House Appropriations Committee Retreat

Transcription

1 House Appropriations Committee Retreat Virginia s Housing Outlook November 13, 2006

2 Virginia s Housing Outlook Construction drop historically leads recession Residential real estate activity is dropping Not because of higher interest rates or slower economic growth Trends driven by home appreciation and affordability Housing drop will not derail economy A 10% drop in NVA home prices won t stop consumer spending Economy remains strong What else should we worry about? Defense spending? Educational competitiveness?

3 Single-Family Housing Permits Dropped 39% Since Sept Month Moving Average 4,500 4,000 3,500 3,000 2,500-39% 2,000 1,500 1,000 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Data through September Source: U.S. Department of Commerce.

4 VA Single-Family Housing Permits Dropped 39% Since Sept Month Moving Average 4,500 4,000 3,500 3,000 2,500-52% -11% -39% 2,000 1,500 1,000 Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Data through September Source: U.S. Department of Commerce.

5 NVA Single-Family Housing Permits Dropped 43% Since August Month Moving Average 1,800 1,600 1,400 1,200 1,000-43% Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Data through September Source: U.S. Department of Commerce.

6 NVA Single-Family Housing Permits Dropped 43% Since August Month Moving Average 1,800 1,600 1,400 1,200 1, % -12% -43% Jun-88 Jun-90 Jun-92 Jun-94 Jun-96 Jun-98 Jun-00 Jun-02 Jun-04 Jun-06 Data through September Source: U.S. Department of Commerce.

7 Why Is the Housing Market Slowing? Employment is growing Unemployment rate is dropping Wages are rising Interest rates are relatively low Investors Affordability

8 Northern Virginia Home Inventories Have Jumped as Investors Exit Thousands Inventory Sales M1 2000M1 2001M1 2002M1 2003M1 2004M1 2005M1 2006M1

9 Home Price Appreciation Remains High Appreciation 40% Washington MSA Home Price Index and Affordability 30% Washington MSA 20% Recession 10% Appreciation U.S. 0% Data through 2006 Quarter 2. Source: Office of Federal Housing Enterprise Oversight.

10 Impacts Affordability Washington MSA Home Price Index and Affordability Appreciation 40% Affordability Affordability 50% U.S. 30% Washington MSA 40% 30% 20% Recession Washington MSA 20% 10% Appreciation 10% U.S. 0% % Affordability - % of households that can afford a median-priced home. Source: Chmura Economics & Analytics.

11 Housing Affordability Has Dropped in All Regions Affordability = % of households that can afford a median-priced home. 58% 53% Hampton Roads Richmond 48% 43% U.S. 38% 33% 28% Washington MSA 23% 18% Data Through 2006 Quarter 2. Source: Chmura Economics & Analytics

12 Home Affordability in Virginia s Metropolitan Areas, 2006 Qtr 2 Affordability = % of households that can afford a median-priced home. Source: Chmura Economics & Analytics

13 Is There a Bubble, Will it Burst, How Bad will it Be? What is needed to burst bubble? How far would prices fall? How would that impact Virginia economy?

14 A Recession or Shock to Region Needed to Burst Bubble

15 Historically, This Measure Has Been Accurate 100% Probability of Recession Index January 1970 to February % 0% Source: Chmura Economics & Analytics.

16 Probability of Recession 36% in February 2007 Probability of Recession Index Source: Chmura Economics & Analytics. Components of Index: Inflation, S&P500, Slope of the Yield Curve, Volatility of the Yield Curve.

17 Housing Bubbles: Regional Attributes are Important 40 House Price Appreciation Percent Change From A Year Ago San Francisco/Oakland MSA Washington DC MSA Los Angeles/Long Beach MSA Source: Office of Federal Housing Enterprise Oversight (OFHEO) Home Price Index

18 Housing Bubbles: Regional Attributes are Important House Price Appreciation Percent Change From A Year Ago Recession Defense Cuts Washington DC MSA San Francisco/Oakland MSA Los Angeles/Long Beach MSA Source: Office of Federal Housing Enterprise Oversight (OFHEO) Home Price Index

19 Housing Bubbles: Regional Attributes are Important House Price Appreciation Percent Change From A Year Ago Recession Defense Cuts Hi-Tech Bust Washington DC MSA San Francisco/Oakland MSA Los Angeles/Long Beach MSA Source: Office of Federal Housing Enterprise Oversight (OFHEO) Home Price Index

20 How Far Can Prices Fall? How Far Above Market Are Home Prices? MSA Cumberland Salisburg Hagerstown Baltimore Danville Winchester Harrisonburg Blacksburg Roanoke Lynchburg Charlottesville Hampton Roads Richmond Greater Washington 4% 14% 10% 15% 13% 21% 23% 27% 26% 31% 33% 33% 37% 39% Source: Chmura Economics & Analytics 0% 10% 20% 30% 40% Over Valuation, 2006 Quarter 2

21 Job Growth Related to Home Building is Slowing

22 Construction Employment is Growing in Nonresidential So Little Change in Overall Growth

23 Potential Impact of 10% Drop in NVA Home Prices 2004 Joint Center for Housing Studies, Harvard University: housing wealth effect Consumer spend 5.5 of every $1.00 of housing wealth increase Spending occurs over a little more than a year Estimated total value of owner-occupied homes in NVA Assume 10% loss in NVA home value translates to decline in spending of 5.5 /$ Retail sales could drop 2.2% in state if, NVA homeowners purchase all their products/services in Virginia

24 Nationally, Taking about 1 Percentage Point Off GDP Growth Real GDP, Annualized rate of growth 8 7 Real GDP Forecast Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1

25 Nationally, Taking about 1 Percentage Point Off GDP Growth Real GDP, Annualized rate of growth 8 7 Real GDP Forecast GDP, Excluding Residential Fixed Investment Contribution Q1 2004Q1 2005Q1 2006Q1 2007Q1 2008Q1

26 Housing Downturn New Home Sales Existing Home Sales Housing Starts Builder Confidence Median Existing Home Prices OFHEO Index Percent Change from A Year Ago -14.2% -14.2% -27.7% Down 37 Points -2.2% % Data Through 2/06

27 The Virginia Economy is Fundamentally Strong Jobs increased 52,700 or 1.4% from year ago (Sept.) (1.3% in U.S.) Retail sales +6% from year ago (Sept.) Initial unemployment claims -4% from year ago (Sept.) Defense spending growing a slower rate

28 Anything to Worry About? The long run Education

29 Broad Relationship Between Education and Economic Well-Being is Well Established More education is associated with higher wages Unemployment rate in 2003 (Percent) Education attained Median weekly earnings in 2003 (Dollars) More education is associated with a lower unemployment rate Doctoral degree Professional degree Master's degree Bachelor's degree Associate degree $1,349 1,307 1, Some college, no degree High-school graduate Some high-school, no diploma 396

30 Education Matters: Regions Grow Faster and HH Income is Higher Relationship Between Education Attainment and Cost of Living Adjusted (COLA) Household Income (Correlation Coefficient 0.47) Loudon Fairfax Median Household Income (Cost of Living Adjusted) Covington Dickenson Albemarle Alexandra Arlington Falls Church Trend Line 0 0% 10% 20% 30% 40% 50% 60% 70% Source: 2000 Census and CEA % Adults With Bachelor Degree

31 Internationally, Our Competitive Advantage is Education Average Years of Schooling of Adults, Selected Countries Brazil China Hong Kong, China India Mexico Singapore South Africa United States Source: World Bank Database.

32 OECD Average OECD Countries Finland Korea Netherlands Japan Canada Belgium Switzerland Australia New Zealand Czech Republic Iceland Denmark France Sweden Austria Germany Ireland Slovak Republic Norway Luxembourg Poland Hungary Spain Portugal Italy Greece Turkey Mexico Partner Countries Hong Kong-China Liechtenstein Macao-China Latvia Russian Federation Serbia Uruguay Thailand Indonesia Tunisia Brazil United States Distribution of Combined Mathematics Scores of 15-Year Old Students, by Country Percentiles of Performance Mean Mean +/- standard error Mean

33 Distribution of Combined Mathematics Scores of 15-Year Old Students, by Country 2003 OECD Average Finland Korea Netherlands Japan Canada Belgium Switzerland Australia New Zealand Czech Republic Iceland Denmark France Sweden Austria Germany Ireland Slovak Republic Norway Luxembourg Poland Hungary Spain Portugal Italy Greece Turkey Mexico Partner Countries Hong Kong-China Liechtenstein Macao-China Latvia Russian Federation Serbia Uruguay Thailand Indonesia Tunisia Brazil United States Our Competitive Advantage Is Eroding Percentiles of Performance Mean Mean +/- standard error Mean

34 International Competition Students Enrolled in Postsecondary (in millions) Change U.S % China % India % UNESCO, 2003

35 New Participants in the World Economy (Supply Side) China, India and Russia = 3 billion people 10% highly educated = 300 million people USA = 300 million people 25% highly educated = 75 million Competition for jobs = 375 million people USA students/adults will face greater competition in the future than anytime in history Craig Barrett, INTEL CEO 2004

36 These Students Will Be Underpinning Growth in 4 to 8 Years... % of Students Passing 8th Grade Mathematics by School Division, Top HIGHLAND CHESTERFIELD ROCKINGHAM FAUQUIER POWHATAN SMYTH WISE KING GEORGE Source: Virginia Dept. of Education. CHARLES CITY

37 These Students Will Be Underpinning Growth in 4 to 8 Years... % of Students Passing 8th Grade Mathematics by School Division, Bottom 10 PORTSMOUTH CITY TAZEWELL SUSSEX LEE BUCKINGHAM SCOTT CHARLOTTESVILLE COVINGTON CITY BUCHANAN PETERSBURG CITY HIGHLAND CHESTERFIELD ROCKINGHAM FAUQUIER POWHATAN SMYTH WISE KING GEORGE Source: Virginia Dept. of Education. CHARLES CITY

38 Higher Skills Needed for Fast Growing Services than Declining Mfg Industries Occupational Skill of Fastest Growing and Declining Industries, Virginia, Average Mfg Skill 2.7 Average Serv. Skill 2.9 Source: JobsEQ Skill Measure of Occupations in Industries

39 Higher Skills Needed for Fast Growing Services than Declining Mfg Industries Occupational Skill of Fastest Growing and Declining Industries, Virginia, Average Mfg Skill Computer/Electronic Prod. Mfg. Chemical Mfg. Petro./Coal Prod. Mfg. Paper Mfg. Leather/Allied Prod. Mfg. Apparel Mfg. Textile Prod. Mills Textile Mills Beverage/Tobacco Prod. Mfg. Mining Biggest Job Loss Job Loss Average Serv. Skill 2.9 Source: JobsEQ Skill Measure of Occupations in Industries

40 Higher Skills Needed for Fast Growing Services than Declining Mfg Industries Occupational Skill of Fastest Growing and Declining Industries, Virginia, Average Mfg Skill Computer/Electronic Prod. Mfg. Chemical Mfg. Petro./Coal Prod. Mfg. Paper Mfg. Leather/Allied Prod. Mfg. Apparel Mfg. Textile Prod. Mills Textile Mills Beverage/Tobacco Prod. Mfg. Mining Job Loss Average Serv. Skill Food Serv./Drinking Places Amusement, Gambling/Recreation Ind. Social Assist. Nursing/Res. Care Facilities Hospitals Ambulatory Health Care Serv. Ed. Serv. Admin./Support Serv. Profess., Scientific, and Tech. Serv. Internet Serv. /Data Process. Serv. Source: JobsEQ Skill Measure of Occupations in Industries Job Gain

41 Higher Skills Needed for Fast Growing Services than Declining Mfg Industries Occupational Skill of Fastest Growing and Declining Industries, Virginia, Average Mfg Skill Computer/Electronic Prod. Mfg. Chemical Mfg. Petro./Coal Prod. Mfg. Paper Mfg. Leather/Allied Prod. Mfg. Apparel Mfg. Textile Prod. Mills Textile Mills Beverage/Tobacco Prod. Mfg. Mining Biggest Job Loss Average Serv. Skill Food Serv./Drinking Places Amusement, Gambling/Recreation Ind. Social Assist. Nursing/Res. Care Facilities Hospitals Ambulatory Health Care Serv. Ed. Serv. Admin./Support Serv. Profess., Scientific, and Tech. Serv. Internet Serv. /Data Process. Serv. Source: JobsEQ Skill Measure of Occupations in Industries Biggest Job Gain

42 Conclusion Drop in housing activity not pointing to recession Even a 10% drop in NVA home values only takes about 2% off state retail sales Outside housing, the economy remains strong People not industries are a region s and firm s most valuable resource...education is very important