bfm_newsletter_032012_a bullish view of us real estate

Executive Summary

• Median Home Price is Down 27% and is Low Compared to

Household Income or New Home Price.

• Housing Affordability is High with Median Mortgage Payment

Low Compared to Household Income.

• Home Building to Home Buying Ratio is Low even with a

Positive Population Growth.

• Renting Seems Expensive Compared to Buying.

• Home Inventories is Lower.

© 2012 Bourbon Financial Management, LLC ~ Excellence-Experience-Ethics ~ All Rights Reserved ~ [email protected] ~ (+1) 312 909 6539 1

Introduction

The real estate crisis has been one of the trigger elements of the

2008 financial crisis. Prices have already fallen by 50% in some U.S.

Cities. Here is a bullish view of the housing market.

While home prices may bottom in 2012-2013, short term future

home-price appreciation is likely to be modest, at best, for the

foreseeable future, based on still-high foreclosure rates, unsold

home inventories, and still-tight credit standard.

© 2012 Bourbon Financial Management, LLC ~ Excellence-Experience-Ethics ~ All Rights Reserved ~ [email protected] ~ (+1) 312 909 6539 2

Median Existing Home Prices

Down 27%

Sources : National Association of Realtors, FactSet, J.P. Morgan Asset Management, and Census Bureau

3 © 2012 Bourbon Financial Management, LLC ~ Excellence-Experience-Ethics ~ All Rights Reserved ~ [email protected] ~ (+1) 312 909 6539

Housing Busts in U.S. History


Home Price Index is Now 15% Below

Household Income Index

Notes : « Median U.S. home price » pertains to existing, single-family home ; « rental equivalent of home prices » is defined by apartment rents as measured by the

CPI shelter index. To minimize base-year effects, all series in Figure 3b have been rebased to index values in which the average for 1983-1993 equals to 100.

Sources : Vanguard, based on data from Federal Reserve, Moody’s Analytics Association of Realtors, U.S. Census Bureau, and U.S. Bureau of Labor Statistics.


Case-Shiller Home Price Index Annual Change


U.S. Housing Follows a More

or Less Regular Cycle

Sources : Bureau of the Census, and GMO, As of 6/30/11


Median Home Price is 153% of

Household Income

Sources: Census, National Association of Realtors, BEA, and J.P. Morgan Asset Management.

September 2011 is a J.P. Morgan Asset Management estimate.


Existing Home Price is Low

Compared to New Home Prices

Sources : FactSet, NAR, and US Census Bureau, as of November 30, 2011


Housing Affordability Index

is close to 200

120.0 means a family earning the median family income has 120% of the income necessary to qualify for a

conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the HAI, then,

shows that this family is more able to afford the median priced home.

Sources : FactSet, NAR, and US Census Bureau, as of November 30, 2011


Price to Income Ratio is Low at 1.8

Sources : BEA, Census, PPR, and Fiserv


Housing Starts as a % of

Population Growth is Low at 223

Sources : BEA, Census, and J.P. Morgan Asset Management.


Median Mortgage Payment is

Low as % of Household Income

Sources : Census, Federal Reserve, BEA, and J.P. Morgan Asset Management. *September 2011 is a J.P. Morgan Asset

Management estimate.


Rent is Now 17% More Expensive

than Mortgage Payment

Sources : Census Bureau, and J.P. Morgan Asset Management. Monthly mortgage payment assumes a 20% down payment at

prevailing 30-year fixed-rate mortgage rates; analysis based on median asking rent and median mortgage payment based on asking

price. *3Q11 estimates provided by J.P. Morgan Asser Management.


Home Inventories Are Back

To 2.8 Millions

Sources : National Association of Realtors, FactSet, J.P. Morgan Asset Management, and Census Bureau.

Home sales include both new and existing home sales. Existing home sale include single-family, townhouse,

condominiums and co-ops


Future Housing

Construction Gap

Numbers shown in thousands. Source: CMSG estimates based on Census Bureau Data.

Gap with potential

demand could soak

up excess supply in

3-4 years.

At that time, we’ll

have to potentially

double, or even

triple, the residential

industry.

Potential significant

impact on

employment,

consumer,

confidence, home

prices, tax revenues,

the balance sheets

of banks and retail

spending.


From 1890 to 2000, Housing Prices

Adjusted for Inflation were almost Flat

Source: Irrational Exuberance, 2nd Edition, 2006 by Robert J Shiller


New Home Sales

and Recessions

www.calculatedriskblog.com


Chicago Data


Sources: Moodys

About Bourbon Financial

Management, LLC

Bourbon Financial Management was formed to provide you with effective and comprehensive solutions for managing your

global wealth. Our disciplined and rigorous approach comes from our collective knowledge in serving large institutional clients

over many years.

Our core investment belief is that asset allocation (equities, fixed income, cash, real estate…) is the single most important

determinant of success in any investment plan. The dominant amount of risk and return comes not from your choice of

individual investments but from your asset class mix. Bourbon Financial Management focuses our resources on risk

management and asset allocation.

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BOURBON FINANCIAL MANAGEMENT

Excellence ~ Experience ~ Ethics

616 W. Fulton St., Suite 411, Chicago, IL 60661

(+1) 312-909-6539 ~ www.bourbonfm.com

Member of the Financial of Planning Association and Academic Affiliate of the National

Association Personal Financial Advisors.


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Disclosures

• This material was prepared by BFM, Copyright by Bourbon Financial Management, LLC. All rights reserved. BFM is a trademark of

Bourbon Financial Management, LLC. No part of this publication may be copied or distributed, transmitted, transcribed, stored in a

retrieval system, transferred in any form or any means-electronic, mechanical, magnetic, manual, or otherwise-or disclose to third parties

without the express written permission of Bourbon Financial Management, LLC, 616 W. Fulton #411, Chicago IL 60661. The information

contained in this presentation is not written or intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any

federal tax penalties. You are encouraged to seek advice from your own tax or legal counsel. The content is derived from sources believed

to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any

security. BFM assumes no responsibility for statements made in this publication including, but not limited to, typographical errors or

omissions, or statements regarding legal, tax, securities, and financial matters. Qualified legal, tax, securities, and financial advisors should

always be consulted before acting on any information concerning these fields.

• All figures represent past performance and are not a guarantee of future results. Investment return and principal value of an investment will

fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The views expressed in this

presentation are not intended to be a forecast of future events, a guarantee of future results or investment advice. The information

contained herein has been prepared from sources believed to be reliable, but it is not guaranteed by Bourbon Financial Management, LLC

as to its accuracy or completeness. Forecasts and predictions are inherently limited and should not be construed as a solicitation or

recommendation or be used as the sole basis for any investment decision. All investments are subject to risk including the loss of principal.

• The information provided here is for general informational purposes only and should not be considered an individualized recommendation

or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to

review an investment strategy for his or her own particular situation before making any investment decision. We believe the information

obtained from third-party sources to be reliable, but neither Bourbon Financial Management, LLC nor its affiliates guarantee its accuracy,

timeliness, or completeness. The views, opinions and estimates herein are as of the date of the material and are subject to change without

notice at any time in reaction to shifting market conditions. Past performance is no guarantee of future results and the opinions presented

cannot be viewed as an indicator of future performance. Examples provided are for illustrative purposes only and not intended to be

reflective of results you should expect to attain.


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