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The worst is now over; so it's time to set our sights on recovery and examine how changes in the consumption of real estate have altered—and will continue to alter— the state of the industry. developments. But the confounding reality of the boom is that it was driven by perfectly ordinary economic and political behavior. We can try to prevent this boom and bust from happening again. We will write tighter standards for mortgage products, demand better analysis from rating agencies, and hold executives more accountable. But we can't prevent some other boom and bust from hap- pening, not unless the mortgage and housing industries are nationalized. The separation between today's value and tomorrow's risk at the heart of the real estate market cannot be regulated away. The biggest lesson to learn from the recent debacle is this cycle will hap- pen again although it will look different. Market Shifts The U.S. population is not a single mass but many smaller demographic pieces, and we happen to be in a period where some of those pieces are changing very rapidly with big consequences for real estate markets. Baby Boomers I'm one of them myself, the group of people born between 1946 and 1964. There are about 80 million baby boomers, and they drove the real estate market during the past 20 years be- cause of their large numbers and high incomes. The youngest of them are now close to 50, the oldest over 65. They bought suburban homes with enough bedrooms to raise 2.5 children, but now the children are grown and no longer live with them (if they're lucky). Even after the fall in home prices, they have equity in their homes. Cashing in and down- sizing makes a lot of sense. Over the next five years, 19 million baby boomers will cross the 60-year mark, and 16 million will cross the 65-year mark. Eighty 76 percent are homeowners, and many will put their houses on the market, making the upper end of the market one that favors buyers. Many will move from the suburbs to the city. Growth in many central cities is now stronger than the growth in their suburbs; prominent examples include Austin, Denver, Raleigh, and Tampa, but it's also the case in Omaha, Memphis, and Kansas City. Baby boomers aren't the only reason for this trend. The rejuvenation of central cities and their cultural life is a magnet for empty-nesters— a dynamic to note for builders and brokers. The Hispanic Population In the last decade, the U.S. population increased by 27 million people to just over 300 million. Of that number, 15 million described themselves as Hispanic or Latino and only 2 million as white–not Hispanic or Latino. Leaving behind the tortured wording of the Census Bureau, the Hispanic population grew quickly to 50 million while the white population, at 200 million, almost stalled. Right now the average Hispanic family is larger than the average white family, has three-quarters the income, and is as likely to rent as to own a home. The Hispanic homeownership rate is 50 percent, while the homeownership rate for whites is 70 percent. Although Hispanics are still heavily Slower Income Growth In 1980, the average house cost four times the average family income. The same was true in 1990 and 2000. Right now, in 2012, the multiple is a touch higher at 4.2. Clearly, and as you would expect, how much people will pay for a house depends closely on how much money they make. But the income prospects for Americans changed as the American economy moved away from well-paid manufacturing jobs to lower-paid service and health-care jobs. To a very large degree, computers and computer- ized machines replaced middle-managers and skilled workers. Yes, new jobs were created to control the computers but far fewer of them. Adjusted for inflation, wages and salaries in the U.S. rose 20 percent in the 1980s and 30 percent in the 1990s, but only 4 percent from 2000 to 2005 and not at all from 2005 to 2010. Homebuyers in this next decade cannot afford the homes of the last decade. The Next Few Years The overall picture is promising. Local concentrated in the Southwest and West, they are an important presence across the country. While California, Florida, New York, and Texas have long had large Hispanic populations, in 18 states Hispanics are more than 10 percent of the population, including such newcomers as Washington, Illinois, Kansas, and Connecticut. Builders, lenders, brokers, and servicers must adapt to this rising economic force. Market Monitor's Housing Demand Index, negative since mid-2006, is almost back to zero. (See Figure 1) The index is based on hiring by homebuilders, mainly small operators who are closest to local market conditions. Real estate cycles in some ways follow a predictable course: there aren't enough homes, so prices go up; higher prices spur both sellers and builders until there are too many homes, so prices go down. The last cycle was different because much of the demand that drove prices higher came from efforts to generate more subprime mortgages, essentially creating new homebuyers who couldn't really afford to buy a home. The fallout was not just lower prices but large numbers of delinquencies, foreclosures, and unhappy people. The supply and demand part of this sorry situation is almost worked out. The U.S. popula- tion grows by about 1 percent per year, or 3 million people. With an average 2.5 people per household and including a small amount for replacement of old units, that's 1.25 million new housing units needed every year. From 2002 through 2007, 11 million new homes were built, about 4 million too many. In the following four years, just 2 million homes were built, about 3 million too few. So, this

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