Economic Forecast 2012


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Housing and the Economy: Impacts and Forecasts - presented by Dr. Geoffrey J.D. Hewings, Director - Regional Economics Applications Laboratory (REAL), University of Illinois Institute of Government and Public Affairs

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Economic Forecast 2012

  1. 1. 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] Illinois Association of REALTORS® January 2012 Public Policy Meetings
  2. 2. Regional Economics Applications Laboratory - University of Illinois <ul><li>Founded in 1989 initially as collaborative venture with the Federal Reserve Bank of Chicago </li></ul><ul><li>Objective: enhance analytical capability for public policy decision-making at the urban and regional scale with an initial focus on Chicago and the Midwest </li></ul><ul><li>Employs doctoral students from economics, agricultural economics, urban and regional planning and geography </li></ul>
  3. 3. REAL – Sample Projects <ul><li>Forecasts for the Chicago region through 2040 (CMAP) </li></ul><ul><li>Economic impacts of project CREATE; Chicago Marathon, Museums </li></ul><ul><li>Analysis of role of interstate and international trade </li></ul><ul><li>Impact of ageing and immigration on the Chicago economy </li></ul><ul><li>Monthly housing forecasts for the Illinois Association of REALTORS® </li></ul>
  4. 4. State of Illinois Economies <ul><li>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 </li></ul><ul><li>If add considerations of: </li></ul><ul><li>population growth since 2000 </li></ul><ul><li>decrease in labor force participation rates </li></ul><ul><li>Large number in part-time who would like full-time employment THEN… </li></ul>
  5. 5. State of Illinois Economies <ul><li>State probably needs to add close to: </li></ul><ul><li>600,000 jobs to achieve equivalent level to November 2000 </li></ul><ul><li>Chicago would need to add 302,000 jobs to return to 2000 level and another 100-150,000 to account for additional factors noted </li></ul>
  6. 6. 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
  7. 7. RECOVERY: History Is Not Encouraging <ul><li>Before this, longest recovery was 8 years (now > 10 years – since 2000) </li></ul><ul><li>Current employment in Illinois matches that late 1990s </li></ul><ul><li>Illinois has 5 of 10 sectors with employment levels below those of 1990: Manufacturing, Information, Construction, Trade, Transportation & Utilities, and Financial activities </li></ul>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)
  8. 8. Sources of Growth – Illinois and Chicago <ul><li>Both economies heavily tied to </li></ul><ul><li>U.S. domestic market </li></ul><ul><li>85% exports go to other states </li></ul><ul><li>15% international with strong dependence (35%) on Canada and Mexico </li></ul>40% of domestic exports and imports are with Midwest neighbors – WI, IN, OH, MI, MO, IA
  9. 9. Sources of Growth – Illinois and Chicago <ul><li>In 2011, Chicago and Illinois matched U.S. employment growth rates (0.08%) </li></ul><ul><li>Rest of Midwest growing faster (0.13%) </li></ul>Recovery of Chicago and Illinois tied in with U.S. recovery but especially Midwest recovery
  10. 10. Where is the growth/decline taking place? <ul><li>Sectors growing in Chicago </li></ul><ul><ul><li>Manufacturing, Construction, Trade/Transportation/Utilities </li></ul></ul><ul><li>Sectors declining in Chicago </li></ul><ul><ul><li>Information, Financial, Government </li></ul></ul>
  11. 11. Where is the growth/decline taking place? <ul><li>In the United States: </li></ul><ul><li>Growing : </li></ul><ul><li>Professional & Business, Education & Health (Chicago flat) </li></ul><ul><li>Declining : </li></ul><ul><li>Information and Financial (much greater losses than Chicago) </li></ul>
  12. 12. 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
  13. 13. Illinois & National Economy Differences between Illinois and U.S. are trivial
  14. 14. Impacts of Migration & Job Losses <ul><li>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) </li></ul><ul><li>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) </li></ul>
  15. 15. Challenge loss of jobs loss of people loss of expenditure loss of business expansion
  16. 16. Housing Market <ul><li>New time buyers – special credit programs </li></ul><ul><li>Housing turnover – people upsizing or downsizing </li></ul><ul><li>Job relocation/migration </li></ul><ul><li>Retirement </li></ul>Sources of Demand for Housing Market
  17. 17. Housing Market: Incentive Programs <ul><li>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) </li></ul><ul><li>Secondly, after program ended, sales plummeted for several months eroding much of the benefit of the program </li></ul><ul><li>In essence, all the program did was accelerate the timing of purchases </li></ul>
  18. 18. Incentive program Ended, 2010
  19. 19. Housing Market: Turnover <ul><li>In recent years, “time on the market” has extended to 15+ months (in the early 2000s, 2-4 months was normal) </li></ul><ul><li>Now dropped below 10 months for first time in 3 years </li></ul>Turnover generating fewer sales as consumers become more risk adverse
  20. 20. Housing Market: Turnover <ul><li>Market segmentation by price becoming more pronounced </li></ul><ul><li>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) </li></ul>
  21. 21. Unsold Inventory by Price Range - Illinois
  22. 22. Housing Market: Job Relocation/Migration <ul><li>Migration rates have been declining since early 2000s </li></ul><ul><li>With buoyant housing market and expectation of price appreciation, relocation often accompanied by sale and purchase of house </li></ul>Job relocation still important source of demand but fewer people changing jobs
  23. 23. Housing Market: Job Relocation/Migration <ul><li>Now with job mobility down, those relocating often “parking” themselves in apartments to shelter against prospect of short-term negative equity in a home </li></ul><ul><li>Rental rates have thus risen in the last two years </li></ul>
  24. 24. Housing Market: Retirement/Migration <ul><li>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.) </li></ul><ul><li>Also had negative impact on housing markets in retiree locations (AZ, FL) </li></ul>
  25. 25. Housing Market: Retirement/Migration <ul><li>Retiree incomes spent in Illinois generating positive ripple effects </li></ul><ul><li>Retirees remaining here are not selling their homes so there is a loss of energy in the housing market </li></ul>Is net effect positive or negative for state?
  26. 26. Housing Market: Turnover generates impacts <ul><li>Through 2007, typical Illinois county experienced 11% turnover in households each year (5% in and 6% out) </li></ul><ul><li>Further 6-12% change houses within the same county </li></ul><ul><li>Rates tend to be higher in metro counties </li></ul>
  27. 27. Housing Market: Turnover generates impacts <ul><li>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 </li></ul><ul><li>In 2010 111,319 sales so direct impact was $3.2 billion </li></ul><ul><li>Generates about $7.9 billion annually through ripple effect </li></ul>
  28. 28. Housing Market: Turnover generates impacts <ul><li>Each $1 billion generates about 12,000 jobs directly: total direct + indirect effect = 130,000 jobs </li></ul><ul><li>34% reduction in sales translates into loss of 50,000 jobs </li></ul><ul><li>Further negative effect on states income and sales taxes </li></ul><ul><li>This is in addition to the construction impacts associated with new homes </li></ul>
  29. 29. Price Blues Continue
  30. 30. Home Sales < $100,000
  31. 31. The Foreclosure Overhang….. <ul><li>Three parts to consider: </li></ul><ul><ul><li>Filings </li></ul></ul><ul><ul><ul><li>Occur when mortgagee cannot make payments </li></ul></ul></ul><ul><ul><li>Sales </li></ul></ul><ul><ul><ul><li>Sale of property returned to owner of the note </li></ul></ul></ul><ul><ul><li>Inventory </li></ul></ul><ul><ul><ul><li>Accumulation of foreclosed properties not yet sold </li></ul></ul></ul>
  32. 32. <ul><li>More on inventory </li></ul><ul><li>Illinois uses the judicial foreclosure process. </li></ul><ul><li>A typical foreclosure case in Illinois takes 210 to 270 days. </li></ul><ul><li>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. </li></ul>The Foreclosure Overhang…..
  33. 33. <ul><li>More on inventory </li></ul><ul><li>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. </li></ul><ul><li>This foreclosure inventory generates large impact for the future housing market sales and prices. </li></ul>The Foreclosure Overhang…..
  34. 34. Start of recession The Foreclosure Overhang…..
  35. 35. Inventory Accumulation Start of recession
  36. 36. 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.
  37. 37. Market Disturbances <ul><li>Large foreclosure inventory could create some troubles in the housing market recovery in 2012. </li></ul><ul><li>Because of the Robo-Signer investigation, many foreclosure filings are piled up in the court. </li></ul><ul><li>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 </li></ul>
  38. 38. Market Disturbances <ul><li>The foreclosure inventory that has accumulated from 2010 and 2011 is over 110,214 cases. </li></ul><ul><li>This is almost twice as much as the monthly housing inventory in Chicago PMSA (55,386 houses in December 2011). </li></ul><ul><li>Large number of foreclosure cases will create a negative impact on the future housing market. </li></ul><ul><li>Given the speed at which these cases are clearing the courts, it is likely that the impacts will be felt well beyond 2012. </li></ul>
  39. 39. Housing Market: Current Situation <ul><li>In Illinois, 8,828 houses were sold in December, 10.5% more than last month and 14.0% more than a year ago. </li></ul><ul><li>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. </li></ul>
  40. 40. Illinois Housing Market: 2011 in Perspective <ul><li>For the last 12 months (January to December 2011) 103,785 houses were sold in Illinois. </li></ul><ul><li>This annual sales figure is up 1.1% from last month, and almost equal to last year. </li></ul>
  41. 41. Chicago PMSA Market: 2011 in Perspective <ul><li>The December ’s annual sales figure for Chicago PMSA is 69,900. </li></ul><ul><li>This figure is 1.3% higher than last month, and it is 1.4% higher than one year ago. </li></ul>
  42. 42. 2012 Illinois Sales Forecast
  43. 43. Chicago PMSA Sales Forecast
  44. 44. Housing Market: Next 12 Months <ul><li>Through April 2012: </li></ul><ul><ul><li>Year-over-year changes in monthly sales are forecast to be positive in both Illinois and Chicago; </li></ul></ul><ul><li>May through August: </li></ul><ul><ul><li>Will see declines, some of which are expected to be less that 6%. </li></ul></ul><ul><li>Remainder of the year: </li></ul><ul><ul><li>Will experience a modest period of small positive growth. </li></ul></ul>
  45. 45. Housing Market: Next 12 Months <ul><li>The month-to-month changes are more volatile, with the usual declines in the winter and early spring. </li></ul><ul><li>Only July, September, October and November are forecast to have positive month-to-month changes in Illinois and Chicago </li></ul>
  46. 46. Housing Market: Next 12 Months <ul><li>By September 2012, the median price of a </li></ul><ul><li>house is forecast to be (September 2011 in </li></ul><ul><li>parentheses): </li></ul><ul><li>$127,527 ($136,850) Illinois (-6.8%) </li></ul><ul><li>$141,603 ($160,000) Chicago PMSA (-11%) </li></ul>
  47. 47. How well did we forecast last year? <ul><li>Last year, the forecasts for September </li></ul><ul><li>2011(actual in parentheses) were: </li></ul><ul><li>$132,912 ($136,850) Illinois (error of 2.8%) </li></ul><ul><li>$156,320 ($160,000) Chicago PMSA (error of 2.3%) </li></ul><ul><li>Hopefully, the slight overestimate of the price declines made last year will continue this year! </li></ul>
  48. 48. Final Concerns <ul><li>Signals in the economy and in the housing market are noisy </li></ul><ul><li>Forecasting more difficult and very sensitive to a single month ’s behavior </li></ul><ul><li>Further housing stimulus package unlikely to prove more effective than the last one </li></ul><ul><li>Attention now focusing on addressing concerns of negative equity </li></ul>
  49. 49. More Final Concerns <ul><li>In the 2000-2007 period, housing was viewed as both an asset and a piggy bank </li></ul><ul><li>Conservative behavior by consumers of late is to be welcomed but…household consumption accounts for 70% of GDP on the expenditure side </li></ul><ul><li>Need to provide appropriate incentives for spending - perhaps instituting some safeguards to prevent the excesses of the past </li></ul>
  50. 50. 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
  51. 51. For More Information