History May Not Repeat Itself, But it Certainly Does Rhyme* *Mark Twain. An Economic and Real Estate Forecast. Chief Economist, Stewart Title

Transcription

1 History May Not Repeat Itself, But it Certainly Does Rhyme* *Mark Twain An Economic and Real Estate Forecast November 5, 2010 Ted C. Jones, PhD Chief Economist, Stewart Title

2 The New Business Model i.e. Things are different today..

3 The New Business Model 1. Cost Control is Essential 2. Consumers Have Changed Expectations 3. Less is More

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5 Boom & the Bust Act Like Business Cycles Have Been Repealed Preceded by Deregulation Followed by 6 Years High Unemployment 5 Years Declining Home Prices Gov t Debt Grows 86% Bust Boom

6 Jobs Are Everything Period.

7 6 US Employment September Year Millions Louisiana Jobs September Year Millions Million Fewer Jobs 22,000 Lost Jobs 10 Years at 100,000 Per Month = 12 Million Needed Jobs 1.2 Percent Loss

8 U.S. Job Numbers Jobs (Millions) Seasonally Adjusted Million Lost Since Jan ,000 Lost in Sept ,000 Gained YTD '07 '08 '09 '10 7

9 U.S. Unemployment Rate Percentage Percent Average '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 8

10 New Orleans Civilian Employment Thousands of Jobs '07 '08 '09 '10

11 New Orleans Jobs Percent Change from Same Month Prior Year 20.0% Not Seasonally Adjusted 10.0% 0.0% -10.0% 67 '01 '02 '03 '04 '05 '06 '07 '08 '09 ' % -30.0% US New Orleans 1,900 Net New Additional Jobs in the Past 12 Months

12 New Orleans Jobs Percent Change from Same Month Prior Year 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% Not Seasonally Adjusted '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 US New Orleans 67 1,900 Net New Additional Jobs in the Past 12 Months

13 12 Louisiana Employment Trends September Comparison Net New Jobs Compound Annual Job Growth Rate Thousands 1 Year 10 Years Alexandria % 0.69% Baton Rouge % 0.80% Houma-Bayou Cane-Thibodaux % 1.64% Lafayette % 0.96% Lake Charles % 0.19% Monroe % -0.38% New Orleans-Metairie-Kenner % -1.74%

14 Inflation Expectations Percent Percent 10-Year Average Current 2.2 Percent '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 University of Michigan 13

15 Average Daily Global Oil Consumption Millions of Barrels Per Day '00 '02 '04 '06 '08 '10f

16 '06 '98 '02 '94 US Energy Consumption Consumption Quadrillion BTUs Other Nuclear Hydro Natural Gas Oil 0 Coal 15 '50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90

17 Rotary Rig Count Average Number Working Per Month 5,000 4,000 3,000 2,000 1,000 0 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 16

18 17 Well Head Natural Gas Price Price Per 1,000 Cubic Feet 3 Month Moving Average $12 $10 $8 $6 $4 $2 $0 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10

19 Spot Oil Price West Texas Intermediate Price Per Barrel 3 Month Moving Average $140 $120 $100 $80 $60 $40 $20 $0 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 Wall Street Journal-St Louis Fed 18

20 30-Year Residential Mortgage Rate Percent '02 '03 '04 '05 '06 '07 '08 '09 '10

21 Oil Prices & 10-Year Treasury Note Rates September 2010 Dollars Oil Prices $140 $ Year Treasury Rates % 17 $ $80 $60 $40 $ $ '02 '05 '

22 Oil Prices & Exchange Rates $US Per Euro Oil in September 2010 Dollars Oil Prices Dollars Per Euro $140 $120 $100 $1.65 $1.45 $80 $60 $40 $1.25 $1.05 $20 '02 '03 '04 '05 '06 '07 '08 '09 '10 $

23 US Treasury Rates 3-Nov-09 3-Nov-10 BP Change 1 mo mo mo yr yr yr yr yr yr yr yr US Department of the Treasury 22

24 Why Interest Rates Are Going To Increase 23 Japanese Buyer of 2-Year Treasury Note in September 2008 Dollar-Yen Exchange Date Event U.S. Dollars Rate Yen Purchase the Bond $ (100,000.00) $ (10,660,000) Interest Payment $ $ 46, Interest Payment $ $ 43, Interest Payment $ $ 43, Interest Payment $ $ 39, Bond Redempetion $ 100, $ 8,330,000 Total (With No Time Value of Money) (2,155,664) $ Return (No Time Value of Money) -20.2%

25 Recession Recovery The recovery in every recession since 1949 has been led by a recovery in the housing market

26 September 2010 US Existing Home Sales Sold (Millions) '02 '03 '04 '05 '06 '07 '08 '09 '10 National Association of REALTORS 25

27 U.S. Existing Home Sales Median Price -- $ Thousands $250 Down 23 Percent From 12-Month Average Peak in July 2006 $200 $150 $100 $50 $0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 National Association of REALTORS 26

28 September 2010 U.S. New Home Sales Sold -- Thousands 1,400 1,200 1, '02 '03 '04 '05 '06 '07 '08 '09 '10 27

29 September 2010 U.S. New Home Sales Median Price $ Thousands $250 $200 $150 $100 $50 $0 '02 '03 '04 '05 '06 '07 '08 '09 '10 28

30 Louisiana Housing Sales Seasonally Adjusted Annualized Rate -- Thousands 100 National Association of REALTORS '02 '03 '04 '05 '06 '07 '08 '09 '10

31 New Orleans Existing Home Prices Average Price $250,000 $200,000 $150,000 $100,000 $50,000 $0 '04 '05 '06 '07 '08 '09 '10

32 Louisiana Residential Building Permits Number of Dwelling Units 40,000 30,000 Single Family Multi 20,000 10, '00 '02 '04 '06 '08 '10f

33 32 Real 2010 GDP Forecasts Sub Saharan Africa Latin America Emerging Asia Emerging Markets China Japan Eurozone US World 4.9% 2.0% 6.7% 4.4% 8.8% 0.8% 0.5% 1.9% 2.5% BMI

34 Gross Domestic Product -- GDP Value of All Goods and Services Produced by a Country GDP = C + I + G + (Ex Im) Where: C = Consumption I = Investments G = Government Spending Ex = Exports Im = Imports Q Percent Q Percent 33

35 U.S. GDP by Category GDP Components Net Change Peak Current Sustainable During Demand Demand Demand Recession Share Share Share Consumption -0.7% 69.9% 70.3% 65.0% Investment -15.7% 15.9% 13.6% 17.5% Government 4.5% 18.4% 19.4% 17.5% Exports - Imports 19.9% -4.2% -3.4% 0.0% How Much It s Grown From What It Is To What It Should Be St Louis Fed 34

36 Consumer Sentiment Q = Average Double Dip Recession S&L Crisis 9-11 Subprime '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 University of Michigan 35

37 Retail Sales Real, Inflation Adjusted Percent Change From Same Month in Prior Year 8.0% 4.0% 0.0% -4.0% -8.0% -12.0% Largest Contraction in Retail Sales Since the Depression '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 St. Louis Fed

38 Light Weight Vehicle Sales Millions Seasonally Adjusted Annual Rates '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 Bureau of Economic Analysis 37

39 Current Conditions Summary GLOBAL ECONOMY U.S. ECONOMY Housing Employment Consumers Inflation Stocks -- Bonds Near-Term Outlook Scattered Recoveries PIGS Issues Foreclosures 1 in 4 Homeowners Underwater Prices Stabilizing in Selected Markets New Home Sales at Record Lows Mortgage Interest Rates At Record Lows Job Losses Ongoing Stimulus Did Not Work Rate of Losses Moderating Spending Growth Is Sporadic Consumer Recessionary Levels Deflationary Threat Diminishing Demographics Save the Day in the Long Run For the US Bond Bubble Burst Potential Uncertainty Rules! Tepid Job Growth at Best in

40 Investments????????????????????????????????????????????????????????????????????????????

41 Gold Price Per Ounce Nominal (Not Inflation Adjusted) 40 $1,500 $1,200 $900 Jan 1980 to Now Gold Up 95.5 Percent 1.95X $600 $300 $0 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10

42 Gold Price Per Ounce Real -- August 2010 $Dollars $2,000 $1,600 $1,200 Jan 1980 to Now Gold Down 30.3 Percent 0.70X $800 $400 $0 '80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 41

43 Existing Home Prices $ Thousands --Nominal Average of MSA Medians $225 $200 $175 $150 $125 $100 $75 $50 $25 $0 Jan 1980 to Now Housing Up 238 Percent 3.38X '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 National Association of REALTORS 42

44 Existing Home Prices $ Thousands Real Inflation Adjusted Aug 2010 $s $250 $200 Jan 1980 to Now Housing Up 22.3 Percent $150 $100 $50 $0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 National Association of REALTORS 43

45 Bond Yields Percent Effective Yield CCC & Less B Corp BB Corp BBB Corp A Corp AA-AAA Corp '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Merrill Lynch - Bloomberg 44

46 IRF Bond Yield Premium Analysis Historical AA/AAA Current Basis Points Basis Points Average Spread Current Spread AA/AAA A BBB BB B CCC Down , Historical Current Premium Premium A 9.1% 27.7% BBB 22.7% 56.4% BB 54.3% 139.8% B 91.1% 196.3% CCC Down 213.5% 319.1% Premium calculated as a percentage of AA/AAA 45

47 $561 Billion Spent 613,000 New Jobs YTD $915,200 Per Job

48 Real Estate Commercial Sales Percent $ Billion Change 2007 $ $ % 2009 $ % $58 Billion Q1+Q2+Q Forecast 2010 = $ % 47

49 $3.5 Trillion in Total Commercial Loans $400 Billion to Refinance Per Year for Next 10 Years

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51 Mortgage Bankers Association Office Building Washington, DC Purchased 2007 $79.0 Million Sold Feb 2010 $41.3 Million Loss $37.7 Million 47.7 Percent

52 MIT Real Estate Group NCREIF Commercial Real Estate Property Value Indices 51

53 Estimated Current Property Value Compared to Q Acquisiton Date Property Type Apartments Industrial Office Retail 2000 Q1 41.3% 16.9% 26.7% 40.2% Q2 35.8% 13.9% 23.5% 43.6% Q3 30.5% 10.5% 20.7% 43.9% Q4 29.3% 10.9% 20.1% 50.2% 2001 Q1 30.8% 6.9% 21.1% 53.4% Q2 21.5% 4.1% 24.0% 46.1% Q3 22.2% 5.3% 28.7% 43.1% Q4 22.4% 7.7% 32.6% 44.4% 2002 Q1 21.3% 13.1% 26.8% 40.7% Q2 25.0% 10.6% 31.3% 37.5% Q3 24.5% 9.1% 22.9% 32.0% Q4 20.5% 4.3% 25.1% 24.2% 2003 Q1 21.6% 8.2% 23.7% 25.4% Q2 22.3% 3.8% 25.5% 17.7% Q3 18.7% -2.0% 21.7% 28.5% Q4 18.0% -2.9% 21.3% 20.2% 2004 Q1 19.3% -4.2% 21.1% 15.5% Q2 14.7% -10.0% 16.5% 10.0% Q3 8.5% -9.3% 15.4% 3.8% Q4 6.2% -9.7% 11.1% -0.3% 2005 Q1-2.2% -6.7% 8.0% 1.2% Q2-2.4% -25.1% -1.4% -17.8% Q3-17.1% -26.0% -7.7% -20.6% Q4-20.9% -25.7% -15.9% -20.6% 52

54 Estimated Current Property Value Compared to Q Acquisiton Date Estimated Percent Change in Value Since Acquisition Property Type Apartments Industrial Office Retail 2006 Q1-23.8% -32.8% -19.4% -21.8% Q2-21.8% -34.1% -19.5% -24.0% Q3-21.1% -32.6% -24.5% -25.6% Q4-21.4% -38.3% -28.6% -27.3% 2007 Q1-19.6% -39.6% -30.9% -28.3% Q2-24.0% -43.6% -35.2% -28.1% Q3-27.7% -41.8% -35.7% -27.1% Q4-27.2% -37.8% -35.3% -25.8% 2008 Q1-26.8% -38.0% -33.7% -21.9% Q2-25.5% -33.1% -28.0% -21.0% Q3-24.5% -31.7% -26.6% -21.3% Q4-13.0% -24.9% -20.8% -18.3% 2009 Q1-8.3% -5.4% -17.3% -14.8% Q2-1.4% -5.4% -6.2% -5.6% Q3-1.1% -4.1% -0.6% -1.2% Q4 8.0% -2.1% 9.2% 4.3% 2010 Q1 5.4% 5.5% 5.0% 5.2% Q2 0.0% 0.0% 0.0% 0.0%

55 Texas Multifamily Prices Down 10 to 15 Percent Since 2007 Peak Texas Industrial Cap Rates Up 100 Basis Points From 6.5 Percent Value Down 13+ Percent

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57 Capitalization Rate Impact Percent Change in Property Value As Cap Rates Increase New Original Rate Rate 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% 8.0% 8.5% 9.0% 9.5% 5.0% 5.5% -9.1% 6.0% -16.7% -8.3% 6.5% -23.1% -15.4% -7.7% 7.0% -28.6% -21.4% -14.3% -7.1% 7.5% -33.3% -26.7% -20.0% -13.3% -6.7% 8.0% -37.5% -31.3% -25.0% -18.8% -12.5% -6.3% 8.5% -41.2% -35.3% -29.4% -23.5% -17.6% -11.8% -5.9% 9.0% -44.4% -38.9% -33.3% -27.8% -22.2% -16.7% -11.1% -5.6% 9.5% -47.4% -42.1% -36.8% -31.6% -26.3% -21.1% -15.8% -10.5% -5.3% 10.0% -50.0% -45.0% -40.0% -35.0% -30.0% -25.0% -20.0% -15.0% -10.0% -5.0% 10.5% -52.4% -47.6% -42.9% -38.1% -33.3% -28.6% -23.8% -19.0% -14.3% -9.5% 11.0% -54.5% -50.0% -45.5% -40.9% -36.4% -31.8% -27.3% -22.7% -18.2% -13.6% 11.5% -56.5% -52.2% -47.8% -43.5% -39.1% -34.8% -30.4% -26.1% -21.7% -17.4% % -58.3% -54.2% -50.0% -45.8% -41.7% -37.5% -33.3% -29.2% -25.0% -20.8% -

58 Multifamily Assessed Value Percent Years Change % % % % % % 2007 Texas Apartment Resales

59 Federal Budget Surplus (Deficit) 58 $ Billions '01 '02 '03 '04 '05 '06 '07 '08 '09 '10f '11f $0.0 -$ $ $ $ $1, $1, $1, $1,600.0

60 Federal On-Budget Deficit Forecast 59 $ Billions Baseline ($10.7 Trillion Total Debt ) $0.0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11f '12 '13 '14 '15 '16 '17 '18 '19 '20 -$ $ $ $ $1, $1, $1, $1,600.0 $10.7 Trillion Cumulative Debt Dec $10.53 Trillion

61 2011 Economic Concerns Wall Street Washington DC Liquidity Jobs Stimulus Not Working GDP=C+I+G Time Bomb Loans Now Commercial Cold War II Terrorists Inflation (and Cap Rates)--Recession Tax Cut Clock Ticking. Energy: US Imports 70+ Percent of Oil Real Estate-Autos-Credit Cards-Banks

62 Ted s Blog

63 Ted C. Jones, PhD Chief Economist Stewart Title Guaranty Co.