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 http://blog.stewart.com/
The New Business Model i.e. Things are different today..
The New Business Model 1. Cost Control is Essential 2. Consumers Have Changed Expectations 3. Less is More
Boom & the Bust Act Like Business Cycles Have Been Repealed Preceded by Deregulation Followed by 6 Years High Unemployment 5 Years Declining Home Prices Gov t Debt Grows 86% ------------- Bust ------------- -----------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 -----------
Jobs Are Everything Period.
6 US Employment September Year Millions 2000 132.1 2010 130.2 Louisiana Jobs September Year Millions 2000 1.922 2010 1.900 1.9 Million Fewer Jobs 22,000 Lost Jobs 10 Years at 100,000 Per Month = 12 Million Needed Jobs 1.2 Percent Loss
U.S. Job Numbers Jobs (Millions) Seasonally Adjusted 138 136 7.75 Million Lost Since Jan 2008 95,000 Lost in Sept 2010 613,000 Gained YTD 134 132 130 128 '07 '08 '09 '10 7
U.S. Unemployment Rate Percentage 12 10 8 6.3 Percent Average 6 4 2 0 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 8
New Orleans Civilian Employment Thousands of Jobs 530.0 525.0 520.0 515.0 510.0 505.0 500.0 '07 '08 '09 '10
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 '10-20.0% -30.0% US New Orleans 1,900 Net New Additional Jobs in the Past 12 Months
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
12 Louisiana Employment Trends September Comparison Net New Jobs Compound Annual Job Growth Rate Thousands 1 Year 10 Years Alexandria -0.1-0.15% 0.69% Baton Rouge -0.4-0.11% 0.80% Houma-Bayou Cane-Thibodaux -0.1-0.11% 1.64% Lafayette 1.7 1.17% 0.96% Lake Charles 1.2 1.35% 0.19% Monroe -1.0-1.32% -0.38% New Orleans-Metairie-Kenner 3.3 0.64% -1.74%
Inflation Expectations Percent 12 10 3.0 Percent 10-Year Average Current 2.2 Percent 8 6 4 2 0 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 University of Michigan 13
Average Daily Global Oil Consumption Millions of Barrels Per Day 90 85 80 75 70 65 60 55 14 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08 '10f
'06 '98 '02 '94 US Energy Consumption Consumption Quadrillion BTUs 100 80 60 Other Nuclear Hydro Natural Gas 40 20 Oil 0 Coal 15 '50 '54 '58 '62 '66 '70 '74 '78 '82 '86 '90
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
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
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
30-Year Residential Mortgage Rate Percent 7.0 6.0 5.0 4.0 19 '02 '03 '04 '05 '06 '07 '08 '09 '10
Oil Prices & 10-Year Treasury Note Rates September 2010 Dollars Oil Prices $140 $120 10-Year Treasury Rates % 17 $100 14 $80 $60 $40 $20 11 8 5 $0 72 75 78 81 84 87 90 93 96 99 '02 '05 '08 2 20
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 $0.85 21
US Treasury Rates 3-Nov-09 3-Nov-10 BP Change 1 mo 0.04 0.13 9 3 mo 0.06 0.13 7 6 mo 0.17 0.16-1 1 yr 0.38 0.22-16 2 yr 0.92 0.34-58 3 yr 1.46 0.49-97 5 yr 2.36 1.11-125 7 yr 3.05 1.85-120 10 yr 3.50 2.67-83 20 yr 4.29 3.71-58 30 yr 4.34 4.09-25 US Department of the Treasury 22
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 9-2008 Purchase the Bond $ (100,000.00) 106.6 $ (10,660,000) 3-2009 Interest Payment $ 480.00 97.9 $ 46,992 9-2009 Interest Payment $ 480.00 91.3 $ 43,824 3-2010 Interest Payment $ 480.00 90.7 $ 43,536 9-2010 Interest Payment $ 480.00 83.3 $ 39,984 9-2010 Bond Redempetion $ 100,000.00 83.3 $ 8,330,000 Total (With No Time Value of Money) (2,155,664) $ Return (No Time Value of Money) -20.2%
Recession Recovery The recovery in every recession since 1949 has been led by a recovery in the housing market
September 2010 US Existing Home Sales Sold (Millions) 8.0 7.0 6.0 5.0 4.0 3.0 '02 '03 '04 '05 '06 '07 '08 '09 '10 National Association of REALTORS 25
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
September 2010 U.S. New Home Sales Sold -- Thousands 1,400 1,200 1,000 800 600 400 200 0 '02 '03 '04 '05 '06 '07 '08 '09 '10 27
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
Louisiana Housing Sales Seasonally Adjusted Annualized Rate -- Thousands 100 National Association of REALTORS 80 60 40 20 0 '02 '03 '04 '05 '06 '07 '08 '09 '10
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
Louisiana Residential Building Permits Number of Dwelling Units 40,000 30,000 Single Family Multi 20,000 10,000 0 31 80 82 84 86 88 90 92 94 96 98 '00 '02 '04 '06 '08 '10f
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% 0 0.02 0.04 0.06 0.08 0.1 BMI
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 Q2 2010 +1.7 Percent Q3 2010 +2.0 Percent 33
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
Consumer Sentiment Q1 1966 = 100 86.4 Average 120 100 Double Dip Recession S&L Crisis 9-11 Subprime 80 60 40 20 0 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09 University of Michigan 35
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
Light Weight Vehicle Sales Millions Seasonally Adjusted Annual Rates 20 16 12 8 4 0 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 Bureau of Economic Analysis 37
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 Confidence @ 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 2011 38
Investments????????????????????????????????????????????????????????????????????????????
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
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
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
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
Bond Yields Percent Effective Yield 40 35 30 25 20 15 10 5 0 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
IRF Bond Yield Premium Analysis Historical AA/AAA Current Basis Points Basis Points Average Spread Current Spread AA/AAA 5.348 0 2.83 0 A 5.836 48.7 3.62 78.6 BBB 6.564 121.6 4.43 159.7 BB 8.255 290.6 6.80 396.1 B 10.219 487.1 8.40 556.3 CCC Down 16.765 1,141.7 11.88 904.4 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
$561 Billion Spent 613,000 New Jobs YTD $915,200 Per Job
Real Estate Commercial Sales Percent $ Billion Change 2007 $ 557.8 2008 $ 181.6-67.4% 2009 $ 54.4-70.0% $58 Billion Q1+Q2+Q3 2010 Forecast 2010 = $77.3 2010 +42% 47
$3.5 Trillion in Total Commercial Loans $400 Billion to Refinance Per Year for Next 10 Years
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
MIT Real Estate Group NCREIF Commercial Real Estate Property Value Indices 51
Estimated Current Property Value Compared to Q2 2010 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
Estimated Current Property Value Compared to Q2 2010 53 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%
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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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% - 12.0% -58.3% -54.2% -50.0% -45.8% -41.7% -37.5% -33.3% -29.2% -25.0% -20.8% -
Multifamily Assessed Value Percent Years Change 2007-2008 -1.4% 2007-2008 22.6% 2007-2008 59.4% 2007-2009 -3.2% 2007-2009 8.7% 2007-2009 20.6% 2007 Texas Apartment Resales
Federal Budget Surplus (Deficit) 58 $ Billions '01 '02 '03 '04 '05 '06 '07 '08 '09 '10f '11f $0.0 -$200.0 -$400.0 -$600.0 -$800.0 -$1,000.0 -$1,200.0 -$1,400.0 -$1,600.0
Federal On-Budget Deficit Forecast 59 $ Billions Baseline ($10.7 Trillion Total Debt 12-31-08) $0.0 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11f '12 '13 '14 '15 '16 '17 '18 '19 '20 -$200.0 -$400.0 -$600.0 -$800.0 -$1,000.0 -$1,200.0 -$1,400.0 -$1,600.0 $10.7 Trillion Cumulative Debt Dec 31 2008 $10.53 Trillion 2009-2020
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
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Ted C. Jones, PhD Chief Economist Stewart Title Guaranty Co. http://blog.stewart.com/