Economic Forecast 2012

Housing and the Economy: Impacts and Forecasts Geoffrey J.D. Hewings, Ph.D. Director Regional Economics Applications Laboratory (REAL) University of Illinois Institute of Government and Public Affairs 217.333.4740 217.244.9339 (fax) [email_address] www.real.illinois.edu Illinois Association of REALTORS® January 2012 Public Policy Meetings

Regional Economics Applications Laboratory - University of Illinois
Founded in 1989 initially as collaborative venture with the Federal Reserve Bank of Chicago
Objective: enhance analytical capability for public policy decision-making at the urban and regional scale with an initial focus on Chicago and the Midwest
Employs doctoral students from economics, agricultural economics, urban and regional planning and geography

REAL – Sample Projects
Forecasts for the Chicago region through 2040 (CMAP)
Economic impacts of project CREATE; Chicago Marathon, Museums
Analysis of role of interstate and international trade
Impact of ageing and immigration on the Chicago economy
Monthly housing forecasts for the Illinois Association of REALTORS®

State of Illinois Economies
State is 406,000 below prior peak (November 2000) “translates” into loss state income tax revenue of $0.5 billion+ in lost sales and income tax
If add considerations of:
population growth since 2000
decrease in labor force participation rates
Large number in part-time who would like full-time employment THEN…

State of Illinois Economies
State probably needs to add close to:
600,000 jobs to achieve equivalent level to November 2000
Chicago would need to add 302,000 jobs to return to 2000 level and another 100-150,000 to account for additional factors noted

RECOVERY SCENARIOS Jobs recovered Since December 2009 TIME GROWTH NEEDED RATE 5 years 102,200 jobs / year 8 years 63,900 jobs / year 10 years 51,100 jobs / year 15 years 34,100 jobs / year Note: Best year since 1980 – Illinois added 60,000 jobs

RECOVERY: History Is Not Encouraging
Before this, longest recovery was 8 years (now > 10 years – since 2000)
Current employment in Illinois matches that late 1990s
Illinois has 5 of 10 sectors with employment levels below those of 1990: Manufacturing, Information, Construction, Trade, Transportation & Utilities, and Financial activities
But in 2011, Illinois ’ employment growth matched that of the U.S. and exceeded that for the Rest of the Midwest (IA, WI, IN, OH, MI, MO)

Sources of Growth – Illinois and Chicago
Both economies heavily tied to
U.S. domestic market
85% exports go to other states
15% international with strong dependence (35%) on Canada and Mexico
40% of domestic exports and imports are with Midwest neighbors – WI, IN, OH, MI, MO, IA

Sources of Growth – Illinois and Chicago
In 2011, Chicago and Illinois matched U.S. employment growth rates (0.08%)
Rest of Midwest growing faster (0.13%)
Recovery of Chicago and Illinois tied in with U.S. recovery but especially Midwest recovery

Where is the growth/decline taking place?
Sectors growing in Chicago
Manufacturing, Construction, Trade/Transportation/Utilities
Sectors declining in Chicago
Information, Financial, Government

Where is the growth/decline taking place?
In the United States:
Growing :
Professional & Business, Education & Health (Chicago flat)
Declining :
Information and Financial (much greater losses than Chicago)

Illinois & National Economy Since early 1990s, Illinois ’ growth rate has fallen behind the U.S. and Rest of the Midwest, but converging with the latter through October 2011, Illinois had added jobs at 40% U.S. rate since 1990 US ILLINOIS

Illinois & National Economy Differences between Illinois and U.S. are trivial

Impacts of Migration & Job Losses
Probably see continued erosion of state ’s competitive position (dropped from 4 th to 15 th in terms of per capita income in the last 15 years)
Average income of in-migrants lower than out-migrants leading to loss of income averaging $1billion over the 2000-2010 decade (translates into loss of 20,000 jobs)

Challenge loss of jobs loss of people loss of expenditure loss of business expansion

Housing Market
New time buyers – special credit programs
Housing turnover – people upsizing or downsizing
Job relocation/migration
Retirement
Sources of Demand for Housing Market

Housing Market: Incentive Programs
Federal Government program successfully attracted buyers – but REAL estimated that CBO estimates were way too high (i.e., incremental sales associated with the program failed to account for sales that could normally have been expected to have been made)
Secondly, after program ended, sales plummeted for several months eroding much of the benefit of the program
In essence, all the program did was accelerate the timing of purchases

Incentive program Ended, 2010

Housing Market: Turnover
In recent years, “time on the market” has extended to 15+ months (in the early 2000s, 2-4 months was normal)
Now dropped below 10 months for first time in 3 years
Turnover generating fewer sales as consumers become more risk adverse

Housing Market: Turnover
Market segmentation by price becoming more pronounced
Usual market signals not working (e.g. historically low mortgage rates yet new loan originations likely to be at level experienced in 1997 next year and continue to decline over next 2+ years)

Unsold Inventory by Price Range - Illinois

Housing Market: Job Relocation/Migration
Migration rates have been declining since early 2000s
With buoyant housing market and expectation of price appreciation, relocation often accompanied by sale and purchase of house
Job relocation still important source of demand but fewer people changing jobs

Housing Market: Job Relocation/Migration
Now with job mobility down, those relocating often “parking” themselves in apartments to shelter against prospect of short-term negative equity in a home
Rental rates have thus risen in the last two years

Housing Market: Retirement/Migration
Retirees finding value of existing home declined combined with extensive time on the market (>10 months in Illinois) caused many to remain in Illinois (and Rest of Midwest) in hopes of housing price rebound. (That has yet to happen.)
Also had negative impact on housing markets in retiree locations (AZ, FL)

Housing Market: Retirement/Migration
Retiree incomes spent in Illinois generating positive ripple effects
Retirees remaining here are not selling their homes so there is a loss of energy in the housing market
Is net effect positive or negative for state?

Housing Market: Turnover generates impacts
Through 2007, typical Illinois county experienced 11% turnover in households each year (5% in and 6% out)
Further 6-12% change houses within the same county
Rates tend to be higher in metro counties

Illinois Total Direct Expenditures on a home sale is $28,581 (payments to REALTORS®, bank loan origination fees, state and county taxes, fix-up costs) source: recent IAR study
In 2010 111,319 sales so direct impact was $3.2 billion
Generates about $7.9 billion annually through ripple effect

Each $1 billion generates about 12,000 jobs directly: total direct + indirect effect = 130,000 jobs
34% reduction in sales translates into loss of 50,000 jobs
Further negative effect on states income and sales taxes
This is in addition to the construction impacts associated with new homes

Price Blues Continue

Home Sales < $100,000

The Foreclosure Overhang…..
Three parts to consider:
Filings
Occur when mortgagee cannot make payments
Sales
Sale of property returned to owner of the note
Inventory
Accumulation of foreclosed properties not yet sold

More on inventory
Illinois uses the judicial foreclosure process.
A typical foreclosure case in Illinois takes 210 to 270 days.
However, if the borrower tries to fight against the foreclosure process, then it will take much longer to finish the foreclosure process – accumulating in the inventory.

More on inventory
According to RealtyTrac, Chicago MSA has the highest foreclosure stock among the top 20 MSAs. Sooner or later, part of the foreclosure inventory will turn into foreclosure sales or short sales.
This foreclosure inventory generates large impact for the future housing market sales and prices.

Start of recession The Foreclosure Overhang…..

Inventory Accumulation Start of recession

REO: Property owned by a lender - usually a bank - after an unsuccessful sale at a foreclosure auction. This is common because most of the properties up for sale at these auctions are worth less than the total amount owed to the bank: the minimum bid in most foreclosure auctions equal the outstanding loan amount, the accrued interest and any fees associated with the foreclosure sale.

Market Disturbances
Large foreclosure inventory could create some troubles in the housing market recovery in 2012.
Because of the Robo-Signer investigation, many foreclosure filings are piled up in the court.
According to foreclosure data REAL, by the end of 2011, only 18% of 2011 new foreclosure filings yielded foreclosure sales, while only 36% of new foreclosure filings in 2010 resulted in final sales

Market Disturbances
The foreclosure inventory that has accumulated from 2010 and 2011 is over 110,214 cases.
This is almost twice as much as the monthly housing inventory in Chicago PMSA (55,386 houses in December 2011).
Large number of foreclosure cases will create a negative impact on the future housing market.
Given the speed at which these cases are clearing the courts, it is likely that the impacts will be felt well beyond 2012.

Housing Market: Current Situation
In Illinois, 8,828 houses were sold in December, 10.5% more than last month and 14.0% more than a year ago.
The comparable figures for the Chicago PMSA were 6,090 houses sold in December 2011, 11.7% more than last month and 17.0% more than December 2010.

Illinois Housing Market: 2011 in Perspective
For the last 12 months (January to December 2011) 103,785 houses were sold in Illinois.
This annual sales figure is up 1.1% from last month, and almost equal to last year.

Chicago PMSA Market: 2011 in Perspective
The December ’s annual sales figure for Chicago PMSA is 69,900.
This figure is 1.3% higher than last month, and it is 1.4% higher than one year ago.

2012 Illinois Sales Forecast

Chicago PMSA Sales Forecast

Housing Market: Next 12 Months
Through April 2012:
Year-over-year changes in monthly sales are forecast to be positive in both Illinois and Chicago;
May through August:
Will see declines, some of which are expected to be less that 6%.
Remainder of the year:
Will experience a modest period of small positive growth.

The month-to-month changes are more volatile, with the usual declines in the winter and early spring.
Only July, September, October and November are forecast to have positive month-to-month changes in Illinois and Chicago

By September 2012, the median price of a
house is forecast to be (September 2011 in
parentheses):
$127,527 ($136,850) Illinois (-6.8%)
$141,603 ($160,000) Chicago PMSA (-11%)

How well did we forecast last year?
Last year, the forecasts for September
2011(actual in parentheses) were:
$132,912 ($136,850) Illinois (error of 2.8%)
$156,320 ($160,000) Chicago PMSA (error of 2.3%)
Hopefully, the slight overestimate of the price declines made last year will continue this year!

Final Concerns
Signals in the economy and in the housing market are noisy
Forecasting more difficult and very sensitive to a single month ’s behavior
Further housing stimulus package unlikely to prove more effective than the last one
Attention now focusing on addressing concerns of negative equity

More Final Concerns
In the 2000-2007 period, housing was viewed as both an asset and a piggy bank
Conservative behavior by consumers of late is to be welcomed but…household consumption accounts for 70% of GDP on the expenditure side
Need to provide appropriate incentives for spending - perhaps instituting some safeguards to prevent the excesses of the past

L L Monthly index of leading indicators for Chicago Monthly Employment analysis for state and Metro areas Illinois Economic Review (monthly) with employment forecasts for next 12 months

For More Information www.real.illinois.edu www.illinoisrelator.org/marketstats

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Economic Forecast 2012

by Illinois Association of REALTORS®

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