Update on theNational Housing Market

William StraussSenior Economistand Economic AdvisorFederal Reserve Bank of Chicago

Economic Forecasting Center ConferenceAtlanta, GANovember 18, 2015

The Great Recessionand Housing

The “Great Recession” ended in June 2009,with the deepest drop and

longest lived downturn since the 1930s

‐10

‐8

‐6

‐4

‐2

0

2

4

6

8

1990 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Real gross domestic productpercent

Quarterly change (saar)

Percent change from a year earlier

Residential investment had been a dragon the U.S. economy between 2006 and 2011

‐1.5

‐1.0

‐0.5

0.0

0.5

1.0

1990 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Residential investment contribution to percent change in real GDPpercent

Residential investment remains well below itslong-run average share of the U.S. economy

2

3

4

5

6

7

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Residential investment as a share of GDPpercent

The Housing Recovery

250

500

750

1,000

1,250

1,500

1,750

2,000

2,250

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Housing startsthousands ‐ 3‐month smoothed

Housing starts have been improving

Existing home sales have been improving

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Existing single family home salesthousands

Homeowner vacancy rates have been falling

0.5

1.0

1.5

2.0

2.5

3.0

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Homeowner vacancy ratepercent

However, new home sales have only been edging higher

0

200

400

600

800

1,000

1,200

1,400

1,600

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

New single family home salesthousands

Largely due to the reduction in the production of single family homes the supplyhas fallen from very high levels

3456789

10111213

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Months supply of new single family homesmonths

Real home prices fell by over 40 percent

$150,000

$175,000

$200,000

$225,000

$250,000

$275,000

$300,000

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Real Median sales price ‐ existing single family home3‐month smoothed (2014 dollars)

‐20

‐15

‐10

‐5

0

5

10

15

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Real median sales price ‐ existing single family home3‐month smoothed ‐ percent change from a year earlier

Real home prices have been risingover the past couple of years

In the second quarter, home prices rose by5.4 percent from a year earlier

The loss in homeowner equity was significant,but it has been recovering at a very decent pace

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

1955 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Households equity in real estatebi l lions of dollars

Equity as a share of value never rose during the housing bubble as homeowners borrowed heavily from their “gains”

35

40

45

50

55

60

65

70

75

80

1955 '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Homeowners' equity as a percent of real estate valuepercent

Mortgage distress is moderating, but it still remains elevated

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10

1980 '83 '86 '89 '92 '95 '98 '01 '04 '07 '10 '13

Delinquencies on Mortgagespercent of loans 90 or more  days past due or in foreclosure

Mortgage rates remain very low

3

4

5

6

7

8

9

10

11

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Mortgage rate ‐ 30‐year fixedpercent

80

100

120

140

160

180

200

220

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

Composite housing affordability indexindex=100when median family income qualifies for an 80% mortgage

on a median priced existing single family home

Housing affordability remains strong

0

2

4

6

8

10

12

1980 '85 '90 '95 '00 '05 '10 '15

Consumer attitudes ‐ plan to buy a home in next six monthspercent of respondents

Yet, consumer attitudes towards buyinga home remains moderate

62

63

64

65

66

67

68

69

70

1965 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Homeownership ratepercent

Home ownership rates have been moving lower

Rents have been rising

‐1

0

1

2

3

4

5

1990'91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

CPI ‐ Rent on primary residencepercent change from a  year earlier

You build homes for people

Why do you build homes?

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New householdsthousands  

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New households and housing startsthousands  

new households

housing starts

There is a very close relationship betweenhousehold formation and housing starts,

but housing starts tend to be above household formation

Housing starts (average) 1,443,000 per yearNew households (average) 1,182,000 per year

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Housing startsthousands  

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Housing startsthousands  

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Housing startsthousands  

The amount of excess housing unitscompared with trend has disappeared

+2,875,000 units

-5,097,000 units

-5,097,000 units2,875,000 units

-2,222,000 units

0

1

2

3

4

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Household formationpercent

0

1

2

3

4

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

Household formationpercent

Since 1990, household formation growthhas averaged one percent

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New Householdsthousands  

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New Householdsthousands  

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New Householdsthousands  

Household formation remains below its long-run average

-3,136,000 units

-3,136,000 units2,254,000 units

-882,000 units

+2,254,000 units

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New households and net housing startsthousands  

new householdsnet housing starts

0

500

1,000

1,500

2,000

2,500

1960 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 '15

New households and net housing startsthousands  

new householdsnet housing starts

Looking at the relationship between housing starts and household formation shows a large excess amount of inventory on the market, although it has begun to fall

+2,861,000 units

-1,977,000 units

-1,977,000 units2,861,000 units

884,000 units

The population to household ratio had been increasingup until the past year

2.67

2.68

2.69

2.70

2.71

2.72

2.73

2.74

2.75

2.76

1990 '95 '00 '05 '10 '15

Population to household ratioratio

0

500

1,000

1,500

2,000

2,500

1980 '85 '90 '95 '00 '05 '10 '15

Housing startsthousands

Blue Chip Housing StartsForecast (thousands)

Actual Forecast       2014           2015 20161,001      1,128 1,283

The forecast calls for a very gradual recovery in housing

•The housing market is improving at a moderate paceSummary

•Low household formation had been restraining absorption ofexcess housing inventory

•Homeownership may be impacted by a changing view on thebenefits of homeownership

•An improving labor market and economy will be a positive forhousing over the next several years

•We may be just a couple of years away from having anormalized housing market