The Housing Outlook Eric S. Belsky Big Builder October 28, 2010
Housing Markets Have Corrected In Significant Ways <ul><li>Home prices have fallen significantly in many metros </li></ul><ul><li>Case-Shiller index-based house price to per capita income ratios have fallen to near 35-year lows nationally and in IL, FL, and CA, and below them in NV and AZ </li></ul><ul><li>Less volatile (net of nonconforming loans) Freddie Mac index shows fewer places back to long-run lows </li></ul><ul><li>Low interest rates have helped bring payment-to-income ratios on median priced homes in the majority of large metros to well below 1990s average levels </li></ul><ul><li>Steep production cuts have brought national 10-year total housing production back in line with 10-year average trends </li></ul>
Worst Home Building Downturn Since World War II Percent Change in Housing Starts Sources: US Census Bureau, New Residential Construction data and Historical Statistics of the United States, Colonial Times to 1970.
The Last 10 Years of Completions and Placements Nearing Low Point of 27 10-year Periods Back to 1974-83 Note: Data go back to 1974. 2010 annual completions and placements are estimated by the following methodology: Jan-Jul 2010 is 13.873% below 2009 levels, so annual is taken to be same amount below 2009 annual. Jan-May placements are 8.33% below Jan-May 2009. Source: JCHS calculations of US Census Bureau data
Housing Markets Face Strong Headwinds <ul><li>Household growth has slowed below normalized levels </li></ul><ul><li>Vacancy rates remain elevated despite sharp housing production cutbacks </li></ul><ul><li>Employment growth has not been enough to reduce unemployment rate or restore consumer confidence </li></ul><ul><li>The 2 million homes in foreclosure and 2 million more 90+days delinquent will pressure prices in many areas </li></ul><ul><li>Tightened underwriting has dramatically reduced pool of eligible homebuyers </li></ul><ul><li>Owners underwater on their mortgages cannot sell or refinance without incurring losses or handing in the keys – crimping trade up markets </li></ul><ul><li>Deleveraging is far from running its course </li></ul><ul><li>Bank debt for AD&C will likely remain tight </li></ul>
Household Growth Has Clearly Slowed, But Estimates of the Degree Vary Widely Notes: ACS estimates are from 2005 to 2008 only. To adjust for rebenchmarking, CPS and HVS estimates for 2002-3 are assumed to equal the average in 2000-5. Sources: US Census Bureau, American Housing Survey; Current Population Survey; and Housing Vacancy Survey.
Strong Employment Growth Has Been More Critical To Strength of Past Demand Rebounds Change in Employment (Percent) Change in Mortgage Rates (Percentage points) Note: Changes are from a trough in new home sales through the first eight quarters of a sustained recovery. Source: JCHS tabulations of US Census Bureau, New Residential Construction Survey; Bureau of Labor Statistics, Current Employment Statistics; and Freddie Mac, Primary Mortgage Market Survey. Change in New Home Sales (Percent)
Employment Has Started to Recover But Is Still in a Deep Hole Note: Quarterly values are three-month averages of seasonally adjusted annual rates. Cyclical trough quarters in new home sales were 1966:4, 1975:1, 1982:2, 1991:1, and false trough in 2009:1. Sources: US Census Bureau, New Residential Construction; BLS, Establishment Survey
Real Home Equity Has Returned to Its 1985 Levels Note: Values are adjusted for inflation using the CPI-U for All Items. Source: Federal Reserve Board, Flow of Funds.
Large Echo-Boom Generation Should Fuel Household Growth Notes: Members of the baby-boom generation were born 1946-1964. Members of the echo-boom generation were born 1981-2000. Source: US Census Bureau, Population Estimates. Population (Millions)
Estimating Underlying New Home Demand <ul><li>Estimates are of long-run sustainable d emand – not a prediction of actual single family and multifamily completions plus manufactured home placements over the projection period </li></ul><ul><li>Actual construction influenced by under or over supply entering and exiting the period </li></ul><ul><li>Household growth projected under two immigration assumptions and with headship rates held constant at 2007-2009 average levels by race/ethnicity and age </li></ul><ul><ul><li>Headship rates are share of people in an age group by race and ethnicity that head a household </li></ul></ul><ul><ul><li>Each household head is equal to one occupied housing unit </li></ul></ul>
Under Low Immigration Assumptions, Underlying Demand Should Top 16 Million 2010-20 if Headship Rates Hold Steady at 07-09 Average Levels Source: JCHS Working Paper W10-9. Assumes headship rates by age and race/ethnicity hold constant at 2007-2009 average levels in Current Population Survey. High immigration is US Census Bureau 2008 baseline population projections and low immigration is half that assumption.
Conclusions <ul><li>Long-run supply and demand may be closer to balance than today’s elevated vacancy rates imply </li></ul><ul><li>Due to substantial headwinds, housing recovery will likely be slow unless job growth stages a more convincing rebound </li></ul><ul><li>Builders will continue to compete with distressed sales in many markets </li></ul><ul><li>The foreclosure crisis threatens the housing recovery </li></ul><ul><li>Immigration and extent of long-term doubling up of households bring uncertainty to long-run new home demand outlook </li></ul><ul><li>Awaiting Census 2010 release to get clearer picture of current population, households, headship rates, and vacancies </li></ul>