  behavior in Feb, 2006

• This is down from 47% in Feb, 2005.




            Opinion Research Corp., Princeton, NJ
                            P/E Ratio
               S&P 500 12-month trailing
50
45
40
35
30
25
20
15
 Jan-98

          Jan-99

                   Jan-00

                            Jan-01

                                     Jan-02

                                              Jan-03

                                                          Jan-04

                                                                   Jan-05

                                                                            Jan-06
                            Source: Standard and Poor’s
     2005 Stock Market Returns

–   South Korea                                             54.0%
–   India Bombay Sensex                                     42.3%
–   Japanese Nikkei Stock Index                             40.2%
–   Europe’s Dow Jones Stoxx 600                            23.5%

– US S&P 500                                                3.0%

    European stock prices still seem reasonable- the P/E ratio is
    just 12.8 times expected 2006 earnings. This is well below
    the average of 16.1 for the past decade.

                      Source: Wall Street Journal 13/2006
Endowment Fund Allocation
 Yale has the second largest endowment
        fund with $15.2 billion.

        Hedge funds            25.7%
        Real assets            25.0%
        Private equity         14.8%
        US stocks              14.1%
        Foreign stocks         13.7%
        Bonds                   4.9%
              Source: WSJ 3/29/06
                Conclusions
•   Mortgage rates unlikely to rise much more
•   Continued weakness in home sales in the US
•   Recession in 2007 unlikely
•   Fed likely to lower rates in 2007
•   Housing starts down 12-15% in 2007
•   Weak home prices through 2007
•   Under $150,000 is the weakest segment