Download - Economic Forecast 2013
Housing and the Economy: Impacts and Forecasts
Geoffrey J.D. Hewings, Ph.D.DirectorRegional Economics Applications Laboratory (REAL)University of IllinoisInstitute of Government and Public Affairs217.333.4740 217.244.9339 (fax)[email protected]
Illinois Association of REALTORS® January 2013 Public Policy Meetings
Regional Economics Applications Laboratory - 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
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
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 tax
But…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…
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
RECOVERY SCENARIOS
Jobs recovered Since December 2009
Note: Best year since 1980 – Illinois added 60,000 jobsLast 12 months added 53,000 jobs
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
Sources of Growth – Illinois and Chicago
Both economies heavily tied to
U.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
Sources of Growth – Illinois and Chicago
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
Recovery of Chicago and Illinois tied in with U.S. recovery but especially Midwest recovery
Where is the growth/decline taking place? US
Growing: • Professional & Business, Education & Health
(Chicago flat)
Declining: • Information and Financial (much greater losses
than Chicago)
Where is the growth/decline taking place? Illinois Metros
TTU Trade, Transportation Utilities; PRO: Professional Services; CON: Construction; EDU: Education; MAN: Manufacturing: GOV: Government
Illinois & National Economy
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
US
95.00
100.00
105.00
110.00
115.00
120.00
125.00
130.00
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
National RMW IL
US
Illinois
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?
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)
Challenge
loss of jobs loss of people
loss of expenditure
loss of business expansion
Housing Market
• New time buyers – special credit programs• Housing turnover – people upsizing or
downsizing• Job relocation/migration• Retirement • Those currently “parked in rental properties”
Sources of Demand for HousingMarket
Housing Market: Do Incentive 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
Incentive programEnded, 2010
Housing Market: Turnover
• 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)
Turnover generating fewer sales as consumers become more risk adverse
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
Unsold Inventory by Price Range – Illinois
December 2012 on top, Dec 2011 on bottom
Housing Market: Job Relocation/Migration
• 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
Job relocation still important source of demand but fewer people changing jobs
Housing Market: Job Relocation/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
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
Housing Market: Retirement/Migration
• 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
Is net effect positive or negative for state?
Housing Market: Turnover generates 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
Housing Market: Turnover generates 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
Housing Market: Turnover generates 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
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) 16,000
Total (86,000) greater than IL job growth in 2012!
Prices Inching up, still below 2010
Sales Gain: strong second half 2012 – eclipsed 2011 and 2010
Mix of Home Sales remained steady -slight decline in properties < $100,000
If sales have increased, why haven’t prices? The Foreclosure Overhang
Three parts to consider:– Filings
Occur when mortgagee cannot make payments
– SalesSale of property returned to owner of the note
– InventoryAccumulation of foreclosed properties not yet
sold
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.
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.
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)
The Foreclosure Overhang…..
The Foreclosure-Sales Relationship
Sales
New Filings
The Foreclosure-Sales Relationship
Start of the recession
Housing Market: Current Situation: 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.
Housing Market: Current Situation: 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.
2013 Illinois Forecast: Prices
2013 Illinois Forecast: Price Changes (year over year by month)
Housing Market: Next 12 Months
Through 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%.
Housing Market: Next 12 Months
By September 2013, the median price of a
house is forecast to be (September 2012 in
parentheses):• $140,423 ($138,000) Illinois
(+1.75%)• $166,045 ($160,000) Chicago PMSA
(+3.7%)
How well did we forecast last year?
Last year, the forecasts for September
2012 (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
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
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…?
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
L L
Monthly index of leading indicators for Chicago
Monthly Employment analysis for state and Metro areasIllinois Economic Review (monthly) with employment forecasts for next 12 months
For More Information
www.real.illinois.edu
www.illinoisrealtor.org/marketstats