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Bargain Real Estate Dallas

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									Dr. James P. Gaines
  Research Economist
    Real Estate Center
at Texas A&M University
        Topics
• The Economy
• The Real Estate
  Markets: National and
  Texas
• Future Prospects for
  Texas

                          2
The Crack REC Economic and
 Housing Forecasting Team




                             3
Length of US Recessions 1900-Present

                              Average
                              Recession is 15
                              months




                                      Current
                                      Recession is 26
                                      months and
                                      counting




                                                        4
               Source: NBER
            Not a Typical Recession
•We have a 0% funds rate, a $1.4 trillion budget deficit, a super-weak exchange
rate, and a $2.2 trillion Fed balance sheet

•Between one-fourth and one-third of homeowners with a mortgage have
negative net equity

•1 in 6 are either unemployed or underemployed.

•1 in 7 homeowners with a mortgage either in arrears or in the foreclosure
process

•Small business failures are up 44% y/y

•1 in 8 Americans on food stamps and there are 239 counties where at least
25% of the population is on the program

•A 30% slide in home prices; a 50% plunge in commercial real estate values;
and a 20% mall vacancy rate nationwide

                                                                             5
Is There a Secular Attitudinal Change
  Going On Given Economy, Credit
 Collapse and Household Net Worth
             Implosion?
 •   Debt
 •   Savings
 •   Discretionary spending patterns
 •   Homeownership

                                       6
Percent Growth in Real GDP Since 2000
                       Seasonally Adjusted Annual Rate




    First quarter of expansion averages +7% after a recession
    As much as 90% of the 2.2% growth was Fed induced




                                                                7
                        Source: Bureau of Economic Analysis
      Overall Inflation Rate




November Total CPI was up 1.9% from a year earlier, due to
energy increase of 7.4% (especially gasoline of more than 24%)
Core CPI was up 1.7% (new and used cars up 4.9% and 5.8%,
respectively)



                             Source: Bureau of Labor Statistics                                  8
           Yr/Yr Rate of Change in the Monthly Index, US Urban, All Items, Seasonally Adjusted
Personal Consumption Expenditures
     Personal consumption represents
     about 70% of US economy and is
     showing signs of recovery




                  Source: Department of Commerce, SAAR
Corporate After-Tax Profits
  ( SAAR Quarterly With Inventory Valuation & Capital Consumption Adjustment)




                                                                                10
                   Source: Bureau of Economic Analysis
Change in Monthly Employment




 7.2 million total job losses since December 2007




                       Source: BLS, SAAR            11
Broadest Measure of Underemployment
 Percent NSA




               Source: BLS, U-6 Unemployment Rate NSA   12
Figuring Out the Economy Around
       the Ole Water Cooler




                             13
                Beginning of 2010, Where Are We?
        Banks/Banking
        Fin/Capital Markets                       Bottomed – Probably not
        Housing
        Employment                                Recovering – Some
        Comm. RE
        Retail consumption                        Cause for Concern – Yes
        Business Spending
        Manufacturing                             Immediate Prospects – Not Good
        Value of $1
        Land
       Stock Market                          True Recovery? Speculation & Inflated P/Es
       Commodities                           Not on Fundamentals
       Imports/Exports                       Exports up because $1 is down
       Energy - gas & oil                    Heavy speculation, low value of $1, demand down
                                                   •   Trillions spent with limited results
Government Stimulus                                •   Little to no multiplier effects from $$ spent
                                                   •   Out of $$ - record deficits
Programs:
•Following Japanese model despite claim not to     •   Probably saved banks & WS, little else
•Long-term consequences may be significant         •   Housing impact minimal
                                                   •   3Q2009 GDP growth all Fed induced
                                                   •           14
                                                       Reckoning coming for value-less assets
    Three Key Questions
• When will recession end?
  – Already ended? End of 2009, 2010 …?
• What shape will the recovery take?
  – V, U, W or an L ? A “jobless” recovery
• What are the risks of a relapse?
  – Government’s exit strategy, investor
    speculation driving commodity prices
    to unreasonable levels; capital market
    conditions – who’s providing capital?


                                             15
What Is Holding Up A Recovery?
• Inability of big banks to lend – credit freeze
  continues
• Household’s reducing debt, not spending
• Unemployment in double digits
• Home prices declining – housing is not leading a
  general recovery as with past recessions
• Commercial real estate drag on community and
  regional banks
• State and local governments financially strapped
• Everyone speculating on what Federal
  Government will do next
                                                 16
     The Best Case Scenario
• Favorable corporate earnings 4Q09
• Sustained stock market rally
• Rise in consumer confidence and
  spending
• Layoffs end by the end of the 2009
• “Jobless recovery” in 2010
• Higher interest rates and inflation in
  2010-11

                                           17
    The Worst Case Scenario
• The securitized lending market doesn’t
  reopen
• Bad banks and businesses propped up
• No price discovery for “toxic” mortgages
• Political risk for business stays high
• Business / investors “sit on their hands”
• Unemployment goes well over 10%
• Commodity deflation and price deflation
  continue and get worse
                                              18
                         2010
• Low interest rates for at least six months; ~ 100-200bp
  increase
• Job losses decline during first half of year, then flat –
  little job gains of note; unemployment could reach
  nearly 11%
• Some improvement in the housing market – flat to low
  growth despite low interest rates, low prices and tax
  credits – high potential for “double dip”
• High foreclosures from high unemployment, ARM
  resets and re-defaults on loan workouts
• Personal consumption up slightly during the year from
  pent-up demand – enough for major recovery?


                                                          19
                         2010
• High number of bank failures; banking system forced to
  “carry” CRE problem into 2011; major reckoning of low-
  to-no-value assets looming, can’t extend & pretend
  much longer
• Government stimulus spending only what’s left of
  original programs with little significant improvement to
  overall economy
• Minimal 2010 impacts of healthcare and cap-and-trade
  legislation, but potentially significant impacts into 2011
• Deflation for at least first six months with potentially
  significant inflation for next several years
• State and local governments financially strapped;
  schools broke
                                                         20
            A Thought from Maxine
            "BAIL EM OUT! ????”
         Wow, back in 1990, the Government
         seized the Mustang Ranch brothel in
        Nevada for tax evasion and, as required
                 by law, tried to run it.
               They failed, and it closed.
   Now we are trusting the auto industry, the
banking system and healthcare to the same nit-
wits who couldn't make money running a whore
          house and selling whiskey!
                                             21
   Texas Scenarios for 2010-2011
• Texas lagged into recession, may lag coming
  out
• Job losses stop and new jobs start being
  created, maybe
• Flat housing market – sales and prices until
  economy truly recovers
• Small and regional bank failures worked out
• In-migration re-invigorates economic growth
  and housing markets
                                                 22
Texas Index of Leading Indicators
(1987=100)




                                                      23
             Source: Federal Reserve Bank of Dallas
Annual Employment Growth Rates for
       US, Texas and Dallas
                              Dallas                                   Texas




                                                                      US


                                                                           24
       Source: BLS, TWC, Real Estate Center at Texas A&M University
Real Estate Markets


                  25
The Housing Market




                     26
      Implications for Housing
• “Tax credit” appears to have stimulated buying
  about 10% to 12%
• Lower demand, foreclosures and homebuilder
  concessions affecting value changes
• Appraisals are major issue in purchases
• Lenders making purchase mortgages difficult to
  obtain
• Jumbo home loans and ADC loans virtually non-
  existent in most of the country
• Affordability operative market word         27
New and Existing SF Home Sales U.S.




                                                                     28
     Sources: US Census Bureau , NAR, NAHB, NBER, 000s of SA units
Monthly Foreclosure Filings




                          Source: RealtyTrac, Inc.                              29
       Data include Notices of Trustee Sales plus Notices of Foreclosure Sale
Foreclosure Filings and the U.S.
     Unemployment Rate




                           Sources: BLS, RealtyTrac, Inc.                                 30
  Foreclosure Filings include Notices of Trustee Sales plus Notices of Foreclosure Sale
Foreclosure Filings and the Texas
      Unemployment Rate




                            Sources: TWC, RealtyTrac, Inc.                                 31
   Foreclosure Filings include Notices of Trustee Sales plus Notices of Foreclosure Sale
Annual U.S. Median Existing Home Price
            Percent Change




   Through June 2009 the median existing home price was
   down 14.8%;
   Through November 2009 the median existing home price is
   down 4.4%;
   12-Month moving average is down 12.7%




                                                             32
                            Source: NAR
US Median Home Prices Since 1990
                 National House
                  Price Bubble




                            The national housing boom started
                            around January 2002 creating a
                            house price bubble that peaked at
                            around $230,900 in 2006




                                                                33
      Source: NAR, Real Estate Center at Texas A&M University
        Has the Housing Market
              Bottomed?
Answer: maybe, hopefully, probably. But we still may not
  really know for sure for another several months.
 Can the market sustain itself without massive Federal government
  help
 Foreclosures will stay high. A large number of Option-ARM and
  prime ARM mortgages reset starting this quarter and going through
  all next year and into 2011.
 The health of the housing market, nationally and locally, depends
  on a general economic recovery - especially stopping the loss of
  jobs and preferably adding new jobs.
 The housing market may have bottomed out, but will probably have
  a long, slow recovery – think 5 to 10 years, not just one or two.

                                                                  34
  Future Home Sales Volume

          Job Growth

Mortgage Rates and Credit Terms

    Home Price Affordability


                                  35
           Texas Single-Family Market

                               Average                          Months
              Sales             Price              Median Price Inventory
November
             12,736           $179,000                $137,200      6.7
2008

November     17,319           $183,800                $143,600      6.7
2009          36.0%               2.7%                     4.7%


YTD 2008     216,428          $191,100                $146,975
                                12-mo MA                12-mo MA


             195,937          $183,475                $143,975
YTD 2009
              -9.5%              -4.0%                    -2.0%
                                                                            36
               Source: Real Estate Center at Texas A&M University
Annual Texas Home Sales
2007 = about 6% decline from 2006.
2008 = 16% less than ’07
2009 = sales down 10% to 15% from 2008 to
2001-2003 levels




                                                                37
           Source: Real Estate Center at Texas A&M University
Texas SF Building Permits
 1984 82% of 1983 peak            2006 98% of 2005 peak
 1985 66% of 1983 peak            2007 72% of 2005 peak
 1986 57% of 1983 peak            2008p 48% of 2005 peak
 1987 43% of 1983 peak            2009e 36% of 2005 peak
 1988 35% of 1983 peak




         Source: US Census Bureau, Real Estate Center at Texas A&M   38
US and Texas Median Home Price
 Texas remains a housing bargain, but not
 by as much.
 The gap between the US and Texas
 median price widened to 38%, but has
 narrowed to 16%




                                                                       39
             Source: NAR; Real Estate Center at Texas A&M University
Texas Median Home Price
        12-Month Moving Average

Current prices are about 7% below trend




                                                           40
      Source: Real Estate Center at Texas A&M University
Texas Households by Highest Affordable Price and
      the Number of Owner-Occupied Units
                         4%


                        3%

                               7%


                              6%


                                    10%

                              6%

                               7%

                                   8%

                                                          20%

                                                                       30%




                                                                                                        41
  Source: US Census Bureau 2008 American Community Survey; Real Estate Center at Texas A&M University
 Dallas Single- Family Market

                             Average               Median               Months
              Sales           Price                 Price               Inventory
November
              2,801         $199,000              $144,000                 6.2
2008
November      3,666         $201,000              $152,400                 5.7
2009           30.9%             1.0%                 5.8%

YTD 2008     47,556 $210,608*                    $155,175*

YTD 2009     42,050 $198,792*                    $153,817*
              -11.6%            -5.6%                 -1.5%


           Source: Real Estate Center at Texas A&M University; NTREIS               42
                       * 12-month moving average to date
Dallas Monthly Home Sales
         12-Month Moving Average




               Sales
              Bubble




            Current sales are about equal to
            2000 levels




                                                            43
       Source: Real Estate Center at Texas A&M University
   Dallas Annual Home Sales
2009 sales at pace of 45,000, an
11.5% decline from 2008.
2010 sales about the same




                                                                    44
               Source: Real Estate Center at Texas A&M University
Dallas Median Home Price
       12-Month Moving Average




               Moving-average Price down 1.5% from
               year earlier and 3.3% from November
               2007 peak.




                                                           45
      Source: Real Estate Center at Texas A&M University
Dallas Median Home Prices




      Average annual increase of 3.0% 1998-2008.
      2009e flat from 2008
      2010p essentially flat, maybe up 1%




      Source: Real Estate Center at Texas A&M University   46
Dallas Single-Family Building Permits

      1983-1988 =
      58% Decline




                                                           2004-2008 = -62%
                                                           -75% to 2009e ~8,000




      Source: US Census Bureau, Real Estate Center at Texas A&M University        47
Dallas Multi-Family Building Permits



                                                             134 permits issued in
                                                             the last 5 months




      Source: US Census Bureau, Real Estate Center at Texas A&M University       48
  Implications for Commercial Real
                Estate
• Heavy downward rent pressure in industrial,
  office and retail
• Cap rates revert back to pre-2002 levels
• Potential wave of foreclosures without extend
  & pretend
• No new office, retail or industrial construction
  until 2012 or 2013
• FRANNIE financing led to gross overbuilding in
  multi-family which has fallen off significantly
                                                     49
DFW Overall Office New Space & Net Absorption
                   Completed Space
                                                                   Absorption




          Source: CoStar; Real Estate Center at Texas A&M University            50
DFW Overall Office Average Gross
    Rents and Occupancy




      Source: CoStar; Real Estate Center at Texas A&M University   51
DFW Warehouse New Space & Net Absorption
     Completed Space
                                     Absorption




         Source: CoStar; Real Estate Center at Texas A&M University   52
DFW Warehouse Rents and Occupancy




       Source: CoStar; Real Estate Center at Texas A&M University   53
DFW Flex R&D New Space & Net Absorption

                        Completed Space
                                                              Absorption




        Source: CoStar; Real Estate Center at Texas A&M University         54
DFW Flex R&D 3-Net Rents and Occupancy




         Source: CoStar; Real Estate Center at Texas A&M University   55
Future Prospects
     Texas – Poised for a 21st
         Century Boom
• Population and Economic growth
• Low cost, available labor
• Pro Growth Attitude
• Migration into State from elsewhere
• Attractive Retirement Area
• Pressure on infrastructure, government
  services, public finance
• Most affordable state for land, housing
  and overall cost of living
                                            57
                  Texas Urban Triangle
58,410 square
miles
Longest
distances:                               By 2040, 33.7
 362 miles N-S                           million people
 315 miles E-W                           will live in the
                                         four principal
                                         metro areas in
In 2007, 15.3                            the triangle, a
million people,                          120% increase
about 90% of
the total
population in
the area, lived
in the four
principal metro
areas in the
triangle



                                                    58
          Projected Texas Population
(000s)
                                      2000 - 2030
           At 50% 1990-2000 rate of immigration
           At 2000-2007 rate of immigration
           At 100% 1990-2000 rate of immigration


         Between 9 and 18 million more
         residents between 2005 and 2030




                                                                                     59
              Source: U.S. Census Bureau, Texas State Demographer 2008 Projections
    Averaging the projections results in an
   increase of 13.9 million people by 2030.
Over the next 25 years, equivalent of adding:

     another 12-county Dallas-Ft.
     Worth metropolitan area, plus
       another 10-county Houston
         metropolitan area, plus

     another 8-county San Antonio
        metropolitan area, plus
          another Corpus Christi
                                           60
Texas Age Distribution 2005-2030
          Boomers
2005                          2010          Boomers




   2020                              2030
                    Boomers                           Boomers




                                                          61
        Dallas Population
Collin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, Rockwall Counties


At 50% 1990-2000 rate of immigration
At 2000-2007 rate of immigration
At 100% 1990-2000 rate of immigration

 Between 2.2 and 5.1 million
 more people by 2030




                                                                         62
Source: US Census Bureau, Texas State Data Center and Demographer
               D-FW MSA Population
Collin, Dallas, Delta, Denton, Ellis, Hunt, Kaufman, Rockwall & Johnson, Parker, Tarrant, Wise Counties


                At 50% 1990-2000 rate of immigration
                At 2000-2007 rate of immigration
                At 100% 1990-2000 rate of immigration

                 Between 2.8 and 6.7 million
                 more people by 2030




                                                                                                    63
               Source: US Census Bureau, Texas State Data Center and Demographer
Dr. James P. Gaines
  Research Economist
    Real Estate Center
at Texas A&M University

								
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