Outlook for Home Sales in 2009

Dr. Mark G. Dotzour Chief Economist Real Estate Center at Texas A&M University

Home Sales Volume Determined by Three Factors • Job Growth • The Cost of Mortgage Money • Positive Home Price Appreciation

Home Price Trends Determined by One Factor
• Inventory of Unsold Homes in the Local Market

Pop Quiz !!

How Much is a Trillion Dollars ?
There are about 300 million people in the US. So there are about 116 million Households in the US.

Pop Quiz:

How Much is a Trillion Dollars ?
$1,000,000,000,000 116,000,000 = $8,620 per household

Another Pop Quiz !!:

How Much is a Trillion Dollars ?
If Americans worked every day of the year for 8 hours per day and earned $20 per hour And paid 100% income tax How many Americans would it take to pay back $1 trillion in a year?

Pop Quiz 2:

How Much is a Trillion Dollars ?
$1,000,000,000,000 ($20*365*8) = 17,123,287

It would take 17 million workers, who work every day of the year at $20 per hour to pay back $1 Trillion

Recessions and Employment
Jobs Peak Nov-43 Sep-48 Apr-57 Jul-74 Jul-81 Jun-90 Feb-01 Dec-07 Jobs Lost 4.3 million 2.3 million 2.3 million 2.1 million 2.8 million 1.6 million 2.7 million 3.8 million % Jobs Lost 10.1 % 5.2 % 4.4 % 2.8 % 3.1 % 1.5 % 2.0 % 4.9% Months of Decline 22 months 12 months 14 months 9 months 16 months 11 months 29 months 14 months Max Rate Unemployment

7.9% 7.5% 9.0% 10.8% 7.8% 6.3% 8.1%

end of 2/09

Source: Bureau of Labor Statistics

Note: Peak Dec07 at 138.078 million

Composition of the US Economy
71.2% 13.9% 20.1% - 5.2% Consumer Spending Business Investment Government Spending Net Exports

Consumer Confidence Index

Source: The Conference Board

Debt Service Payments
as a Percent of Disposable Personal Income

Source: Federal Reserve Board

Corporate Profits
(With Inventory Valuation Adjustment & Capital Consumption Adjustment)

Source: Department of Commerce

Gross Private Domestic Investment

Source: Department of Commerce

Small Business Outlook
“Planning To Hire People In The Next Six Months”

National Federation of Independent Business

Corporate Hiring Plans: Next 6 Months
Q4-08 Q3-08 Q2-08 Q1-08

More Jobs Less Jobs

9% 60%

29% 32%

28% 31%

30% 22%

Source: Business Roundtable

Corporate Earnings Per Share
S&P 500 Operating Earnings

Source: Standard and Poor’s

Investor Concerns
Raise Capital Gains Rate Raise Income Tax Rates Print Too Much Money Destroy the Value of Savings Government Picks Winners Government Picks Losers No Longer Investing Just Speculating on Gov’t

Business Concerns
Raise Income Tax Rate Nationalize my industry Windfall profits tax Carbon tax Empower organized labor Excessive regulation Dictate what products I sell Dictate my compensation Dictate my advertising Dictate my travel

The Best Case Scenario
Favorable corporate earnings 4Q09 Stocks rise about four months prior to that Consumer confidence rises with stocks House prices/volume continue to fall Foreclosure pressure continues to be heavy More spending results in higher profits Layoffs end by the end of the 2009 “Jobless recovery” in 2010 Higher interest rates and inflation in 2010-11

The Worst Case Scenario
No effective fiscal package gets passed Treasury and Fed continue to stumble Bad banks and businesses propped up No price discovery for “toxic” mortgages $25T CDS market doesn’t get unwound Political risk for business stays high Business / investors “sit on their hands” Unemployment goes well over 10% Commodity deflation and price deflation

Implications for Housing
• Tax credit will help stimulate buyers • Mortgage rates at cyclical low in 2009 • Last year the report was 1-2 million vacant homes , now it’s up to 6 million • No incentives to buy foreclosed homes • Homebuilder concessions putting downward pressure on the markets • Stocks of homebuilders appear to have bottomed, and M&A coming • Bank examiners bias against ADC loans

Implications for Housing
• Case-Shiller Index overstating the price declines in housing • Housing demand will resume when the threat of price declines diminishes • Price declines will subside when new construction bottoms and foreclosures peak • New home construction in Texas will hit bottom in 2009 and could rebound sharply if the US economy starts to mend in 2010.

Housing Starts in the US

Source: Department of Commerce

Employment Growth Rates

Existing Home Sales
Fort Worth

2006 2008 2007

Source: Real Estate Center

Inventory of Unsold Homes
Fort Worth

Jan. 1997 to present Source: Real Estate Center