According to Dr. Yun this morning, aided by the home buyer tax credit, the outlook for housing and the economy appears headed for a sustainable . “Things are looking much better”.  The projections are enhanced by a tax credit expansion to more home buyers through the middle of 2010. “Given the success of the first-time buyer tax credit to date, and the need for qualified buyers to continue to absorb inventory that will include additional foreclosures over the coming year, we are hopeful about the impact of the expanded tax credit because it will stabilize home prices,” he said. “In fact, the credit is working better than first projected – it now looks like we’ll have 2.3 to 2.4 million first-time buyers this year.” He estimates that 350,000 – 400,000 of those would not have purchased right now – would not have gotten off the fence without the tax credit. Overall impact from the tax credit extension & expansion will give a 15% boost to existing home sales.

“We’ve seen a steady downtrend in housing inventory for well over a year and home prices appears to be in the early stages of stabilizing. We’ve also seen 8 straight months of seasonally adjusted sales increases. With expansion of the tax credit to additional buyers through the middle of next year, and no major unforeseen events impacting the economy, home prices should rise between 3 and 5 percent in 2010, but with wide geographic differences,” Yun said.

Yun also talked about the difference between a tax credit and just letting prices drop further. To consumers the $8,000 credit looks the same as an $8,000 price reduction. But to the market, an $8,000  price reduction means a 4% drop in wealth or another $730 billion destruction of housing wealth and further negative economic impact. We’ve already lost $4 trillion in housing wealth from the peak and all the money the bubble made has been removed – in fact many markets are over-corrected at this point.

We are experiencing a bifurcated recovery – under $500,000 has been very resilient while over $500,000 continues to lag badly.

Yun also questioned whether first time buyers are used up or pent up? In 2000, pre-boom, there were 11 million renters who could qualify to purchase if they wanted to. Today there are 16 million. The demand remains and there are still a lot of people sitting on the fence hoping to buy at the absolute bottom of the market. The move-up and upper end markets also have a lot of room for improvement but that will wait until consumer confidence starts to rise again – it hasn’t yet.

The recent increase in velocity stimulates economic stability, helps price stabilization and eliminates that fear factor which will lead to more demand as people realize things are looking better. With unemployment expected tom peak mid-2010 (although remain at around 10% for awhile) we will see a gradual decline in foreclosure activity as home values start to increase. That makes it easier for re-sets to stay in their homes and reduces the trend to strategic defaults. Bank balance sheets will improve and lenders will increase their activity both on mortgages and business loans.

“The size of the U.S. budget deficit is a concern going forward, and carries the risk of higher inflation. At this point, that risk appears to be restrained,” Yun said. The federal deficit has more than tripled this year to $1.4 trillion. The government must start showing they have a plan and the political will to curb that debt and start soon. They must do it judiciously in order not to shut off the recovery but they must act soon or our foreign lenders will start to get nervous, the money supply will contract and there will be a significant rise in interest rates to the 7% – 8% range, which would effectively shut down any recovery. Yun does not believe that will happen and does not see a ‘double-dip’ recession in the future.

You can download all of Dr. Yun’s slides from this mornings presentation right here. Use them at your next office meeting and you too will sound like you have a clue.

Housing Market Trends and Outlook

As usual, Dr. Yun’s presentation was well attended and comprehensive – at least I was impressed. Of course I used to enjoy David Lareah too so what do I know. I realize Dr Yun doesn’t have the most sterling reputation for perspicacity but I always find him enjoyable and – if you factor in his advice with that of 3 or 4 other experts you’ll either get somewhat closer to the truth or you’ll get stark raving bull goose looney. So if you take his remarks for what they’re worth, you’ll still come away with a good education from one of the best. After all, you don’t get named one of the nations top 10 economic forecaster by USA Today by being wrong all the time. If you can’t learn something from this man, you can’t learn at all.

Anyway, you can watch a video of his morning meeting here: Mid-year Economic Summit – Dr. Lawrence Yun.

Or if you would like a PPT copy of his slides, check here: Mid-year Economic Summit – Presentation.

But for the condensed version, touching briefly on the highlights and the lowlights as well as the inevitable running commentary from your host – read on:

Dr. Yun began his remarks asking if we are on the cusp of a recovery or are we poised to head even further down as the job market sours. His prognosis? We will see the nationwide jobless rate grow to 10.5% by late this year followed by a generally recovering economy with that recovery stretching over several years. But he warned that the recovery could, COULD, be quite robust. More on that later. Early summer will be the test period. By then a number of factors will occur that will shape the next 12 – 18 months. Things like the sliding labor market, the impact of the commercial real estate market, banks that have money that won’t lend or banks that have no money lending, the potential tsunami of new foreclosures, things like that. But he acknowledged there are lots of moving parts and the outlook is cloudier than ever before. I felt better right away.

Nationwide the level of sales is back to 1998-1998 levels. From a peak of over 7 million units in 2005, sales were under 5 million units in 2008. But as he also pointed out, we have 30 million more people than we did then and that points to a pent-up demand. We also need 1.3 – 1.7 new units every year and the past two years we’ve produced only half that many. Again, the need is there. As you look at the historic trendline and note the sharp spike up from 2004 – 2007, we have dropped back down to what would be considered a normal position on that trendline. Unfortunately just as we spiked up, we are now overshooting downward. This yo-yoing effect is what may produce a very strong recovery, a sling-shot recovery. Any further declines will be the result of over-correction.

Yun also pointed out that prices never really got out of line in several major markets across the country. But as the slump drags on, even those markets are suffering from the perception that their properties are overvalued. He does believe that some states like California have reached a tipping point. Price bottoming is occurring, people know it’s a great time to buy but they don’t feel that feeding frenzy yet. There are several factors that could push the button to get that tipped including:

1) pent-up demand.

2) banks loosening their purse strings to a more normal stricture.

3) the lowest interest rates since Eisenhower was President

4) aging population aquiring 2nd homes

5) the new Baby Boom (did you know the HS graduating class of 2010 will be the LARGEST graduating class ever. Who’s going to be selling them homes in 10 – 15 years.)

6) another 30 million prospects from the BRIC countries (Brazil, Russia, India, China). As the economies of these nations improve they will add 30 million people to their middle class – people whose goal with their newfound wealth is to acquire a vacation home in the United States.

Yun briefly chimed in on the ‘Too Big To Fail’ issue noting that 75% of our assets are owned by just 10 banks. Are they too big? He also opined that sometimes those too big to fail are also too big to govern. Should those 10 banks be broken into smaller, mopre responsive units and should the government do the same thing with Fannie & Freddie? In addition to lending institutions, he specifically noted the economies of California and New York as prime examples of this dichotomy – too big to fail / too big to manage.

He concluded his remarks by noting that that the global economy truly is here to stay. Fiscal Isolationism is no longer possible nor will it produce the results we need. He also stated to ‘Demography is Destiny’, you may dispute some of the particulars or debate the timeframe but the fact is there’s a whole new demographic coming into play and you can call them GenX or Y or whatever but they are the new, improved and supersized Baby Boomers.

Finally he left with  words of caution. No matter how the market looks to you at the time – STAY WITHIN YOUR BUDGET.