2011 Charlotte Residential Real Estate Forecast by Helen Adams Realty

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2011 residential real estate forecast

For the charlotte, nc metro area

Presented by Jeff Adams, president

Helen adams Realty

Wednesday, October 20, 2010

Charlotte country club

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We have spent the past 2 years recovering from a housing bubble that began to burst in other parts of the

country and finally came home to roost in Charlotte in the summer of 2008. There is lots of blame to pass

around for the causes of our housing bubble. From our politicians who sought our votes, to the big political

action committees who represent the housing lobby, the mortgage bankers associations, the National

Association of Realtors, and the National Home Builders Association, to name a few.

And we and the press listened to and wanted to believe it would never end. Here is what these guys were

telling us as the housing market began to collapse:

From David Lereah, then chief economist, Nation Association of Realtors, October 2006:

“The worst is behind us, as far as market correction – this is likely the trough for sales.”

From David Seiders, chief economist, National Association of Homebuilders, December, 2006:

“The downsizing in sales hit bottom recently…and we are now expecting sales to show some improvement

by the first quarter of 2007.”

From Robert Toll, CEO, Toll Brothers, February 2006 in Barron’s:

“We don’t see a doomsday scenario.”

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From Jan Hatzius, chief US economist, Golman Sachs, October, 2006:

“the point of maximum deterioration in housing activity has probably passed.”

From the Mortgage Bankers Association, February 2007:

“The housing market will regain its footing by mid-to-late 2007.”

From Jim Juback, senior markets editor, MSN Money website, June 2005:

“For all the teeth-gnashing and pundit-moralizing, we really don’t have a housing bubble that’s

anywhere near bursting.”

As Yogi Berra said “the tough thing about the future is that it’s hard to predict,” but those guys have a

vested interest in this outlook? Clearly the forecasting game is a dicey business, but I really believe

what I am going to tell you is the gospel truth.

Following are some charts which show the adjustments we are making to overcome the false housing

economics created by our politicians and the big housing lobby that supports them. The adjustments

really mean we are returning to normal.

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From the mid 90’s through 2009, demand for housing was artificially stimulated by offering

extremely generous mortgage terms to people who could not afford them. Thus we saw the rate

of home ownership increase from an historical level of 64%, where it had been since 1985, to a

peak of 69% in 2004 and 2005. Since 2005 the rate has been steadily declining back to its normal

level.

Today normal mortgage lending guidelines which calls for two years of W2 forms, proof of assets

and tax returns. Oh, and by the way, you’ll need a job.

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The demographic which has seen increase in homeownership in the past 5 years is the

55 and older category.

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In the past 6 years, the total share of US households has risen in the 25-29 year old and 55-69

year old categories.

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With easy credit the temptation was to buy a bigger house then you might need and we did!

However, as we realized that house prices can and do fall, they have elected to purchase

smaller homes. From the peak of 2309 square feet in 2007, the size of a new single family

home fell 6.1% to 2169 square feet in the second quarter of this year.

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And as the housing bubble burst so did our economy. This caused job loss which resulted in

foreclosures which resulted in fewer and fewer household formations which caused

construction of new homes to come to a virtual standstill… to the lowest levels since 1963.

In order to get a better handle on the national housing outlook, I have drawn on resources

provided by PMI Mortgage Company. The PMI risk index is a leading indicator of national real

estate trends.

Here is what David Berson, chief economist for PMI Mortgage Insurance Company, has to say

about housing demand: “Household formations are one of four drivers of demand for home

sales. The other three are job growth; affordability; demographics, and “animal spirits” (a

catchall for items such as the willingness of households and investors to purchase a depreciating

asset.”

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Household formations shown in this chart tell us that in the 3rd quarter of 2009 new

households were formed at the lowest rate since 1990. Since the 3rd quarter of 2009 new

households have grown to reach this long term trend of 1.1% per year and this bodes well for

improvement in the housing market.

PMI believes that home sales have reached a bottom. Home sales have plummeted in the

aftermath of the second home-buyers tax credit, with new construction home sales at their

lowest levels since information was collected beginning in 1963.

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“A recently developed leading indicator of home sales is the pending sales index from the National Association of Realtors (NAR). Because reported existing sales tend to be a lagging indicator of housing demand as a result of being counted when loans close, the NAR developed its pending sales index to show contract signing activity similar to the way that new home sales are counted. The pending home sales chart shows the large falloff in pending sales after the expiration of the first homebuyer tax credit in 2009, and an even bigger drop following the expiration of the second credit this year. The August reading, however, showed a modest rise of 5.2%. This is consistent with the increase in the MBA’s purchase applications and the two of them together strongly suggest that sales have bottomed out, at least for now. Unlike the MBA and NAR surveys, the housing market index from the National Association of Homebuilders (NAHB) showed an additional decline in August. The index is now at the lowest level since March 2009. It is likely that the continued poor performance of the NAHB survey index, relative to MBA and NAR, shows that new home sales will lag behind existing sales in coming months, perhaps because of stronger demand for distressed homes that buyers can get at lower prices, which tend to be mostly existing homes. A huge backlog of foreclosed homes is dominating the market and providing competition for builders. The leading indicators of housing demand suggest that the drop in home sales is probably over and that some modest gains may be in store for the August – October period. Beyond that, the underlying determinants of housing demand will have to strengthen in order for home sales to rise appreciably. It seems unlikely that affordability will increase much from current levels, so job growth, household formations and animal spirits will have to improve in order for a true housing recovery to occur. Our projection of faster economic growth for 2011 should lead to a pickup in job gains and stronger household formations (since they tend to be pro-cyclical). Low expectations of future capital gains on housing investments will likely reduce this component of housing demand for some time to come. Taken together, these underlying factors of housing activity suggest that 2011 will show a stronger, but still historically modes, rise in home sales. And when combined with the near-term leading indicators, home sales have probably reach their trough for this cycle.”

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Staying with PMI’s analysis of the national marketplace, I want to show you a few charts which

illustrate the strength of Charlotte’s real estate market relative to the rest of the country.

This map of “The Graphic Distribution of House Price” risk depicts the geographic distribution

of house price risk for all 366 MSAs across the country. Each is assigned a risk rank and

corresponding color. Among the 50 largest MSAs, Miami ranks the highest on the index with

nearly 100% chance that home prices will be lower in two years. At the other end of the risk

spectrum, among the top 50 largest MSAs, Charlotte ranks among the lowest risk for decrease

in home prices.

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The next slide gives the detailed analysis of risk in the top 50 markets. Only 5 other markets in

the country have a lower risk index than the Queen City.

The detailed risk analysis of PMI’s report for Charlotte, along with a complete description of

the indexes they use is available on our website, under the “Market Data” tab on

www.helenadamsrealty.com.

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Charlotte’s prices did not increase as dramatically as the rest of the country and prices will not

have as far to drop as shown in this Case-Shiller chart. This chart shows that Charlotte’s prices

have fallen 11.8% from their peak in 2006, 2nd best in the country.

Case Shiller’s main variable used for index calculation is the price change between two arms-

length sales of the same single family home. Case Shiller computes lots of other variables but

the main one is for repeat sales of the same home.

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We thought we’d take a look at how the prices of homes fared that had been purchased in

2005, 2006 and 2007 and then sold again in 2010. In this slide we chose properties located in

12 different zip codes in Charlotte. These zip codes represent the market areas our three

offices serve.

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As you can see from this slide the zip code that had the most repeat sales in 2010 was 28078,

yet the price changes was less than 5%.

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For example, in zip code 28031 – 18920 Peninsula Club Drive sold for $916,650 in 2007 and

resold in February 2010 for $905,000, which represents a price drop of 1.27%.

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In zip code 28203, 1818 Ewing Avenue in Dilworth sold for $600,000 in 2006 and resold in July

20120 for $445,000 which is a 25.83% drop in value.

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In zip code 28207 a house at 2209 Bucknell sold for $1,595,000 in 2005 and resold this year for

almost the same price.

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There have been 462 repeat sales so far this year within 12 different zip codes, highlighted in

the map shown.

As this map shows us, these 12 zip codes are also the zip codes with the highest average home

prices in Charlotte.

These 12 zip codes have also seen a steady rise in homes under contract since 2008, and also a

lower percentage of foreclosure sales.

Let’s look at the data…

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Taking a cue from PMI that a measure of pending home sales is a good indicator of the future

direction of the market, we studied the pending sales or “homes under contract” for these

same 12 zip codes. Our time frame was for the 2 year period of September 2008 through

September 2010. We searched for the number of homes that went under contract for each

month of the 24 month period and also tried to track the percentage of bank-owned homes

vs. the percentage of non bank-owned homes that went under contract each month.

What we discovered was that in each of the 12 zip codes the number of houses under contract

had risen steadily over this 24 month period, except for the zip code 28205, which had a very

high number of sales during the tax credit month of March and April, resulting in an unusually

low number of sales in the following months. We also discovered that the percentage of bank-

owned sales was lower in the 12 zip codes vs. the entire MLS. 19% vs. 31% for all MLS.

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The number of single family homes under contract in the entire MLS system as of September

2010 was 1923 units as opposed to 1717 units in September 2008, a 12% increase.

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The foreclosure filings chart for Mecklenburg County shows that the number of monthly filing

has remained fairly consistent around 1100 filings per month since October 2009. This is

further proof that the areas of Charlotte with the highest average prices have out performed

the market.

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The number of single family homes in the Helen Adams 12 zip code market area as of

September 2010 was 342 units as opposed to 247 units in September 2010, a 38.5% increase.

Based on these charts and numbers it appears as though homes in the higher price ranges are

in more demand and selling at a faster pace than the overall market.

As we will discover in a later analysis the top end of the market (homes priced from $350,000

to over $1 million) did in fact out perform the lower price ranges.

The following slides show a detailed, “Homes Under Contract” trend for each of the 12 zip

codes studied….

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One of the best leading indicators for predicting the direction of future home sales is the pace

of showings.

This chart shows that for the 12 month period ending September 30, 2009, our company’s

listings were shown on average 416 times per month. For the 12 months ending September

30th, 2010 the average was 454 showings per month, a 9.3% increase year over year.

During these same time frames, sales for our MLS increased almost 10%.

Note the large fall off in showing traffic as the expiration date of the two tax credits draws near

in November of 2009 and again May 2010.

Pay attention to your Realtor when the talk about traffic and showings. They are experiencing

and making the market first hand and know the direction the market is heading.

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Not all showing traffic is created equal. All real estate markets are made up of 3 segments. The

bottom segment of the market, referred to in this slide as the stagnant mass, is made up of

homes that are simply over-priced. Buyers and their agents know the market and they are not

going to waste their time looking at homes that are poorly priced. Houses in the middle

segment of the market receive a lot of showings but take forever to sell. If your house is being

shown and it is not selling, then it is almost always about the condition of the home. If it is not

being shown it is always about the price.

Homes that are in the flow meet the four conditions of salability. They are well-priced; they are

in good condition; they offer the proper buyer and Realtor incentives and they are marketed in

a way to reach the largest number of buyers in the marketplace.

This means they are properly exposed in the MLS system and their presence on the internet

has been maximized by syndication to more than 36 global search engines.

In Charlotte the vast majority of sales are co-brokered with another firm and the most

comprehensive way to market your home is through the internet. Over 85% of all buyers begin

their search for a new home with the internet.

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In a falling market many sellers ask the question “should I wait to sell?” If you are buying a

more expensive home in the same marketplace then the answer is yes, because the savings

you realize in buying the more expensive home will almost always be larger than the reduction

in price you may realize when selling the smaller home.

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When buying in a down market it is always prudent to wait until the market hits the bottom.

But as Yogi Berra would say, “The tough thing about the future is in that you can’t predict it.”

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Next I want to provide you with specific examples of market trends in established Charlotte

neighborhoods.

I have asked agents in each of our offices to prepare market studies for neighborhoods in their

marketplace.

Special thanks to Brandon Ruby, Kelly Blandford, Charmaine Kolander, Brandon Boyd, Kerry

Beach, and Joyce Poole, for their assistance in putting their information together.

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The market absorption trend for The Peninsula is very positive. Within the past 12 months, 40

houses have closed in The Peninsula at a rate of three closings per month. Within the last 3

months, 10 houses have closed at a rate of 3 houses per month. There are currently 15 homes

for sale in The Peninsula and the months of supply of homes on the market has moved from

15.3 to 4.5 months of supply.

During the past 12 months the average sold price in The Peninsula has dropped from $860,656

to $745,690.

The sellers in The Peninsula have adjusted the prices of their homes to meet the market and

they have moved from a seller’s market to a buyer’s market in just 12 months.

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The market absorption trend for Myers Park is also very positive especially in the price ranges

of $750,000 to $1 million. In this price range within the past 12 months, 25 homes have sold at

a rate of two houses per month. Within the past three months eight homes have closed at the

rate of almost three sales per month. There are currently 20 homes for sale in Myers Park in

the $750,000 to $1,000,000 price range and the months of supply of homes on the market has

moved from 9.6 months to 7.5 months of supply.

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The market absorption trend for Ballantyne Country Club has been remarkably steady. In the

past 12 months 55 homes have sold at a rate of 4.58 sales per month. Within the past three

months 17 homes have closed at a rate of 5.67 homes per month. There are currently 44 active

listings in Ballantyne Country Club and the months of supply on the market has improved from

9.6 months to 7.76 months.

The average sold price has remained steady at around $760,000.

The market studies for the neighborhoods of Foxcroft, Eastover, Wynfield Forest, Macauly,

Montibello and in-town condos are posted on our website.

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And now for our sales forecast for 2011.

This year I am drawing from information provided by Moody’s analytics report and from data

provided by the Charlotte Regional Realtor Association and from the Federal Housing Finance

Agency.

The Annual Home Price Appreciation Chart for the Charlotte metro area is for the years 1978

to 2010. In this 33 year history prices have increased every year except 2009 and 2010. This is

a very positive statement about the stability of our housing market in the face of the worst

economic slowdown in the past 80 years.

This Price Appreciation Chart was created by our government entity called FHFA. The Federal

Housing and Finance Agency is comprised of the offices of the Federal Housing Enterprise

Oversight (OFHEO), the former Federal Finance Board (FHFB) and the Department of Housing

and Urban Development (HUD), which happens to also include Fannie Mae and Freddie Mac.

FHFA is the real deal. They almost entirely control the housing industry. They set the mortgage

rates, establish the level of subsidized housing in each market, establish lending guidelines and

mortgage conditions

and control the loan underwriting and appraisal process. Therefore they also probably control

the price appreciation rates for Charlotte.

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Whatever the case, this knowledge of the home price appreciation history in Charlotte given

added weight to projections made by Moody’s Metro Report, (and last I checked Moody’s was

a private enterprise). Moody’s forecast population growth of 2.2% per year through 2014. This

report estimates our average home sales price will increase from $187,000 in 2010 to

$220,000 in 2014, an increase of over 17% in 5 years.

Please note that Moody’s numbers are based on the Charlotte Metropolitan Statistical Region

which is a larger area than is covered by the Charlotte Regional Realtor Association.

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This next slide shows the history of single family permits in Mecklenburg County. For 2011 we

forecast 1,941 single family permits will be issued. Mark Baldwin, president of the Charlotte

Homebuilders Association, has estimated that 2,465 single family permits will be issued in 2011

– a 27% increase over 2010.

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In the Charlotte Regional Realtor Association market area, the average sales price this year is

forecast to be $208,000. This is a 3.3% increase from 2009. For 2011 we forecast the average

sales price will be $210,500 which is about the same average sales price from 2004.

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In 2010 the estimated number of units to sell within the Charlotte Regional Realtor Association

market area was 22,022 units, almost the same number of sales as in 2009.

In 2011 we are forecasting a 1.7% increase in the number of closed units for a total of 22,386

units.

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This next slide shows sales in the Charlotte Regional Realtor Association by price range and by

year. Underneath each price range by year we track the percentage increase or decrease in the

number of sales in a particular price range from one year to the next.

In the years 2008 and 2009, the price ranges of 250,000 and above made the biggest

downward adjustments, yet in this year homes priced $250,000 and above made the biggest

comeback. One assumption for this change is that the more expensive homes had more built in

equity and were therefore able to more easily adjust their prices downward to meet he

market.

A second assumption is that the recession had a more severe impact on folks who were in the

market place for homes priced less than $250,000.

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The following slide is just a combined summary of the sales volume and units sold forecast. The

interesting story this slide tells is the total change in volume from 2006 through 2010 – a 52%

drop and the total units change from 2006 through 2010 – a 49% drop.

One result of this drop in volume is that in 2006 our Association had 12,000 members, and

today we have around 7,000 members.

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These next few slides concern trends which we feel will have an impact on the Charlotte Real Estate

market.

Many of the trends which we felt would have an impact on our market last year are still important

today. The rapid exchange and access to sales information means more transparency and therefore a

more stable marketplace. Last year, for the first time, the Charlotte Regional Realtor Associations

offered sold data on its website.

The Charlotte Mecklenburg population is projected to continue to grow at the pace of 2% per year.

People are voting with their feet and they continue to move to Charlotte from all parts of the country.

The synergy of energy in Charlotte is alive and growing. Charlotte is home base for Duke Power and

these following companies have moved or expanded their local operations: Shaw Group, Coalogix and

Toshiba Nuclear.

Late last year our airport completed the construction of its 3rd parallel runway making it one of the

most efficient in the world. Only 3 other airports in the country feature 3 parallel runways. Increasingly

companies from across the world find Charlotte an attractive place to do business as a result of our

airport.

Health care expansion moves us into one of the top tier providers of health care services in the

country.

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The government’s political involvement in the housing industry creates uncertainty as

government and politicians play an increasing role and control interest rates, the appraisal

process, lending standards and the secondary mortgage market.

Interest rates will likely increase as the economy improves.

The psychology of homeownership has changed. Ownership will be viewed more as a lifestyle

decision than an investment decision.

Unemployment has risen and this has slowed the growth of household formations.

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New construction sales growth will remain stunted due to a backlog of foreclosed properties

which are dominating the market and providing competition for builders.

The deleveraging of consumer debt and an increased focus on consumer savings will mean

consumers will postpone discretionary purchases until more certainty returns to the economy.

Home purchases will be more centered upon job changes and household formations.

Housing affordability has increased through a reduction in prices caused by less demand, lower

construction costs, lower labor and land costs.

The most positive trend in Charlotte is also the world’s most valuable resource – human

capital.

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The world’s most valuable asset is human capital and the global competition for it is fierce. Our

only truly sustainable advantage is our people. Charlotte’s people are behind new processes

and new systems and new ideas. Charlotte’s people create our best competitive advantage.

During the past decade Charlotte has experienced unbelievable growth in its human capital.

People have been attracted to Charlotte for many reasons; our schools, our climate, our

churches, our airport, and on and on. But the main attraction to Charlotte has been jobs and

not just any jobs, but the best jobs: in education, in the health industry, in engineering, and in

the financial services profession.

According to the Moody’s Charlotte Metro Report, “Charlotte has tremendous advantages to

attract businesses because of its highly educated work force.” Charlotte is blessed to be the

home to over 40 institutions of higher education. Our crown jewels include Davidson College,

UNCC, Queens University, Johnson C. Smith University, and CPCC. This focus and investment in

education is also one of the best real estate investments we can make as well.