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This document provides a summary and analysis of the US economy and housing market by Jed Smith of the National Association of Realtors. It discusses how the economy gradually recovered from the Great Recession in a slower and weaker manner than past recessions. While home prices seem to be stabilizing and affordability is high, challenges remain around availability of credit, high unemployment, and consumer confidence. The outlook forecasts continued recovery, but notes many risks and uncertainties depend on government policies around jobs, spending, taxes, and housing programs.
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- 1. The Economy… RealEstate Outlook and Risks Federal Home Loan Bank of Chicago MPF Advisory Council Meeting Presentation, April 18, 2012 Four Seasons Hotel 120 East Delaware Place Chicago, Illinois Jed Smith Managing Director, Quantitative Research National Association of Realtors®
- 2. The Economy: Whereand Why? Looking At NAR’s Economic and Housing Outlook • Forecasting: Some Comments. • The Economic Outlook. • How Do We Reach Our Conclusions? • Forecast Risks and Uncertainties. • How Likely Are We Correct! WHY?
- 3. Forecasting: Some Comments •Projections: Based on Economic Relationships, Best Available Data. • Assumptions. • Uncertainties. • Risk Analysis. • Black Swans! Unknown Unknowns.
- 4. ECONOMIC OUTLOOK How WeGot Here, Where We Are, Where We Are Headed
- 5. The Economy—How WeGot Here! Excessive Spending, Leverage, Permissive Financial Behavior Great Recession, Slow Recovery Key Issues: Credit, Balance Sheets, Confidence, Jobs, Nasty Disagreements, Grid Lock May Jun July Aug Sep 2009 2008 2008 2008 2008 2008
- 6. Economic Outlook: AGradual Recovery Much Slower and Weaker than Other Recessions
- 7. $ Billions -13000 12000 17000 7000 2000 -8000 -3000 1947 - Q1 1948 - Q3 1950 - Q1 1949 1951 - Q3 1953 - Q1 1954 - Q3 1953-54 1956 - Q1 1957 - Q3 1959 - Q1 1960 - Q3 1957-58 1962 - Q1 1963 - Q3 1960 1965 - Q1 1966 - Q3 1968 - Q1 1969 - Q3 1971 - Q1 1972 - Q3 1969-70 1974 - Q1 1975 - Q3 1973-75 1977 - Q1 1978 - Q3 1980 - Q1 1981 - Q3 1980 1983 - Q1 GDP, Annualized % Growth 1981-82 1984 - Q3 1986 - Q1 1987 - Q3 1989 - Q1 A Slow Recovery 1990 - Q3 1992 - Q1 1990-91 1993 - Q3 1995 - Q1 Real GDP 1996 - Q3 1998 - Q1 1999 - Q3 Economic Activity – Post Recessions 2001 - Q1 2002 - Q3 2001 2004 - Q1 2005 - Q3 2007 - Q1 2008 - Q3 Source: BEA 2008-09 2010 - Q1 0 5 -5 10 20 15 -15 -10 Percentage
- 8. Economic Outlook, HomeSales: Actual and Forecast Market Appears to be Recovering
- 9. Median Prices: Expectedto Stabilize Prices Recovering from the Great Recession
- 10. HOW DO WEREACH OUR CONCLUSIONS? Problems in a Variety of Sectors: Look at the Drivers.
- 11. 20 00 20 - J 0 a 125000 135000 145000 20 0 - n 01 Ju 20 - J l 0 a 20 1 - n 02 Ju 20 - J l 0 a 20 2 - n 03 Ju 20 - J l 0 a 20 3 - n 04 Ju The Economy: 20 - J l 0 a 20 4 - n 05 Ju 20 - J l 0 a 20 5 - n 06 Ju 20 - J l 0 a 20 6 - n 07 Ju 20 - J l 0 a 20 7 - n 08 Ju l 20 - Ja n 20 08- 09 Ju - l 20 -Ja 0 n Recession is Over. Where are the Jobs? Projected Time for Jobs Recovery: Four Years? 20 9-J 10 ul 20 -Ja 1 n 20 0-J 11 ul 20 -Ja 1 n 20 1-J 12 ul -J Total Jobs: Non-Farm, Establishment Data an Source: BLS
- 12. Home Inventories: Approaching6 Months The Shadow: Potentially 5 Million Homes Some Areas Experiencing Low Inventories—Could Sell More
- 13. Household Wealth: Impactof Great Recession Lost Approximately $14 Trillion in Assets Financial Assets: Recovering. Real Estate: Recovery Still to Come. Households & Nonprofit Org: Total Financial Assets Households & Nonprofit Org: Assets: Total Owner-occupied Real Estate NSA, Bil.$ NSA,Bil.$ 60000 60000 24000 24000 50000 50000 20000 20000 40000 40000 16000 16000 30000 30000 12000 12000 20000 20000 8000 8000 10000 10000 4000 4000 0 0 0 0 80 85 90 95 00 05 10 80 85 90 95 00 05 10 Source: Federal Reserve Board 01/13/12 Source: Federal Reserve Board 02/08/12
- 14. Unemployment Need an Additional 11 Million Jobs Number Unemployed: Unprecedented. Time to find a job: Unprecedented. Unemployed, 16 Years & Over: 16 yr + Average {Mean} Duration of Unemployment SA, Thous SA, Weeks 16000 16000 45.0 45.0 14000 14000 37.5 37.5 12000 12000 30.0 30.0 10000 10000 22.5 22.5 8000 8000 15.0 15.0 6000 6000 4000 4000 7.5 7.5 80 85 90 95 00 05 10 80 85 90 95 00 05 10 Source: Bureau of Labor Statistics 02/08/12 Source: Bureau of Labor Statistics 02/08/12
- 15. Distressed Sales: 30%to 40% of Transactions Major Impact--Price and Consumer Confidence
- 16. Percent of HomesUnderwater by State Source: Fannie Mae/Core Logic
- 17. Mortgages Past Due ShadowInventory Includes Foreclosures, Short Sales, and Some Percentage of Past Due
- 18. FORECAST RISKS ANDUNCERTAINTIES Does An Economist EVER Reach A Conclusion? A Comment from Harry Truman
- 19. The Good • HomePrices: Seem to be Stabilizing. Emotional, psychological, confidence issues. Price to Income Ratios favorable. • Affordability: Very High. • Interest Rates: Low IF you can get the mortgage. • Stress Tests. • Pent Up Demand: Possibly 500,000 or more per year. • Demographics: Millennial Generation is large; favorable attitudes towards housing; delayed household formation.
- 20. Residential Markets: TheOutlook Indications that Recovery is Underway • A Recovery is Underway—Short Term Issues. – Highly Dependent on Economic Policy. – Many Uncertainties, Black Swans, and Potential Surprises. – Confidence, Attitudes. • A Recovery is Underway—Longer Term. – Significant Division of Opinions Concerning Entitlements, Spending, and the American Dream. – Competitive Position, Economic Trends.
- 21. Residential Markets ShowingModest Signs of Recovery REALTOR Confidence in Market Outlook 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Apr08 Jul08 Apr09 Jul09 Apr10 Jul10 Apr11 Jul11 Jan08 Jan09 Jan10 Jan11 Jan12 Oct08 Oct09 Oct10 Oct11 Single Family Townhouses Condos
- 22. Investor Activity AndPent-Up Demand
- 23. Challenges and Opportunities Rents Appraisal Problems Down Slightly
- 24. The Bad Credit Availabilityand Financial Issues, Consumer Confidence, Jobs Situation FICO and Mortgages: Unrealistic Some Major Issues • Jobs: Lack of demand or technological change? How long and how much? • Wages: Intense pressure for a lot of people. • Downsizing the Dream: Car, House, Job, Life. • Financial Issues: Stress Tests, Liquidity, Portfolio Problems, Liquidity Issues.
- 25. Consumer Confidence Continues at Mediocre Level Conference Board: Consumer Confidence SA, 1985=100 150 125 100 75 50 25 85 90 95 00 05 10 Source: The Conference Board 03/30/12
- 26. Government Spending andTax Receipts Major Area of Controversy!!! $ billion 4200 Government Outlays 3700 3200 2700 2200 1700 Government Receipts 1200 700 200 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
- 27. Problems of MajorConcern! “DUDE--Where’s My Raise, My Job?” Major Jobs Problems Median Usual Wkly Earnings: Full Time Wage & Salary Wkrs SA, 1982-84 CPI-U Adj$ Full Time Wage and Salary Workers SA, Thous 345.0 112500 337.5 105000 97500 330.0 90000 322.5 82500 315.0 75000 307.5 67500 80 85 90 95 00 05 10 Source: Bureau of Labor Statistics 02/07/12
- 28. The Ugly: Uncertaintiesand the Outlook • Longer Term Issues and Problems--Affecting Jobs. – Competitive Position – Tax and Incentive Structures – Possible Structural Problem. – U.S. International Competitiveness. • Short Term Issues and Problems. – Recovering from Great Recession – Government Spending and Taxing. – Deficits. – International Financial and Governmental Actions and Policies. • People Issues. – Consumer Moods: Confidence, Personal Wealth, Lingering Effects of Recession. – Basic Disagreements: The American Future, Who Pays Taxes, Role of Government. • Economic Uncertainties – Foreclosures, Short Sales, Upside Down Homeowners, Down Payments, Credit Availability, Mortgage Interest Deductions, GSE Reform, Proposed Regulations, European Credit Markets, Oil Prices, Risk Aversion.
- 29. Washington Policy Impacts Opinions, Uncertainties, and Ill Will • Housing Proposals. – Raise down payment to 20%: Currently approximately 2/3 of buyers obtaining a mortgage put down less than 20 percent. – Mortgage Interest Deduction: high income/second homes? – Conforming Loan Limits. – Refinancing/Upside Down/Distressed. • Government Sponsored Enterprises. – Issues for resolution. – Mortgages: Fannie and Freddie model was flawed (private profit/taxpayer loss). • Washington Now Focused on Jobs and Economy. – Potential for many bad outcomes! – Creating a Job Climate vs. Creating Jobs. – Concern over economic circumstances. – Oil Prices, International economic developments—may have major impact. – Taxes, Benefits, Spending, Mortgages, and Uncertainties. – Who Pays Income Taxes? – Who Receives Entitlements? – Higher Taxes vs. Decreased Spending vs. What? – Concern Over Deductions.
- 30. Commercial Sector Forecasting aModest Recovery
- 31. U.S. Commercial Fundamentals OFFICE 2011 2012 2013 Vacancy Rate 16.6% 16.3% 15.9% Net Absorption ('000 sq. ft.) 20,178 31,700 53,000 Completions ('000 sq. ft.) 11,659 25,474 37,847 Rent Growth 1.4% 1.7% 2.4% • Commercial Real Estate. INDUSTRIAL 2011 2012 2013 – Stabilization of fundamentals. Vacancy Rate 12.4% 11.9% 11.1% – Demand turns positive. Net Absorption ('000 sq. ft.) 61,957 41,249 59,855 Completions ('000 sq. ft.) 20,462 26,947 54,881 – Vacancy Rates elevated but Rent Growth -0.5% 1.8% 2.3% declining. – Rent Growth edging up. RETAIL 2011 2012 2013 Vacancy Rate 12.9% 12.2% 11.0% Net Absorption ('000 sq. ft.) 1,238 13,547 23,330 Source: NAR / REIS Completions ('000 sq. ft.) 4,207 12,677 19,878 Rent Growth -0.2% 0.7% 1.4% MULTI-FAMILY 2011 2012 2013 Vacancy Rate 5.4% 4.6% 4.5% Net Absorption (Units) 238,398 126,621 102,687 Completions (Units) 38,014 88,839 93,706 Rent Growth 2.5% 3.5% 3.8%
- 32. U.S. Commercial Markets U.S. Sales Volume $160 Apartment Hotel Industrial Office Retail Billions $140 $120 $100 $80 $60 $40 $20 $0 05Q4 08Q3 11Q2 05Q1 05Q2 05Q3 06Q1 06Q2 06Q3 06Q4 07Q1 07Q2 07Q3 07Q4 08Q1 08Q2 08Q4 09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4 11Q1 11Q3 11Q4 Source: Real Capital Analytics
- 33. How Likely AreWe To Be Correct? There Are Major Risks • A Recovery is Underway—Short Term Issues. – Highly Dependent on Economic Policy. – Many Uncertainties, Black Swans, and Potential Surprises. – Confidence, Financial Issues, Attitudes. • Short Term—Favorable Outlook. – Residential Prices Probably At or Near Bottom. – A substantial market appears to be headed up. – Homeownership Still the American Dream. – Affordability and Prudence – Current Market Developments at www.Realtors.org
- 34. How Likely AreWe To Be Correct? There Are Major Risks • A Recovery is Underway—Longer Term. – Significant Division of Opinions Concerning Entitlements, Spending, and the American Dream. – Competitive Position, Economic Trends. • Risks: Short Term and Longer Term. – Some major issues with major risks—unresolved. – Political Risks, Expectations, Foreign Economies, Financial Sectors. • My “ONE ARM” Assessment – We are in recovery and should see expansion for the next several years.
- 35. NAR: A Sourcefor Housing Information www.realtor.org For More Information • Profile of Home Buyers and Sellers – National Survey • Statistics: http://www.realtor.org/ • Information Sources – Facebook: http://www.facebook.com/narresearchgroup – Twitter: http://twitter.com/#!/NAR_Research National Association of Realtors: – http://www.realtor.org/research/index.html • Economists Outlook • http://economistsoutlook.blogs.realtor.org/ • Metro Analysis: – http://www.realtor.org/research.nsf/pages/MetroHomePriceAnalysisReports