Ted C. Jones PhD ~ 2009 All About the Price

Date: Nov. 13th, 2008

Ted C. Jones PhD ~ 2009 It's All About the Price
Senior Vice President – Chief Economist
Director of Investor Relations Stewart Information Services Corporation

US Economic Overview
1. Economy downward spiral turned January 2008
2. Energy: Gas will go back up to $5 per gallon
3. No such thing about a national real estate market – despite what the media says – very localized.
4. No sign that economy is going to get better any time soon
5. Employment was growing at 10% until Jan 2008. September and October were the biggest job loss. However, Denver is growing jobs along with; Texas, Oklahoma City,
6. Economics = domino effect.
7. What was the butterfly affect that put this chain of events into effect and crashed our economy? 2002 the Feds went to 1% on their fed fund rates. Lenders started concentrating on short term loans. These short terms loans put down the real estate market.
8. Exotic loans (California used as an example). 3.9% loans that jump to 10.9% in six months with optional payments? Reason – they were going to flip it in a few months. This did not work.
9. Should the government bailout owners who took these loans? Not the solution: 60% of loans that were restructured have gone bad with new terms. Results from Fannie…this is only prolonging the fall.
10. $23 Billion in reset loans scheduled in 2009, and will go down. However Option adjustment arms (worse than sub loans) will max out 2010. We have three more years before all these loans come do.
11. 18.6% of all loans are under water…and will get worse.
12. The last “normal” real estate market was 2002 when we came off the last recession in 2001.
13. Existing home sales are 86% of normal. He feels Colorado is at the normal level. Why we never had a big boom affect.
14. He believes this is a normal market in Colorado? Does not take into account what types of homes are being sold to keep us at normal.
15. 2007 the trade deficit was 5 x that of the Federal Deficit. This is on the consumer…the last time the government took in more money than it spent was Jan 2007. Why tax cuts work not stimulus packages.
16. 2008 largest single deficit, why…the bailout. Next year is on schedule to be the largest single deficit in history.
17. Interest Rates: use to be so easy to forecast. Interest rates follow Oil rates 73% of the time by looking at energy futures. In 2002 interest rates went low and oil rates rose dramatically. Why, Alan Greenspan put too much money out there chasing too few good deals. Therefore, we sold more homes and cars than we should have. We used more credit than we should have. The next melt down in the market are credit cards. Why did Oil go up…the weak dollar; as we import the majority of our oil we pay Middle East for oil and they turn around and spend it in Europe.
18. Oil Price Futures: will go up. Why…we did not invest in oil and we are subsidizing alternative fuels. Not a good investment strategy. The cheapest form of electrical is Hydro, nuclear, coal, gas (in that order). Wind is 40x more expensive than the top 5. Solar is 150X more expensive. If we research, innovate, and build it – this will put the economy back on track and free from the oil. Side note, the corn option for fuel is the worst thing our current president supported = net energy loss. Ethanol is viable but can’t be corn based – can go sugar cane.
19. Why stimulus programs don’t work? 57.7% of the money sent to the public had no affect on the economy as it went towards consumers existing bills and higher cost of living. 6% went towards clothes and electronics; this money goes towards other countries.
20. Lending: down; 53% in commercial lending. Hotel industry is in trouble as they are the leader in this sector.

2008 Forecast
1. Rates will go up .5 to 1% by the end of the year and will go up next year. The bailout and inflation will drive this rate.
2. Denver-Aurora Jobs: .88% growth = better than others. When the US economy does well Colorado does great. Why people move here and vacation here. When the US economy is bad Colorado is really down. Why, people can’t afford to move here and play here.
3. Average closing per month 2006 to 2008 has gone down from 4,500 homes per month to 3,900. Colorado has pent up supply. If sellers could get the price they wanted they would sell. We are 10% down from 2006 when we were booming…not bad as we look across the country.
Perception from buyers out of state and in state is they think everything is bad and do not realize this trend.
4. Building in Denver: have come down 9,000 units. If it weren’t for foreclosures we would not be overbuilding. However, we do have foreclosures and we are still overbuilding.
5. Taxes with Obama: 2012 will be up 10%, Top tax rate 35% to 39.6%, Cap Gains 15% to 20%, Dividends from 15% to 39.6%, will go to marginal tax rates.
6. Estate Tax repealed in 2010, returns in 2011 at 2001 rates.
7. We are no longer fat cats = you must respond and adapt to the economy in your business model.

Economic Concerns
1. Wall Street – Washington – Liquidity
2. Time Bomb Loans: housing sales continued stagnant; 2009 to 2011
3. Cold War II – terrorists. Next 20-40 years our children will become use to it.
4. Pandemic (bird flu). Happens every 30 years = we are due.
5. Inflation (and cap rates) = recession
6. Tax cut clock ticking
7. Energy: US imports 63% of Oil
8. Real Estate – Autos – Credit Cards – Banks (have not resolved with bailouts)
9. to follow Ted’s future comments.

Going Green
1. Sustainability that makes economic sense
2. US government, largest tenant in the country will not renew a lease if building is not an energy star building.
3. LEED on Average for $11.33 more per square foot, Occupancy rate 4.1 percent greater, sell for $171 more per square foot.
4. Energy Star Buildings: Rent on average for $2.40 for per sq foot, occupancy 3.6 percent greater.
5. A building make their own electricity, process their own sewage, lights etc. 6% more to add this and only is taking 12-14 months to pay back.