Transcript Charlotte, Where Growth Is Just Beginning To Rev Up

Now That The Housing Boom Is Over What Comes
Next For The U.S. Economy & Commercial Real
Estate?
SIOR National Convention
Charlotte, North Carolina
Mark Vitner
Director and Senior Economist
Wachovia Corporation
October 26, 2006
Welcome To Charlotte, Where Growth Is
Just Beginning To Rev Up
2
Overall Economic Conditions Have Been Stronger
Than Widely Believed But Growth Is Now Slowing
• Home Sales Peaked About A Year Ago & Are Now About Half
Way Through A Major Correction
• Consumer Spending Is Growing More Modestly But Will Hold
Up Better Than Expected Thanks To Job Growth
• Domestic Motor Vehicle Producers Are Shutting Plants To
More Permanently Align Production Versus Sales
• Businesses Remain Cautious – Capital Spending Has Not
Picked Up As Much As Had Been Expected
• The Trade Deficit Appears To Be Topping Out And May
Improve Slightly During Coming Years
3
Growth Is Expected To Moderate During The
Remainder Of 2006. Look For 2% to 3% Gains.
REAL GDP
Bar - Compound Annual Rate, Line - Yr/Yr % Change
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
Line - Yr/Yr % Change @ 3.5%
Bar - 2nd Quarter 2006 @ 2.6% Ann Rate
-2%
4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-2%
Hiring Has Slowed Recently But The BLS Has Also
Disclosed That Past Growth Was Understated
NONFARM EMPLOYMENT GROWTH
In Thousands
600
600
September 2006
+ 51,000
300
300
0
0
-300
-300
Green Bar is Preliminary Estimate of Annual Benchmark Rev ision
Dashed Line is 130,000 Job Figure Cited By Ben Bernanke Recently
As What Is Needed To Hold The Unemployment Rate Steady
-600
5
2000
2001
2002
2003
2004
2005
2006
-600
The Unemployment Rate Is Showing Signs Of
Bottoming Out, We Might Even See A Slight Rise
CIVILIAN UNEMPLOYMENT RATE
Seasonally Adj usted
11%
11%
September '06
10%
10%
@ 4.6%
9%
9%
8%
8%
7%
7%
6%
6%
5%
5%
4%
4%
3%
65
70
75
80
85
90
95
00
05
3%
Dashed Line is Average Unemployment Rate 1965 to Date @ 6.0%, Shaded Bars Denote Recession Periods
6
The Sharp Run-Up In Home Prices Has Ended
MEDIAN SALES PRICE FOR AN EXISTING HOME
Year to Year Percent Change
20%
20%
August 2006
NAR Median price = $225,000
15%
15%
10%
10%
5%
5%
0%
-5%
0%
6-month moving average @ 2.7%
Q2 OFHEO Price Index @ + 10.1%
Median Price Change @ - 1.7%
97
98
99
00
01
02
03
Bold Line is Six-Month Moving Average
7
04
05
06
-5%
New Home Sales Peaked About One Year
Ago And Will Likely Slide For Another Year
NEW HOME SALES
Seasonally Adjusted Annual Rate - In Thousands
1400
1400
August 2006
@ 1050
1200
1200
1000
1000
800
800
12-Month Moving
Avg. @ 1150
600
600
Bold Line is 12-Month Moving Average
400
8
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
400
Homeownership Has Turned Down In
Response To Soaring Home Prices
HOMEOWNERSHIP RATE FOR THE U.S.
70%
70%
2Q '06
@ 68.6%
68%
68%
66%
66%
64%
64%
Bold Line is 4-Quarter Moving Average
62%
66 68
70 72 74 76 78
80 82 84 86
88 90 92 94 96
Source: The Census Bureau
9
98 00 02 04
06
62%
Homebuilders Are Considerably Less
Optimistic About The Housing Outlook
NAHB HOUSING MARKET INDEX
Seasonally Adjusted
80%
80%
60%
60%
October 2006
31.0
40%
40%
20%
0%
10
20%
86
87
88
89
90
91
92 93 94 95 96 97 98 99 00
Bold Line is 12-Month Mov ing Av erage
01
02
03
04
05
06
0%
Homes Sales Are Expected To Slow At
Least 20% Over The Next Two Years
SALES OF NEW AND EXISTING SINGLE-FAMILY HOMES
Seasonally Adjusted Annual Rate - In Thousands
8000
8000
6100
6100
4200
4200
2300
2300
400
11
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Source: The Census Bureau, National Association of Realtors, Forecast by Wachov ia
400
Home Price Appreciation Has Slowed
HOME TURNOVER TENDS TO COINCIDE WITH RISING PRICES
Ratio of Total Hom e Sales to Housing Stock vs Yr/Yr Change in Housing Prices
9%
16%
Dashed Line is Yr/Yr % Change In OFHEO Home Prices
On Right Scale
7%
12%
5%
8%
4%
4%
2%
0%
Solid Line is Housing Turnov er
On Left Scale
0% 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: Census Bureau, National Association of Realtors, Office of Federal Housing Enterprise Oversight, and W achovia
12
-4%
Consumer Spending Has Slowed And Will Grow
Only Modestly For The Next Several Quarters
EX. AUTO & GAS RETAIL SALES VS. INCOME GROWTH
Series Are 3 Month Moving Averages
15%
15%
After-Tax Incom e
August @ 7.0 %
Tax Cut 2
Refi Boom
Stock Market Bubble
10%
10%
Tax Cut I
5%
5%
Retail Sales
Ex. Motor Vehicles & Gasoline
August @ 3.3%
0%
0%
Bold Line = Disp. Personal Income, Yr/Yr % Change
Thin Line = Retail Sales, Ex. Motor Vehicles 3-Mo. Chg, Ann. Rate
-5%
96
97
98
99
00
01
02
03
04
05
12-Month Change (Disp. Personal Income is 12-Month Moving Average)
13
06
-5%
Capacity Utilization Has Risen Above Its LongRun Average & A Few Shortages Exist
CAPACITY UTILIZATION
Percent of Capacity
86
84
86
September '06
@ 81.9
84
82
82
80
80
78
78
76
76
74
74
72
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Bold Line is a 12-Month Mov ing Av erage, Dashed Line is 1972 to 2005 Av erage of 81.0
14
72
Business Investment Spending Unexpectedly
Slowed In The Second Quarter
INFORMATION PROCESSING EQUIPMENT & SOFTWARE
VS. OTHER CAPITAL SPENDING
30%
30%
Solid Bar = Information Processing Equipment & Softw are
2Q @ - 1.1%
20%
20%
10%
10%
0%
0%
-10%
-10%
-20%
-20%
Clear Bar = Other Capital Spending, 2Q @ - 1.79%
-30%
15
2000
2001
2002
2003
2004
2005
2006
-30%
Commercial Construction Has
Strengthened Across Most Product Lines
Private Construction of Commercial Buildings
Billions of Current Dollars, SAAR
$80
$80
$75
$75
$70
$70
$65
$65
$60
$60
$55
$55
$50
$50
$45
$45
$40
$40
Commercial: Jul @77.2
$35
12 Month Moving Average: Jul @73.7
$30
94
16
$35
95
96
97
98
99
00
01
02
03
04
05
06
$30
But All The Cranes Are In Dubai, Moscow & Shanghai
17
Vacancy Rates Have Fallen Across The U.S.,
Particularly In NYC, The South & Parts Of The
West
OFFICE VACANCY RATES
Vacancy Rate -- Multi-Tenant Office Space
25%
25%
Third Quarter 2006
Suburban Area @ 14.0 %
Downtown Area @ 11.7 %
20%
Metropolitan Area @ 13.2%
20%
15%
15%
10%
10%
5%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Shaded Area Denotes Recession, Source: CB Richard Ellis
18
5%
Industrial Vacancy Rates Have Begun To
Fall, Mostly In Coastal Areas
U.S. INDUSTRIAL VACANCY RATE
Vacancy Rate On Class A, Multi-Tenant Office Space
12%
12%
Third Quarter 2006
10%
@ 9.5%
10%
8%
8%
6%
6%
4%
4%
2%
2%
0%
0%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
CB Commercial
19
The Fed Is Done For The Time Being. We See The
Risks Now Being More To The Down Side
FEDERAL FUNDS RATE
Monthly Average
10%
10%
September '06
@ 5.25%
8%
8%
6%
6%
4%
4%
2%
2%
Dashed Line is Forecast
0%
20
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Bold Line is Three-Month Mov ing Av erage
0%
Long-Term Interest Rates Remain
Abnormally Low
TEN YEAR TREASURY vs NOMINAL GDP
Monthly Average
14%
Line is 10-Year Treasury Note -- 2nd Qtr Avg @ 4.59% (4.73% Currently)
Bar is Nominal GDP -- 1st Qtr @ 6.7%
12%
14%
12%
10-Yr Treasury Has On Average Been
111 Basis Points Above Nominal GDP
10%
10%
8%
8%
6%
6%
4%
4%
2%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06
Both Series Are Four-Quarter Moving Averages
21
2%
Economic Forecast
*(Qtr/Qtr%
Change, Annual
Rate)
2004
2005
2006
2007
Real GDP*
3.9%
3.2%
3.5%
2.5%
Personal
Consumption*
3.9%
3.5%
3.1%
2.6%
Equipment &
Software*
7.2%
8.9%
7.3%
4.8%
CPI (YoY)
2.7%
3.4%
3.4%
2.5%
Corporate Profits
(YoY)
19.1%
12.5%
18.1%
7.2%
10-Yr
T-Note
22
4.21%
4.28%
4.89%
5.10%