U.S. Real Estate Market Conditions: The Good, the Bad, and the Ugly Mid-Year Meetings The Counselors of Real Estate Seattle May 2010 Stan Humphries, PhD.

U.S. Real Estate Market Conditions: The Good, the Bad, and the Ugly

Mid-Year Meetings The Counselors of Real Estate

Seattle May 2010

Stan Humphries, PhDChief [email protected]

206.470.7127

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Current Market Performance

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• Case-Shiller only includes homes that have sold at least twice (and excludes all new construction)

• Case-Shiller includes foreclosure re-sales even though these are substantially different than non-distressed sales.

• ZHVI looks at all home values, regardless of what has sold or not.

• ZHVI does not include foreclosure re-sales.

The Zillow Home Value Index: Comparison with Case-Shiller

Peak-to-Current ChangeZHVI: -23%Case-Shiller: -28%

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Home values in the United States

Source: Zillow.com

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Foreclosures in the United States

Source: Zillow.com

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Comparing the top metros

United States $183,700 -3.8% -0.3% -23% 0.11%Denver Metro $212,900 2.3% 0.1% -9% 0.17%Los Angeles Metro $415,300 3.3% 0.3% -31% 0.13%Philadelphia Metro $209,000 -0.3% 0.0% -11% 0.02%San Diego Metro $364,800 3.7% 0.4% -32% 0.15%San Francisco Metro $515,300 3.4% 0.3% -27% 0.14%Atlanta Metro $142,600 -6.4% -1.5% -22%Baltimore Metro $240,100 -5.0% -0.9% -19% 0.08%Boston Metro $315,100 0.7% -0.4% -21%New York Metro $366,300 -2.3% -0.3% -20% 0.01%Pittsburgh Metro $105,400 -4.2% -0.6% -6% 0.05%San Jose Metro $561,700 -0.2% -0.1% -24% 0.11%Washington Metro $322,500 -0.4% -0.1% -26% 0.12%Las Vegas Metro $131,300 -18.2% -0.5% -57% 0.33%Miami-Fort Lauderdale Metro $160,700 -9.8% -0.8% -48%Phoenix Metro $141,100 -13.9% -1.2% -50% 0.44%Riverside Metro $188,900 -8.3% -0.1% -53% 0.31%Charlotte Metro $147,500 -5.3% -0.7% -11% 0.12%Chicago Metro $191,100 -9.1% -1.0% -29%Detroit Metro $87,300 -18.8% -2.4% -46%Minneapolis-St Paul Metro $184,500 -4.5% -0.6% -25% 0.12%Portland Metro $231,200 -6.9% -1.1% -22% 0.10%Seattle Metro $291,900 -5.9% -0.8% -23% 0.08%Tampa Metro $118,000 -12.1% -1.3% -45%

Tentative bottom?

Moment in the sun

Better, then flat

Better, then worse

Percent of All Homes Foreclosed In March

Sparkline is prior one year trend; red bar is maximum

Region

Zillow Home Value Index

March 2010Change from

February 2010

Change from Peak

Sparkline is prior one year trend; red bar is minimum

Annual Appreciation

Source: Zillow.com

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Markets which have stopped falling – will it last?

Source: Zillow.com

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Markets which touched a bottom and then weakened

Source: Zillow.com

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Hard-hit markets where improvement has stalled

Source: Zillow.com

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Markets which were improving (or getting less bad) but have weakened

Source: Zillow.com

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A look at the magnitude of the housing recession

MetroPeak-to-Current

Fall in Home Values

Last Time Home Values Were At

Current Level

Merced, CA -69.5% 2000-04Stockton, CA -61.8% 2000-10Modesto, CA -61.4% 2001-01Madera, CA -59.4% 2002-02Vallejo, CA -57.2% 2000-10Las Vegas, NV -57.0% 2000-10El Centro, CA -54.5% 2001-12Salinas, CA -54.5% 2000-09Port St. Lucie, FL -53.7% 2002-07Riverside, CA -53.2% 2002-12Bakersfield, CA -52.7% 2003-09Orlando, FL -51.9% 2002-04Sarasota, FL -51.1% 2002-07Naples, FL -51.1% 2003-02Bend, OR -51.0% 2002-06Phoenix, AZ -50.4% 2002-05Reno, NV -49.9% 2002-10Melbourne, FL -49.6% 2003-04Vero Beach, FL -49.4% 2002-10Fresno, CA -48.4% 2003-05Miami-Fort Lauderdale, FL -48.0% 2003-04Detroit, MI -47.1% 1996-02

Source: Zillow.com

The magnitude and breadth of current housing recession

is unprecedented in the post-Depression era

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Phoenix foreclosures

Source: Zillow.com

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Las Vegas foreclosures

Source: Zillow.com

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Stockton foreclosures

Source: Zillow.com

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Continuing Challenges for Housing Market

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America is flush with empty homes

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Current inventory level of for-sale homes is very high

• We made some good progress reducing inventory levels last fall with tax credits

• Did not work as well this year

• April: Nearly twice as many homes added to market as were sold in month

• Inventory levels back to July 2009 levels

Pent-up supply? 7% of homeowners (5.3 million) want to sell if they see signs of

improvement

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Lots of “shadow inventory” in the wings

Pct MortgagesIn Foreclosure 4.63% 2,407,600.00 30-90 Days Delinquent 4.47% 2,324,400.00 > 90 Days Delinquent 4.91% 2,553,200.00

• 7.3 million mortgages either in foreclosure or delinquent as of March 2010.

• Accounting for shadow inventory, there was 45% more supply than indicated in official NAR inventory numbers as of Sept 2009.

• This discrepancy is growing over time meaning that, while official inventory has been falling, real inventory is essentially unchanged.

Source: Mortgage Bankers Association; First American/Corelogic

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Negative equity among the largest metro markets

Source: Zillow.com

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Negative equity + unemployment = more foreclosures

• Negative equity can only be worked down by sales/foreclosures, price appreciation or paying down mortgage balances

• We don’t expect much price appreciation near-term

• Unemployment forecasted to remain above 8% through end of 2012

• Result: 3+ years of high unemployment visited on homeowners who can’t easily sell or refinance their mortgages

MetroPercent Single-Family

Homes With Mortgages in Negative Equity

Unemployment Rate

(March 2010) (March 2010)

USA 23.3% 10.2%Las Vegas Metro, NV 80.6% 13.8%Orlando Metro, FL 74.8% 12.1%Phoenix Metro, AZ 64.6% 8.9%Reno Metro, NV 64.4% 13.2%Modesto Metro, CA 60.7% 19.2%Merced Metro, CA 58.8% 22.1%Lakeland Metro, FL 58.5% 13.0%Fort Meyers Metro, FL 58.2% 13.5%Stockton Metro, CA 57.7% 18.4%Port St. Lucie Metro, FL 56.2% 14.0%El Centro Metro, CA 54.9% 27.0%Vallejo Metro, CA 54.7% 13.0%Tampa Metro, FL 53.1% 12.7%Riverside Metro, CA 51.2% 15.0%Jacksonville Metro, FL 49.1% 11.9%Sarasota Metro, FL 47.8% 12.7%Madera Metro, CA 46.4% 17.5%Melbourne Metro, FL 45.6% 12.2%Bakersfield Metro, CA 45.6% 18.3%Vero Beach Metro, FL 45.2% 13.9%Miami-Fort Lauderdale Metro, FL 44.3% 11.5%

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• Mortgage rates are currently helping the market

• We’d been expecting mortgage rates to be in the upper 5% range by end of year.

• Greece, Portugal, North Korea and complete lack of inflation pressure have helped keep interest rates low.

When will mortgage rates rise?

Source: Zillow.com; see real-time rates and historical charts at http://www.zillow.com/Mortgage_Rates/

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Mortgages continue to reset and recast

Source: Deutsche Bank Global Markets Research

• Alt-A resets and Option ARM recasts have been a concern

• Alt-A: Less worrisome now with low mortgage rate environment

• Option ARM: Default rates have already been high in this product so fewer that will have to recast

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• Home values will continue to fall until Q3 2010.

• A likely total peak-to-trough decline of 26-28%.

• Further declines driven by foreclosures (themselves driven by negative equity and unemployment), an already high supply of for-sale homes, high overall vacancy rates, pent-up supply, and weaker demand after the homebuyer tax credits lapse due to demand-shifting.

• Very anemic appreciation after bottom is reached; may not appreciate at all in real terms for next 3-5 years.

Conclusions