economic and real estate outlook silicon valley (october 2015)

Economic and Real Estate Outlook

By Lawrence Yun, Ph.D.Chief Economist

National Association of REALTORS®

Presentation at Silicon Valley Association of REALTORS®San Jose, CA

October 13, 2015

How’s the Economy?

GDP Quarterly Activity(Awesome?)

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

2014 - Q1

2014 - Q3

2015 - Q1

-10

-8

-6

-4

-2

0

2

4

6

Annualized Growth Rate

Annual GDP … Below 3% for 10 straight years

19501953

19561959

19621965

19681971

19741977

19801983

19861989

19921995

19982001

20042007

20102013

-4

-2

0

2

4

6

8

10

GDP Annual Growth Rate

Sluggish Growth + Gap after Recession ($1.7 trillion gap … $5,000 per person)

1998 - Q1

1998 - Q3

1999 - Q1

1999 - Q3

2000 - Q1

2000 - Q3

2001 - Q1

2001 - Q3

2002 - Q1

2002 - Q3

2003 - Q1

2003 - Q3

2004 - Q1

2004 - Q3

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

10000

11000

12000

13000

14000

15000

16000

17000

18000

GDP in 2009 Dollars

Real GDP Real GDP W/O Recession

3% Growth Line

2.2% Growth Line

Jobs(8 million lost … 12 million gained)

2000 - Jan 2001 - Dec2003 - Nov2005 - Oct 2007 - Sep2009 - Aug 2011 - Jul 2013 - Jun2015 - May120,000

125,000

130,000

135,000

140,000

145,000In thousands

Fresh Unemployment Insurance Claims

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan250

300

350

400

450

500

550

600In thousands

Unemployment Rate Falling

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan0

2

4

6

8

10

12

But Employment Rate Not Rising

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan54

56

58

60

62

64

66

Top and Bottom States for JobsThe Best % Gain in 12

months

Utah 4.5%

Florida 3.6%

Nevada 3.6%

Washington 3.5%

Oregon 3.5%

California 3.2%

Idaho 3.1%

South Carolina 3.0%

North Carolina 2.9%

Indiana 2.7%

The Worst % Gain in 12 months

West Virginia -1.8%

North Dakota -0.5%

Wyoming 0.4%

Alaska 0.6%

Louisiana 0.7%

San Francisco and Oakland Total Jobs

2000 - Jan2002 - Jan2004 - Jan2006 - Jan2008 - Jan2010 - Jan2012 - Jan2014 - Jan800

850

900

950

1000

1050

1100

1150

San Jose Metro Total Jobs

2000 - Jan2002 - Jan2004 - Jan2006 - Jan2008 - Jan2010 - Jan2012 - Jan2014 - Jan800

850

900

950

1000

1050

1100

Monetary Policy and Mortgage Credit

Fed Policy and Mortgage Rate

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan0

1

2

3

4

5

6

7

8

9

Mortgage Rate Fed Funds Rate

What Determines Bond Yields?

• Federal Reserve’s short-term rate changes• Inflation and erosion of purchasing power• Foreign capital flow and demand for dollar• Savings rate• U.S. budget deficit• Printing of money• …

Federal Deficit - Shrinking( $ million, 12 month total)

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan

-1600000

-1400000

-1200000

-1000000

-800000

-600000

-400000

-200000

0

200000

400000

Federal Debt … Cumulative ( $ million; debt held by public excluding intra-governmental holdings)

2001 - Jan 2002 - Dec 2004 - Nov 2006 - Oct 2008 - Sep 2010 - Aug 2012 - Jul 2014 - Jun0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

U.S. Dollar Reversing the Decline … Stronger and Stronger

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan80

90

100

110

120

130

140

Dollar Strength Index – Trade Weighted

No CPI Inflation – Yet

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan

-3

-2

-1

0

1

2

3

4

5

6

Rents Rising at 7-year high

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan

-1

0

1

2

3

4

5

Renters' Rent

Rental Vacancy Rate(30-year low)

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

2014 - Q2

2015 - Q1

5

6

7

8

9

10

11

12

Monetary Policy

• Quantitative Easing … Finished

• Fed Funds Rate hike … September/October

• 10-year Treasury reaching – 2.3% by end of 2015 – 3.0% by end of 2016

Credit Box Opens?• FICO New Method

• Fannie/Freddie– Lower down payment products

• FHA premiums … lowered

• Portfolio Lending … historic low mortgage default rates on recent vintages (2010-2014)

Housing Market

Annual Home Sales

20002001

20022003

20042005

20062007

20082009

20102011

20122013

20142015

0

1000000

2000000

3000000

4000000

5000000

6000000

7000000

8000000

9000000

NewExisting

Home Sales in San Mateo and Santa Clara Counties

– Home Sales … up 6% in August

– Median Price … up 13%

– Business $ volume … up 21%

Home Price IndexSan Jose vs San Fran vs Phoenix

1995 - Q1

1996 - Q1

1997 - Q1

1998 - Q1

1999 - Q1

2000 - Q1

2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1

2007 - Q1

2008 - Q1

2009 - Q1

2010 - Q1

2011 - Q1

2012 - Q1

2013 - Q1

2014 - Q1

2015 - Q1

0

50

100

150

200

250

300

350

400

New Price Bubble?

2005-2006 Bubble

• 7.2 m existing home sales

• 1.3 m new home sale

• Loose Credit

• 2.1 m housing starts

2015

• 5.3 m existing home sales

• 0.6 m new home sales

• Tight Credit and all-cash

• 1.1 m housing starts

Trade-Up Opportunitiesfrom Housing Equity

2000 - Q1

2000 - Q4

2001 - Q3

2002 - Q2

2003 - Q1

2003 - Q4

2004 - Q3

2005 - Q2

2006 - Q1

2006 - Q4

2007 - Q3

2008 - Q2

2009 - Q1

2009 - Q4

2010 - Q3

2011 - Q2

2012 - Q1

2012 - Q4

2013 - Q3

2014 - Q2

2015 - Q1

0

5000

10000

15000

20000

25000

Real Estate Value Mortgage Debt

$ billion

First-time Buyers (mostly Millennials)

2009 - Jan

2009 - May

2009 - Sep

2010 - Jan

2010 - May

2010 - Sep

2011 - Jan

2011 - May

2011 - Sep

2012 - Jan

2012 - May

2012 - Sep

2013 - Jan

2013 - May

2013 - Sep

2014 - Jan

2014 - May

2014 - Sep

2015 - Jan

2015 - May

0

10

20

30

40

50

60

Inventory of Homes For Sale

2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct 2010 - Jul 2012 - Apr 2014 - Jan0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

4,500,000

Shadow Inventory(% of mortgages in foreclosure or late payment)

2000 - Q1

2001 - Q1

2002 - Q1

2003 - Q1

2004 - Q1

2005 - Q1

2006 - Q1

2007 - Q1

2008 - Q1

2009 - Q1

2010 - Q1

2011 - Q1

2012 - Q1

2013 - Q1

2014 - Q1

2015 - Q1

0

2

4

6

8

10

12

14

NJCA

Housing Starts Recovering … Too Slowly

1970 - Jan 1975 - Jul 1981 - Jan 1986 - Jul 1992 - Jan 1997 - Jul 2003 - Jan 2008 - Jul 2014 - Jan0

500

1000

1500

2000

2500

3000Thousand units

Housing Starts in San Jose-Santa Clara

20032004

20052006

20072008

20092010

20112012

20132014

20150

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

MultifamilySingle-family

Time to Sell a New Spec Home(in months)

2000 - Jan 2002 - Jan 2004 - Jan 2006 - Jan 2008 - Jan 2010 - Jan 2012 - Jan 2014 - Jan0

2

4

6

8

10

12

14

16

American Inequality?

Homeownership Rate(50-year low)

1990 - Q1 1992 - Q4 1995 - Q3 1998 - Q2 2001 - Q1 2003 - Q4 2006 - Q3 2009 - Q2 2012 - Q1 2014 - Q463

64

65

66

67

68

69

70

Renters(8 million more households)

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

2014 - Q1

2014 - Q3

2015 - Q1

30

32

34

36

38

40

42

44

Homeowners (2.5 million fewer households)

2005 - Q1

2005 - Q3

2006 - Q1

2006 - Q3

2007 - Q1

2007 - Q3

2008 - Q1

2008 - Q3

2009 - Q1

2009 - Q3

2010 - Q1

2010 - Q3

2011 - Q1

2011 - Q3

2012 - Q1

2012 - Q3

2013 - Q1

2013 - Q3

2014 - Q1

2014 - Q3

2015 - Q1

74.0

74.5

75.0

75.5

76.0

76.5

77.0

Household Net Worth($5,500 vs. $195,500)

Renter Homeowner$0

$50,000

$100,000

$150,000

$200,000

$250,000

1998 2001 2004 2007 2010 2013

x31 x46x36 x34x46

Homeowner net worth ranges from 31 to 46 times that of renters x36

Source: Federal Reserve Survey of Consumer Finances

Younger Buyers Have Optimism—View of Home as Good Financial Investment

2014 Profile of Home Buyers and Sellers

34 and younger

35 to 49 50 to 59 60 to 68 69 to 890

102030405060708090

42 39 40 39 38

30 30 26 26 20

12 13 12 1215

Better than stocksAbout as good as stocks

84% 82% 77% 77% 72%

Most Difficult Steps of Home Buying Process

Finding the right prope

rty 53%

Paperwork 24%

Under-

standing the proces

s 16%

Getting a

mortgage

14%No

difficult

steps16%

Saving for the down payme

nt12%

24% of Baby Boomers noted there were no difficult steps compared to only 9% of Millennials

Paperwork and understandingthe process was more difficult for Millennials than any othergeneration

Finding the right property was ranked highest among all generations for the MOST DIFFICULT STEP in home buying

2014 Profile of Home Buyers and Sellers

Forecast and Risks

Economic Forecast2013 2014 2015

Forecast2016

ForecastGDP Growth 2.2% 2.6% 2.3% 3.0%

Job Growth +2.3 million +3.0 million +2.4 million

+2.7 million

CPI Inflation 1.5% 1.6% 0.3% 3.2%

Consumer Confidence

73 87 99 101

10-year Treasury

2.5% 2.6% 2.2% 3.3%

Housing Forecast2013 2014 2015

Forecast2016

ForecastHousing Starts 925,000 1 million 1.1 million 1.4 million

New Home Sales

430,000 437,000 570,000 720,000

Existing Home Sales

5.1 million 4.9 million 5.3 million 5.5 million

Median Price Growth

+ 11.5% + 5.7% + 6% + 4%

30-year Rate 4.0% 4.2% 4.0% 5.2%

Underwriting Standards

Strict Strict Transition Normal

2/3 of Members used 1031 Like-Kind Exchanges

40%

14%4%

5%

37%

Exhibit 3-1: Number of LKE Transactions for All Members 2011-14

1 - 34 - 67 - 12More than 12None

1031 and Economic Impact

Less than 10%

10% to 24%

25% to 49%

50% to 100%

Greater than 100%

Not applicable

16%

55%

16%

5%

1%

7%

Exhibit 3-9: Average Capital Investment in Property Improvements (% of Property's Fair Market Value)