Wisconsin Housing Market Update

Transcription

1 Wisconsin Housing Market Update for The Wisconsin Residential Real Estate Summit by Mark J. Eppli. Ph.D. (with some help) Bell Chair in Real Estate, Marquette University March 12, 2018

2 Wisconsin Housing Market Update I. Economic Growth Housing demand generators II. III. IV. Employment and Inflation Impact on future mortgage rates Mortgage Finance Market and underwriting standards Single-Family Housing Inventory The Problem: Low Inventory Levels The Challenges: Why inventory levels are so low

3 GDP (creating demand for housing)

4 Since the Great Recession, GDP has grown at a modest 2.1%. At 104 months it is the third longest of the 33 economic cycles since Average Growth Rate: 3.2% Sources: Federal Reserve Economic Data and Marquette University

5 .... GDP growth by component.... Sources: Federal Reserve Economic Data

6 .... why are household s spending? The wealth effect, and net worth is back.... Sources: Federal Reserve Economic Data and Marquette University

7 .... household liabilities growth is low CAGR = 9.65% CAGR = 0.81% Sources: Federal Reserve Economic Data and Marquette University

8 .... and consumers are confident. Sources: Federal Reserve Economic Data and Marquette University

9 Economic Growth (demand for housing) GDP never hit a period of rapid growth post-great Recession GDP will not take off like a rocket ship because of the Tax Act, expect a mid-to-upper 2% growth rate Consumers have high net worth, modest debt and low debt service payments, and will continue to be the stable force behind GDP growth In summary, the demand-side of the housing market is in very good shape.

10 Employment and Inflation (impact on future mortgage rates)

11 86 months of employment growth, the longest in history averaging 196,000 monthly jobs.... Source: Federal Reserve Economic Data and Marquette University

12 .... the job market has dramatically tightened.... Sources: Federal Reserve Economic Data and Marquette University

13 .... wages have outpaced inflation since Sources: Federal Reserve Economic Data, Federal Reserve Bank of Atlanta, and Marquette University

14 .... low unemployment push up wages, increasing inflation.... Sources: Federal Reserve Economic Data, and Marquette University

15 .... the runoff in the value of the dollar puts pressure on imported goods prices, and in turn domestic prices.... Source: Federal Reserve Economic Data.

16 $11 trillion of central bank assets will need to be unwound, the U.S. Fed owns $4.0 trillion.... Source: Economist, June 1, 2017.

17 mortgage interest rates have remained below 5% since % Source: Economist, June 1, 2017.

18 .... but the tight labor market and other economic factors will increase rates. About 70% of what we purchase is labor, wage rates are on the rise and will push up inflation The Fed will need to raise short-term rates, and is selling off part of it mortgagebacked bond balance sheet, both will nudge, if not push, rates higher The dollar s weakness and trade sanctions push up inflation and rates Greater deficit spending from the 2017 Tax Act will push up the cost to borrow In summary, expect a continued upward march in 30-year mortgage interest rates to 5.0% over the coming year.

19 Housing Finance

20 Over 90% of purchase mortgages are 15 or 30 year mortgages.... Source: Urban Institute, Housing Finance at a Glance, February 2018 p. 9.

21 .... Fannie Mae/Freddie Mac supply most of the long=term fixed-rate mortgage debt with banks holding some whole loans.... Source: Urban Institute, Housing Finance at a Glance, February 2018 p. 7.

22 .... conforming Fannie/Freddie loans remain conservatively underwritten with high FICO credit scores (average FICO score in the U.S. is ).... Source: Urban Institute, Housing Finance at a Glance, February 2018 p. 13.

23 .... and Fannie and Freddie have modest-to-conservative debt-to-income ratios.... Source: Urban Institute, Housing Finance at a Glance, February 2018 p. 14.

24 In summary, the residential mortgage market is well-functioning with appropriate, if not overly restrictive underwriting standards, especially as the economy is in it s ninth year of expansion.

25 Limited Housing Inventory (The market, the inventory problem, and its causes)

26 The Market: In 2017 house prices appreciated 5.6% in the U.S. Source: 2017 Fannie Mae Credit Supplement, February 18, 2018.

27 The Market: Price changes in 2017 varied significantly across price point.... Source: National Association of REALTORS, Summary of January 2018 Existing Home Sales Statistics.

28 The Market: Wisconsin beat U.S. house price appreciation rates in 2017 with State-wide prices up 6.5% in 2017 over Source: Wisconsin REALTORS Association, interactive webpage:

29 The Market: 2017 transaction volume in Wisconsin was up 1.4% over Source: Wisconsin REALTORS Association, interactive webpage:

30 The Market: 2017 Wisconsin foreclosures were the lowest in 17 years.... Source: Wisconsin REALTORS Association, interactive webpage:

31 The Problem: Low national inventory levels, 3.5 month supply of for-sale housing.... Source: National Association of REALTORS, Summary of January 2018 Existing Home Sales Statistics.

32 The Local Problem: Low inventory levels, a 3.5 month for-sale housing in Wisconsin.... Source: Wisconsin REALTORS Association, interactive webpage:

33 Benefit of the Problem: Fewer average days on market.... Source: Wisconsin REALTORS Association, The Inventory Problem: Causes Consequences and the Future for Housing,

34 The Cause: U.S. households have doubled from 63.4 to million from 1970 to 2017, but new single-family houses sold has not grown.... Source: Wisconsin REALTORS Association, The Inventory Problem: Causes Consequences and the Future for Housing,

35 The Cause: Six million homes went from owner-occupied to renter occupied.... Source: Urban Institute, L. Goodman and K. Kaul : Fannie Mae s Financing of Single-Family Rentals: Good Pilot but Plenty to think about, February 2017.

36 The Cause: low mobility rates.... Source: The Brookings Institution U.S. migration still at historically low levels, census shows, William Frey, November 20, 2017

37 The Cause: 3/5ths of all moves are local moves, people are aging in place.... Source: The Brookings Institution U.S. migration still at historically low levels, census shows, William Frey, November 20, 2017

38 The Cause: Weak property price appreciation since the 2006Q3 price peak.... Source: 2017 Fannie Mae Credit Supplement, February 18, 2018.

39 The Single-Family Market Inventory The problem: Low national, state, and metro-area inventory levels The causes: Inadequate new construction (slowly being remedied) Investors purchased over six million single-family units since 2005 (going the wrong direction, large investors continue to purchase more than they sell) Low migration rates/people aging in place (low interest rates, little appreciation. Rates going in the wrong direction, property appreciation going in the right direction) Weak property appreciation since the Great Recession (Going in the right direction) In summary, low inventory levels will persist with likely outsized appreciation. One building concern for markets with significant investor purchasing is that investors sell at the same time.

40 Summary of the Economy, Rates and the Market in 2018 GDP, consumption, and business spending are likely to remain strong Wage inflation, Fed interest rate increases, Fed bond sales, weak dollar, among other factors will push up mortgage interest rates to 5.0% Residential mortgage markets are functioning well, if not conservatively The problems that are creating the for-sale inventory shortage are not likely to go away soon.

41 A Wisconsin Housing Market Update with a Discussion on: Where is the Single-Family Housing Inventory? for The Wisconsin Residential Real Estate Summit by Mark J. Eppli. Ph.D. (with some help) Bell Chair in Real Estate, Marquette University March 12, 2018