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Charleston Market Report

Charleston Trends and Forecast

www.charlestonmarketreport.com
©2009

Welcome to my presentation. I was unable to make this entire presentation on April


14th at the Friends of the Carter Center networking event at the College of
Charleston due to time constraints. So I will do my best to talk you through each
slide and help you understand what I trends I am seeing in the Charleston and U.S.
economy.

1
Opening Joke

 I actually told this joke before I started the


presentation. ☺

www.charlestonmarketreport.com
©2009

Young Chuck, moved to Texas and bought a donkey from a farmer for $100.
The farmer agreed to deliver the donkey the next day. The next day he drove up
and said, "Sorry son, but I have some bad news. The donkey died."
Chuck replied, "Well, then just give me my money back."
The farmer said, "Can't do that. I went and spent it already."
Chuck said, "Ok, then, just bring me the dead donkey."
The farmer asked, "What ya gonna do with him?"
Chuck said, "I'm going to raffle him off."
The farmer said, "You can't raffle off a dead donkey!"
Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead."
A month later, the farmer met up with Chuck and asked, "What happened with that
dead donkey?"
Chuck said, "I raffled him off. I sold 500 tickets at two dollars a piece and made a
profit of $898.00."
The farmer said, "Didn't anyone complain?“

Chuck said, "Just the guy who won. So I gave him his two dollars back."
Chuck now works for Goldman Sachs in their OTC Default Derivative Department.

Ironically, the “Goldman Gangstas” just declared a $1.5 billion profit this week after
receiving TARP money just a few months ago. Amazing!

2
Definitions
 SFD = Single Family Detached (House)
 SFA = Single Family Attached
(Condo/Townhouse)
 Months Inventory = "Current Inventory" divided by
"Monthly Sales.“ This reflects how many months it
would take to sell out of inventory at the current
month's rate of sale.
 “Big Mama” = The Government
 “Go Go Days” = 2004-06

www.charlestonmarketreport.com
©2009

I am sure many of you already know these definitions but I included them just in
case you don’t.

3
The Economy and Real Estate

www.charlestonmarketreport.com
©2009

The economy, real estate and stock market are all complicated just like my girl
Denise Richards. There are thousand of variables that effect each industry
everyday and the media and internet can spit out info at a lightening fast pace that
is enough to confuse anybody. All this information overload makes it difficult to stay
focused on the real fundamentals that matter to each segment of the economy.
This is why the CMR has a disciplined and focused approach to evaluating and
measuring the risk in the market.

4
Paradigm Shift in Finance

www.charlestonmarketreport.com
©2009

Everything happens for a reason!

Credit is the engine for real estate since most transactions are leveraged.

We just had a major transmission failure of the the U.S. credit engine that takes
time to repair. This engine will never run in the same manner it did from 2004-07 so
we will have to deal with the ramifications of the shift in financing.

This shift was force consumers to save more and live within their means in the
future.

5
Paradigm Shift in Finance

 U.S. consumer spending was out of control.


 U.S. consumer living beyond means.
 U.S. consumer is addicted to credit.
 Wall Street profited from providing the “fix.”
 Enormous opportunities if have cash!
 Opportunities difficult because of credit
contraction and tighter lending.
 Back to fundamentals.

www.charlestonmarketreport.com
©2009

I believe there are major opportunities in this market but they will be more difficult to
achieve because credit is now very tight. We have a consumer who has been
addicted to credit for many years and “Big Mama” and Wall Street acted like drug
dealers straight out of Columbia. Due to this major contraction of credit there are
many real estate players who are boxed in with projects and have run out of cash.
Those with access to cash and credit will be able to pick up distressed and
performing assets at discounted prices. There are also many real estate deals that
are worthless and have no bids that will cause major problems for the banks that
made the loans.

In order to stay ahead of the pack investors will need to be very careful at
measuring risk, stay disciplined and stick to the fundamentals.

6
Risk Management

 “The trend is your friend.”


 The entire finance and real estate industry lost
focus of risk management.
 Banks, Appraisers, Federal Reserve, Realtors,
“Big Mama”, Credit Rating Agencies, Builders,
Developers.
 This is now “Water under the bridge.”
 No point in dwelling on the past and playing the
blame game.
www.charlestonmarketreport.com
©2009

After spending 10 years in the stock and real estate market I can not tell you how
important it is to keep the trend as your friend. Those who fight the trend usually
lose.

Since 2000 when “Lending Gone Wild” got started up the entire financial industry
lost focus of risk management and it is now biting us (the taxpayer) in the rear.
Once “Lending Gone Wild” was shut down there has been plenty of blame to go
around on who was at fault. There were many parties involved and knew what was
going and others unknowingly were just busy making money. Regardless, it is now
“water under the bridge” and in the past and we all must focus on the present and
future.

At the end of the day our clients want just one thing……THE TRUTH. So why not
give it to them? Quit dwelling on how bad the media coverage is on the economy
and communicate the truth with your clients. This is the entire purpose of the CMR.
Take the noise out of the daily information overload and help piece together what is
a very complicated economic puzzle so our clients can make better investment
decisions.

7
Decline in Mortgage Lending Standards
from 2001-2006

Source: Loan Performance

www.charlestonmarketreport.com
©2009

In 1989 the average down payment on a home was 10% vs. 2% in 2007.

It is clear from the charts above that risk management from the financing side of the
transaction was completely abandoned. It was “Lendapalooza” on a grand scale
which helped brink this economy to its knees.

The banks and Wall Street firms made a ton of money on the front end through
commissions and fees. Let’s not forget that this engine was fueled by the
securitization of mortgages. The problem that is displayed above is that they
allowed practically anyone the ability to obtain a loan with no equity or
documentation. These banks and lenders completely abandoned risk management.

These slack lending standards are the prime reason that foreclosures and short
sales are exploding across the nation.

8
U.S. Housing Price Trend….Boring!

www.charlestonmarketreport.com
©2009

As you can see from the chart above is that U.S. housing prices were consistently
boring from 1950 until 2000. They averaged approximately 1.5-2% and stayed
really close to the trend line.

Then something amazing happened. Wall Street needed a new gig to generate
billions of dollars in fees and Congress repealed the Glass-Stegall Act of 1933. The
internet industry had blown up and we were heading for a recession so what was
going to be Wall Street’s next big idea.

9
Price Explosion….Booyah!

www.charlestonmarketreport.com
©2009

Thus the Perfect Storm was created. Viva La Lending!

You can see the incredible spike in home prices that had not been seen in over 50
years.

10
Current Bailout Tab

$7,244,000,000,000

$7.244 TRILLION
Since December 12, 2007

Source: Congressional Budget Office, Federal Reserve, U.S. Dept. of Treasury

www.charlestonmarketreport.com
©2009

The current tab includes:


Swaps, TAF, Stimupork, TALF, Bear Stearns bailout, Fannie and Freddie bailout,
AIG bailout, Money market fund bailout, TARP, Citigroup bailout, Bank of America
bailout, Foreclosure Relief, Purchase of Treasuries, and Toxic Asset Plan.

More to come? Bet your future taxes on it.

11
Stages of Real Estate

We are here.
 Cycles
Stage 3

St
ag
e
4
2
ge
a
St

Stage 1

www.charlestonmarketreport.com
©2009

Currently the Charleston real estate market is in the worst stage which is stage 4.
Real estate is no different than the stock market or the weather because it runs in
cycles. Each of these stages may run longer than the other but at the end of the
day prices do not go up forever as so many believed during the “Go Go” days.

The stages of real estate are explained below:


Stage 1 – Market hits bottom.
Stage 2 – Uptrend. The “Go Go” days from 2001-2007.
Stage 3 – The market hits a peak….2006
Stage 4 – The downturn. 2007 – Until ?

12
Fundamental Analysis vs.
Technical Analysis
What is Fundamental Analysis? What is Technical Analysis?
1. What to Buy 1. When to Buy
2. Segmentation of 2. Trend Analysis
demographics and 3. Moving Average
economic data. 4. Market Momentum
3. Price/Rent Ratio 5. When to Sell
4. Sales comparison,
cost and income
approach.

Basically, there are two types of securities analysis – fundamental analysis and
technical analysis. Fundamental analysis is what most of us are familiar with.
When you see an analyst on television or read comments from an analyst in a
magazine or news story, most often these comments come from fundamental
analysts.

A fundamental analyst tries to answer the question “What” to buy. They will study
the company’s balance sheet, evaluate the management team, try to understand
the quality of the company’s earnings.

A technical analyst tries to answer the question “When” to buy and just as
importantly, “When” to sell. A technical analyst wants to find the trend of a chart –
is it trending up or trending down. Is the stock outperforming the broad market?
How high, or in some cases, how low can the stock go?

Unfortunately, there are very few on Wall Street who effectively combine the
fundamentals with the technicals. In a sense, they’re playing the piano with only
one hand. While that may be a way to play a simple melody, you can play much
better music if you play the piano with both hands. In fact, our game plan is
grounded in this philosophy of combining the fundamentals with the technicals, or
playing the piano with both hands.

13
Supply and Demand

 We all understand the


basic forces of supply and
demand.
 The same forces that
affect prices in the
supermarket also affect
prices in the stock and
real estate market.
 Stocks, sectors, and asset
classes move in and out
of favor just like produce
in the supermarket.

We all understand the basic law of supply and demand; we have all experienced
these forces at the supermarket. We inherently understand why there are lemonade
stands in the summer and hot chocolate stands in the winter. Stocks and real
estate move in and out of favor just like produce in the supermarket.

In economics and real estate the first thing they teach you is that supply and
demand dictates action on price. However most economists or real estate analysts
do not even utilize the proper analysis of supply and demand.

Why? The reason is that it is not taught.

14
5 Main Indicators

 1. Existing Home Sales


 2. Inventory
 3. Building Permits
 4. Interest Rates
 5. Foreclosures

 All 5 Indicators can have an impact on price.


 Key measurements of Supply and Demand.

www.charlestonmarketreport.com
©2009

The five main indicators that the CMR uses to analyze the market are shown above.
These indicators are placed in an order of importance where the first three are the
most important and the last two are lagging indicators.

All five of these indicators have an impact on price which is why we monitor them on
a consistent basis. I am merely monitoring these indicators in order to spot a major
change in trend that will notify me of major buying or selling opportunities before
everyone else.

15
Market Momentum
 Collect monthly data.
 Determine a Moving Average.
(Sum of months 1 through 12 divided by 12)
 Calculate the Market Momentum.
(Current 12 month MA – Previous Year MA)
divided by Previous Year MA
 MM=Speed of Trend
 Trend = Change in Direction
www.charlestonmarketreport.com
©2009

The important aspect about the market momentum formula to understand is that
trends DO NOT change in one month. You will notice that the market momentum
calculation includes current 12 month moving averages and previous year moving
averages.

The National Association of Realtors and many other real estate groups are famous
for releasing data and bragging about how sales improved X% from the previous
month. These are very misleading statements to the public because trend changes
do not occur that quickly. It takes two years worth of data just to create a market
momentum chart.

What the market momentum charts do is take the noise out of the data. Real estate
moves in slow motion compared to the stock market so spotting trend changes is
very predictable.

16
Existing Home Sales

www.charlestonmarketreport.com
©2009

Here is the most important indicator the CMR follows dating back to 1990. You will
notice that over the past 19 years the Market Momentum has never really ventured
to far below the trend line into unfavorable status. The Charleston real estate
market has been very consistent for a long time and prices never appreciated at a
severe level like certain markets in California have experienced in the past.

This trend changed in 2005 when the market momentum began declining and
switched to unfavorable status in September of 2006. I knew we had major issues
at this point in time with the other variables in play in the market that was the
equivalent of a red flag going up regarding the real estate market in Charleston.

Now that prices are beginning to decline I believe there is a strong possibility that
we could see the bottoming of sales volume. The Feb. 2009 sales volume of 333
transactions was the lowest number number of sales in the MLS since Feb. 1992.

17
Inventory

.
www.charlestonmarketreport.com
©2009

18
Tri-County Income
 Single - $32,111 per year
 Married - $64,222 per year
 15% Income Tax Rate
 Single 28% DTI (After Taxes) - $637
 Married 28% DTI (After Taxes) - $1274
 Most buyers qualify for homes ranging from
$100,000-$180,000
 2926 out of 10,083 homes…..29% of inventory!
 Inventory in Charleston County out of whack.

www.charlestonmarketreport.com
©2009

I took this data from the Bureau of Labor Statistics. What I did is factor a 15%
income tax rate into these average Charleston salaries and then estimate what an
lending underwriter would determine these qualified buyers Debt to Income (DTI)
would be per month.

The conclusion is that most homebuyers in the Tri-County area can really only
afford a home priced between $100,000-180,000. Taking this stat into account we
can see how completely out of whack our inventory is when only 29% of the 10,083
SFD and SFA homes listed for sale in the MLS fall into this price range.

19
Tri-County (Detached & Attached)
Supply and Demand Trends
Monthly Sales Current Inv

2000 12000
1800
10000
1600

Units of Inventory (MLS)


Sales per Month (MLS)

1400
8000
1200
Demand

Supply
1000 6000
800
4000
600
400
2000
200
0 0
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
www.charlestonmarketreport.com
©2009

The chart above is a supply and demand chart of all homes in the Tri-County area.
What you will see is the inverse relationship that sales versus inventory has in the
market. This is why these are two of my most important main indicators.

You will notice how high demand (blue bars) was from 2004-06 which kept inventory
at lower levels. Then the trend began to slowly change and an opposite effect on
these two variables began to take place. If you were not monitoring thousands of
transactions you could not have seen this coming.

The March 2009 sales volume was lowest number hit since 1999 according to the
MLS. There has been a major deterioration of demand in this chart which explains
the build up of inventory in our market.

As the price decline stage takes effect and homes become more affordable demand
will increase and supply will decrease. Unfortunately this transition takes time in the
real estate market compared to the stock market.

20
Counted Inventory – New Homes
Berkeley County

www.charlestonmarketreport.com
©2009

I would like to thank William and Mary Lattimore of Coastal MarketGraphics for
giving me the next three charts on the new homes market in Charleston. This is a
very busy chart so let me help point out what is most important in these charts. In
the top right corner of the slide you will notice how the total supply column of Non
Finished Unoccupied (NFU) homes has been decreasing from 12 months back until
the present time. This is good news since our market is currently overbuilt. There
is no need for developers to add more inventory into a saturated market when we
have over 10,000 homes for sale. This slide represents a great picture of the
market correcting itself due to existing conditions. Another important piece of data
on this slide to focus on is in the bottom right corner. At the present time, the
Berkeley County # of Months Supply stands at 4.6 months, which is roughly two
times higher than the ideal supply figure of 2 to 2.4 months supply.

In my opinion, this is very encouraging news for Berkeley County that I will discuss
in more detail later.

21
Counted Inventory – New Homes
Charleston County

www.charlestonmarketreport.com
©2009

Charleston County has the most disturbing new homes inventory situation out of the
three counties in the low-country. Charleston county still has 1391 NFU homes
sitting on the market for sale, which is approximately 3 times higher than the ideal
supply according to MarketGraphics.

The other problem with this new home inventory in Charleston county is that it is
generally priced higher than Berkeley and Dorchester counties because Charleston
county includes areas such as Mount Pleasant, Isle of Palms, Folly Beach,
Sullivans Island, and Dunes West.

The new home inventory in Charleston county will feel the most pain because of the
pricing aspect and lack of demand.

22
Counted Inventory – New Homes
Dorchester County

www.charlestonmarketreport.com
©2009

Dorchester, which is smaller than Berkeley county, looks very similar to Berkeley
county in terms of supply. Again, this is good news and as demand picks up since
we are now in the spring and summer season of real estate I expect the new home
inventory picture to improve.

23
Tri-County SFD Snapshot

Median Sold PSF MI


Tri-County $ 197,000 $ 124 16.5
Berkeley $ 172,500 $ 103 12.7
Charleston $ 236,500 $ 152 19.3
Dorchester $ 165,000 $ 86 14.8
North Charleston $ 149,990 $ 81 12.3
Summerville $ 170,000 $ 88 15.0
Goose Creek $ 165,500 $ 91 9.5
West Ashley $ 215,000 $ 124 13.4
Johns Island $ 185,250 $ 127 24.5
James Island $ 235,000 $ 150 21.7
Mt. Pleasant $ 384,000 $ 158 16.3
Daniel Island $ 639,900 $ 249 17.4

www.charlestonmarketreport.com
©2009

I highlighted in green the areas that are affordable according to my Tri-County


income slide where I mentioned most people can only afford a $100,000-180,000
home.

You will notice a consistent theme where Berkeley and Dorchester counties are
much more affordable than Charleston county for obvious reasons.

An important part of this slide to watch is the Months Inventory (MI) on the right. I
expect these numbers will decline because we are now in the buying season for real
estate. Unfortunately, due to the severe recession the Tri-County inventory has
been building for the last few years and is at extremely high levels in many areas.
These high level areas will experience larger price declines in the future.

24
Tri-County SFD
$100,000-$200,000 Price Range
Supply & Demand
$100,000-$200,000 Price Range
$8000 1st time
Months Inventory Avg $/Sqft Poly. (Avg $/Sqft)
homebuyer tax credit!
$115 16

14
$110

12
$105

Months of Inventory (MLS)


f 10
$ per Sq. Ft (MLS)

$100

$95

$90
4

$85
2

$80 0
Jan-04

Apr-04

Jul-04

Oct-04

Jan-05

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09
www.charlestonmarketreport.com
©2009

This is a chart of the “sweet spot” of the SFD Tri-County market based on simple
calculation of income. What you will notice is months inventory on the right side is
standing at approximately 11 months right now. I fully expect this to decrease since
we are now into the spring and summer seasonal period along with low interest
rates and the $8k homebuyer tax credit.

Yes, it is an excellent time to buy an affordable home in Charleston if you have a


secure job with decent income and a down payment.

You will also notice that the Price per Square.Foot on the left side of the chart
peaked in 2007 and has declined approximately 14% since that time. This is a
major decline for the low end of the market! However, we are seeing a slight
adjustment to the upside in this segment of the market due to low rates and the tax
credit.

25
Tri-County SFD
Supply & Demand by Price Range

Current Inventory % YTD Sales %

45.0%

40.0%

35.0%

30.0%
Percentage

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
$0

$1
$1

$2

$3

$4

$5

$6

$7

$8

$9
-1

m
00

00

00

00

00

00

00

00

00

il+
00

-1

-2

-3

-4

-5

-6

-7

-8

-9
k

99

99

99

99

99

99

99

99

99
k

k
SFD Price Range
Source: MLS

www.charlestonmarketreport.com
©2009

This slide represents a basic supply and demand chart by price range for the Tri-
County SFD market. When you see the maroon bar (YTD Sales) exceed the blue
bar (Current Inventory) that is a good sign because demand is higher than supply.
Again you are seeing the lower end of the market ($0-400k) gradually being worked
off. The real action is in the $100-300K market because it is affordable.

This is not rocket science everyone. The consumer is back to basics and most in
the Tri-County can not afford anything less than $400k. Even the individuals and
couples who can afford a more expensive home are moving down in price because
everyone has lost so much money in real estate and the stock market over the past
few years. We have now entered the “frugal economy” and the inventory sitting in
upper end of the price range is at the highest risk of more severe price declines in
the future.

26
Tri-County SFD Inventory Snapshot
Inventory Months Inventory

2500 100.0

90.0

2000 80.0

70.0
Inventory (# of Homes)

1500 60.0

Months of Inventory
50.0

1000 40.0

30.0

500 20.0

10.0

0 0.0
$1

$2

$3

$4

$5

$6

$7

$8

$9
$0

$1
00

00

00

00

00

00

00

00

00
-1

m
00

i l+
-1

-2

-3

-4

-5

-6

-7

-8

-9
99

99

99

99

99

99

99

99

99
k

k
Price Range
Source:MLS

www.charlestonmarketreport.com
©2009

We would prefer to have months inventory below 6 months but this is not a normal
real estate market. It is obvious from this SFD inventory snapshot that the lower
inventory levels are at the lower end of the price range, where real estate is
affordable for most buyers. This is not a coincidence.

27
Mount Pleasant SFD Market Share
of Tri-County by Price Range
Percentage

18.0%

16.0%

14.0%

12.0%
Percentage

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
0-

$1

$2

$3

$4

$5

$6

$7

$8

$9

$1
$1

00

00

00

00

00

00

00

00

00

m
il+
00

-1

-2

-3

-4

-5

-6

-7

-8

-9
k

99

99

99

99

99

99

99

99

99
k

k
Price Range
Source:MLS

www.charlestonmarketreport.com
©2009

A scary chart for the Mount Pleasant crowd. Notice the percentage of inventory in
the unaffordable range of the market for each price range in the Tri-County.

Once these more expensive homes sell that are sitting on the market you will see
major price declines show up in our indexes.

28
Tri-County SFA Snapshot

Median Sold PSF MI

Tri-County $ 172,250 $ 154 29.2

Berkeley $ 124,900 $ 113 22.3

Charleston $ 187,380 $ 175 32.3

Dorchester $ 123,000 $ 84 20.4

Summerville $ 123,000 $ 84 20.4

Goose Creek $ 120,000 $ 88 10.6

West Ashley $ 181,850 $ 107 14.4

Mt. Pleasant $ 193,500 $ 130 21.5

James Island $ 161,150 $ 148 43.2

www.charlestonmarketreport.com
©2009

You have to be careful with SFA property. The median sold and PSF do not include
the regime fees. You must factor the monthly regime fees into the equation to get a
true sense of the cost to own a townhouse or condo. This snapshot tells the same
story as the SFD snapshot.

29
Tri-County SFA
Supply & Demand by Price Range
Current Inventory % YTD Sales %

60.0%

50.0%

40.0%
Percentage

30.0%

20.0%

10.0%

0.0%
$0

$1
$1

$2

$3

$4

$5

$6

$7

$8

$9
-1

m
00

00

00

00

00

00

00

00

00

il+
00

-1

-2

-3

-4

-5

-6

-7

-8

-9
k

99

99

99

99

99

99

99

99

99
k

k
SFA Price Range
Source: MLS

www.charlestonmarketreport.com
©2009

Same story as the SFD snapshot.

The demand is where the maroon bar (YTD Sales %) is higher than the blue bar
(Current Inventory). The demand for SFA is in the $0-199k.

30
Tri-County SFA Inventory Snapshot
Inventory Months Inventory

1200 160.0

140.0
1000

120.0

800

100.0
Inventory (# of Hom es)

Months of Inventory
600 80.0

60.0
400

40.0

200
20.0

0 0.0
$0 $1 $2 $3 $4 $5 $6 $7 $8 $9 $1
- 10 00 00 00 00 00 00 00 00 00 m
0k -1 -2 -3 -4 -5 -6 -7 -8 -9 i l+
99 99 9 9k 99 99 99 99 99 99
k k k k k k k k
Price Range

www.charlestonmarketreport.com
©2009

This chart demonstrates the high quantity of homes on the market (Red bar) vs. the
Months Inventory (Blue Line).

31
New Building Permits

Jan.
2005

www.charlestonmarketreport.com
©2009

The new building chart is in un-chartered territory based on historical data.


Although this chart hit -38, which is an all time low record the fact that new building
permits has slowed down considerably is a good thing when you have a market that
is overbuilt.

What is really fascinating about this chart is how the momentum began to decline in
January 2005. This sign of weakness was well in front of the time when real estate
hit its peak in 2007.

I believe we should start to see this chart bottom out soon since credit is so tight
and there is a ton of inventory sitting on the market right now.

32
Tri-County Annual Housing Construction

Tri-County Building Permits

Single Family Multi-Family Total Poly. (Total)

12,000

10,000

8,000
No. of Permits

6,000

4,000

2,000

0
1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Source:Census Bureau

www.charlestonmarketreport.com
©2009

33
Interest Rates

30 Yr. Conventional Mortgage Rates

12

11
Created by: Brad Rundbaken
www.charlestonmarketreport.com
10

9
Mortgage Rate %

Source: Federal Reserve

4
Jan-90
Jul-90
Jan-91
Jul-91
Jan-92
Jul-92
Jan-93
Jul-93
Jan-94
Jul-94
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Date

Series1 6 per. Mov. Avg. (Series1) 12 per. Mov. Avg. (Series1)

www.charlestonmarketreport.com
©2009

Here is a major bright spot in the real estate world right now thanks to the U.S.
government. Yes, the government has artificially kept interest rates low by buying
up our own treasuries which has helped the residential real estate market. You will
notice how we are at low rates not seen in a long time.

34
Treasury Yield Story

www.charlestonmarketreport.com
©2009

This chart goes all the way back to 1962 and demonstrates the various interest rate
stages we have been in over the years.

Currently we are in a deflationary stage for real estate. This is evident in the action
on home prices.

I expect us to return to an inflationary period sometime in the future. Let us all hope
it is not hyperinflation. I expect inflation to return and it will present difficulties for
the real estate market as this will place major pressure on home prices to come
down further.

35
Foreclosures
Tri-County Distressed Real Estate
Source: RealtyTrac

900
857

800

723
705
700 675 678

600

515
500
# of Units

400 378 373

316 315
287
300
251
205 210
200 185 174 177
158 165 167
142 140
129
107
100

0
Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09
www.charlestonmarketreport.com

Berkeley Charleston Dorchester Tri-County

www.charlestonmarketreport.com
©2009

In order to get more detail on how this info is compiled go to:


http://www.realtytrac.com/education/foreclosureTerms.html

36
Where Art Thou Foreclosures?

 See below.

www.charlestonmarketreport.com
©2009

A recent Study by RealtyTrac found only 30% of foreclosures were listed for sale in the MLS in foru
states including CA.

Currently there are 634 Active “distressed” listings on the MLS out of 9696 listings.
13.5% of homes sold in Q1 2009 were distressed.
Only 6.5% of homes listed in the MLS are “distressed.” (4/10/09)

Based on the RealtyTrac study and my discussions with local REO brokers the Tri-County
region could easily have 3000 homes in some stage of a short sale or foreclosure right now.
This is a major problem that the real estate community needs to address ASAP.

Where are all the foreclosures??


Reasons there is “invisible” distressed inventory:
1. System overwhelmed and takes time to process.
2. Banks do not want to write down losses.
3. Banks holding back inventory so prices do not fall to fast.
4. All mortgages have not reset. (See next slide)
5. Charleston prices are only recently starting to show declines.
6. An increasing unemployment rate in Charleston, declining real estate values and mortgage resets
will continue to place pressure on many homes in the Tri-County area.

Major problem that must be addressed within the community.


Government programs will not fix the problem.
There is demand but NO transparency for these properties.

Solutions:
1.) A platform designed for the private (and where sensible) public purchase of assets - a market
stabilizing process is involved. Essentially an auction process or clearing exchange
2.) A structural (infrastructure) analysis of relative value - product price analysis.
3.) Affordable housing or "market rate" housing with some assistance for governing entities

37
Next Wave of Defaults….AlARMing

www.charlestonmarketreport.com
©2009

You will notice from the graph above how we are almost done with all the sub-prime
resets. However there are other types of loans such as Alt-A and Prime that are
defaulting in Charleston and other cities around the country. This vicious cycle
does not end until 2012. These defaults will continue to place pressure on homes
until the loans are modified or resold. It will take time to work through these loans
and reduce “distressed” transactions in the real estate market.

38
Foreclosures cont.

www.charlestonmarketreport.com
©2009

Equifax, a well-respected credit bureau, found that 7% of homeowners with


mortgages that were at least 30 days late on their payments in February, that’s up
50% from a year ago. And close to 40% of sub-prime borrowers are late, up from
23.7% a year ago.

We really did not experience an increase in short sales and foreclosures here in
Charleston until 2008. It will take us a few years to clean up the mess that was
created mostly from 2004-07.

This will create opportunity for many buyers who have cash in a desirable location
of the U.S.

39
Foreclosure Effect on Price

www.charlestonmarketreport.com
©2009

Obviously an inverse relationship.

As foreclosures increase the median home price drops.

California has witnessed a 50% decline in the median home price over the past
three years once foreclosures exploded from 2007 until the present time.

40
Negative Equity

www.charlestonmarketreport.com
©2009

Scary chart for the Tri-County region. Yes, many people are currently “underwater”
(house is worth less than what they owe) and this is a major concern of mine.

41
Charleston Unemployment

www.charlestonmarketreport.com
©2009

Our unemployment rate has practically doubled over the past year. Although this is
a lagging indicator these lost jobs will place pressure on the residential and
commercial markets in Charleston. I expect this chart to worsen for a little while
longer. Hopefully Charleston can gain some in-migration from people up north and
the midwest who can eventually sell their homes and move here.

42
Alternate Unemployment Data

www.charlestonmarketreport.com
©2009

The U.S. government's Bureau of Labor Statistics (BLS) shocked the world Friday with the release of
its official, headline unemployment number: A surge from 8.1 percent to 8.5 percent. But it's really a
lot worse. This number (called "U-3"), although invariably cited by the press in the headlines, is the
narrowest, most sugarcoated measure of U.S. joblessness: It excludes workers seeking full-time
jobs, failing to find them, and then accepting part-time work that almost invariably pays far less.

It excludes discouraged workers who have given up looking for jobs because they can't find any.

And, as if that wasn't enough to color the truth, the BLS has been consistently and grossly
understating the current unemployment numbers, not revising them until months later when fewer
people are paying attention.
Williams points out that:
"The pattern of impossible biases being built into the headline monthly payroll employment continued
with March 2009 reporting. Instead of the headline jobs loss of 663,000, consistent application of
seasonal-adjustment factors would have shown a more-severe monthly jobs loss of about 750,000.
This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month total
upside headline-number bias of 1,345,000."
The proof: In every single one of its six most recent monthly payroll reports, the BLS has announced
massive upward revisions in prior months' job loss numbers — with five of those even exceeding its
own guidelines for the acceptable margin of error (plus or minus 5 percent).

Fact #2. Government Admits Some of the Flaws


The government also publishes a broader measure of unemployment ("U-6"), which corrects some
— but not all — of the above flaws.
This measure includes many discouraged and part-time workers, as it should. And, lo and behold,
those adjustments alone add more than seven full percentage points to the unemployment rate!
Instead of 8.5 percent unemployment, suddenly we see that we have 15.6 percent unemployment,
according the government's own admission.

Instead of a recession, suddenly we see that we are already in a depression.

43
NATIONAL OPPORTUNITY/RISK INDEX

Source: Real Estate Economics

44
JOBS-TO-HOUSING RELATIONSHIPS

UNITED STATES
TOTAL JOBS-TO-TOTAL HOUSING INDEX
115.0

112.5
S T R O N G E R

110.0

107.5

105.0

102.5

100.0
W E A K E R

97.5

95.0

92.5
Over
90.0
Supply
87.5

85.0
Jan-9 0
A pr
Jul
O ct
Jan-9 1
A pr
Jul
O ct
Jan-9 2
A pr
Jul
O ct
Jan-9 3
A pr
Jul
O ct
Jan-9 4
A pr
Jul
O ct
Jan-9 5
A pr
Jul
O ct
Jan-9 6
A pr
Jul
O ct
Jan-9 7
A pr
Jul
O ct
Jan-9 8
A pr
Jul
O ct
Jan-9 9
A pr
Jul
O ct
Jan-0 0
A pr
Jul
O ct
Jan-0 1
A pr
Jul
O ct
Jan-0 2
A pr
Jul
O ct
Jan-0 3
A pr
Jul
O ct
Jan-0 4
A pr
Jul
O ct
Jan-0 5
A pr
Jul
O ct
Jan-0 6
A pr
Jul
O ct
Jan-0 7
A pr
Jul
O ct
Jan-0 8
A pr
Jul
O ct
Jan-0 9
A pr
Jul
O ct
Jan-1 0
A pr
Jobs-to-Housing Index Equilibrium

The total number of jobs relative to the total number of homes in the nation lends
insight to the economic foundation that supports net housing demand. The indexed
chart below presents historical relationships and a near-term forecast in jobs-to-
housing relationships relative to a long-term equilibrium line derived by Real Estate
Economics:

The jobs-to-housing index is arrayed relative to an equilibrium line set at 100. An


index above equilibrium reflects periods of pent-up demand or under supply of
housing relative to jobs, while any index below 100 represents over supply. As
shown above, since late Year 2002, the nation has been in a state of over supply of
housing.

This pattern of over supply suggests that the strong housing sales activity and the
housing price run-up that occurred after the 2002/2003 recession were largely
artificial, being caused by deregulation of the financial industry and the resultant
loosened lending practices that allowed non-traditional users (investors and
unqualified buyers) to enter the housing market in large numbers.

Now, with unprecedented job losses, the index is being driven down further,
reflecting a reduced ability for the national economy to support the existing housing
supply. The result has contributed to distressed sales, foreclosures and further
drops in home prices. Unfortunately, the pattern worsens during the next 12
months – despite the fact that very few homes are now being constructed.

45
MORTGAGE COST-TO-INCOME
RELATIONSHIPS

UNITED STATES
MORTGAGE COST-TO-HOUSEHOLD INCOME INDEX
150.0
U N D E R V A L U E D

140.0

130.0
Under
120.0 Valuation
110.0

100.0
V A L U E D

90.0

80.0

70.0
O V E R

60.0

50.0
Jan-90
A pr
Jul
O ct
Jan-91
A pr
Jul
O ct
Jan-92
A pr
Jul
O ct
Jan-93
A pr
Jul
O ct
Jan-94
A pr
Jul
O ct
Jan-95
A pr
Jul
O ct
Jan-96
A pr
Jul
O ct
Jan-97
A pr
Jul
O ct
Jan-98
A pr
Jul
O ct
Jan-99
A pr
Jul
O ct
Jan-00
A pr
Jul
O ct
Jan-01
A pr
Jul
O ct
Jan-02
A pr
Jul
O ct
Jan-03
A pr
Jul
O ct
Jan-04
A pr
Jul
O ct
Jan-05
A pr
Jul
O ct
Jan-06
A pr
Jul
O ct
Jan-07
A pr
Jul
O ct
Jan-08
A pr
Jul
O ct
Jan-09
A pr
Jul
O ct
Jan-10
A pr
Mortgage Cost-to-Income Index Equilibrium

The other half of the equation to national market stability deals with housing costs
(or more specifically, mortgage costs) relative to household incomes. Long term
trends and a near term forecast between mortgage costs and household incomes
are shown below:

The equilibrium line shown in the chart above represents the long-term relationship
between costs and incomes, and as with the jobs-to-housing index, the equilibrium
line associated with the mortgage cost-to-income index is set at 100. Any index
above the 100.0 equilibrium index reflects under valuation of housing relative to
household income support, while an index below equilibrium represents a period of
over valuation.

The chart reveals that housing values are currently well above equilibrium, reflecting
a trend of increasing under valuation that began during the latter part of Year 2007,
and is now quite severe.

This is a reversal, following four years of over valuation (a price ‘bubble’) that
formed from 2004 thru late-2007. Correcting from the past run of artificially
overvalued housing, the current drop in home prices indicates a considerable over
correction and unprecedented levels of housing affordability. With current and
projected job losses, under valuation may need to be even greater in order to offset
a very poor jobs-to-housing index.

46
COMPOSITE INDEX OF LEADING INDICATORS

NATIONAL HOUSING MARKET OPPORTUNITY/RISK INDEX


For the Month of February 2009 Under Valuation will
increasingly offset
Composite O/R Index Jobs-to-Housing Index EconomicIndex
Mortgage Cost-to-Income Losses. Equilibrium
Market stabilization by
135.0 3Q’10.
130.0
E R

125.0
120.0
T
T

115.0
B E

110.0
105.0
100.0
150.0
140.0
E

95.0
130.0 During the 18-24 month lag The Index Leads the
W O R S

90.0
120.0 time between the index Market by 18 to 24
85.0
110.0 Months –
and market manifestation, It Effectively
80.0
100.0 foreclosure inventory will Predicted the
90.0
75.0 shrink, credit will ease and downturn.
80.0
Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10
Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul
70.0 growth will
economic
60.0 resume (3Q’10). INDEX DATE
50.0
Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12
Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul

Jul
ESTIMATED DATE THE INDEX IS MANIFEST IN THE MARKET

The above indexes tend to be counter-cyclical. More importantly, they tend to pre-
empt actual market changes. When the above indexes for jobs-to-housing and
mortgage costs-to-incomes are combined into a composite index (the Housing
Opportunity/Risk Index), the resultant Housing O/R Index leads market change by
18 to 24 months – effectively giving a clear warning to market participants when to
leave the market… and when to enter. The chart below presents this composite
Housing Opportunity/Risk Index:

The O/R Index shown for February 2009 is recorded at 110.2 – near a record high.
This index, however, won’t be felt in the housing market until the latter half of Year
2010. Indeed, what we’re feeling now is the depressed index of early Year 2007 –
near the low point of the cycle.

The current index gives a clear indication as to what market conditions will be like
during the latter half of Year 2010. And they’ll be healthy - not in terms of price as
much as in terms of sales volume. The incredibly strong values reflected by the
current index will become increasingly apparent as the economy begins to recover.
Even with modest incremental job growth (which is expected to be evident by the
latter part of Year 2010), an increasing number of potential buyers will recognize the
market’s severe under valuation, and will enter the market. Sales volume will
increase dramatically as an increasing number of buyers seek to take advantage of
under valuation once economic stability is established. Indeed, even speculators
may, once again, become an issue.

Though the index has been trending in positive market territory (an over correction),
the severity of the financial crisis and extremely poor market psychology will
continue to hinder market conditions in Year 2009 and well into Year 2010.
47
Forecast for Charleston

 Forecasting is very difficult.


 Forecasting is the equivalent of fortune
telling.
 Forecasting is impossible when “Big Mama”
(Government) constantly changes the rules.
 Prefer Risk Management to Forecasting!

www.charlestonmarketreport.com
©2009

48
Tri-County Median Price Forecast

18000 $350,000
March 2009
16000 $270,000
Another 15-20% drop in hom e $300,000

Average Annual Sales Price


rrice s is pos sible in next 12-18
14000 m onths.
Sale Volume per Year

$250,000
12000

10000 $200,000

8000 $150,000
6000
$100,000
4000
Aberration in Price and Sales $50,000
2000

0 $0
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
Sales Volume Avg Sale $

www.charlestonmarketreport.com
©2009

This is probably one of my most busy and confusing charts but it is the one everybody
wants…..The Forecast.

I am forecasting another 15-20% drop in home prices for all homes above the $400k price range
over the next 12-18 months. This would obviously have an impact on the overall median and
average Tri-County home prices but the decline in prices would be caused by the upper end of
the market.

The reason I anticipate a further decline in price is the “Lending Gone Wild” era created excess
supply and demand. You can see this by looking at the arrows on the above chart. If the
Charleston market had remained on a normal trend with regards to sales volume the average
home price would probably be approximately $225,000 and NOT $270,000. The reversion to the
mean will occur once the upper end of the market finally sells off at lower prices.

I do not anticipate the $100-300k segment of the market to have that bad of a correction but it is
impossible to know until we can all see all the distressed real estate in this town. Until that
occurs we are all flying blind.

49
Good News About Charleston

www.charlestonmarketreport.com
©2009

50
Good News About Charleston!

www.charlestonmarketreport.com
©2009

51
Good News About Charleston!

 Charleston is special!
 Travel + Leisure Magazine 2008
#1 Friendliest City
#2 Shopping
#2 Home Design
 2008 Southern Living
#1 Best Southern City
 Inc.Com
#6 Midsize City for Doing Business

www.charlestonmarketreport.com
©2009

52
Good News continued

 Forbes Magazine
25 Strongest Housing Markets
 Conde Nest
2008 #2 Top U.S. Destination
 Milken Institute
2008 Top 25 Best Performing Cities
 Weather, low taxes, beaches, golf, history,
etc.

www.charlestonmarketreport.com
©2009

53
Conclusions
 Tri-County median home prices will continue to decline because of
upper end of market being overbuilt and overpriced due to current
supply and demand conditions.
 The affordable market is priced competitively.
 Deterioration of price depends on how we handle foreclosures.
 Charleston desperately needs affordable housing!
 Lending/Financial Crisis could benefit Charleston with jobs and in-
migration.
 Excellent opportunities in affordable market because of low rates
and tax credit.
 Great time to buy if home priced correctly!
 Economic and real estate correction will take time.
 As long as the credit system does not have any further meltdowns
we could be witnessing the low point of sales volume now that
prices are beginning to decline.
.
 Proper risk management is KEY.

www.charlestonmarketreport.com
©2009

54
Thank You!

 Post & Courier


 College of Charleston
 Everyone for Attending
 PowerPoint available at:
www.charlestonmarketreport.com

www.charlestonmarketreport.com
©2009

55