ECONOMIC SUMMIT 2011

Residential Real Estate in

WASHINGTON COUNTY

“A Review and a Preview”

Presented by Vardell H Curtis, RCE Chief Executive Officer Washington County Board of REALTORS ®

Where Did It All Begin?

First, home buyers qualified for a plethora of home-baked mortgages – Interest Only , Negative Amortization those and of course all of Subprime Mortgages – all of which grew debt three times faster than income. The lack of control in the sector resulted in excessive lending and often an absence of credit checks that brought about the only possible outcome; a total collapse of the economy. Swanepoel TRENDS Report - 2010

And Then What Happened?

Then we watched as the federal government rushed in and began doing what only it can do: throw obscene amounts of money at the crisis.

And so we watched it all unfold as we moved deeper and deeper into the current recession with unemployment at its highest level in years – 10.2% to 17% -- and a real estate market trying to dig itself out of a very cold snow drift.

Swanepoel TRENDS Report 2010

Who Knows What to Expect in 2011?

Just how much snow has been shoveled to date is a matter of opinion and there certainly isn’t a shortage of those. Opinions are being offered from every corner and they range from overly positive to extremely negative. Every side of the issue has been hashed out by the “experts” for months now and every conclusion has been supported by one theory or another.

Swanepoel TRENDS Report - 2010

The Threat of Inflation

At the end of 2010, inflation remained a nonissue, with the Consumer Price Index up a low 1.1 percent from 2009. Indeed, some analysts have been talking about the risks of entering a period of Japanese-style deflation in which the expectation for continuing price drops keeps people from spending. But there are signs that prices could start heading up soon, a possibility that the Federal Reserve fueled in late 2010 when it announced it would flood the economy with money by buying $600 billion worth of Treasury bonds in the first three quarters of 2011 to stimulate growth.

REALTOR.org – 12/23/10

The Threat of Inflation

One of the big remaining questions is whether inflation, long dormant, is poised to return in 2011 or 2012 as the recovery solidifies and businesses start to raise prices. Interest rates will likely increase to hedge against rapid inflation. Keeping rates low will help in the recovery in the short term, but the long-term consequences could be even higher inflation that’s difficult to manage. The impact will fall hardest on first-time homebuyers; as interest rates rise along with inflation, homeownership will become increasingly out of reach. REALTOR.org – 12/23/10

Rise in Yields Pushes Up Rates

A sudden and unexpectedly quick bounce in Treasury yields has jolted the financial markets – including mortgage rates, which have risen rapidly in response. Freddie Mac puts 30-year home loan interest at an average of 4.83 percent for the week ended Dec. 16, up from a record bottom of 4.17 percent a month ago. Although the rate is still favorable by historical norms, any jump in borrowing costs is certain to pinch housing demand, prevent refinancing, and motivate sellers to reduce asking prices. Daily Real Estate News – 12/17/10

Rising Rates Could Get Buyers Moving

Ironically, it could be rising interest rates that finally push home buyers off of the fence and into the market. While Congress is debating the tax-cut compromise, the financial markets have interpreted the proposal as a development that will likely push mortgage interest rates higher than they have been for months. Analysts are predicting that buyers will move quickly when it looks like rates are going up and are unlikely to come down. “Once people see this might actually be the bottom, they’ll go for it,” says Paul Dales of Capital Economics.

Fortune Magazine – 12/10/10

Consumer Behavior

One of the key issues concerning the growth of the housing market going forward will be the behavior of consumers. The large losses in wealth they have suffered at the hands of reduced house values, losses in the stock market and unemployment have severely constrained spending. It is a complex issue that will require attention to be paid to multiple elements outside the real estate industry.

Swanepoel TRENDS Report 2010

Consumer Confidence

In the past, as the economy emerged from recession, businesses poured money into growing their capacity – hiring workers, renting office space, replacing old equipment – to position themselves for growth. But that hasn’t happened this time. The reluctance among business leaders to spend, despite sitting on money from strong profit growth during the recovery, stems from low consumer confidence.

REALTOR.org – 12/23/10

Consumer Confidence

With unemployment high and lingering concerns about whether home prices have really stabilized, consumers remain far from certain that the worst is behind them. Weak business spending also stems from uncertainty over how much it will cost to comply with last years Wall Street and health care reform laws. Businesses don’t know fully what the rules of the game are going to be down the line.

REALTOR.org – 12/23/10

Consumer Confidence

A barometer of consumers’ expectations rose to 74.2 in November – the highest level since May – from 67.5 in October. When it comes to buying plans, 5.4% of consumers in November said they have plans to buy an automobile within six months, up from 5.2% in October. The percentage of those with plans to buy a home fell to 1.7% from 2.2%, and those with plans to buy major appliances fell to 24.4 % from 25.4%.

Rismedia.com – 12/2/10

Collateral Damage

While consumers facing foreclosure and banks facing bankruptcy dominate economic headlines, millions of other Americans are suffering effects of the housing market collapse, while subtler, are very real. Homeowners who are under water often can’t move to take advantage of new job opportunities, they can’t refinance and take advantage of low mortgage rates, and they generally feel rotten about their prospect.

MSNBC.com – 12/2/10

Shadow Inventory

As foreclosed and distressed properties continue to be a part of the market, we are going to see certain banks holding more properties off the market, hoping to be able to sell them when the economy becomes stronger. This “Shadow Inventory” is estimated to be as much as 1.7 million homes. So just how many loans are in arrears or have been foreclosed upon and not listed on the market is anyone’s guess at this point.

Swanepoel TRENDS Report 2010

Shadow Inventory

A recent research report from the Amherst Security Group says “

the single largest impediment to a recovery in the housing market is the large number of loans that are either in delinquent status or in foreclosure that are destined to liquidate

.” If lenders sell off their inventory over time on a controlled basis then local home prices will be supported. However, if lenders suddenly dump massive numbers of foreclosed properties then the result will be substantially reduced home values for everyone.

Realtytrac – 12/2/10

Shadow Inventory

Today we have a marketplace where potential losses are so great in some areas that many owners cannot offer their homes for sale. In terms of distressed real estate we have huge numbers of properties entering the foreclosure system – but far fewer that are leaving because lenders want to avoid losses. The result is a massive backlog of unsold distressed properties, homes at the center of the shadow inventory. The slow release of foreclosed homes is intended to stabilize home prices by limiting supply.

Realtytrac - 12/2/10

The Shadow Inventory

If banks begin dumping REOs on the market at significantly reduced prices, the impact will be very significant. There are several keys to this issue to watch, including the credit market, unemployment rates and what happens in the commercial real estate market. Of particular interest will be what happens in the foreclosure market and what the industry is doing to smooth out the wrinkles in the short sale process.

Swanepoel TRENDS Report 2010

Shadow Inventory

The worry raised by the shadow inventory is that the insurance and maintenance costs required to retain growing lender inventories cannot be sustained, forcing lenders to quickly release more and more distressed homes into local markets. The direct result would be more homes for sale, increased supply and lower real estate prices. But while the worry is real, the reality is that lenders are unlikely to quickly unload foreclosed inventory because accounting rules and the potential for current losses and future profits are too powerful to ignore.

Realtytrac – 12/2/10

What About Empty Houses?

The fragile U.S. economy will not recover until someone solves the issue of empty houses and their drag on everyone’s financial stability. According to the U.S. Census Bureau, there already are 19 million vacant homes in America. Nothing would more quickly kill a fledgling recovery and further decimate everyone’s home values than dumping another projected 10 million or so more foreclosures in the pipeline.

MSNBC – 12/2/10

Empty Neighborhoods

The empty house problem impacts us all. Each foreclosure drains $4,000 in equity from neighboring homes, according to some estimates. Empty neighborhoods create blight; empty houses kill the new construction industry. And even if you aren’t among the 10 million homeowners at risk of foreclosure, odds are good that you are a responsible mortgage payer whose home is now “under water.” MSNBC – 12/2/10

Who Created This Empty House Mess?

The empty house problem is vexing because it is not monolithic. One side might think the problem was created by homeowners who overreached and deserve to lose their homes; the other side counters that corrupt banks tricked families into booby-trapped loans. In fact, the housing mess is all those things, and more. Lenders who used illegal tactics like “robo-signing” foreclosure documents and greedy speculators who bought properties hoping to flip them for profit also contributed to the mess.

MSNBC – 12/2/10

Robo-signing?

There has been such a crush of new foreclosures entering the system that banks were essentially having notaries rubber stamping foreclosure files as fast as they could without reviewing the files to insure they contained the actual documents and figures they were supposed to. One lender was using 7 or 8 notaries to notarize over 18000 files per month, obviously they couldn’t be thoughtfully reviewing that many files.

thexbroker.com – 12/2/10

National Foreclosure Moratorium

Banks have taken a month (or two) to clean up what amounts to procedural defects in their processing of foreclosures. However, this “moratorium” must be relatively temporary in that the housing market cannot afford to slow down anymore than it already has. A protracted “foreclosure freeze” would be very bad for the overall housing market (and economy) as it would further stagnate inventory that’s already stuck in quagmire. The cost of credit would rise as well, as banks and investors pass on the costs of holding inventory to new buyers.

thexbroker.com – 12/2/10

Congress Calls for Program Revamp

The government should retool its foreclosure prevention program because so far it hasn’t worked, a report released by the Congressional Oversight Panel declares. The program “will never

have the reach necessary to put an appreciable dent into the foreclosure crisis,

” the report says. The report calls for the Treasury Department to set objectives and hold banks that administer mortgages accountable for failing to complete loan modifications properly. Associated Press – 12/14/10

Foreclosures Challenge New Construction

Much of the price excesses from the housing bubble have been squeezed out of the market. In fact, home prices may have even overcorrected in certain circumstances. This price correction creates a whole new problem in the market. Specifically, the cost of duplicating an existing home, when you factor in the expense of buying bricks and mortar and putting it all together, is likely going to be more expensive. REALTOR.org – 12/23/10

Home Building Industry Outlook

Short-term Outlook: A number of factors should help the housing market move forward in the near term. Over the past couple of years, there has been pent-up demand – people have doubled up and moved in with family and friends during the recession. We anticipate that low mortgage rates, stabilizing home vales and these demographic trends should result in more households entering the housing market in the coming months. National Association of Home Builders

Home Building Industry Outlook

Long-term Outlook: As household formation rates return to normal, the prospects for housing are much brighter. The NAHB economists project that the industry will need to deliver 16 million homes over the next decade just to keep pace with demand. Main Industry Challenge: NAHB’s top priority is opening up the lines of credit for new housing production; and resolving problems with the appraisal process.

National Association of Home Builders

Commercial Real Estate Market

This is potentially a ticking time bomb that has been building for a long time as banks and financial institutions have avoided taking a hit in hopes that unemployment will turn around and resolve the problem. This is unlikely to happen in the near term and they are going to have to face the problem. There are sure to be some ripple effects that will impact the residential market, further drying up credit for one.

Swanepoel TRENDS Report 2010

2010 Census Shows 9.7% Jump

The U.S Census Bureau released the first results from the 2010 census which showed there are 308.74 million Americans, an increase of 27 million or 9.7 percent since 2000. About 13 million of the increase is new immigrants, while 17 million came from births by existing residents. Nearly 80 percent of the growth was among minorities, with Hispanics registering the biggest gains.

Where is the Population Growth Occurring?

Most of the population growth is in the South and West. The 10 fastest-growing states had average population gains of 21 percent. The states were: 1. Nevada 2. Arizona 3. Utah 4. Idaho 5. Texas 6. North Carolina 7. Georgia 8. Florida 9. Colorado 10. South Carolina

2011’s Strongest & Weakest Markets

Home prices are expected to rise in 40 percent of major metropolitan areas, according to Veros Real Estate Solutions, a research firm that provides information to the mortgage industry.

STRONGEST San Diego / Carlsbad Kennewick / Richland Pittsburgh Fargo Washington DC WEAKEST Reno / Sparks Orlando / Kissimmee Boise / Nampa Daytona Beach Port St.Lucie Housing Wire.com

ACCRA COST OF LIVING THIRD QUARTER 2010

City St.George Salt Lake City Composite Grocery Housing Utilities Health Care 94.5 97.8 91.3 87.1

88.7

101.2 93.9

106.4

73.5 100.4

Las Vegas Phoenix Prescott Cedar City 101.8 109.6 88.7 99.0 112.4

103.0 115.7 90.2 101.1 114.1

104.0 95.0 121.0 92.3 97.4

88.1

99.5 72.9 84.5

85.1

Logan Honolulu San Francisco Manhattan Harlingen, TX 94.9 103.9 66.6 84.0 101.0

167.8 164.5 255.4 148.5 118.2

162.0 109.2 278.9 96.4 115.4

207.9 147.9 370.5

172.8 127.1

79.9 78.9 71.4 102.3 95.0

People Still Want to Own a House

The desire to own a home hasn’t been diminished by the downturn in the industry, according to a survey by Fannie Mae. Of owners and renters surveyed, 51 percent say the housing crisis has not affected their overall willingness to buy a home. About 27 percent say they are more likely to buy since the crisis, presumably because of lowered prices, and 19 percent say they are more likely to rent.

Fannie Mae – 12/15/10

The American Dream

Home ownership is one of the best ways to build long-term wealth. The historical picture shows that “a home owner’s net worth has ranged from 31 to 46 times that of a non homeowner”. More than two thirds (67%) of American households are owner-occupied. America is a nation of home owners. Home ownership matters!

REALTOR.org/Homeownership

Homeowners’ Net Worth 41 Times Greater Than That of Renters

In 2010, homeowners’ net worth averaged between $150,000 and $200,000, with a substantial part of that net worth coming from homeowner equity. In the past 12 years, the net worth of the typical homeowner has ranged between 31 and 46 times that of a renter.

National Association of REALTORS ®

Positive Returns

Typical home sellers are experiencing positive returns despite drops in home prices over the past couple years. According to the 2010 Profile of Home Buyers and Sellers, the typical seller who purchased a home eight years ago experienced a median equity gain of $33,000, a 24 percent increase. Those who stayed in their homes from 11 to 15 years saw an increase of 40 percent.

National Association of REALTORS ®

Interest Rates = Historic Opportunity

The average interest rate for a 30-year loan was 5 percent over the last 12 months. The average over the last 10 years was 6.13 percent. The highest rate since January 1964 was 18.45 percent in October 1981. The lowest rate since January 1964 was 4.42 percent last November. That is some history lesson. No matter how you slice it, today’s home prices and mortgage rates represent an HISTORIC OPPORTUNITY that cannot be ignored. WJ Bradley Mortgage Capital Corp

Unemployment is a Key Factor

While the outlook for 2011 appears inviting, there’s a catch; unemployment . With a rate of 10% (which is expected to go higher), all the attractive low mortgage rates are of no value if you don’t have a stable job. The job market, simply put, is critical for the recovery of the housing market and any significant movement in the level of unemployment in either direction will have an impact on the health of the market.

Swanepoel TRENDS Report 2010

2011 Crystal Ball

This year should be very good for first-time buyers to shop. The three main ingredients that affect buyer affordability are mortgage rates, house prices, and income. With the first two at or near cyclic lows, buyer affordability is at the highest level in decades. The National Association of REALTORS’ ® Affordability Index for the third quarter 2010 reported one of the most affordable buying markets since the inception of the index in 1971.

2011 Crystal Ball

While some rise in fixed-rates is expected, 30-year fixed-rate loans are likely to remain below 5 percent throughout the year. With federal reserve observers expecting the central bank to keep the federal funds rate at its current target range of of zero percent to 0.25 percent for most or all of 2011, relatively low mortgage rates will be a feature of this years mortgage market.

2011 Crystal Ball

Economists clearly see low home-loan interest rates, rebounding home prices and more job creation leading to a gradual recovery in the second half of the year, according to a new year-end economic outlook by Freddie Mac. As in the past, income growth, unemployment rate, and inflation will affect the performance of the housing and mortgage markets.

2011 Crystal Ball

Single-family home mortgage delinquency rates remain extraordinarily high but have begun to decline in the aggregate. Based on the last several business cycles, the share of loans 90-or-more days delinquent or in foreclosure proceedings, generally crests within a year of the start of the recovery in payroll employment, and this economic recovery appears to fit within that pattern.

2011 Crystal Ball

Home prices nationwide are close to hitting bottom. Most experts look for single-family U.S. indexes to bottom out in the first half of 2011, with a gradual but sustained recovery after that. However, local markets that have relatively large inventories of for sale homes and real estate owned (REO) dispositions will continue to see home value weakness in 2011.

2011 Crystal Ball

Ultimately, the real estate market in 2011 is not going to be markedly different from the 2010 real estate market. As you can see, many of the predictions that are being made for 2011 are cautious assumptions that the market may change slightly. For the most part, experts are predicting that changes will be slow and subtle and that there will be no huge surprises in 2011.