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Economic Forecast 2013


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Housing and the Economy: Impacts and Forecasts - Illinois Association of REALTORS® January 2013 Public Policy Meetings - Presented by Geoffrey J.D. Hewings, Ph.D. Director, Regional Economics Applications Laboratory (REAL)
University of Illinois, Institute of Government and Public Affairs

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Economic Forecast 2013

  1. 1. Housing and the Economy: Impacts and ForecastsGeoffrey J.D. Hewings, Ph.D.DirectorRegional Economics Applications Laboratory (REAL)University of IllinoisInstitute of Government and Public Affairs217.333.4740 217.244.9339 (fax) Illinois Association of REALTORS® January 2013 Public Policy Meetings
  2. 2. Regional Economics ApplicationsLaboratory - 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
  3. 3. 2012-2013 Highlights Last half of 2012 revealed positive changes in prices Significant increase in sales volume Resolution of foreclosure issues saw significant increase in foreclosed properties Consumer optimism dampened by “fiscal cliff issues in Washington and the failure of Illinois state government to address deficit and unfunded pension obligations Combination of enhanced inventory, historically low interest rates and accelerating costs of renting should fuel the housing market in 2013
  4. 4. State of Illinois Economies• State is 330,000 below prior peak (November 2000) “translates” into loss state income tax revenue of $0.4 billion+ in lost sales and income taxBut…need to 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…
  5. 5. State of Illinois Economies State probably needs to add close to: • 647,000 jobs to achieve equivalent level to November 2000 • Chicago would need to add 285,000 jobs to return to 2000 level and another 100-140,000 to account for additional factors noted
  6. 6. RECOVERY SCENARIOSJobs recoveredSince December 2009 Note: Best year since 1980 – Illinois added 60,000 jobs Last 12 months added 53,000 jobs
  7. 7. RECOVERY:How long will it take?• Before this recession, longest recovery was 8 years (now > 12 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 2012, Illinois’ employment growth rate was 65% of U.S. but below that for the Rest of the Midwest (IA, WI, IN, OH, MI, MO). Usually it is 35% US
  8. 8. Sources of Growth – Illinoisand ChicagoBoth economies heavily tied toU.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
  9. 9. Sources of Growth – Illinoisand Chicago Recovery of Chicago and Illinois tied in with U.S. recovery but especially Midwest recovery Political leaders in Midwest fail to appreciate the negative effects of “job poaching” (e.g. the Indiana ad “Are you Illinoyed?”) Illinois is in a sense the economic locomotive for Midwest economy
  10. 10. Where is the growth/declinetaking place? USGrowing:• Professional & Business, Education & Health (Chicago flat)Declining:• Information and Financial (much greater losses than Chicago)
  11. 11. Where is the growth/decline taking place?Illinois Metros TTU Trade, Transportation Utilities; PRO: Professional Services; CON: Construction; EDU: Education; MAN: Manufacturing: GOV: Government
  12. 12. Illinois & National Economy130.00 US125.00 US120.00115.00110.00105.00100.00 Illinois National RMW IL 95.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Since early 1990s, Illinois’ growth rate has fallen behind the U.S. and Rest of the Midwest, but paralleling with the latter in the last two years
  13. 13. Illinois and National Economy• Illinois’ performance is surprising in view of the fact that, unlike the Rest of the Midwest, it has a similar structure to the US• Then, why have we underperformed US? • Lower population growth? • Loss of human capital? • Less competitive industries? • Governance issues?
  14. 14. Impacts of Migration &Job Losses• Probably see continued erosion of state’s competitive position (dropped from 4th to 15th 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)
  15. 15. Challenge loss of jobs loss of people loss of expenditure loss of business expansion
  16. 16. Housing MarketSources of Demand for HousingMarket • New time buyers – special credit programs • Housing turnover – people upsizing or downsizing • Job relocation/migration • Retirement • Those currently “parked in rental properties”
  17. 17. Housing Market: DoIncentive Programs Work? 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
  18. 18. Incentive programEnded, 2010
  19. 19. Housing Market: Turnover Turnover generating fewer sales as consumers become more risk adverse• In recent years, “time on the market” has extended to 15+ months (in the early 2000s, 2-4 months was normal)• In December 2012, it was between 4-5 months (pre-recession, 2+ months)
  20. 20. Housing Market: Turnover• Market segmentation by price becoming more pronounced• Time on market increases with price• However, note the significant decreases across all prices ranges comparing December 2012 with 2011
  21. 21. Unsold Inventory by Price Range – IllinoisDecember 2012 on top, Dec 2011 on bottom
  22. 22. Housing Market: JobRelocation/MigrationJob relocation still important source ofdemand but fewer people changing jobs• Migration rates have been declining since early 2000s - demographers are puzzled by this phenomenon• In a buoyant housing market and expectation of price appreciation, relocation often accompanied by sale and purchase of house
  23. 23. Housing Market: JobRelocation/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• A Deutsche Bank A.G., the cost of renting in Chicago was 31.3% higher than average after-tax monthly mortgage payments in the third quarter in 2012
  24. 24. Housing Market:Retirement/Migration• Are retirees beginning to reconsider remaining in the Midwest?• Relative housing price declines greater in FL and AZ – suggesting that retirees could sell in IL (even below their desired price) and still afford the house they desire in FL or AZ
  25. 25. Housing Market:Retirement/MigrationIs net effect positive or negativefor state?• 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
  26. 26. Housing Market: Turnovergenerates 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
  27. 27. Housing Market: Turnovergenerates impacts• 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
  28. 28. Housing Market: Turnovergenerates impacts• 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
  29. 29. Let’s Do the Math –Cumulative Impacts on Jobs• Decline in housing sales 50,000• Net Out-migration 20,000• Reduced spending for road construction (down $1 b) 16,000Total (86,000) greater than IL job growth in 2012!
  30. 30. Prices Inching up, still below 2010
  31. 31. Sales Gain: strong second half 2012– eclipsed 2011 and 2010
  32. 32. Mix of Home Sales remained steady-slight decline in properties < $100,000
  33. 33. If sales have increased, why haven’tprices? The Foreclosure Overhang Three parts to consider: – Filings Occurwhen mortgagee cannot make payments – Sales Sale of property returned to owner of the note – Inventory Accumulation of foreclosed properties not yet sold
  34. 34. The Foreclosure Overhang…..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.
  35. 35. The Foreclosure Overhang…..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.• For several months in 2012, Illinois led nation in foreclosure sales• This foreclosure inventory generates large impact for the future housing market sales and prices.
  36. 36. The Foreclosure Overhang…..More on inventory: Good news – Bad news• Bad news: foreclosed property sales drag down median prices• Good news: number of foreclosed sales greater than new additions to the inventory• Faster the foreclosed properties are moved, greater the possibility for some sustained price recovery (estimate 2 years)
  37. 37. The Foreclosure-Sales Relationship Sales New Filings
  38. 38. The Foreclosure-Sales RelationshipStart of the recession
  39. 39. Housing Market: CurrentSituation: Sales In December, year-over-year increase in sales slowed down: 10,264 houses were sold in Illinois, 15.2% more than a year ago. In Chicago, 7,372 houses were sold, 19.2% more than last December.
  40. 40. Housing Market: CurrentSituation: Prices Median prices were $132,000 in Illinois, reaching the highest year-over-year change rate of 5.6% since 2008. Similarly, median price in Chicago PMSA experienced a historic high yearly increase of 4.1% and stood at $151,000.
  41. 41. 2013 Illinois Forecast: Prices
  42. 42. 2013 Illinois Forecast: PriceChanges (year over year by month)
  43. 43. Housing Market:Next 12 MonthsThrough mid Year: • Year-over-year changes in monthly sales are mixed in both Illinois and Chicago;Mid Year through December • Mixed changes tending to group around + or - 1-3%.
  44. 44. Housing Market:Next 12 MonthsBy September 2013, the median price of ahouse is forecast to be (September 2012 inparentheses):• $140,423 ($138,000) Illinois (+1.75%)• $166,045 ($160,000) Chicago PMSA (+3.7%)
  45. 45. How well did we forecast last year?Last year, the forecasts for September2012 (actual in parentheses) were:• $127,527 ($138,000) Illinois $141,603 ($160,000) Chicago PMSA• Our model is a sprint/medium distance system 3-6 months ahead) and weights more recent events higher• Took a while to embrace the change in the last 6 months of 2012
  46. 46. Final Concerns Signals in the economy and in the housing market continue to be “noisy” Congress’ inability to fully address Fiscal Cliff (including deductibility of mortgage interest) creates uncertainty State has not yet demonstrated that it is prepared to tackle its fiscal problems Firms would like to locate/expand in the state but have little faith in the state’s fiscal management
  47. 47. Illinois’ Opportunities Re-shoring is beginning to gather momentum  Boston Consulting Group estimated Chinese wages will approach US levels in 3-5 years Developments in 3-D manufacturing have the capacity to change the state’s locational competitive advantage Do we have the leadership in place…?
  48. 48. REAL’s Current Initiatives Continue to work on development of a housing index that reflects housing characteristics Examining the role of crime and gang activity in affecting housing prices (in Chicago) Completed a Japanese case study of the impact of a negative event (death or crime in a house) on its price
  49. 49. Monthly index ofleading indicatorsfor Chicago LMonthly Employment analysisfor state and Metro areasIllinois Economic Review(monthly) with employmentforecasts for next 12 months
  50. 50. For More Information