current status & outlook for the us economy & residential real estate in 2011
DESCRIPTION
Presentation by Dr. LaVaughn HenryTRANSCRIPT
The Current State and Outlook for the U.S. Economy and Residential Real Estate in 2011
2
“Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually.”
Federal Reserve Chairman Ben BernankeFOMC StatementMarch 15, 2011
What Economic Realities are Driving the Current Economic Recovery?
Household spending and business investment in equipment and software continue to expand.
However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed.
Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.
Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.
3
U.S. PRODUCTION AND CONSUMPTION
4
Real GDP Growth is showing increasing strength, but remains relatively weak for a recovery…
0.9
3.22.3 2.9
‐0.7
0.6
‐4.0
‐6.8
‐4.9
‐0.7
1.6
5.03.7
1.72.6 3.1
2.13.5
‐8.0
‐6.0
‐4.0
‐2.0
0.0
2.0
4.0
6.0
5
Quarterly Change at SAAR
Source: Bureau of Economic Analysis , Macroeconomic Advisors
ForecastEstimate
…but Personal Consumption Expenditures are showing continued improvement…
6
Source: Bureau of Economic Analysis
…with continuing improvement coming in Retail Sales…
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
Retail Sales & Food ServicesRetail Sales & Food Services (excluding Motor Vehicles and Parts)
7
Source: Census Bureau
…while Personal Savings Rates are continuing to trend higher.
0
2
4
6
8
10
12
14
Rat
e
Personal Savings (NIPA)
8
Source: Bureau Economic Analysis
However, growth in Real GDP remains substantially below historical norms for this stage of a recovery.
Sources: Bureau of Economic Analysis, Blue Chip Feb. newsletter
-10
-5
0
5
10
15
20
0 3 6 9 12 15 18 21 24
Current cycle
Average of all previous postwar cycles
Range
Percent change from previous peak
Quarters from previous peak
Blue Chip forecast
NATIONAL LABOR MARKET
10
Unemployment is off its high, but remains substantially elevated…
8.8
9.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Jan-
07
Mar
-07
May
-07
Jul-
07
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-
08
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-
09
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-
10
Sep
-10
Nov
-10
Jan-
11
Mar
-11
Un
emp
loym
ent
Rat
e
United States Cincinnati MSA
11
Source: Bureau of Labor Statistics, Moody’s Analytics
…with similar improvement in unemployment being seen across the Tri-state area.
8.8
10.4
9.2
0.0
2.0
4.0
6.0
8.0
10.0
12.0Ja
n-07
Mar
-07
May
-07
Jul-
07Sep
-07
Nov
-07
Jan-
08M
ar-0
8M
ay-0
8Ju
l-08
Sep
-08
Nov
-08
Jan-
09M
ar-0
9M
ay-0
9Ju
l-09
Sep
-09
Nov
-09
Jan-
10M
ar-1
0M
ay-1
0Ju
l-10
Sep
-10
Nov
-10
Jan-
11
Un
emp
loym
ent
Rat
e
IndianaKentuckyOhio
12
Source: Bureau of Labor Statistics, Moody’s Analytics
Private Sector Job growth is beginning to accelerate…
-1000
-800
-600
-400
-200
0
200
400
600
Growth in Total Nonfarm Employment
13
Source: Bureau of Labor Statistics.
…while State and Local Government Payrolls continue to decline.
12-month percent change
Local
State
Source: Bureau of Labor Statistics.
Although, there are early signs of improvement in some recent Labor Market Indicators… Private-sector employment increased by 201,000 from February to
March on a seasonally adjusted basis, according to the latest ADP National Employment Report®. Strength was evident within all major industries and across all size business tracked in the ADP Report. This month’s Report removes any remaining doubt that private nonfarm payroll employment accelerated heading into 2011. (source: ADP National Employment Report)
In the week ending March 26, the advance figure for seasonally adjusted Initial Unemployment Insurance Claims was 388,000, a decrease of 6,000 from the previous week's revised figure of 394,000. The 4-week moving average was 394,250, a increase of 3,250 from the previous week's revised average of 391,000. (source: US Dept. of Labor)
After reaching a seven-year high in 2009, Planned Layoffs in 2010 fell to its lowest level since 1997, as employers announced plans to eliminate 529,973 positions. The year came to a close with the lowest monthly job-cut total since 2000. (source: Challenger, Gray & Christmas)
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…but the number of Discouraged Workers remains high as does the Duration of Unemployment.
0
200
400
600
800
1000
1200
1400
0
5
10
15
20
25
30
Jan-
08
Mar
-08
May
-08
Jul-
08
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-
09
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-
10
Sep
-10
Nov
-10
Jan-
11
Mar
-11
Tho
usa
nds
Wee
ks
Median Weeks Discouraged Workers
16
Source: Bureau of Labor Statistics
THE RESIDENTIAL REAL ESTATE MARKET
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Beige Book Summaries on Residential Real Estate Federal Reserve System
- Recent activity in residential real estate varied, but overall sales and construction remained at low levels across all Districts.
- The Richmond, Atlanta, and Chicago Districts reported a slight improvement in the level of recent activity, while Boston noted that activity was mixed across New England. New York described the housing market as stable with some pockets of improvement. Demand was unchanged according to reports from the San Francisco District. Philadelphia, Kansas City, and Dallas described recent activity as sluggish, and St. Louis noted sales continued to decline.
- Construction activity was described as flat or down by Cleveland, Atlanta, Minneapolis, and Kansas City. Philadelphia and Atlanta contacts attributed weaker buyer traffic in January to inclement weather, and Philadelphia noted a pickup in early February. Richmond, Kansas City, and Dallas also indicated an increase in buyer traffic.
- Reports on home prices were mixed. Atlanta and Kansas City observed persistent downward price pressure. Home prices continued to fall according to Philadelphia reports, but mainly at the high-end of the market. Cleveland and Chicago contacts described prices as little changed.
- The outlook for residential sales and construction improved marginally, although activity is expected to remain at low levels. Kansas City contacts anticipate a seasonal surge in sales activity this spring. Atlanta, Dallas and San Francisco also expect modest improvement, while little to no sales growth is expected among Philadelphia contacts. A slight uptick is expected in Chicago and San Francisco construction.
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Source: Federal Reserve Board of Governors, March 2, 2011 Beige Book
Beige Book Summaries on Residential Real Estate Federal Reserve Bank of Cleveland
- New home construction was generally flat at a low level during the past six weeks, with purchases mainly in the move-up buyer categories.
- A few builders noted that most of their revenues now come from remodeling work. On a year-over-year basis, sales were mainly lower.
- Contractors expect construction to remain sluggish through at least the first half of 2011.
- List prices of new homes and discounting have shown little change, while some upward pressure on the cost of building materials was reported.
- Little movement was seen in land positions or spec inventories.
- We heard many reports of subcontractors struggling to stay in business due to very thin margins.
- General contractors continue to work with lean crews, and no hiring is expected in the near term.
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Source: Federal Reserve Bank of Cleveland, March 2, 2011 Beige Book
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%Ja
n-06
Apr
-06
Jul-
06
Oct
-06
Jan-
07
Apr
-07
Jul-
07
Oct
-07
Jan-
08
Apr
-08
Jul-
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Oct
-08
Jan-
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Apr
-09
Jul-
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Oct
-09
Jan-
10
Apr
-10
Jul-
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Oct
-10
Jan-
11
12
-mon
th P
erce
nta
ge C
ha
nge
House Prices are showing the possibility of a “Double Dip” at the national level…
Source: Standard & Poors/Case-Shiller 20-metro Composite Index
…due to pressure remaining from a continuing high level of foreclosures.
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
1.60
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.0020
05Q3
2005
Q4
2006
Q1
2006
Q2
2006
Q3
2006
Q4
2007
Q1
2007
Q2
2007
Q3
2007
Q4
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Q1
2008
Q2
2008
Q3
2008
Q4
2009
Q1
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
2010
Q3
2010
Q4
Rat
e
Seriously Delinquent Foreclosures
21
Source: Mortgage Bankers Association
Millions of units
Permits
Single-Family Housing Starts & Permits remain depressed…
Source: Census Bureau.
Starts
22
…while Sales have yet to consistently recover, and remain below year earlier levels…
-60.0%
-50.0%
-40.0%
-30.0%
-20.0%
-10.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
12-m
on
th P
erce
nta
ge
Ch
an
ge
Existing Home Sales New Home Sales
23
Source: National Association of Realtors, Census Bureau
…but Pending Home Sales are slowly, very slowly, showing continued signs of improvement…
0.0
20.0
40.0
60.0
80.0
100.0
120.0
24
Source: National Association of Realtors
However, the Cincinnati-Middleton MSA housing market is faring slightly better in price growth.
$129.1
$131.1
$128.0
$128.5
$129.0
$129.5
$130.0
$130.5
$131.0
$131.5
2009Q4 2010Q4
Tho
usa
nds
Median Home Prices
53.9
39.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2009Q4 2010Q4
Thou
san
ds, S
AA
R
Existing Home Sales
25
Source: National Assoc. of Realtors, Moody’s Analytics Estimates
1.5%Increase
26.9%Decrease
Existing Home Sales are approximately back to the level they were at the beginning of the prior decade…
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
Thou
san
ds
26
Source: National Assoc. of Realtors, Moody’s Analytics Estimates
…while Housing Affordability significantly exceeds levels seen at the beginning of the decade.
0.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
$80
$90
$100
$110
$120
$130
$140
$150
Med
ian
Ho
use
Pri
ces
House Price Price-to-Income Ratio
27
Source: National Assoc. of Realtors, Moody’s Analytics Estimates
REGIONAL HIGHLIGHTS ACROSS THE TRI-STATE AREA
28
Highlights of the Ohio Economy…
29
• The housing market has failed to turn the corner, and foreclosures represent a major downside risk to the recovery in 2011.
• The foreclosure rate is down from its 2008 peak, but this trend could change as the “robo-signing” scandal dissipates.
• A relatively large inventory of foreclosed properties, particularly in Cincinnati, Toledo and Dayton, as well as more fundamental supply and demand imbalances, will place downward pressure on prices in 2011.
• Price declines have been moderate, at 5% from peak, versus 10% nationally, based on the FHFA index.
• The forecast calls for an additional 2% decline in 2011, before recovery begins in 2012
Sources: Moody’s Analytics
Highlights of the Kentucky Economy…
30
• Kentucky’s recovery has gained momentum in recent months, and the risk of a double-dip recession has abated.
• Payroll employment has climbed steadily over the past year, with job growth well above the national average.
• Personal income growth slowed in the fourth quarter but remains healthy. KY’s high concentration of manufacturing was a major weakness during the recession, but has been the primary reason the state has outperformed the U.S. over the past year as demand and hiring have picked up.
• The state’s small house price declines and low foreclosure rate have also contributed to the solid performance.
• The unemployment rate has held steady at above 10% for the past half-year.
Sources: Moody’s Analytics
Highlights of the Indiana Economy…
31
• Manufacturing employment is showing strength as the national economy continues its recovery.
• Growing confidence in the recovery will help to boost spending and in the retail and leisure/hospitality sectors.
• Housing indicators are mixed. Despite improving home prices, demand for new dwellings remains weak, causing construction payrolls to fall to a new cycle low.
• Education/healthcare remains a bright spot. The industry has been adding jobs throughout most of the year, and payrolls have surpassed
• their prerecession peak.
Sources: Moody’s Analytics
Summary & Conclusions
The national economic recovery is underway, and is slowly firming.
The housing market remains a significant drag on the broader economic recovery
- Prices remain under pressure due to >2M houses in shadow inventory
- Pending sales trends are promising, but not significant enough to indicate a rapid turnaround
- Underwriting remains tight and is likely to remain as such for the near term
Employment is recovering, albeit slowly.
There is pressure on headline inflation due to growth in commodity and food prices, but core rates remain within subdued.
32