Dj Vu All Over Again

An Economic and Real Estate Forecast for 2012

Ted C. Jones, PhD, Chief Economist, Stewart Title
http://blog.stewart.com/

Dj Vu

The fact that we are here today to debate raising Americas debt limit is a sign of leadership failure. It is a sign that the US Government can not pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Governments reckless fiscal policies. Increasing Americas debt weakens us domestically and internationally. Leadership means that the buck stops here.' Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better.

Senator Barack H. Obama, March 2006

Mega Themes
Residential Renting vs. Owning Liquidity Trap

Massive Uncertainty from Washington, DC

Time to Over-Weight in Real Estate

Axiom 1
There is No Such Thing as a National Real Estate Market or a National Economy

Jobs Are Everything

Period.

Texas Best Business Tax Environments

http://taxfoundation.org/files/bp60.pdf

U.S. Job Numbers

Recession Millions of Jobs Seasonally-Adjusted
150 140 130 120 110

6.44 Million Jobs Down From Record

100 90 80

70

75 77 79 81 83 85 87 89 91 93 95 97 99 '01 '03 '05 '07 '09 '11

U.S. Job Numbers

Jobs (Millions) Seasonally Adjusted
138 136 134 132 130 128
'07 '08 '09 '10 '11

6.44 Million Fewer vs. Jan 1 2008 120,000 Gained in Nov 2011

US Jobs
Percent Change from Same Month Prior Year
Not Seasonally Adjusted

3.0% 1.5% 0.0% -1.5% '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 -3.0% -4.5% -6.0%
US

Beaumont-Port Arthur MSA Jobs

Jobs (Thousands) Seasonally Adjusted
169 167 165 163 161 159 157 155
'07 '08 '09 '10 '11
7,100 Jobs Down Since Aug 2008 2,000 Jobs Added Last 12 Months

Beaumont-Port Arthur Jobs

Percent Change from Same Month Prior Year
Not Seasonally Adjusted

10.0% 7.5% 5.0% 2.5% 0.0% -2.5% '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 -5.0% -7.5% US Beaumont-Port Arthur
7 6

Global Oil Consumption Per Day

Millions of Barrels
90 85 80 75 70 65 60 55
80 82 84 86 88 90 92 94 96 98 '0 0 '0 2 '0 4 '0 6 '0 8 '1 0 '1 2 f
Capacity to spool up annual production 1.5 million barrels per day.

Well Head Natural Gas Price

Price Per 1,000 Cubic Feet 3 Month Moving Average
$12 $10 $8 $6 $4
$2 to $4 2X

$2 $0
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10

Spot Oil Price West Texas Intermediate

Price Per Barrel 3 Month Moving Average
$140 $120 $100 $80 $60 $40 $20 $0
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10

$20 to $100 5X

Wall Street Journal-St Louis Fed

U.S. Oil & Gas Rotary Rig Counts

Number of Rigs 5 Week Moving Average
2,100 1,800 1,500 1,200 900 600 300 0
00 01 02 03 04 05 06 07 08 09 10 Ja nJa nJa nJa nJa nJa nJa nJa nJa nJa nJa nJa n11

From 20 Percent Oil to 53 Percent Today

Gas

Oil

US Energy Consumption
Consumption Quadrillion BTUs
100 80 60 40 20 0
'5 0 '5 4 '5 8 '6 2 '6 6 '7 0 '7 4 '7 8 '8 2 '8 6 '9 0 '9 4 '9 8 '0 2 '0 6 '1 0

Other Nuclear Hydro

Natural Gas

Oil
Coal

President Obama 80 Percent Clean Energy by 2035

U.S. Nuclear Power Production

Nuclear Power Plants Annual Quadrillion BTUs Quadrillion BTUs Per Plant 104 8.44 0.0812

Current Energy Source Coal Oil Gas Coal + Oil + Gas

Annual Required Number of New Nuclear Plants Quadrillion To Replace Respective Percent of Each BTUs 10% 20% 30% 40% 50% 20.71 26 51 77 102 128 35.97 44 89 133 177 222 24.67 30 61 91 122 152 81.35 100 200 301 401 501

GDP Implicit Price Deflator

Percent Change from Same Quarter in Prior Year

10% 8% 6% 4% 2% 0%
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10
US Dept of Commerce-Bureau of Economic Analysis

Current 2.40 Percent 2.26 Percent 10-Year Average

Inflation

US Existing Home Sales

Sold (Millions) Average Per Month For Prior 12 Months
Bubble
7.0 6.0 5.0 4.0 3.0
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Seasonally Adjusted Annualized Rate

8.0

Normal

$8,000 Tax Credit

National Association of REALTORS

U.S. Existing Home Sales

Median Price -- $ Thousands -- Average for Prior 12 Months
$240 $220 $200 $180 $160 $140
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11
Current Median Down 25.8 Percent from Peak in July 2006

National Association of REALTORS

U.S. Residential Building Permits

Number of Dwelling Units -- Millions
2.1 1.8 1.5 1.2 0.9 0.6 0.3 0.0
80 82 84 86 88 90

Single Family

Multi

92

94

96

98

'0 0

'0 2

'0 4

'0 6

'0 8

'1 0

Gold
Price Per Ounce Nominal (Not Inflation Adjusted)
$1,500 $1,200 $900 $600 $300 $0
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10

Jan 1980 to June 30 2011 Gold Up 136.9 Percent

Existing Home Prices

$ Thousands --Nominal Average of MSA Medians
$225 $200 $175 $150 $125 $100 $75 $50 $25 $0
Jan 1980 to June 30 2011 Housing Up 225 Percent Even Though Down 25.7 Percent From Peak (12-Month Average)

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10
National Association of REALTORS

Beaumont Home Sales

Average Number Per Month For Prior 12 Months

225 200 175 150 125 100 75 50 25 0

'0 2 '0 3 '0 4 '0 5 '0 6 '0 7 '0 8 '0 9 '1 0
Beaumont Board of REALTORS

'1 1

Beaumont Home Prices

Average Price
$200 $175 $150 $125 $100 $75 $50 $25 $0
'0 2 '0 3 '0 4 '0 5 '0 6 '0 7 '0 8 '0 9 '1 0
Beaumont Board of REALTORS

'1 1

Beaumont Home Prices

Median Price 12 Month Moving Average
$150 $125 $100 $75 $50 $25 $0
'0 2 '0 3 '0 4 '0 5 '0 6 '0 7 '0 8 '0 9 '1 0
Beaumont Board of REALTORS

'1 1

Beaumont-Port Arthur Residential Building Permits

Number of Dwelling Units
2,500 2,000 1,500 1,000 500 0
98 '0 0 '0 2 '0 4 '0 6 '0 8
Single Family Multi

2,000 New Jobs vs. 648 New Dwelling Units in Last 12 Months

'1 0

80

82

84

86

88

90

92

94

96

Light Weight Vehicle Sales

Millions Seasonally Adjusted Annual Rate
3 Month Moving Average
20 16 12 8 4 0
'90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Bureau of Economic Analysis

Money Supply M1
$ Billions Seasonally Adjusted
$2,100 $1,800 $1,500 $1,200 $900 $600 $300 $0
'80 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10
Currency, Checking Accounts, Demand Deposits

Federal Reserve

Stock Values vs. GDP

Index 1975 = 1.0
6 5
Real GDP

4 3 2 1

Real Dollar Stock Values

Rational Behavior Returns

0 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11

S&P, BEA

U.S. Personal Savings Rate

Percent of Disposable Income
9 8 7 6 5 4 3 2 1 0 '07 '08 '09 '10
Plunging Savings Rate

'11

St. Louis Fed

Household Debt Service as a Percent of Household Disposable Income

Percent
14 13 12 11 10 9 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11
FED Board of Governors, BEA

$15,799 Average Credit Card Debt Per Household

Business Bankruptcy Filings

Number of Filings -- Thousands
90 80 70 60 50 40 30 20 10 0
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Consumer Bankruptcy Filings

Number of Filings -- Thousands
2,400 2,100 1,800 1,500 1,200 900 600 300 0
'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10

Bank Failures
Number of Institutions Per Year

400 300 200 100 0

'70 '73 '76 '79 '82 '85 '88 '91 '94 '97 '00 '03 '06 '09
2011 estimated

FDIC

U.S. Real Retail & Food Service Sales

$Billions Seasonally Adjusted
$190 $180 $170 $160 $150 $140
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Oil Prices & 10-Year Treasury Rates

September 2011 Dollars
Oil Prices
$150 $130 $110 $90 $70 $50 $30 $10 -$10 72 75 78 81 84 87 90 93 96 99 9 6 3 '02 '05 '08 '11 0

10-Year Treasury Rates %

21 18 15 12

Oil Prices & Exchange Rates $US Per Euro

Oil in September 2011 Dollars

Oil Price
$140 $120 $100 $80 $60 $40 $20
'02 '03 '04 '05 '06 '07 '08 '09 '10 '11

Dollars Per Euro

$1.65 $1.45 $1.25 $1.05 $0.85

Operation Twist
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1 mo 3 mo 6 mo 1 yr 2 yr

Federal Resave Owns $1+ Trillion Percent Treasury Yield Rates of Treasuries
Yield Curve Data as of Oct 28 2011 Since commencing program, 30-yr rates up 47 basis points

Buy These

Sell These
3 yr 5 yr 7 yr 10 yr 20 yr 30 yr

Early 1960s Operation Twist Saw Long-Term Rates Decline 0.15 Percent

Federal On-Budget Deficit Forecast

$ Billions Baseline ($10.7 Trillion Total Debt 12-31-08)
$0.0 -$200.0 -$400.0 -$600.0 -$800.0 -$1,000.0 -$1,200.0 -$1,400.0 -$1,600.0
$14.8 Trillion Oct 31 2011
$7.6 Trillion 2011-2020

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11p '12 '13 '14 '15 '16 '17 '18 '19 '20
$10.7 Trillion Cumulative Debt Dec 31 2008

Interest Expense on Federal Debt

$ Billions
$1,200 $1,000 $800 $600 $400 $200 $0
88 92 96 '0 0 '0 4 '0 8 '1 2 '1 6 '2 0

2011 2020 $438 Billion $1.1 Trillion CBO Forecast

Forecast Assumes No Added Federal Spending Programs Not Already in the Budget Healthcare Funding is Adequate (taxes)

U.S. Income Taxes 2008

Tax Payers Percent of All Taxes Paid Top 1 Percent 38 Percent Top 5 Percent 59 Percent Top 10 Percent 70 Percent 45 Percent of Taxpayers Paid $0 51 Percent of Taxpayers Paid $0 2009

Home Prices and Stock Market Performance 12-Month Moving Average

January 2002 = 100 Quarterly Commercial Data Modeled to Monthly Returns

190 170 150 130

Housing

Commercial Real Estate

110
DJIA

90
SP500

70 '02 SP500 '03 DJIA '04 '05 '06 '07 '08 '09 '10 '11 Home Prices Commercial Values

NCREIF, S&P, Dow Jones, National Assn of Realtors

Real Estate

Commercial Sales
$ Billion Percent Change

2007 $ 557.8 2008 $ 181.6 -67.4% 2009 $ 54.4 -70.0% 2010 $ 120.0 120.6% 2011 $220 Billion (Teds Forecast) 2012 $250 Billion

3 Q
Ted C. Jones

Quality
Location Property Tenants

Mortgage Bankers Association Office Building Washington, DC

Purchased 2007 Sold Feb 2010

Loss

$79.0 Million $41.3 Million

$37.7 Million 47.7 Percent

Mortgage Bankers Association Office Building Washington, DC

Purchased 2010 Sold Feb 2011

Gain

$41.3 Million $101.0 Million

$59.7 Million 145 Percent

2012 Economic Concerns

Wall StreetWashington DCLiquidity Jobs Stimulus Did Not Work
GDP = Consumption + Investment + Government Spending + Exports - Imports

Cold War IITerrorists Rural Land Bubble Liquidity Trap Energy: US Imports 50+ Percent of Oil Real Estate-Autos-Credit Cards-Banks

Teds Blog

http://blog.stewart.com/

Ted C. Jones, PhD Chief Economist Stewart Title Guaranty Co. http://blog.stewart.com/