October 2009 Charleston Market Report

www.charlestonmarketreport.
com
“The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
William Arthur Ward
October 2009 Edition

In This Issue:
RESILIENT Charleston
Cartoons
Slow Recovery
Bank Failures
Commercial Real Estate in Charleston
Trick or Treat?
Just Desserts and Markets Being Silly Again
Charleston Snapshot
Real Estate Tidbits
National Economic/Housing Trends and 5 Year Forecast
Quick Note: I previously announced I would not use MLS data anymore. I have changed my mind and the next
issue I will do some residential Charleston real estate analysis as long as CTAR allows me to have access to the
MLS again. I am not sure if they will but I am going to try. From my past experiences CTAR does not like my
analysis because it does not always paint a rosy and optimistic view of the market. Now, when I mention CTAR
I have to stress that this organization has its rules made the realtors in Charleston. So we will see what happens
and time will tell if I get access again. There are many realtors that subscribe to the CMR and want the truth out
in the open in the market however they are outnumbered by some agents who use “smoke and mirrors” just to
make a commission. This occurs in all businesses that are driven by commissions and just a fact of life.
Resilient Charleston
Since I was born and raised in Charleston I feel I know this town pretty darn good from many different
perspectives. I have lived here almost my entire life except for that first job out of college which took me to
Charlotte and New York for a couple of years. There is one word that comes to my mind about Charleston which
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history will prove time and time again…..RESILIENT. Whenever you think this city is on the rocks the citizens
of Charleston always seem to find a way to come back strong. This was displayed during the Civil War, a major
earthquake in 1886, numerous hurricanes but especially Hugo in 1989, the closing of the Navy Base and the
present severe recession that has caused high unemployment and multiple challenges in the real estate industry.
However, the past few weeks have given lifelong and current Low country residents a reason to smile with the
announcement of the signing of a new Maersk contract that will keep the shipping company from leaving the Port
of Charleston and the announcement last week of the commitment from Boeing to build a production plant to
build the 787 Dreamliner in North Charleston.
The impact from Boeing coming to Charleston is all positive for the local Tri County economy. The question
that is impossible to answer at the moment is what type of economic impact Boeing will have on the Tri County
economy? Boeing will not cure all the real estate and unemployment problems in Charleston but it will certainly
help once the plant begins operations. Charleston is quietly building some “cluster” industries that could have a
significant impact in the future with Boeing and the Defense industry. Both industries bring good paying jobs
with nice benefits that will help this economy. However, the impact of Boeing will take time. The plant will take
approximately two years to build so do not plan on an instant influx of homebuyers yet.
Here is the exciting aspect of this entire deal. Boeing employs 76,000 people in the state of Washington and
there are 150,000 jobs associated with Boeing in Washington. It is very possible that the 3800 jobs to be
filled in North Charleston is just the beginning of many more to come. Now if we get 25-50% of these current
jobs in Washington shifted to Charleston then it will be a major game changer for this market in the next five to
ten years. It will change everything from unemployment rates to the real estate market BUT as of right now
nobody knows what Boeing plans on doing. I know one thing that they are sick and tired of the Machinist Union
and can not afford anymore plant shutdowns. I have a feeling the 787 plant is just the beginning of many more
jobs to come because SC is a right to work state with a world class port and affordable lifestyle. Time will tell.
Cartoons
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Slow Recovery
One reason for this has been a gradual shift over the past decade in how employers view the economy.
Recessions were once viewed as a temporary phenomenon in which workers were more easily laid-off and then
re-hired once business activity picked up. While recessions are still temporary, the effect they have on the job
market has tended to linger over a longer period. In an increasingly competitive and specialized environment,
employers have become less willing to part with highly skilled workers who can be costly to replace once the
market turns the corner. The approach many employers took during the 2001 recession, consequently, was a
strategic one in which they pared payrolls by eliminating redundancy and increased efficiency by retaining only
the most productive workers. In this way employers were able to increase worker productivity and eliminate the
need to rapidly replenish their payrolls during the subsequent recovery.
Structural Imbalances in Finance and Housing Present Challenges to Real Estate
Source: Bureau of Labor Statistics.
The longtime readers of the CMR knew a long time ago that this was not going to be an ordinary recession. In
fact it's hard to envision a situation where one could argue that either finance or housing could rebound quickly
enough to power an economic recovery. Jobs lost on Wall Street are likely permanent; losses in securities and
trading as a result of mergers, acquisitions and outright failures will likely never be replaced, as these types of
actions are geared at eliminating redundancies. If that were not enough, banks are now bracing for the fallout of a
potential commercial real estate collapse. As asset values have fallen sharply over the past two years, many banks
are holding commercial loans on properties that are now worth less than their outstanding debt—a predicament
that is drawing some parallels in the press to the sub prime housing crisis.
Make no mistake, however: the recovery will take some time. It's hard to image a scenario in which the job
market could bounce back in such a way that commercial real estate fundamentals might quickly turn around.
The bottom is coming into sight, but we will be slow to return to the pre-crisis glory days.
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Bank Failures
The increase in bank failures has been expected especially as the commercial real estate market weakens. Let the
good banks survive and the bad banks fail is the way the free market should work. Unfortunately the U.S. has a
few big banks that are “Too big to fail” that control the majority of the loans in the U.S. It should also be noted
that the FDIC is probably controlling the number of banks that fail each Friday to keep a panic from occurring.
Obviously from the graph below we are beginning to see more action on “Failure Friday.” Get used to it for the
next few years unless we have more stimulus laws passed to bailout other banks.
From Bud Conrad of Casey Research:

“We should be closing several hundred banks almost immediately. The problem is that the FDIC is out of money.
So they are just kicking the can down the road and ignoring many problems. The result of that is that the banks
get into even worse trouble every day. You see, the law is that the FDIC is supposed to promptly close any
institution that doesn't meet its capital requirements. If it does so, it wipes out the shareholders, but normally
there is some equity left in the operation, and the cost to refund the depositors is very small.
But by letting the banks hang on, they lose more and more every day, to the point that when they are closed
down, the net negative difference between assets and liabilities is a big loss, and then, when the FDIC does close
them down, there are huge losses to be made up. Even in this case, the FDIC has done a deal to kick the can
down the road by giving the carcass to USB and letting them figure out later how bad the losses have actually
become.
The FDIC says this bailout will cost $2.5 billion. I'm willing to bet that they are hiding losses just as they've been
avoiding taking over banks until it's far too late. The combination is that they've built up a reservoir of big losses
that they in no way can handle. The whole organization has been mismanaged from top to bottom since the
beginning, when Paulson was telling Sheila Bair what to do. She was supposed to be running the tight ship of an
insurance company, and she became part of the government scam.
Furthermore, the FDIC has guaranteed debts of over $300 billion by the big banks, lowering their interest rate
on that debt so that the profits accrue more rapidly on the investments. The FDIC has no business doing such
operations.
Perhaps the worst line in Sheila Bair's interview here is her saying that the public has absolutely no reason to be
scared that their deposits would not be covered. Her glib talking over interviewers very fast and acting confident
reminds me of Geithner. They are driving all of us over the cliff.”
Since I deal with banks everyday I can tell all of you that this quote from Mr. Conrad is correct. Part of the
reason the FDIC does not want to shut down to many banks each Friday is that they do not want to spook the
market and cause a run on the banks. The FDIC is very calculated in the number of banks they are shutting down
each week so I do not expect to ever see 30 banks shutdown in one day or it would be all over the news and cause
the American consumer to get really scared. I still stick by my prediction that over 1000 banks will fail before
the dust settles because the commercial real estate market is going to get worse due to the future resets. If the
FDIC and the government allow too many banks to collapse all at once then we will enter a Great Depression
scenario which is exactly what nobody wants to have happen.
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Commercial Real Estate in Charleston
The real wild card for the economy in many experts’ opinions remains the fate of the commercial real estate
market. A large amount of commercial notes are coming due in the next three years while vacancy rates are
climbing and refinancing becomes more difficult in deteriorating economic conditions. Since the securitization
of loans for CRE is dead it has become very difficult to get new deals done in the current market.
In my opinion, www.barkleyfraser.com has the best commercial real estate reports for the Charleston area. You
will all notice below that the vacancy rates in some specific areas for industrial and office markets are extremely
high. This is the result of a commercial market that has become overbuilt just like certain areas of the residential
market. If you have cash and want to be an owner occupier of commercial property there are some major
discounts to be had compared to the market top prices we all witnessed in 2007. Yes, blood is running through
the commercial streets but this is the normal process that must occur as a market goes through a major correction
towards a bottom.
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Industrial Notes
• TBC announced Berkeley County for a 1.1 mil sq ft distribution facility.
• Boeing announced they were building an assembly line for the 737 Dreamliner, which means more
announcements are possible in the future for other planes.
• The former Mikasa DC may be purchased.
• Sales remain slow and space is being offered 40% below the market highs of 2007.
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Office Notes
• The vacancy trend has leveled out; however it has leveled out at 21%.
• The sales market is dominated by distressed sales and foreclosures which is causing declining prices.
• Demand for vacant office land is very soft and prices are falling.
• Demand for vacant space is still soft resulting in downward pressure on lease rates.
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Retail Notes
• The retail market remains stable. This is stunning considering what has happened over the course of the
past year.
• Leasing activity has remained surprisingly strong despite negative economic news.
• Expect leasing activity to cool off the next few quarters until confidence returns to the economy.
Source: www.barkleyfraser.com
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Trick or Treat?
Trick….Bernie Madoff for Halloween. Whatch out he might have stolen candy from you!
The paper below written by Jeremy Grantham is so good I just had to copy and paste it into the CMR.
Grantham is a financial genius on risk and the markets.
Just Desserts and Markets Being Silly Again

By Jeremy Grantham
Just Desserts
I can’t tell you how surprised, even embarrassed I was to get the Nobel Prize in chemistry. Yes, I had passed the
dreaded chemistry A-level for 18-year-olds back in England in 1958. But did they realize it was my third
attempt? And, yes, I will take this honor as encouragement to do some serious thinking on the topic. I will also
invest the award to help save the planet. Perhaps that was really the Nobel Committee’s sneaky motive, since
there are regrettably no green awards yet. Still, all in all, it didn’t seem deserved. And then it occurred to me.
Isn’t that the point these days: that rewards do not at all reflect our just desserts? Let’s review some of the more
obvious examples.
1. For Missing the Unmissable

Bernanke, the most passionate cheerleader of Greenspan’s follies, is picked as his replacement, partly, it seems,
for his belief that U.S. house prices would never decline and that at their peak in late 2005 they largely just
reflected the unusual strength of the U.S. economy. As well as missing on his very own this 3-sigma (100-year)
event in housing, he was completely clueless as to the potential disastrous interactions among lower house prices,
new opaque financial instruments, heroically increased mortgages, lower lending standards, and internationally
networked distribution. For these accumulated benefits to society, he was reappointed! So, yes, after the fashion
of his mentor, he was lavish with help as the bubble burst. And how can we so quickly forget the very painful
consequences of the previous lavishing after the 2000 bubble? Rewarding Bernanke is like reappointing the
Titanic’s captain for facilitating an orderly disembarkation of the sinking ship (let’s pretend that happened) while
ignoring the fact that he had charged recklessly through dark and dangerous waters.
2. The Other Teflon Men

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Larry Summers, with a Financial Times bully pulpit, had done little bullying and blown no warning whistles of
impending doom back in 2006 and 2007. And, famously, in earlier years as Treasury Secretary he had
encouraged (I hope inadvertently) wild and reckless financial behavior by helping to beat back attempts to
regulate some of the new and most dangerous instruments. Timothy Geithner, in turn, sat in the very engine room
of the USS Disaster and helped steer her onto the rocks. And there are several others (discussed in the 4Q 2008
Letter). You know who you are. All promoted!
3. Misguided, Sometimes Idiotic Mortgage Borrowers

The more misguided or reckless the borrowers, the more determined the efforts to help them out, it appears,
although it must be admitted these efforts had limited effect. In comparison, those who showed restraint and
either under housed themselves or rented received not even a hint of help. Quite the reverse: the money the more
prudent potential buyers held back from housing received an artificially low rate. In effect, the prudent are
subsidizing the very same banks that insisted on dancing off the cliff into Uncle Sam’s arms or, rather, the arms
of the taxpayers – many of whom rent.
4. Reckless Homebuilders
Having magnificently overbuilt for several years by any normal relationship to the population, we have decided
to encourage even more homebuilding by giving new house buyers $8,000 each. This cash comes partly from the
pockets of prudent renters once again. This gift is soon, perhaps, to be extended beyond first-time buyers (for
whom everyone with a heart has a slight sympathy) to any buyers, which would be blatant vote-buying by
Congress. So what else is new?
5. Over-spenders and Under-savers

To celebrate the overwhelming consensus among economists that U.S. individuals have been dangerously over
consuming for the last 15 years, we have decided to encourage consumption and penalize savers by maintaining
the aforementioned artificially low rates, which beg everyone and sundry to borrow even more. The total debt to
GDP ratio, which under our heroes Greenspan and Bernanke rose from 1.25x GDP to 3.25x (without even
counting our Social Security and Medicare commitments), has continued to climb as growing government debt
more than offsets falling consumer debt. Where, one wonders, does this end, and with how much grief?
6. Banks Too Big to Fail

Here we have adopted a particularly simple and comprehensible policy: make them bigger! Indeed, force them to
be bigger. And whatever you do, don’t have any serious Congressional conversation about breaking them up.
(Leave that to a few journalists and commentators. Only pinkos read pink newspapers anyway!) This is not the
first time that a cliché has triumphed. This one is: “You can’t roll back the clock.” (See this quarter’s Special
Topic: Lesson Not Learned: On Redesigning Our Current Financial System.)
7. Over-bonused Financial Types

Just look at Goldman’s recent huge “profits,” two-thirds of which went for bonuses. It is now estimated that this
year’s bonus pool will be plus or minus $23 billion, the largest ever. Less than a year ago, these same guys were
on the edge of a run on the bank. They were saved only by “government” – the taxpayers’ supposed agents – who
decided to interfere with the formerly infallible workings of capitalism. Just as remarkably, it is now reported that
remuneration for the entire banking industry may be approaching a new peak. “Well, we got rid of some of those
pesky competitors, so now we can really make hay,” you can almost hear Goldman and the others say. And as for
the industry’s concern about the widespread public dismay, even disgust, about excessive remuneration (and, I
would add, plundering of the shareholders’ rightful profits)? Fuhgeddaboudit! In the thin book of “lessons
learned,” this one, like most of our other examples, will not appear.
8. Overpaid Large Company CEOs

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Even outside the financial system, there are many painfully obvious unjust desserts in the form of top
management rewards. And most of the excessive rewards come out of the pockets of our clients and other
stockholders, which is particularly galling. When I arrived in the States in 1964, the ratio of CEO pay to the
average worker was variously reported to be between 20/1 and 40/1. This seemed perfectly respectable and had
held for the previous 30 years. By 2006, this ratio had exploded to between 400/1 and 600/1, which can only be
described as obscene. The results certainly don’t suggest such high rewards: a) 10-year stock market returns are
close to zero in real terms; and b) U.S. GDP growth has finally slipped below its 100-year trend of 3.5%. After
deducting the effect of the rampant increase in the financial system, the growth in GDP ex-finance has fallen to
3.1% since 1982 and well below 3% since 2000, all measured to the end of 2007 to avoid the recent crisis. The
corporate system, to be frank, seemed to run faster and more efficiently back in the 1960s before CEOs and
financial types began to gobble up other people’s lunches. I suppose I have done my share of gobbling. But, it
still ain’t right!
9. Holders of the Stocks of Ridiculously Overleveraged and Wounded Corporations

Yes, I admit this is part envy and part hindsight investment regret. But, really, our financial leaders so over
stimulated the risk-taking environment that junky, weak, marginal companies and zombie banks produced a
record out performance (the best since 1933) of junk over the great blue chips. (Ouch!) In a world with less moral
hazard, which would be a world of just, although painful desserts, scores of these should-be-dead companies
would be. As it is, they live to compete against the companies that actually deserve to be survivors. Excessive
bailouts are just not healthy for the long-term well-being of the economy.
10. The Well-managed U.S. Auto Industry

While firms in other industries fail and their workers look for new jobs, the auto industry is rewarded by direct
subsidized loans, governmental arm-twisting of creditors forced to settle far below their legal rights, and direct
subsidies for their products. All of this for their well-deserved ranking as the most short-sighted industry of the
last 20 (40?) years, and one of the worst managed.
11. The World’s Most Over-vehicled Country

We chew up a dangerously large amount of Middle Eastern oil (and oil desperately squeezed from Canadian tar
sands), which is ruinous for our globalpolitical well-being (and ability to avoid war) and also not so good for an
overheating world. So the answer must be to subsidize more car purchases, and when the subsidies run out, you
can have all the fun again. Good long-term thinking!
12. Stock Options

This, of course, is the crème de la crème of unjust desserts. Recent practices have basically been a legalized way
to abscond with the stockholders’ equity. So if the stock price crashes, perhaps with considerable help from
management, that’s all right – just rewrite the options at the new low prices. There has been no serious attempt to
match stock option rewards (or total financial rewards for that matter) to the building of long-term franchise
value. Instead, the motto is: grab it now and run! You can fill in your own favorite anecdotes here – there are so
many of them!
13. Finally, Just in Case You’ve Forgotten, We Have My Old Nemesis, Greenspan
Alan Greenspan receives the title of Maestro in the U.S. and is knighted by the Queen for thoroughly
demolishing the integrity of the U.S. financial system. He overtly ignored the great threat of bubbles in asset
classes and, in fact, encouraged them. He Ayn Rand-ishly facilitated the progressive dismantling of governmental
restrictions on financial behavior; he deliberately kept real interest rates at zero for years, etc., etc., etc. You have
heard it before. Now, remarkably, in his very old age he has become imbued with the spirit of Hyman Minsky:
“Unless somebody can find a way to change human nature, we will have more crises.” Now he finally gets it.
Too late! In his merely old age, he ignored or abhorred Minsky, and consistently behaved as though markets were
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efficient and the players were honest and sensible at all times. But for all of the egg on his face, the Maestro
continues to consult with the rich and famous, considerably to his financial advantage. In the good old days, he
would have been set in the village stocks, and not the kind you buy and sell. And I would have been right there,
Alan, with very ripe tomatoes.
The Last Hurrah and Markets Being Silly Again

The idea behind my forecast six months ago was that regardless of the fundamentals, there would be a sharp
rally.1 After a very large decline and a period of somewhat blind panic, it is simply the nature of the beast.
Exhibit 1 shows my favorite example of a last hurrah after the first leg of the 1929 crash.
After the sharp decline in the fall of 1929, the S&P 500 rallied 46% from its low in November to the rally high of
April 12, 1930. It then, of course, fell by over 80%. But on April 12 it was once again overpriced; it was down
only 18% from its peak and was back to the level of June 1929. But what a difference there was in the outlook
between June 1929 and April 1930! In June, the economic outlook was a candidate for the brightest in history
with effectively no unemployment, 5% productivity, and over 16% year-over-year gain in industrial output. By
April 1930, unemployment had doubled and industrial production had dropped from +16% to -9% in 5 months,
which may be the world record in economic deterioration. Worse, in 1930 there was no extra liquidity flowing
around and absolutely no moral hazard. “Liquidate the labor, liquidate the stocks, liquidate the farmers”2 was
their version. Yet the market rose 46%.
How could it do this in the face of a world going to hell? My theory is that the market always displayed a belief
in a type of primitive market efficiency decades before the academics took it up. It is a belief that if the market
once sold much higher, it must mean something. And in the case of 1930, hadn’t Irving Fisher, arguably the
greatest American economist of the century, said that the 1929 highs were completely justified and that it was the
decline that was hysterical pessimism? Hadn’t E.L. Smith also explained in his Common Stocks as Long Term
Investments (1924) – a startling precursor to Jeremy Siegel’s dangerous book Stocks for the Long Run (1994) –
that stocks would always beat bonds by divine right? And there is always someone of the “Dow 36,000″
persuasion higher prices in previous peaks must surely have meant something, and not merely have been
unjustified bubbly bursts of enthusiasm and momentum.
Today there has been so much more varied encouragement for a rally than existed in 1930. The higher prices
preceding this crash (that were far above both trend and fair value) had lasted for many years; from 1996 through
2001 and from 2003 through mid-2008. This time, we also saw history’s greatest stimulus program, desperate
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bailouts, and clear promises of years of low rates. As mentioned six months ago, in the third year of the
Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great
job of driving equity markets and speculation higher. In total, therefore, it should be no surprise to historians that
this rally has handsomely beaten 46%, and would probably have done so whether the actual economic recovery
was deemed a pleasant surprise or not. Looking at previous “last hurrahs,” it should also have been expected that
any rally this time would be tilted toward risk-taking and, the more stimulus and moral hazard, the bigger the tilt.
I must say, though, that I never expected such an extreme tilt to risk-taking: it’s practically a cliff! Never mess
with the Fed, I guess. Although, looking at the record, these dramatic short-term resuscitations do seem to breed
severe problems down the road. So, probably, we will continue to live in exciting times, which is not all bad in
our business.
Lesson Not Learned: On Redesigning Our Current Financial System

I can imagine the company representatives on the Titanic II design committee repeatedly pointing out that the
Titanic I tragedy was a black swan event: utterly unpredictable and completely, emphatically, not caused by any
failures of the ship’s construction, of the company’s policy, or of the captain’s competence. “No one could have
seen this coming,” would have been their constant refrain. Their response would have been to spend their time
pushing for more and improved lifeboats. In itself this is a good idea, and that is the trap: by working to mitigate
the pain of the next catastrophe, we allow ourselves to downplay the real causes of the disaster and thereby invite
another one. And so it is today with our efforts to redesign the financial system in order to reduce the number and
severity of future crises.
After a crisis, if you don’t want to waste time on palliatives, you must begin with an open and frank admission of
failure. The Titanic, for example, was just too big and therefore too complicated for the affordable technology of
its day. Given White Star Line’s unwillingness to spend, she was under-designed. The ship also suffered from
agency problems: the passengers bore the risk of unnecessary speed and overconfidence in “too big to sink!”
while the captain stood to be rewarded for breaking the speed record. No captain is ever rewarded for merely
delivering his passengers alive. Greenspan, nearly 100 years later in his short-lived “irrational exuberance” phase,
did not enjoy being metaphysically slapped by the Senate Subcommittee for threatening the then speedy progress
of the economy. What is needed in this typical type of agency problem is for the agent on those rare occasions
when it really matters, whether a ship’s captain or a Fed boss, to stop boot licking and say, “No, this is wrong. It
is just too risky. I won’t go along.”
We have an once-in-a-lifetime opportunity to effect genuine change given that the general public is disgusted
with the financial system and none too pleased with Congress. I have no idea why the current administration,
which came in on a promise of change, for heaven’s sake, is so determined to protect the status quo of the
financial system at the expense of already weary taxpayers who are promised only somewhat better lifeboats.
It is obvious to most that there was a more or less complete failure of our private financial system and its public
overseers. The regulatory leaders in particular were all far too captured and cozy in their dealings with reckless
and greedy financial enterprises. Congress also failed in its role. For example, it did not rise to the occasion to
limit the recklessness of Fannie and Freddie. Nor did it encourage the regulation of new financial instruments.
Quite the reverse, as exemplified by the sorry tale of CFTC Chairman Brooksley Born’s fight to regulate credit
default swaps.
But, at least now, Congress seems to realize the problem: the current financial system is too large and
complicated for the ordinary people attempting to control it. Even Barney Frank, were he on his death bed, might
admit this; and most members of Congress know that they hardly understand the financial system at all. Many of
the banks individually are both too big and so complicated that none of their own bosses clearly understand their
own complexity and risk taking. The recent boom and the ensuing crisis are a wonderfully scientific experiment
with definitive results that we are all trying to ignore. And, except for bankers, who have Congress in an iron
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grip, we all want and need a profound change. We all want smaller, simpler banks that are not too big to fail. And
we can and should arrange it!
Step 1 should be to ban or spin off that part of the trading of the bank’s own money that has become an
aggressive hedge fund. Proprietary trading by banks has become by degrees over recent years an egregious
conflict of interest with their clients. Most if not all banks that prop trade now gather information from their
institutional clients and exploit it. In complete contrast, 30 years ago, Goldman Sachs, for example, would never,
ever have traded against its clients. How quaint that scrupulousness now seems. Indeed, from, say, 1935 to 1980,
any banker who suggested such behavior would have been fired as both unprincipled and a threat to the partners’
money. I, for one, saw Goldman in my early days as a surprisingly ethical firm, at worst “long-term greedy.”
(This steady loss of the old partnership ethic is typically underplayed in descriptions of Goldman.) Today,
Goldman represents a potential hedge fund trade as being attractive precisely because they themselves have
already chosen to do it. These days, all – or almost all – large banks do proprietary trading that is pure hedge fund
in nature. Indeed the largest bank, Citi (owned by us taxpayers), is gearing up to substantially increase its
aggressive prop trading as I write. (”No, no, we’re not!”)
Some insiders have argued that we should not worry about prop trading because they claim it did not play an
important part in the recent crisis. I think this is completely wrong for it misses the very big picture. Prop trading
can easily introduce an aggressive hedge-fund type mentality into the very hearts of what ideally should be
conservative, prudent – even boring – banks. This hedge fund mentality became a dominant organizing principle,
particularly with respect to compensation practices. It encouraged personal aspirations over corporate goals and
invited bonus-directed behavior at the clients’ expense and ultimately, as we have seen, at the taxpayers’ expense
to rid itself of this problem. All Congress has to overcome is the lobbying power and campaign contributions of
the finance industry itself, which I admit is no small feat. In a bank with a hedge fund heart, you can’t reasonably
expect ethical or non-greedy behavior, and you haven’t seen it.
Of course, commercial and investment banks need to invest their own capital. They probably should have the
right to do genuine hedging against investments that flow naturally from their banking business. As for the rest,
they could easily be required either to limit the leverage used on prop desk trading or to be restricted to investing
in government paper and, at the very least, play by the same rules as other hedge funds. What they certainly
should insurance, as is now the case.
In the early 1930s, following the famous Pecora hearings, the conflict of interest between the management of
other people’s money as fiduciary and the business of dealing and underwriting in securities was considered so
inimical to the public interest that Congress almost compelled separation of proprietary trading and client trading.
Close, but no cigar. Instead, Glass-Steagall made the probably less useful step of separating commercial and
investment banking. Unfortunately, they left intact the obvious conflict between the banks’ managing their own
money and simultaneously that of their clients. We now have a unique opportunity to revisit this matter.
(As we ponder the problem of prop trading, let us consider Goldman’s stunning $3 billion second quarter profit.
It appeared to be almost all hedge fund trading. Be aware also that this $3 billion is net of about $6 billion
reserved for future bonuses. Goldman’s CEO had, in fact, the interesting job of deciding how much of this $9
billion profit would be arbitrarily awarded to shareholders. [In this case, one-third. Could be worse!] This means
that they extracted every penny of $9 billion from a fragile financial system. “Good for them,” you may say, and
they indeed are very smart. But surely they should not have been insured against failure by us taxpayers!
Remember, they are now also a commercial bank yet very, very little of their $9 billion came from making loans.
Three months later their bonus pool for the year is estimated to be a new record at $29 billion. And the whole
banking industry is back to a new record for remuneration. How resilient! How remarkable! How basically
undesirable for our economy!)
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In Step 2, the Justice Department, together with Congressional and other advisors, should be invited to develop a
special set of rules for the banking industry that recognizes the moral hazard of “too big to fail.” If really too big
to fail, banks should be divided by Justice into manageable, smaller pieces that can indeed be allowed to fail.
With these two steps and possibly with an intelligent son of Glass-Steagall, the deed would be done! Regulators
would have a fighting chance of being able to regulate, unlike their recent woeful past. If an angel appeared,
waved his wings and, lo, it was so, almost every single Congressman would sigh with relief.
The separation of commercial banking from investment banking is not as vital as the removal of prop desk
complicated enterprises both smaller and simpler, which characteristics I for one believe are probably essential if
we are to avoid further disasters. So what is the problem? The argument against all major changes, without at
least some of which we will soon surely be back in another crisis, is always the same. “Oh, you can’t roll back
the clock.” But, even repeated twice before every breakfast, it is not persuasive. Why exactly can’t you roll back
the clock? We did it once before and, although it was very imperfect and probably missed the central point of
conflict of interest, it still produced an improved system that was successful enough for 50 years. In general,
countries with simpler and less aggressive banks have had much less pain in the recent crisis while we were
pawning the Crown Jewels – sorry, the Federal Jewels – to bail out aggressive bankers who were out of their
depth in the new complexities.
Step by step, even as the complexity grew, our regulatory leaders enabled systemic risk to grow. They continued
to push the boundaries for banks by allowing more leverage, new instruments, and less control. The details are
familiar. All this was done in the name of untrammeled, unfettered capitalism, and almost all of it was a bad idea.
“Oh!” say the bankers, “If we become smaller and simpler and more regulated, the world will end and all serious
banking will go to London, Switzerland, Bali Hai, or wherever.” Well, good for those other places. If that means
they will have knee-buckling, economy cracking, taxpayer-impoverishing meltdowns every 15 years and we will
be left looking like a boring back water, that sounds fine to me. Remember, just like our investment management
branch of the financial system, banking creates nothing of itself. It merely facilitates the functioning of the real
world.
Yes, of course every country needs a basic financial system to function effectively with letters of credit, deposits,
and check writing facilities, etc. But as you move beyond that it is worth remembering that every valued job
created by financial complexity is paid for by the rest of the real economy, and talent is displaced from real
production, as symbolized by all of the nuclear physicists on prop trading desks. Viewed from the perspective of
the long-term well-being of the whole economy, the drastic expansion of the U.S. financial system as a
percentage of total GDP in the last 20 years has been a drain on the health and cost structure of the balance of the
real economy. To illustrate this point, in 1965 the financial sector of the economy took up 3% of the GDP pie.
The 1960s were probably the high water mark (or one of them) of America’s capitalism. They clearly had
adequate financial tools. Innovation could obviously have occurred continuously in all aspects of finance, without
necessarily moving its share of the economy materially over 3%. Yet by 2007 the share had risen to 7.5% of
GDP!
The financial world was reaching into the GDP pie and taking an unnecessary extra 4%. Every year! This extra
rent is enough to lower the savings and investment potential of the rest of the economy. And it shows. As
mentioned earlier, the growth rate of the GDP had been 3.5% a year for a hundred years. It had proven to be
remarkably robust. Even the Great Depression bounced off it, and soon GDP growth was back on the original
trend as if the Depression had never occurred. But after 1965, the growth of the non-financial slice, formerly
3.4%, slowed to 3.2%. After 1982 it dropped to 3.1% and after 2000 fell to well under 3%, all measured to the
end of 2007, before the recent troubles. These are big declines. It is as if a runner has a growing and already
heavy blood sucker on him that is, not surprisingly, slowing him down. In the short term, I realize that job
creation in the financial industry looked like a growth driver, as did the surge in financial profits (which we now
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realize were ludicrously overstated). But in the long term, like a sugar high, this stimulus was temporary and
unhealthy.
The financial system was growing because it could. The more complex and confusing new financial instruments
became the more “help” ordinary citizens needed from the experts. The agents’ interests were totally unaligned
with the principle/clients’ interests. This makes a mockery of “rational expectations” and the Efficient Market
Hypothesis, which assumes (totally unproven, as usual) equivalent and perfect knowledge on both sides of all
transactions. At the extreme, this great advantage in knowledge and information held by the financial agents has
the agents receiving all the rewards, according to the recent work3 by my former partner, Paul Woolley, and his
colleagues at the Woolley Centre for the Study of Capital Market Dysfunctionality. (With a great name like that
their job is half done before they start.)
The second problem, right on the heels of the too-big-and complicated issue, is that of inadequate public
oversight. Even with existing institutions, we would have avoided most of the recent pain, borne by taxpayers, if
we had had better public leadership. Yes, the public bodies had flaws, but the individuals running the shop had
far bigger flaws. Greenspan, with arguably the most important job in the world, simply did not believe in
interfering with capitalism at all. His regulatory colleagues such as Bernanke and Geithner fell into line without
any challenges. And Congress, strongly influenced by the financial industry, or merely misguided, or often both,
facilitated the approach that capitalism in general and banking in particular would do just fine if left entirely
alone. It was a very expensive error. Does anyone think we would have run off the cliff with even one change –
Volcker at the Fed? I, for one, am confident that we would have done far less badly.
Behind this weakness in the recent cast of characters is a systemic (suddenly the trendiest word in the English
language) weakness in our method of job selection. How can Greenspan, with his long-established record of
failure as a professional economist, have resurfaced as the Fed boss? With no record of success in any important
job, he gets one of the world’s two most important jobs! Now we have to decide how much more decision-
making power to give to the Fed – an institution with a 25-year proven record of failure. How can we separate the
logical neatness of institutional design from our recent proven inability to pick effective, principled leaders with
strong backbones?
It is a conundrum: too many regulatory agencies and you have too many opportunities for financial interests to
shop around for regulatory bargains and to find and exploit the ambiguous seams between them. Too few
agencies and we run the risk of my worst nightmare: waking up and finding Alan Greenspan with twice the
authority!
At the least we must recognize the improbability of acquiring great leaders and that our financial system must be
simple and robust enough to withstand the worst efforts from time to time of poor or even bad leadership. A
simpler, more manageable financial system is much more than a luxury. Without it we shall surely fail again.
And it looks as if we are bound and determined to bend once again to the will (and the money) of the financial
lobby, which is encouraged by the unexpected conservatism of the current administration’s “Teflon” men. They
seem terrified to make any substantial changes. And the one person with the character to make tough changes –
Paul Volker – is window dressing, exactly as I suggested in January. A sad, wasted opportunity!
Summary
• Yes, this was a profound failure of our financial system.
• The public leadership was inadequate, especially in dealing with unexpected events that often, like the
housing bubble breaking, should have been expected.
• Of course, we should make a more determined effort to do a more effective job of leadership selection.
But excellence in leadership will often be elusive.
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• Equally obvious, we could make a hundred improvements to the lifeboats. Most would be modest
beneficial improvements, but in the long run they would be almost completely irrelevant and, worse, they
might kid us into thinking we were doing something useful!
• But all of the above points fail to recognize the main problem: the system has become too big and
complicated for even much-improved leaders to handle. Why should we be confident that we will find
such improved leaders? For, even in an administration directed to “change,” Obama and his advisors fell
back on the same cast of characters who allowed, even facilitated, the development of the current crisis.
Reappointing Bernanke! What a wasted opportunity to get a “son of Volker” type. (Or should that be
“grandson of Volker?”)
• The size of the financial system continues to grow and shows every sign of being out of control. As it
grows, it becomes a bigger drain on the rest of the economy and slows it down.
• The only long-term hope of avoiding major recurrent crises is to make our financial system simpler, the
units small enough that they can be allowed to fail, and, above all, to remove the intrinsically conflicted
and dangerously risk-seeking hedge fund heart from the banking system. The rest is window dressing and
wishful thinking.
• The concept of rational expectations – the belief in the natural efficiency of capitalism – is wrong, and is
the root cause of our problems. Hyman Minsky, on the other hand, was right; he argued that the natural
outcome of ordinary people interacting is to make occasional financial crises “well nigh inevitable.”
Crises are desperately hard to avoid. We must give ourselves a chance by making the job of dealing with
them much, much easier.
All in all we are likely to have learned little, or rather to act, through lack of character, as if we have
learned nothing. In doing so we are probably condemning ourselves to another serious financial crisis in
the not too- distant future.
Footnotes:
1 Erratum: Last quarter I cast mild aspersions on Finanz und Wirtschaft by suggesting that I had not precisely
said that the S&P would scoot rapidly up to 1100; I remembered it more as between 1000 to 1100. Never mess
with a Swiss journalist: this one duly pointed out that his tape of April 1 confirmed his accuracy. Either way, here
we are, more or less (at 1098 on October 19).
2 Andrew Mellon, Secretary of the Treasury, 1931.
3 Biais, Bruno; Rochet, Jean-Charles; and Woolley, Paul. Rents, Learning and Risk in the Financial Sector and
other Innovative Industries. September, 2009. Working Paper Series 2009, The Paul Woolley Centre for the
Study of Capital Market Dysfunctionality.
http://www.lse.ac.uk/collections/paulWoolleyCentre/news/RentsLearningAndRisk.htm
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Charleston October Snapshot
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Real Estate Tidbits
From a national perspective houses still aren't affordable based on historical price/income ratios. I wonder if
“cash for homes” has anything to do with this chart. Hmmmm.
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Will the seasonal downturn take home prices down again?
Moody’s Investors Service said it’s planning a review of U.S. home-loan securities that will likely lead to another
round of rating changes based on a new view that property prices won’t bottom until next year’s third
quarter.
The firm will boost its loss projections by “significant” amounts for prime-jumbo, Alt-A, option adjustable-rate
and sub prime mortgages backing bonds issued between 2005 and 2008, also after seeing higher losses per
foreclosure than expected ... Recent data showing rising home prices doesn’t prove the slump is over, the
company said.
“The overhang of impending foreclosures and the continued rise in unemployment rates will impact home prices
negatively in the coming months,” New York-based Moody’s said.
Source:Bloomberg
http://www.bloomberg.com/apps/news?pid=20601087&sid=a35NB2J0hkHw
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Housing Prices Could Keep Falling For Years?
http://www.dailyfinance.com/2009/10/21/housing-prices-forecast-to-fall-in-2010-and-could-keep-fallin/print/
Risk
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Below is a forecast from a firm called Real Estate Economics. They provide real estate research for
multiple MSAs all over the U.S. I do not agree with all of their forecast but still believe it is a very good
report that will give all of you some excellent insight from a different perspective on what to possibly
expect over the next couple of years.
NATIONAL ECONOMIC AND HOUSING TRENDS AND 5-YEAR FORECASTS
Employment Trends and Forecasts

The main long-term foundational driver in terms of housing sales volume and price support is the nation’s
employment base. The following table presents historical trends and a five year forecast in terms of employment
and unemployment levels for the nation:
TOTAL NONFARM JOBS

UNITED STATES
OCTOBER 2009
Civilian Labor Force Civilian Employment Civilian Total Non-Farm
Year Total Jobs 12 Month Change Total Jobs 12 Month Change in Jobless Rate Total Jobs 12 Month Change
1990 127,105,837 - - 119,975,590 - - 5.6% 109,486,583 - -
1991 127,876,142 770,305 0.6% 119,132,052 -843,538 -0.7% 6.8% 108,374,500 -1,112,083 -1.0%
1992 129,854,189 1,978,047 1.5% 120,095,180 963,128 0.8% 7.5% 108,726,167 351,667 0.3%
1993 131,132,614 1,278,425 1.0% 122,052,557 1,957,377 1.6% 6.9% 110,843,750 2,117,583 1.9%
1994 133,173,236 2,040,621 1.6% 125,033,789 2,981,231 2.4% 6.1% 114,290,500 3,446,750 3.1%
1995 134,775,461 1,602,225 1.2% 127,200,126 2,166,337 1.7% 5.6% 117,297,583 3,007,083 2.6%
1996 136,728,912 1,953,452 1.4% 129,306,456 2,106,330 1.7% 5.4% 119,708,000 2,410,417 2.1%
1997 139,091,461 2,362,549 1.7% 132,176,514 2,870,058 2.2% 5.0% 122,776,417 3,068,417 2.6%
1998 140,735,712 1,644,251 1.2% 134,351,292 2,174,778 1.6% 4.5% 125,929,667 3,153,250 2.6%
1999 142,386,273 1,650,561 1.2% 136,356,857 2,005,565 1.5% 4.2% 128,993,000 3,063,333 2.4%
2000 143,941,312 1,555,038 1.1% 138,175,815 1,818,958 1.3% 4.0% 131,784,833 2,791,833 2.2%
2001 145,233,946 1,292,635 0.9% 138,337,066 161,251 0.1% 4.7% 131,825,667 40,833 0.0%
2002 146,437,709 1,203,763 0.8% 137,949,849 -387,218 -0.3% 5.8% 130,341,000 -1,484,667 -1.1%
2003 147,191,379 753,670 0.5% 138,381,556 431,708 0.3% 6.0% 129,999,083 -341,917 -0.3%
2004 148,171,228 979,849 0.7% 139,985,362 1,603,805 1.2% 5.5% 131,434,917 1,435,833 1.1%
2005 149,935,263 1,764,035 1.2% 142,298,978 2,313,616 1.7% 5.1% 133,702,833 2,267,917 1.7%
2006 150,310,245 374,982 0.3% 143,364,438 1,065,460 0.7% 4.6% 136,086,417 2,383,583 1.8%
2007 151,900,798 1,590,554 1.1% 144,878,528 1,514,090 1.1% 4.6% 137,598,417 1,512,000 1.1%
2008 153,476,399 1,575,600 1.0% 144,591,910 -286,618 -0.2% 5.8% 137,065,500 -532,917 -0.4%
2009est 152,918,970 -557,428 -0.4% 139,736,589 -4,855,320 -3.4% 9.4% 132,183,950 -4,881,550 -3.6%
2010prj 152,058,746 -860,225 -0.6% 138,651,708 -1,084,881 -0.8% 9.7% 131,157,742 -1,026,208 -0.8%
2011prj 151,549,055 -509,690 -0.3% 139,416,192 764,483 0.6% 8.7% 131,881,175 723,433 0.6%
2012prj 151,346,895 -202,160 -0.1% 140,922,533 1,506,342 1.1% 7.4% 133,306,408 1,425,233 1.1%
2013prj 152,150,833 803,938 0.5% 143,150,067 2,227,533 1.6% 6.3% 135,413,842 2,107,433 1.6%
2014prj 153,938,676 1,787,843 1.2% 146,128,825 2,978,758 2.1% 5.3% 138,231,925 2,818,083 2.1%
Source: Bureau of Labor Statistics; Real Estate Economics
www.realestateeconomics.com
Patterns in total non-farm jobs in the nation are shown graphically as follows:
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UNITED STATES
Total Non-Farm
150,000,000
5-Year Forecast
140,000,000
130,000,000
120,000,000
110,000,000
100,000,000
109,486,583
108,374,500
108,726,167
110,843,750
114,290,500
117,297,583
119,708,000
122,776,417
125,929,667
128,993,000
131,784,833
131,825,667
130,341,000
129,999,083
131,434,917
133,702,833
136,086,417
137,598,417
137,065,500
132,183,950
131,157,742
131,881,175
133,306,408
135,413,842
138,231,925
90,000,000
80,000,000
70,000,000
60,000,000
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Twelve month changes in the total non-farm job base are shown in the chart below:
UNITED STATES
Total Non-Farm 12-Month Change
6,000,000
5-Year Forecast
4,000,000
2,117,583
3,446,750
3,007,083
2,410,417
3,068,417
3,153,250
3,063,333
2,791,833
1,435,833
2,267,917
2,383,583
1,512,000
1,425,233
2,107,433
2,818,083
351,667
723,433
40,833
2,000,000
0
0
-1,112,083
-1,484,667
-341,917
-532,917
-4,881,550
-1,026,208
-2,000,000
-4,000,000
-6,000,000
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
As shown, compounded by a financial crisis, the nation is forecast to lose 4,881,550 non-farm jobs during Year
2009 – a 3.6% loss of the total non-farm job base, or the biggest loss in decades. During Year 2010, another
1,026,208 jobs are forecast to be lost. Thereafter, the impact from the national stimulus package will
increasingly be felt, and combined with improved financial markets, should lead the national economic recovery
towards statewide economic expansion. By Year 2014, a healthy 2.1% growth rate is forecast for non-farm jobs
nationally.
Patterns in unemployment are shown below:
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UNITED STATES
Civilian Unemployment
12%
5-Year Forecast
10%
8%
6%
4%
2%
5.6%
6.8%
7.5%
6.9%
6.1%
5.6%
5.4%
5.0%
4.5%
4.2%
4.0%
4.7%
5.8%
6.0%
5.5%
5.1%
4.6%
4.6%
5.8%
9.4%
9.7%
8.7%
7.4%
6.3%
5.3%
0%
2009est
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010prj
2011prj
2012prj
2013prj
2014prj
After reaching historic levels estimated at 9.4% unemployment in 2009, it is forecast to peak at 9.7% in 2010
before gradually receding toward more normal levels thereafter. Several states with budget woes have intensified
high unemployment levels.
Housing Construction Trends and Forecasts

Levels of housing construction in the Nation closely correlate with residential permit activity. Builders cut back
sharply on construction after the housing bubble burst, causing the severe decline in permit activity in 2008.
Residential permit activity is anticipated to drop to historic lows in 2009, and remain low through 2012, as shown
in the chart below:
ANNUAL RESIDENTIAL PERMIT ACTIVITY

UNITED STATES
OCTOBER 2009
2,500,000
5-Year Forecast
2,000,000
1,500,000
1,000,000
500,000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
Single Family Multi-Family Total
As shown, permit activity is at extremely depressed levels and will likely remain anemic for the next 3 years
before gradually increasing to improved (but still low) levels by Year 2013.
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Corresponding trends in the overall housing stock are projected in the following chart:
TOTAL HOUSING SUPPLY

UNITED STATES
OCTOBER 2009
140,000,000
5-Year Forecast
130,000,000
120,000,000
110,000,000
100,000,000
102,923,868
104,321,464
105,447,251
106,680,317
108,037,322
109,570,887
111,112,932
112,723,391
114,366,967
116,186,205
117,913,834
119,088,280
120,255,564
121,489,806
122,848,672
124,345,266
125,862,386
127,156,890
128,119,015
128,771,047
129,185,666
129,510,612
129,880,257
130,358,454
131,054,601
90,000,000
80,000,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
Gradual incremental growth in the nation’s housing stock is projected due to the recessionary impact on limited
funding and limited feasibility for new home development. Incremental increases in housing stock will be
relatively small – far lower than historical patterns:
12-MONTH CHANGE IN TOTAL HOUSING SUPPLY
UNITED STATES
OCTOBER 2009
2,000,000
5-Year Forecast
1,800,000
1,600,000
1,400,000
1,200,000
1,000,000
800,000
600,000
1,397,596
1,125,786
1,233,066
1,357,006
1,533,565
1,542,045
1,610,459
1,643,576
1,819,238
1,727,629
1,174,447
1,167,283
1,234,242
1,358,866
1,496,594
1,517,120
1,294,504
962,125
652,032
414,618
324,946
369,644
478,197
696,147
400,000
200,000
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
Housing Price Trends and Forecasts

The following table presents historical and forecast changes in the median price of single family homes in the
nation:
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MEDIAN HOME PRICES
UNITED STATES
OCTOBER 2009
Time Median 12-Month Change

Period (Single-Family) # %
1990 $97,017 - -
1995 $116,492 $3,683 3.3%
2000 $146,517 $5,850 4.2%
2001 $155,483 $8,967 6.1%
2002 $167,042 $11,558 7.4%
2003 $179,325 $12,283 7.4%
2004 $194,208 $14,883 8.3%
2005 $219,017 $24,808 12.8%
2006 $221,583 $2,567 1.2%
2007 $214,150 ($7,433) -3.4%
2008 $193,375 ($20,775) -9.7%
2009est $174,834 ($18,541) -9.6%
2010prj $176,365 $1,531 0.9%
2011prj $180,108 $3,744 2.1%
2012prj $185,042 $4,933 2.7%
2013prj $191,600 $6,558 3.5%
2014prj $200,083 $8,483 4.4%
Source: National Association of Realtors; Dataquick; Real Estate
Economics
Though the above table reflects median prices for single-family homes only, the percentage changes will likely
be similar for condominium product.
As shown, declines in housing values during 2008 were harsh, with less severe drops estimated in 2009 (mostly
occurring in the 1st half) with stabilization projected during the 2nd half of the year. By 2010, prices will flatten
out with demand pressures driving a slight 1.8% increase.
These pricing trends and forecasts in median prices for single family homes in the nation are shown graphically
below:
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MEDIAN HOME PRICES
UNITED STATES
OCTOBER 2009
$240,000
5-Year Forecast
$220,000
$200,000
$180,000
$160,000
$140,000
$120,000
$102,500
$105,017
$108,742
$112,808
$116,492
$122,267
$128,650
$135,467
$140,667
$146,517
$155,483
$167,042
$179,325
$194,208
$219,017
$221,583
$214,150
$193,375
$174,834
$176,365
$180,108
$185,042
$191,600
$200,083
$97,017
$100,000
$80,000
$60,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
As shown, declines in housing values during 2008 and projected for 2009 are substantial. The median home
price has fallen 21% from its peak in 2006 to a level similar to the median price in 2003. It should be noted that
most of the decline associated with the 2009 forecast mostly occurred during the 1st half of the year, and further
losses in housing prices will be minimal from the extremely low level already defined during the 1st half of 2009.
The median price is expected to bottom out in 2009, and remain relatively flat in 2010, after which mild price
appreciation patterns will likely occur, building momentum as the economy improves and distressed inventory is
absorbed. By 2014, the median home price is forecast to increase a healthy 4.4%. Despite this increase, the
resultant forecast median price for 2014 will remain well below the peak unsupportable level achieved during
2006.
Mortgage Rate Trends and Forecast

The chart below presents trends and forecasts for 30 year fixed mortgage rates:
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30-YEAR FIXED RATE MORTGAGES
NATIONAL AVERAGES
SEPTEMBER 2009
11%
5-Year Forecast
10%
9%
8%
7%
6%
5%
4%
3%
2%
10.1%
9.2%
8.4%
7.3%
8.4%
8.0%
7.8%
7.6%
6.9%
7.4%
8.1%
7.0%
6.6%
5.8%
5.8%
5.9%
6.4%
6.3%
6.0%
5.1%
5.2%
5.5%
5.9%
6.4%
7.2%
1%
0%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
As shown, Years 2009 and 2010 will be the lowest years in terms of mortgage rates in over two decades. The
super low home loan rates have been made possible by the Federal Reserve’s extraordinary efforts to prop up the
housing market and the overall economy in the wake of the global financial crisis.
A window of opportunity exists to refinance or purchase a home at historically low rates, allowing for much more
relatively affordable housing costs for most buyers. By 2011 mortgage rates are likely to increase as economic
growth increasingly stimulates inflationary pressures, and as the world demands higher payments to service the
nation’s enormous debt load.
Household Income Trends and Forecasts

The following table presents trends in median household incomes for the nation:
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31
MEDIAN HOUSEHOLD INCOMES
UNITED STATES
OCTOBER 2009
$70,000
5-Year Forecast
$60,000
$50,000
$40,000
$30,000
$31,058
$31,885
$32,844
$33,872
$34,940
$35,757
$37,122
$38,860
$40,405
$41,844
$43,184
$44,000
$44,821
$45,358
$46,051
$47,030
$48,655
$50,125
$51,251
$51,552
$51,930
$52,573
$53,489
$54,691
$56,195
$20,000
$10,000
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009est
2010prj
2011prj
2012prj
2013prj
2014prj
As shown, increases in median household incomes are likely to be marginal during Years 2009 and 2010 – a
reflection of the current economic downturn and nationwide budget deficit. Thereafter, income growth is likely
to begin to normalize, reaching a 2.7% gain by Year 2014.
Overall trends and changes in household incomes by income range during the next 5 years are shown in the chart
below:
FORECAST HOUSEHOLD INCOME CHANGES FROM 2009 TO 2014

UNITED STATES
4,000,000
3,000,000
5 Yr. Change in No. of Households
2,000,000
1,000,000
-1,000,000
-2,000,000
-3,000,000
Less than $50k $50k - $100k $100k - $150k $150k - $200k $200k - $250k $250k +
Houshold Income Range
Source: Real Estate Economics; Claritas; Dataquick; Census Bureau; Bureau of Labor.
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As shown, the number of households making between $50,000 and $150,000 is likely to increase dramatically
during the next five years as the population matures and as economic growth resumes.
Demographic Trends and Forecasts

The distribution of the population in the nation by age bracket is shown in the following chart:
POPULATION DISTRIBUTION BY AGE

UNITED STATES
50,000,000
45,000,000
40,000,000
35,000,000
30,000,000
25,000,000
20,000,000
15,000,000
10,000,000
5,000,000
-
Age < 5 Age 5 Age 15 Age 25 Age 35 Age 45 Age 55 Age 65 Age 75 Age 85+
to 14 to 24 to 34 to 44 to 54 to 64 to 74 to 84
2000 Census Yr. 2009 Estimates Yr. 2014 Forecasts
The population distribution by age compares estimates for 2009 and forecasts for 2014 with Census data from the
year 2000.
Changes in the population between 2009 and 2014 are more clearly shown in the following chart:
FORECAST POPULATION CHANGES FROM 2009 TO 2014

UNITED STATES
6,000,000
5,000,000
5-Year Population Change
4,000,000
3,000,000
2,000,000
1,000,000
-1,000,000
-2,000,000
Age < 5
Age 5-14
Age 15-24
Age 25-34
Age 35-44
Age 45-54
Age 55-64
Age 65-74
Age 75-84
Age 85+
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As shown, except for a population loss in the 35 to 44 years age bracket, relatively modest population gains are
forecast among all age brackets except for move-down householders between 55 and 74 years of age. For age
brackets between 55 years and 74 years, population growth is especially intense, and will greatly impact the
overall choices available in the housing market.
As a result, move-down and age targeted/qualified housing in various forms are likely to perform relatively well
once economic growth resumes. This influx of buyers into the mature housing market is significant since baby
boomers now account for one-fifth of the national population. The mature market is anticipated to perform very
well in the next cycle, as is moderately priced conventional housing, while select move-up price ranges of the
conventional housing market may remain relatively sluggish.
NATIONAL HOUSING SUPPLY/DEMAND AND OVER/UNDER VALUATION PATTERNS AND 5-

YEAR FORECASTS
Each month, Real Estate Economics updates our database to reflect the most recent changes in national
employment, housing supply, housing prices, mortgage rates and all other major factors that directly influence
housing demand and supply. All of our economic and housing market data flow into a predictive model that
forecasts housing supply and demand patterns and price appreciation/depreciation for the next five years. This
report presents our most recent modeled conclusions.
Housing Supply and Demand Trends and Forecasts

The following housing demand model generated from our economic database, presents our housing
supply/demand estimates and forecasts for the United States:
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HOUSING DEMAND/SUPPLY PATTERNS
UNITED STATES
OCTOBER 2009
Total Housing Housing Market is Under/

Year Jobs Supply Demand (Over) Supplied
1990 109,486,583 102,923,868 101,806,967 (1,116,902) (1.1%) Overbuilt
1991 108,374,500 104,321,464 100,851,641 (3,469,824) (3.3%) Overbuilt
1992 108,726,167 105,447,251 101,258,343 (4,188,908) (4.0%) Overbuilt
1993 110,843,750 106,680,317 103,311,425 (3,368,892) (3.2%) Overbuilt
1994 114,290,500 108,037,322 106,607,491 (1,429,832) (1.3%) Overbuilt
1995 117,297,583 109,570,887 109,498,096 (72,792) (0.1%) Overbuilt
1996 119,708,000 111,112,932 111,836,194 723,262 0.7% Underbuilt
1997 122,776,417 112,723,391 114,792,982 2,069,591 1.8% Underbuilt
1998 125,929,667 114,366,967 117,833,714 3,466,747 3.0% Underbuilt
1999 128,993,000 116,186,205 120,795,063 4,608,859 4.0% Underbuilt
2000 131,784,833 117,913,834 123,506,743 5,592,910 4.7% Underbuilt
2001 131,825,667 119,088,280 123,642,167 4,553,886 3.8% Underbuilt
2002 130,341,000 120,255,564 122,346,161 2,090,598 1.7% Underbuilt
2003 129,999,083 121,489,806 122,121,539 631,733 0.5% Underbuilt
2004 131,434,917 122,848,672 123,568,224 719,552 0.6% Underbuilt
2005 133,702,833 124,345,266 125,799,826 1,454,559 1.2% Underbuilt
2006 136,086,417 125,862,386 128,143,749 2,281,363 1.8% Underbuilt
2007 137,598,417 127,156,890 129,670,018 2,513,128 2.0% Underbuilt
2008 137,065,500 128,119,015 129,270,151 1,151,136 0.9% Underbuilt
2009est 132,183,950 128,771,047 124,765,114 (4,005,933) (3.1%) Overbuilt
2010prj 131,157,742 129,185,666 123,895,077 (5,290,589) (4.1%) Overbuilt

2011prj 131,881,175 129,510,612 124,677,524 (4,833,088) (3.7%) Overbuilt
2012prj 133,306,408 129,880,257 126,126,308 (3,753,949) (2.9%) Overbuilt
2013prj 135,413,842 130,358,454 128,221,150 (2,137,304) (1.6%) Overbuilt
2014prj 138,231,925 131,054,601 130,993,878 (60,723) (0.0%) Overbuilt
Source: Bureau of Labor Statistics; Census Bureau; National Assoc. of Realtors

Real Estate Economics
In general, the patterns of over supply and under supply are based on a comparison between a given year’s ratio
between jobs and housing relative to the long-term trend. As shown, the table presents patterns in over-supply
and under-supply of housing in the nation since 1990, with a forecast extending to 2014.
The model accurately measures significant levels of distressed inventory which are likely to peak during the next
24 months, followed thereafter by a trend toward under-supply, which is likely to first occur during 2014, with
the market showing tightness as early as 2013. Under-supply is likely to be significant after 2014.
These patterns are shown graphically in the chart below:
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HOUSING DEMAND AND SUPPLY PATTERNS
UNITED STATES
140,000,000
5-Year Forecast
135,000,000
130,000,000
Units Demand/Supplied
125,000,000
120,000,000
115,000,000
110,000,000
105,000,000
100,000,000
95,000,000
90,000,000
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 prj
Jan-11 prj
Jan-12 prj
Jan-13 prj
Jan-14 prj
Supply of Housing Demand for Housing*
* Over/Under supply measures based on current jobs-to-housing relationship relative to long-term relationship between jobs and housing.
Source: Bureau of Labor Statistics; Census Bureau; National Assoc. of Realtors; Real Estate Economics
As shown, demand and supply estimates represent the total number of houses demanded and supplied in the
United States. The current year reflects over-supply which will likely worsen during the next twelve months
before improving, then reaching equilibrium during late 2013. Thereafter, another cycle of under-supply is likely
to form as the economy continues to expand in an atmosphere of relatively low housing supply.
The chart below presents these patterns in over and under-supply by measuring differences between overall
demand and overall supply:
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HOUSING (OVER)/UNDER SUPPLY PATTERNS
UNITED STATES
8,000,000
5-Year Forecast
6,000,000
4,000,000
UNDER BUILT
2,000,000
(2,000,000)
OVER BUILT
(4,000,000)
(6,000,000)
(8,000,000)
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 prj
Jan-11 prj
Jan-12 prj
Jan-13 prj
Jan-14 prj
* Over/Under supply measures based on current jobs-to-housing relationship relative to long-term relationship between jobs and housing.
As shown, oversupply (mainly caused by over building during the past several years and high levels of distressed
housing) will cause continued (but more conservative) depreciation in the current year, followed by relatively flat
pricing in Year 2010, then low rates of price appreciation beginning by 2011. Periods of oversupply should be
followed by increasing levels of undersupply as the economy begins to expand and as incremental housing
supply remains very low.
It should be noted that patterns in over-supply or under-supply do not fully describe the health of the overall
housing market. Absorption of housing can be strong in an atmosphere of over supply and under valuation. In
order to more fully understand market health, patterns in over- and under-valuation must be understood. These
patterns are presented in the next section.
Housing Over/Under Valuation Trends and Forecasts

Historical trends and a five year forecast in terms of overall housing over-or-under-valuation for the United States
is shown below:
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HOUSING OVER/UNDER VALUATION PATTERNS
UNITED STATES
OCTOBER 2009
Median Equilibrium 30-Yr. Ann. Mtg. Equil Median Market is Under/
Year Home Price Home Price Mtg. Rate Cost Mtg.Cost HH Income (Over) Valued
1990 $97,017 $86,678 10.13% $8,263 $7,380 $31,058 ($10,339) (10.7%) Overvalued
1991 $102,500 $95,882 9.25% $8,095 $7,563 $31,885 ($6,618) (6.5%) Overvalued
1992 $105,017 $106,426 8.40% $7,681 $7,777 $32,844 $1,410 1.3% Undervalued
1993 $108,742 $121,403 7.33% $7,178 $8,006 $33,872 $12,661 11.6% Undervalued
1994 $112,808 $113,501 8.36% $8,217 $8,243 $34,940 $693 0.6% Undervalued
1995 $116,492 $120,388 7.96% $8,171 $8,421 $35,757 $3,897 3.3% Undervalued
1996 $122,267 $126,335 7.81% $8,454 $8,726 $37,122 $4,069 3.3% Undervalued
1997 $128,650 $134,719 7.60% $8,717 $9,118 $38,860 $6,069 4.7% Undervalued
1998 $135,467 $149,061 6.94% $8,603 $9,464 $40,405 $13,595 10.0% Undervalued
1999 $140,667 $146,917 7.43% $9,377 $9,783 $41,844 $6,250 4.4% Undervalued
2000 $146,517 $142,327 8.06% $10,383 $10,078 $43,184 ($4,190) (2.9%) Overvalued
2001 $155,483 $160,971 6.97% $9,903 $10,250 $44,000 $5,488 3.5% Undervalued
2002 $167,042 $170,803 6.57% $10,207 $10,422 $44,821 $3,761 2.3% Undervalued
2003 $179,325 $186,054 5.85% $10,152 $10,527 $45,358 $6,729 3.8% Undervalued
2004 $194,208 $188,627 5.84% $10,990 $10,669 $46,051 ($5,581) (2.9%) Overvalued
2005 $219,017 $191,766 5.87% $12,425 $10,876 $47,030 ($27,251) (12.4%) Overvalued
2006 $221,583 $186,876 6.41% $13,321 $11,231 $48,655 ($34,707) (15.7%) Overvalued
2007 $214,150 $193,539 6.34% $12,782 $11,548 $50,125 ($20,611) (9.6%) Overvalued
2008 $193,375 $204,019 6.04% $11,180 $11,786 $51,251 $10,644 5.5% Undervalued
2009est $174,834 $226,837 5.11% $9,123 $11,833 $51,552 $52,004 29.7% Undervalued
2010prj $176,365 $226,368 5.18% $9,272 $11,898 $51,930 $50,003 28.4% Undervalued
2011prj $180,108 $221,769 5.45% $9,767 $12,023 $52,573 $41,661 23.1% Undervalued
2012prj $185,042 $215,439 5.86% $10,489 $12,210 $53,489 $30,397 16.4% Undervalued
2013prj $191,600 $207,233 6.42% $11,524 $12,461 $54,691 $15,633 8.2% Undervalued
2014prj $200,083 $196,993 7.16% $12,984 $12,780 $56,195 ($3,090) (1.5%) Overvalued
As shown, historical and forecast median home prices are compared with our modeled estimates of supportable
median home prices since 1990.
Similar to our over/under supply analysis presented in the previous section, differences between our modeled
estimate of supportable median home prices and actual median home prices offer measures of over-valuation or
under-valuation since 1990, with forecasts during the next five years.
These differences between supportable median home prices and actual median home prices are shown in the chart
below:
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HOUSING VALUATION PATTERNS
UNITED STATES
$250,000
5-Year Forecast
$225,000
$200,000
Median Housing Value
$175,000
$150,000
$125,000
$100,000
$75,000
$50,000
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 prj
Jan-11 prj
Jan-12 prj
Jan-13 prj
Jan-14 prj
Historical/Forecast Median Home Price Supportable Median Home Price*
* Over/Under valuation based on value of housing (inclusive of mortgage rates) relative to long-term relationship between housing value & household incomes.
The blue curve shown in the chart above represents actual median home prices recorded since 1990, and
projections through 2014. The green curve shows our modeled estimate of supportable housing values based on
the relationship of mortgage costs (which incorporate mortgage rates) with household incomes relative to the
long-term balance between costs and incomes. Periods where the actual median exceeds the supportable median
reflect periods where the housing market is over valued. When the actual median falls below the supportable
median, under valuation is evident.
These patterns in over- and under-valuation are shown more clearly below:
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HOUSING (OVER)/UNDER VALUATION PATTERNS
UNITED STATES
$75,000
5-Year Forecast
$50,000
UNDER VALUED
$25,000
$0
OVER VALUED
($25,000)
($50,000)
($75,000)
Jan-12 prj
Jan-13 prj
Jan-14 prj
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 prj
Jan-11 prj
* Over/Under valuation based on value of housing (inclusive of mortgage rates) relative to long-term relationship between housing value & household incomes.
As shown, the model accurately reflected serious levels of over valuation which occurred from 2004 through
2007. Precipitous drops in price during 2007 and 2008, and continuing into 2009, have caused current levels of
unprecedented under valuation, which have been magnified by historically low fixed mortgage rates. It must be
stressed that these severe levels of under valuation, which are now apparent, reflect not only severe price drops
during the past 24 months, but also historically low fixed mortgage rates. If rates jump, the unprecedented level
of under valuation would disappear.
Given our forecasts for rising mortgage rates and eventual price appreciation, levels of under-valuation are likely
to recede fairly gradually, with equilibrium and some modest over valuation forecast to appear in 2014.
These patterns suggest that the ideal time for housing and residential land purchases in the United States began
early 2009 and should continue during the next 12 to 24 months. Thereafter, strong values will continue, but at a
diminishing rate. Never in recent history have housing values been so strong in the nation – reflective of a severe
recession, but even more reflective of the impact of extremely tight credit and artificially low mortgage rates. For
those households who are secure in their jobs and who can purchase a home with a fixed rate mortgage, there
may never be a better opportunity.
Overall Market Forecast

Our analysis of both housing supply and demand patterns, and housing over/under valuation is merged into a
composite index that Real Estate Economics refers to as the Market Opportunity/Risk Index as presented in
the exhibit at the end of this report. This index includes jobs-to-housing relationships and mortgage cost-to-
income relationships as shown in the following chart taken from the exhibit:
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40
RESIDENTIAL MARKET OPPORTUNITY/RISK INDEX
UNITED STATES
OCTOBER 2009
Composite O/R Index Jobs-to-Housing Index Mortgage Cost-to-Income Index Equilibrium

140.0
5-Year Forecast
STRONGER
130.0
120.0
110.0
100.0
WEAKER
150
150.0
90.0
140
140.0
130
130.0
80.0
120
120.0
110
70.0
110.0
100
100.0
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
Jul-09 prj
Jan-10 prj
Jul-10 prj
Jan-11 prj
Jul-11 prj
Jan-12 prj
Jul-12 prj
Jan-13 prj
Jul-13 prj
Jan-14 prj
Jul-14 prj
90
90.0
80
80.0
70
70.0
INDEX DATE
60
60.0
50
50.0
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
1
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
Jul-09 prj
Jan-10 prj
Jul-10 prj
Jan-11 prj
Jul-11 prj
Jan-12 prj
Jul-12 prj
Jan-13 prj
Jul-13 prj
Jan-14 prj
Jul-14 prj
Jan-15 prj
Jul-15 prj
Jan-16 prj
Jul-16 prj
ESTIMATED DATE THE INDEX IS FIRST MANIFEST IN THE MARKET 97.5
102.5
ESTIMATED DATE THE INDEX IS FIRST MANIFEST IN THE MARKET

It must be stressed that the Opportunity/Risk Index tends to lead market changes by as much as 24 months. For
example, as the composite index began to fall significantly below equilibrium in 2005, it correctly predicted
market troubles which first became apparent by early 2006. The index formed a floor during 2006, translating to
the worst part of the real estate cycle being felt during 2008. The index reached and began surpassing
equilibrium early 2008, but the resultant market stability is not likely to be manifest until mid-2010.
Similarly, the high level that the index has currently reached during the 1st half of 2009 will not likely be manifest
in the market until the 1st half of 2011. If relationships between this index and actual market manifestation holds
true, overall market conditions should improve dramatically during 2011 from current levels. Prices will
essentially remain flat in 2010, but demand pressures and mild appreciation will become increasingly apparent by
2011 as more households recognize the severe under valuation of housing throughout the nation, and as the
economy resumes expansion.
Summary
With Federal Reserve Chairman Ben Bernanke’s recent announcement that the national recession is likely over,
our key indicators outlined in this report suggest a prolonged weak economic recovery. Having suffered through
some of the nation’s biggest downturns in labor and housing, recent rising unemployment and falling home prices
have been less severe. Persistent weakness in the job market has increased unemployment to 9.4% with forecasts
for it to peak during the middle of 2010. As a lagging indicator, rising unemployment will occur as the economy
begins to build from its defined floor and job creation begins to gain momentum.
The national housing market clearly benefited by stimulus measures including an $8,000 federal first-time
homebuyer tax credit and low mortgage interest rates, which made housing more affordable and served to lessen
the severity of the downturn. Congress is facing pressure to extend the tax credit which is set to expire on
November 30 - being uncertain about spending more money to prop up the housing market. While large price
swings brought greater instability as the median price fell 21% from peak levels experienced in 2006, stability is
expected by 2010 as prices bottom out. Once prices begin to stabilize, they will likely ‘ride the floor’ for a few
quarters, rising a projected 0.9% next year.
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First time buyers and investors have provided much of the momentum in home sales this year, snapping up
foreclosures and distressed properties. As distressed inventory continues to fall, market share will begin to swing
back to the new home market if enhanced value is apparent and supply is made available. Housing permits will
continue to fall, which will eventually help to bring supply into balance with demand.
Uncertainty exists regarding another potential wave of foreclosures. Despite reports of rising defaults, the next
wave of foreclosure activity may likely be much less pronounced than the first wave due to the following:
• Many Adjustable Rate Mortgages (ARMs) are resetting at lower interest rates,
• Many ‘teaser rate’ ARMs have already gone into foreclosure, i.e., the 1st wave was bigger than
anticipated,
• Many government and bank programs that are designed to reduce foreclosures are just beginning to be
fully implemented,
• Prices are dropping to levels that stimulate a sale, effectively pre-empting foreclosure,
• The economic impact from the stimulus package has not been fully felt, with job creation reducing
foreclosures.
The effect of a foreclosure surplus on prices will continue to wane, because values have already dropped to levels
that stimulate strong demand for distressed properties. When distressed inventory is finally absorbed, the low
level of new housing in the pipeline should put upward pressure on sales volume and price support due to limited
competition. Historic under valuation will be followed by price appreciation once economic growth emerges,
forecast to occur by 2011, setting the stage for significantly improved housing conditions as the economy begins
to expand.
Source:www.realestateeconomics.com
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Disclaimer
The research done to gather the data in The Charleston Market Report involves examining thousands of listings. With
this much data inaccuracies will occur. Care is taken in gathering and processing the data and information within this
report is deemed reliable. IT IS NOT GUARANTEED. The real estate market is cyclical and will have its ups and
downs. Past performance cannot determine future performance. The purpose of the Charleston Market Report is to
educate you on current and consistent market conditions by reporting leading market indicators with the support of
traditional real estate data.
This information is offered with the understanding that the author is not engaged in rendering legal, tax or other
professional services. If legal, tax or other expert assistance is required, the services of a competent professional are
recommended. This is a personal newsletter reflecting the opinions of its author. It is not a production of my
employer. Statements on this site do not represent the views or policies of anyone other than myself.
Investing in real estate is not a get-rich-quick scheme nor is there any guarantee you will make a profit. Every effort
has been made to make this report as complete and accurate as possible. However, there may be mistakes. Therefore,
this report should be used only as a general guide and not as the ultimate source for making money in real estate.
www.charlestonmarketreport.com

October 2009 Charleston Market Report

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October 2009 Edition

Structural Imbalances in Finance and Housing Present Challenges to Real Estate

Source: Bureau of Labor Statistics.

From Bud Conrad of Casey Research:

Just Desserts and Markets Being Silly Again

1. For Missing the Unmissable

2. The Other Teflon Men

3. Misguided, Sometimes Idiotic Mortgage Borrowers

5. Over-spenders and Under-savers

6. Banks Too Big to Fail

7. Over-bonused Financial Types

8. Overpaid Large Company CEOs

9. Holders of the Stocks of Ridiculously Overleveraged and Wounded Corporations

10. The Well-managed U.S. Auto Industry

11. The World’s Most Over-vehicled Country

12. Stock Options

The Last Hurrah and Markets Being Silly Again

Lesson Not Learned: On Redesigning Our Current Financial System

NATIONAL ECONOMIC AND HOUSING TRENDS AND 5-YEAR FORECASTS

Employment Trends and Forecasts

TOTAL NONFARM JOBS

Patterns in unemployment are shown below:

Housing Construction Trends and Forecasts

ANNUAL RESIDENTIAL PERMIT ACTIVITY

Single Family Multi-Family Total

TOTAL HOUSING SUPPLY

Housing Price Trends and Forecasts

Time Median 12-Month Change

Mortgage Rate Trends and Forecast

Household Income Trends and Forecasts

FORECAST HOUSEHOLD INCOME CHANGES FROM 2009 TO 2014

Demographic Trends and Forecasts

POPULATION DISTRIBUTION BY AGE

FORECAST POPULATION CHANGES FROM 2009 TO 2014

NATIONAL HOUSING SUPPLY/DEMAND AND OVER/UNDER VALUATION PATTERNS AND 5-

Housing Supply and Demand Trends and Forecasts

Total Housing Housing Market is Under/

2010prj 131,157,742 129,185,666 123,895,077 (5,290,589) (4.1%) Overbuilt

Source: Bureau of Labor Statistics; Census Bureau; National Assoc. of Realtors

Housing Over/Under Valuation Trends and Forecasts

Overall Market Forecast

Composite O/R Index Jobs-to-Housing Index Mortgage Cost-to-Income Index Equilibrium

ESTIMATED DATE THE INDEX IS FIRST MANIFEST IN THE MARKET

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