REALTORS® CONFIDENCE INDEX

Report and Market Outlook August 2012 Edition
Based on Data Collected August 27 through September 4, 2012

NATIONAL ASSOCIATION OF REALTORS®
Research Department Lawrence Yun, Senior Vice President and Chief Economist

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Table of Contents
SUMMARY .................................................................................................................................................. 3 Current Conditions .................................................................................................................................... 3 Market Outlook ......................................................................................................................................... 4 I. Market Conditions .................................................................................................................................... 6 REALTORS® Confidence Index Rises in August ................................................................................... 6 Sixty –Nine percent of REALTORS® Report Constant or Higher Prices on Recent Transactions Compared to a Year Ago .......................................................................................................................... 7 Eighty-seven Percent of Responding REALTORS® Expect Constant or Higher Residential Prices in the Next 12 Months................................................................................................................................... 8 Buyer Traffic Continues to Outpace Seller Traffic ................................................................................... 8 Thirty-Two Percent of Houses Sold in One Month .................................................................................. 9 Distressed Sales Continued to Decline in Market Share ......................................................................... 10 II. Buyer and Seller Characteristics ............................................................................................................ 12 Cash Sales: 27 Percent of Residential Sales .......................................................................................... 12 First Time Buyers: 31 Percent of Residential Buyers ............................................................................ 13 Buyers Due to Relocation/Job Changes: 16 Percent of Residential Market ........................................... 14 Residential Sales to Investors: 18 Percent of Residential Market .......................................................... 15 Second Home Purchases: 12 Percent of Residential Market .................................................................. 15 Thirty-seven Percent of Sales with Mortgages Had Down Payments of 20 Percent or More ............... 16 REALTORS® Continued to Report Rising Rents for Residential Properties ........................................ 16 International Transactions: Two Percent of Residential Market............................................................. 17 III. Current Issues........................................................................................................................................ 17 Appraisals—A Continuing Problem ....................................................................................................... 17 Tight Credit Conditions and Slow Lending Process ............................................................................... 18 IV. Recent NAR® Articles ......................................................................................................................... 19 Home Price Recovery Strengthening in More Markets .......................................................................... 19 Realtor® Comments in Respone to the August Survey .......................................................................... 22 Buyer Interest: Foot Traffic Increases .................................................................................................... 23 On the Path to Recovery ......................................................................................................................... 24 Commercial Sales Rise 6.3 Percent in First Half of 2012....................................................................... 26

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SUMMARY Real Estate Markets Continue to Recover
Jed Smith and Gay Cororaton The REALTORS® Confidence Index (RCI) report provides monthly information pertaining to expectations about overall market conditions, buyer/seller traffic, price, buyer profiles, and issues affecting real estate. The August edition is based on responses of over 3,400 REALTORS® to a survey conducted during August 27 through September 4, 2012.1 All real estate is local: conditions in specific markets may vary from the overall national trends presented in this report. Current Conditions  The REALTORS® current and future confidence index rose in August for all types of property, although only the single-family index indicated above moderate expectations. REALTORS® Confidence Index--August 2012 Current Conditions
Aug '12: SF: 61 TH: 39 Condo

80.0 60.0 40.0 20.0 0.0

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Prices continued to hold up with 69 percent of REALTORS® reporting constant or increasing prices compared to the same time a year ago; 87 percent of REALTORS® expect constant or rising prices in the next 12 months. Based on REALTORS comments, the “low inventory” has led to mult-bidding especially in the lower to mid price range. Buyer and Seller traffic were essentially constant between July and August. Seller traffic continued to be significantly lower than buyer traffic. Seller traffic remains flat as sellers apparently wait for prices to pick up further . The percentage of REALTORS ® reporting distressed (foreclosed and short sales) property sales was at 22% , compared to 31 percent a year ago.

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There were 3,479 respondents to the August survey, which was sent to approximately 50,000 REALTORS®.

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Aug12

Although confidence is generally rising, REALTORS® noted several factors that appeared to be constraining the recovery in the residential housing market. First, the appraisal process continues to be a major problem—with negative comments on the accuracy of the process, market knowledge of many appraisers, and the failure of appraisals to reflect accurately increasing prices. Second, REALTORS® reported that buyers continued to face tight mortgage standards, a stringent and slow bank approval process, and overall difficulties in obtaining a loan. Some REALTORS® also noted problems in dealing with nonmarketable REO titles, which creates another kink in the process. Finally, low inventories and multi-bidding, especially in the lower price ranges for homes , were mentioned by many, indicating a tight supply of available housing. Sellers were reported as continuting to be reluctant to list their homes, and there is concern that not enough bank-owned inventory is being released to relieve the tight supply. Market Outlook REALTORS ® generally expect better conditions over the next six months. The sixMonth Outlook Confidence Index for all property types was up in August. An index of 50 indicates moderate expectations.
REALTORS® Confidence Index--August 2012 Six-Month Outlook
70.0

60.0
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Aug'12: SF: 62 TH: 42 Condo 38

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NAR’s latest economic proejctions is for continued increases in residential home sales along with continued price improvement (although sales and price trends will vary from market to market). Existing home sales are projected to expand to 4.6 million in 2012 ( 5 million in 2013) while the median price for existing home sales is forecasted at $179,900 in 2012 ($182,700 in 2013). The forecast is based on an economy expected to grow at 2.2 percent in 2012 (2.6 percent in 2013), which can create 1.5 million jobs in 2012 (2.3million jobs in 2013). See http://www.realtor.org/sites/default/files/reports/2012/embargoes/2012-07-phs/forecast-092012-us-economic-outlook-presentation-slides-08-29-2012.pdf

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May12

Aug12

Existing Home Sales: Actual and Forecast Outlook for 2012: 4.63 Million Home Sales
8000000
6000000 4000000 2000000 0

250000 200000 150000

100000
50000 0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan - Jan
Median Price Forecast

Economic Factors Affecting the Housing Market      Shadow inventory is still high, but it is about 1 million fewer homes than two years ago and is anticipated to steadily diminish over time. The falling share of distressed properties over time may lead to a higher median price for all homes. Housing starts are projected to rise by 25% in 2012 followed by a 50% jump in 2013. This will lead to new home sales surpassing 600,000 by 2013. Projections are based on “muddling through” the problem. Job generation by the economy has been disappointing, with continued high levels of unemployment. The potentially adverse economic effect of the “fiscal cliff”(expiration of Bush tax cuts and mandated spending cuts and increased taxes in the absence of legislative action) is a political as well as an economic issue. The slowdown in economic growth especially in the Euro countries and the possibility of recession in Europe remain potential problems.

What Does This Mean For REALTORS®? Compared to a year ago the real estate markets continue to recover. The major issues right now are mortgage availability and underwriting standards, appraisals, and inventory/supply. The major clouds overhanging the economy are job creation, employment

1999 - Dec 2000 - Aug 2001 - Apr 2001 - Dec 2002 - Aug 2003 - Apr 2003 - Dec 2004 - Aug 2005 - Apr 2005 - Dec 2006 - Aug 2007 - Apr 2007 - Dec 2008 - Aug 2009 - Apr 2009 - Dec 2010 - Aug 2011 - Apr 2011 - Dec 2012 - Aug 2013 - Apr 2013 - Dec
Twelve Month Roll Forecast

Prices by Month, Not Statistically Adjusted Outlook Projecting Improvement

2012Forecast: $173K; 2013Forecast: $182 K

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security, and the impact of the budgetary/fiscal cliff on growth and employment. However, interest rates continue to be reasonable.

I. Market Conditions
REALTORS® Confidence Index Rises in August The REALTORS® Confidence Index (RCI) is an indicator of housing market strength based on a monthly survey sent to over 50,000 real estate practitioners. Respondents indicate whether conditions are, or are expected to be "strong" (100 points), "moderate" (50 points), and "weak" (0 points). A score of 50 for the index is the threshold between “strong" and “weak” conditions. The REALTORS® Confidence Indexes reflect current market conditions and expectations for the next six months for single family, townhouse, and condo markets. The RCI indexes rose across all markets in August. REALTORS® Confidence Index--August 2012 Current and Six Month Outlook: Single Family Properties
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0

Aug '12: Current: 61 Outlook: 62

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Current Confidence

Confidence in Outlook

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REALTORS® Confidence Index--August 2012 Current and Six Month Outlook: Townhouse Properties
50.0 40.0 30.0 20.0 10.0 0.0 Nov08

Aug '12: Current: 39 Outlook: 42

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Confidence in Outlook

REALTORS® Confidence Index--August 2012 Current and Six Month Outlook: Condo Properties
40.0 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 Nov08

Aug '12: Current: 34 Outlook: 38

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Current Confidence

Confidence in Outlook

Sixty –Nine percent of REALTORS® Reported Constant or Higher Prices on Recent Transactions Compared to a Year Ago Home prices continue to firm up as demand is reported to be increasing faster than supply. For the current survey, 69 percent of respondents to the RCI reported constant prices, higher than July’s figure of 64 percent. About 30 percent reported constant prices while 39 percent reported rising prices . About 5 percent reported seeing price increases of 10 percent or more.

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Prices on Recent Transactions Relative to a Year Ago
35% 30% 25% 20% 15% 10% 5% 0%

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2012-Apr

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Eighty-seven Percent of Responding REALTORS® Expect Constant or Higher Residential Prices in the Next 12 Months. Eighty-five percent of respondents reported the expectation of constant or higher prices in the next year. Many REALTORS ® noted a significant increase in multi-bidding on properties, especially for lower priced houses .

100% 80% 60% 40% 20% 0%

REALTORS® Price Expectations-Next 12 Months

Buyer Traffic Continues to Outpace Seller Traffic Buyer and seller traffic indexes continue to indicate an imbalance between demand and supply, with the buyer index greater than the seller index. Buyer traffic continues to be higher than was the case some months ago. Meanwhile, the seller traffic index has remained constant,
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200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206 201208 Constant/Rising Prices Falling Prices

reflecting low inventory levels. Potential sellers appear to be holding back from listing their properties, waiting for prices to still rise markedly and recover from the steep fall in housing prices of the Great Recession.
Indexes of Buyer and Seller Traffic
70.0 60.0 50.0 40.0 30.0 20.0

Aug '12: Buyer: 62 Seller: 41

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Thirty-Two Percent of Houses Sold in One Month Time on the market when a property is sold has been declining. Approximately a third of REALTORS® noted that recently sold properties were on the market for less than a month when sold, and 59 percent were sold within 3 months. The proportion of REALTORS® who responded that the house had been on the market for 6 months or more when sold fell to 19 percent from 26 percent a year ago.

Time On Market When Sold
35% 30% 25% 20% 15% 10% 5% 0% <1 mo 1-2 mo 2-3 mo 3-4 mo 4-5 mo 5-6 mo 6-9 mo 9-12 mo >=12 mo Apr-12 May-12 June-12 Jul-12 Aug-12 14% 13% 11% 5% 5% 7% 4% 8% 32%

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On Market 6 Months or More
31% 30% 30% 26% 28% 29% 28% 29% 28% 26% 28% 27% 23% 24% 21% 19%

Distressed Sales Continued to Decline in Market Share Twenty-four percent of respondents reported selling distressed property (foreclosed and short sales), down substantially from what had been the case a year or two ago. Cash sales accounted for roughly 39 percent of distressed sales (unchanged from July).

Percent of Respondents Reporting Distressed Sales
60% 50%

Foreclosed: 12% Shortsale: 12%

40%
30% 20% 10% 0%

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Foreclosed Short Sale

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Distressed Real Estate—Below Market Prices Distressed properties typically sell below the market price of similar non-distressed properties, a similar property being noted as being in a distressed condition and possibly poorly maintained. The level of discount fluctuates depending on sales location, type of property, and property condition.   Foreclosures have been selling at approximately 20 percent below market: 19 percent as of August 2012. Short Sales have been selling at approximately 15 percent below market: 13 percent as of August 2012.

Distressed Sales- Mean Percentage Discount
25.00

Aug '12: Foreclosed: 19%; Shortsale:13%

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Property Condition Affects the Selling Price of Distressed Properties The discount to market experienced by distressed property is affected by the property’s physical condition. Well maintained properties tend to sell at a lower discount than is the case for properties in poor condition. The un-weighted average price discounts to market are presented for the time periods September 2011 through Auagust 2012. Prices for distressed houses with above average condition are discounted at about 13 – 15 percent, with the discount increasing significantly depending on the degree of property deterioration.

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Percent Price Discount by Property Condition
Unweighted Average for Sept 2011 to August 2012 Surveys
40.0 36.5 35.5 29.4 15.5 13.5 21.9 24.5 17.3

30.0 20.0
10.0 0.0 1-Above average 2-Average

17.0 12.7

3-Below average

4-Well below 5-Bottom 1% ave

Foreclosed

Shortsale

Property Discounts as a Function of Condition—August Data

Mean Percent Below Market Value August 2012 RCI Survey House Condition 1-Above average 2-Average 3-Below average 4-Well below ave 5-Bottom 1% Foreclosure 14.5 15.6 19.5 34.6 43.0 Short Sale 13.0 9.6 17.3 23.0 62.0

II. Buyer and Seller Characteristics
Cash Sales: 27 Percent of Residential Sales Approximately 27 percent of REALTORS® reported making cash sales in August, unchanged from July’s figure. The percentage of cash payments fluctuates from month to month. The high preponderance of all-cash sales appears to be due to stricter mortgage underwriting standards, and purchases by investors and second home buyers, who frequently pay cash, possibly edging out buyers needing to secure a mortgage.
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Cash Sales as Percent of Market
40% 35% 30% 25% 20% 15% 10% 5% 0% 200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206 201208

Aug: 27%

First Time Buyers: 31 Percent of Residential Buyers Approximately 31 percent of REALTORS® who responded reported making a sale to first time home buyers. Normally first time buyers are in the neighborhood of 40 percent of total residential sales, according to NAR’s Profile of Home Buyers and Seller. The proportion of firsttime homebuyers hit a peak of approximately 50 percent in 2009. Most first time buyers obtain a mortgage: About 8.7 percent of REALTORS® who made a first time home buyer sale reported a cash sale (compared to 10.8 percent in July). The decrease in first time buyers from the typical 40 percent share in part reflects the difficulty of securing mortgage financing, delays with distressed sales, and purchases of lower priced properties by investors. REALTORS® have noted that that investors offering all-cash sales to sellers have crowded out first-time buyers in some cases, particularly in the case of distressed properties. Unsuccessful first-time buyers typically continue their property search, sometimes making a number of bids before securing a property.

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First Time Buyers as Percent of Total Buyers
60% 50% 40% 30% 20% 10% 0% 200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206 201208

Aug: 31%

Buyers Due to Relocation/Job Changes: 16 Percent of Residential Market

REALTORS® reported that 16 percent of residential sales were to buyers for relocation purposes, i.e., a job move, retirement, etc. About 18 percent of REALTORS® who made a sale to a relocation buyer reported a cash sale (compared to 20 percent in July).

Relocation Buyers as Percent of Market
14% 14% 13% 15% 15% 15% 15% 14% 14% 15% 15% 15% 13% 11% 12% 13% 16%

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Residential Sales to Investors: 18 Percent of Residential Market REALTORS® reported that investors accounted for 18 percent of total residential sales in August. Investors have reported that in many cases they can obtain a positive cash flow converting properties to rental units. Approximately 67 percent of respondents who reported a sale to an investor reported a cash sale (compared to 69 percent in July).

Sales to Investors as Percent of Total Sales
30%

Aug: 18%
25% 20% 15% 10% 5% 0% 200810 200812 200902 200904 200906 200908 200910 200912 201002 201004 201006 201008 201010 201012 201102 201104 201106 201108 201110 201112 201202 201204 201206 201208

Second Home Purchases: 12 Percent of Residential Market REALTORS® who reported making a second home sale accounted for 12 percent of responses. Approximately 40 percent of second home sales were for cash (compared to 51 percent in July).

Second Home Buyers as Percent of Market
12% 11% 10% 13% 14% 14% 13% 13% 13% 13% 13%13% 12% 12% 12% 12% 12% 12% 11% 11% 11% 11% 10%

10%

201009 201010 201011 201012 201101 201102 201103 201104 201105 201106 201107 201108 201109 201110 201111 201112 201201 201202 201203 201204 201205 201206 201207 201208

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Thirty-seven Percent of Sales with Mortgages Had Down Payments of 20 Percent or More More REALTORS® reported higher downpayments: about 37 percent of mortage sales involved a down payment of 20 percent or more. Down payments of 11-19 percent were unchanged at 6 percent.

34%

37% 36% 32%

Percent of Mortgage Transactions by Downpayment Levels
34% 35% 34% 34% 36% 35% 32% 34% 33%

37% 36%

34%

37%

5% 4% 4% 5% 4% 5% 5% 4% 5% 4% 4% 5% 5% 5% 4% 6% 6%

11-19%

>=20%

REALTORS® Continued to Report Rising Rents for Residential Properties Higher residential rents compared to a year ago were reported by 55 percent of REALTORS® in August, compared to 57 percent in July. Nine percent of REALTORS® reported lower rents, and 17 percent reported contant rents. Percent of REALTORS Reporting Changing Rent Levels as Compared to 12 Months Ago
60% 50% 40% 30% 20% 10% 0%

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Lower Rents

Constant

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International Transactions: Two Percent of Residential Market Approximately 2 percent of REALTORS® who responded reported sales of U.S. residential real estate to foreigners not residing in the U.S. Approximately 73 percent of respondents who reported transactions with international clients reported cash sales. Information on foreigners purchasing U.S. real estate is available at http://www.realtor.org/research/research/reportsintl.

III. Current Issues
Appraisals—A Continuing Problem Appraisals continue to be a problem. Many REALTORS® expressed frustration that reported appraisal values are not keeping pace with the appreciation in market values and that appraisers are not taking into account the condition of the home. REALTORS® also reported encounters with out-of-town appraisers who have little knowledge of the neighborhood/local conditions, including non-local bank appraisers. REALTORS® also expressed frustration at the slow turn around time from appraisers and appraisal requirements that are an uncessary expense on the buyer. Thirty-four percent of REALTORS® reported having had a problem with an appraisal in the past 3 months. Approximately 10 percent of the respondents reported contract cancellation, 11 percent reported a delay, and 15 percent reported that the appraisal problems led to lower prices.

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REALTORS® Reporting Appraisal Problems With A Contract in Past 3 Months
50% 40% 30% 20% 10% 0% 201003 201004 201005 201006 201007 201008 201009 201010 201011 201012 201101 201102 201103 201104 201105 201106 201107 201108 201109 201110 201111 201112 201201 201202 201203 201204 201205 201206 201207 201208 Contract Cancelled Contract Delayed Negotiated to Lower Price

Aug: 34%

Tight Credit Conditions and Slow Lending Process One of the most frequent comments by REALTORS® was a concern over unreasonably tight credit conditions. Respondents indicated that credit conditions continue to be too tight, that lenders are taking too long in approving an application, and that information required by lenders is excessive. Some respondents expressed frustration that financial institutions appear to be focusing on making loans only to individuals with the highest levels of credit scores. It is well known that a number of financial institutions have weak loan portfolios due to previous lending standards now perceived as having been too loose. The lending pendulum appears to have swung to the other extreme in some cases, resulting in some institutions decreasing their overall lending efforts and/or imposing unrealistically high credit standards. In the 2001-04 time frame—a time of normal residential real estate markets before the Great Recession--approximately 40 percent of Fannie Mae’s and Freddie Mac’s loans went to applicants with credit scores above 740. In contrast, REALTORS® responding to the RCI survey indicated that over 50 percent of loans went to borrowers with credit scores above 740 in August, including Fannie, Freddie, and other lenders. In the case of Fannie and Freddie—which are now a smaller part of the market—in 2011 approximately 75 percent of loans had credit scores of 740 and above. There appears to be an unnecessarily high level of risk aversion. Estimates by NAR economists have indicated that an additional 500,000 to 700,00 additional sales could be made if credit conditions returned to normal. This would reprent an additional 250-350 additional jobs on an annual basis, because existing home sales generate jobs across a wide spectrum of the economy—i.e., attorneys, painters, plumbers, landscapers, title companies, furniture manufacturers, etc. Given the current high level of unemployment, a consideration of the credit and job situation is appropriate—for these are jobs that could be generated at no cost and almost immediately.

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FICO Scores: Percent of FICO Scores 740 and Above
80% 70% 60% 50% 40% 30% 20% 10% 0%

The meaning for REALTORS® is clear: In many cases lenders are not making loans to potential buyers with “less than perfect” credit scores. A potential home buyer who is rejected by one bank or financial institution should try, try, try again at a different financial institution. Rejection of a loan application may be more indicative of the financial state of the lending institution than of the applicant’s credit worthiness. In addition, there are a variety of potential lending sources in addition to large banks and mortgage brokers. For example, a number of REALTORS® noted that regional and community banks and credit unions could be good potential alternative sources of mortgages.

IV. Recent NAR® Articles
Home Price Recovery Strengthening in More Markets Lawrence Yun, Senior Vice President and Chief Economist

Home prices are up 3.6 percent in June from one year ago at the national level, according to the government repeat price index, which tries to measure the genuine home price appreciation of a typical homeowner. This price index, unlike the median price, is not impacted by the mix of homes. Arizona is leading the pack with a strong 13 percent one-year gain. Idaho, Florida, Michigan, Arkansas, and Utah are next with better than 7 percent increases. North Dakota, which had continuous job growth over the past 10 years and avoided a local economic recession, experienced further non-stop price gains.
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At the metro level, double-digit gains are occurring in Phoenix, Miami, and the Detroit suburbs of Warren-Troy-Farmington Hills. Connecticut, due to many distressed properties that have yet to go through the court system, is the weakest market with prices having fallen 5 percent from one year ago. There needs to be an alternative non-judicial process to move distressed inventory into the hands of buyers quickly, or the price declines will be stretched out over a much longer period. The full report is here. Please do not print this massive document. Simply jump to page 27 see your state’s performance.

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Realtor® Comments in Respone to the August Survey Jed Smith, Managing Director, Quantitative Research Every month REALTORS® provide a variety of written, open-ended comments when replying to the RCI questionnaire. Here is a summary of the comments:  This month the appraisal process continued to be noted as a major problem, as has been the case in a number of months recently. There were a significant number of concerns that reported appraisal levels are not keeping up with recovering market prices, killing deals in a number of instances. Credit was reported as continuing to be tough and tight. Lenders are slow in responding to potential buyers, have unrealistically difficult underwriting standards, and are difficult in their practices and business relationships. The types of problems and comments were essentially unchanged from last month, although there were marginally fewer negative commnets. In addition to slow credit on the lender side of the transactions, many potential buyers are reported as having had credit problems as a result of the Great Recession, or—alternatively— desirous of purchasing a house but saddled with a property underwater, thereby preventing a transaction. Inventories of available homes were reported as down significantly in many areas. Multibidding/multiple offers were mentioned by many respondents. This is a new development. In contrast, other respondents mentioned continued low-balling by potential buyers and price resistance. There were a significant number of comments indicating that the lower ends of the market are seeing substantial buyer interest and activity. Although the market was reported to be headed upwards in terms of sales and price in many areas of the country, there continued to be REALTORS® who mentioned difficult market conditions--which confirms the statement about all real estate being local. However, the number of REALTORS® reporting slow/down markets was significantly fewer than the number reporting markets that were improving. In some areas buyers are still focused on obtaining “deals” and give-backs. REALTORS® continued to note the problems associated with short sales, focusing on delays and client frustration and in some cases the withdrawal of purchase offers. Many REALTORS® noted continued problems of economic uncertainty, with negative impacts on the real estate markets. Concerns over jobs and job availability, consumer confidence, tax and economic uncertainties, and the political process were mentioned as holding the real estate markets back.

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Buyer Interest: Foot Traffic Increases Ken Fears, Manager, Regional Economics

Every month SentriLock, LLC. provides NAR Research with data on the number of showings. Foot traffic has a strong correlation with future contracts and home sales, so it can be viewed as a peek ahead at sales trends two to three months into the future. In the latest reading, foot traffic reversed course in August posting a strong 70.5 compared to 37.0 in July. The diffusion index for August, which measures the share of markets that experienced an improvement in foot traffic over the 12-month period ending in August, jumped nearly 50% and is at its highest level since March of this year. In August of last year, foot traffic was on the decline in most markets after peaking in July. This year, foot traffic appears to be bucking the typical late summer decline in the same way that it was stronger than the normal seasonal pattern in January and February. Historically low mortgage rates, improved employment conditions and rising prices appear to have shorn up buyer confidence and are feeding a robust resurgence of demand.

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On the Path to Recovery Ken Fears, Manager, Regional Economics The strong spring and summer housing markets helped to reduce inventories nationally and the same dynamic has played out in local markets. Somewhat surprisingly, many housing markets that were hardest hit by the housing bust are sharing in the benefits of reduced inventories.

The months’ supply of housing, supply divided by the current rate of sales depicts how many months it would take to exhaust the current supply of homes at the current rate of sales. This measure has fallen sharply in Atlanta, Chicago, Las Vegas, Phoenix, Tampa, and Palm Bay. Over the four-quarter period ending in the 2nd quarter of 2012, the months’ supply of housing had fallen by more than 20% in each of these markets.

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From a historical perspective, the months’ supply in several of these markets is approaching levels last seen in the period from 2000 to 2002. The months’ supply during the 2nd quarter in the Phoenix market was at 2.3, nearly half the 3.9 months of inventory listed in the 2nd quarter of 2000. Phoenix had experienced a peak months’ supply of 9.9 in the 2nd quarter of 2007.

The boom in sales has been in both the traditional and distressed portions of these markets. According to Corelogic, the months’ supply of homes has fallen in nearly all of these markets over the 11-month period ending in June and notably in Illinois, a judicial state [1], which has experienced long foreclosure timelines and backed up pipelines as a result. Not surprisingly, Phoenix experienced the sharpest decline in distressed inventory of 34.8% to 4.5 months over this period. Both Riverside-San Bernardino and Sacramento experienced declines greater than 22% over this same time period. The sharp decline in inventories raises the question of how markets will be impacted by plans at the FHFA for expanded bulk sales (each of the markets listed above is part of the FHFA’s initial REO bulk sale pilot program). With both demand and prices having risen since the pilot program was proposed and supplies down sharply, many markets appear to be experiencing a nascent or mature correction. What’s more, with prices on the rise in the face of heightened confidence of both investors and traditional home buyers, bulk sales may be difficult to execute at an efficient price relative to a free market transaction. NAR has voiced concerns to regulators about bulk sales earlier this year and in the fall of 2011. [2] Unfortunately, there is little known about the pricing of the sales to date, but the FHFA has suggested that it will release more information in the coming weeks. With time we’ll have clarity on the program, but it is clear that investors will continue to play an important role in buying homes for rental or remodeling to be re-sold into the market, whether through bulk or individual transactions.
[1] Other judicial states like Florida appear to be doing better, but results are mixed as evidenced by the divergent experiences of Tampa and Orlando, suggesting that more done on this front could help to liquidate backlogs. [2] http://www.ksefocus.com/billdatabase/index.php

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Commercial Sales Rise 6.3 Percent in First Half of 2012 By George Ratiu, Manager, Quantitative & Commercial Research Sales of major commercial properties in the first half of 2012 totaled $111.7 billion encompassing 7,877 properties, according to Real Capital Analytics. Along with rising sales of individual properties, portfolio transactions made up close to a quarter of all sales. The pace of activity slowed during the second quarter, as macroeconomic indicators softened. However, the sales volume surpassed the first half of 2011 totals by 6.3 percent. Prices for commercial assets remained steady during the first half of the year, with top-tier properties maintaining their price premiums. While the bifurcation of commercial assets along location and value remained, there were clear signs that investors have been branching out from top markets into secondary and tertiary ones, in search of yields. Sales volume in secondary and tertiary markets is on the rise, while the deal size in top markets is moderating.

Source: Real Capital Analytics

Major markets experienced flattening or negative sales activity, as the supply of properties entering the market has been slowing. During the first half of 2012, there were 27 markets which exceeded $1.0 billion in commercial sales according to Real Capital Analytics. Manhattan retained the top spot with $9.8 billion in transactions, followed by Los Angeles and Chicago, with $6.5 billion and $5.2 billion, respectively. Rounding out the top five were San Francisco which posted $4.4 billion in sales, and Dallas with transactions totaling $3.9 billion. Several cities recorded strong increases in sales in the first half of the year. Along with the usual performers—Seattle, San Jose, Austin, which were up an average 78 percent—markets like Baltimore, Charlotte and Nashville also posted growth in excess of 90 percent from the first half of 2011. Overall, 21 of the 35 top markets registered year-over-year sales gains in the first half of the year.

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Cap rates for commercial properties continued on a downward trend in 2012. Based on Real Capital Analytics data, average cap rates declined from 7.2 percent in the first half of 2011 to 6.9 percent in the first six months of 2012. The higher rates continued to indicate an improvement in secondary markets, as investors shifted capital into commercial properties with better returns. The apartment and retails sectors witnessed noticeable cap rate compressions during the period. Apartment average cap rates decreased from 6.5 percent in the first half of 2011 to 6.2 percent in the same period of 2012, while retail cap rates moved from 7.6 percent to 7.3 percent.

Source: Real Capital Analytics

With equity markets roiled by Eurozone swings and regulatory actions keeping a tight rein on bank lending, financial institutions maintained a risk-averse posture towards commercial real estate. The main buyers charging into commercial markets have been private investors and institutional and equity investors. Private investors accounted for 41 percent of acquisitions during the first half of the year and equity funds made up 28 percent of the total. REITs, with made up a fifth of the market in 2011, scaled back their purchases in the first six months of this year, totaling 15 percent of all purchases. For more information on commercial reports, visit http://www.realtor.org/research-andstatistics/research-reports.

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