The Housing Market and the Macroeconomy. Karl E. Case. University of North Carolina February 18, 2010

Transcription

1 The Housing Market and the Macroeconomy Karl E. Case University of North Carolina February 18, 2010

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4 Briefly describe some of the connections between the housing market and the Macroeconomy Discuss how we got to this point Make some comments about where we are and where we are going. Is it a bottom?

5 S&P Case-Shiller Home Price National Index Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1

6 OHFEO House Price Index Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q1

7 Between 2000 and 2005 We added $10 trillion to the stock of housing: $5 trillion in land $5 trillion in structures

8 Balance Sheet of the U.S. Household Sector Q Total Assets 76.5 Total Liabilities 14.4 Net Worth 62.1 Amounts in trillions of dollars

9 Balance Sheet of the U.S. Household Sector Q Total Assets 67.5 Total Liabilities 14.1 Net Worth 53.4 Amounts in trillions of dollars

10 Household Balance Sheet Detail Q Household Assets Real Estate 20.5 Pension Fund Reserves 13.0 Equities (Direct) 9.3 Mutual Funds 5.0 Credit Instruments 4.2 Cash 7.5 Durable Goods 4.0 Non-Corp. Buinesses 7.9 Other 5.1 Total 76.5 Household Liabilities Home Mortgages 10.5 Consumer Credit 2.5 Other 1.4 Total 14.4 Amounts in trillions of dollars

11 Implications for Balance Sheet Known Losses Q as of Feb Household Assets Real Estate Pension Fund Reserves Equities (Direct) Mutual Funds Credit Instruments Cash Durable Goods Non-Corp. Buinesses 7.9? Other 5.1? Total Household Liabilities Home Mortgages 10.5 Consumer Credit 2.5 Other 1.4 Total Amounts in trillions of dollars

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13 Housing Starts (Census Bureau SAAR) January 2006 (Peak) Full year 2009 Down Average Fixed Investment Per Unit (ex: Land) Total Annual Direct Lost Production Total Lost Production (multiplier: 1.4) Effect on GDP Annual Lost Production As Percentage of GDP million units 571,600 units million units $250,000 $425.3 billion 1.4 x $425.3b = $595.4 billion 4.1% of GDP

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16 Tiered Home Price Indices for San Francisco 300 <$410K >$675K Low Tier: 2000 to Peak (2006-8): 176% Peak to : -54% High Tier: 2000 to Peak (2007-8): 91% Peak to : -18%

17 LOW TIERS Seventeen Metros 350 Miami Los Angeles 300 San Diego Washington Tampa 250 San Francisco New York Las Vegas 200 Phoenix Boston Seattle 150 Portland Minneapolis 100 Chicago Denver Atlanta Cleveland

18 HOW DID THIS HAPPEN.?????

19 Loans Originated ($bills) Figure 11 b: United States Total Quarterly Originations Refinance Originations Housing Prices Purchase Originations Target fed funds rate 1, Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Time Source Greenspan and Kennedy, Federal Reserve Board of Governors, S&P Case-Shiller. 0

20 WHERE DO WE GO FROM HERE?

21 Two Market Clearing Processes Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls

22 Two Market Clearing Processes Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls Foreclosure auctions: prices less sticky, distressed sales

23 The Good Existing home sales up sharply in November to 6.6 million BUT DOWN TO 5.45 in December +44% year over year in November Highest since million was biggest year ever The inventory of for sale property is down from 11 months in November 08 to 6.5 months in November % December 09 We are producing practically nothing! December starts were 557,000 (SAAR) Since 1959 only one month below 800,000 We have now been below 600,000 for 13 months We are 30% below the lowest level in years

24 The Good (continued) PRICES ARE DOWN 29% from peak down 40% in CA, 50% in LV, Phoenix and Miami Actually attracting buyers Showing signs of bottom and even rising SF 16%, Minn 14%; even Cleveland and Detroit BUYER OPTIMISM -- Case and Shiller Survey results RATES ARE LOW

25 The Bad Pending Home Sales figures for December increased by 1% since November, but dropped 15% since the October high of 114. Since January 2009, Pending Home Sales has been up for 10 of the last 11 months. Continuing bankruptcies and foreclosures December 115,000; last year 1.5 million Mostly FCAzN now, CA FL and AZ OH, MI, and GA Unemployment: 15 million COMING RESETS of ARMs and OPTION ARMs 20% are under water

26 The Confusing The rental market is soft. The vacancy rate hit 11.1%, the highest rate recorded since the data are available in With a lower home ownership rate, rents should be rising. On the contrary, rents are falling everywhere. The home owner vacancy rate hit 2% for the first time ever in 2005 and then rose to 2.9% a year ago. It came down to 2.5%...only to jump back to 2.6% in Q3. IF PRICES FALL 15% IN 2010, THE 2008/2009 BOOKS WILL BE BAD

27 The Confusing (continued) The Feds are doing a lot: is that the reason? 8,000 credit + 6,000 credit Fed purchase of $1.25 trillion of MBS and $175 billion of GSE debt Effectively zero Fed Funds rate Tighter lending standards Continued heavy subsidies through the income tax p-tax, mort. int., IMPUTED RENT

28 Generally, the outlook was for gains in housing activity to continue. However, some participants still viewed the improved outlook as quite tentative and again pointed to potential sources of softness, including the termination next year of the temporary tax credits for homebuyers and the downward pressure that further increases in foreclosures could put on house prices. Moreover, mortgage markets could come under pressure as the Federal Reserve s agency MBS purchases wind down.

29 the Committee affirmed its intention to purchase $1.25 trillion of agency MBS and about $175 billion of agency debt by the end of the first quarter of 2010 and to gradually slow the pace of these purchases to promote a smooth transition in markets. -Minutes of the Fed, December 15-16, 2009

30 Mar-87 Mar-88 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Price/Income Ratio Home Sales Price/Per-capita Income Ratios for Selected Metro Areas, Q Q AZ-Phoenix CA-Los Angeles CA-San Diego CA-San Francisco CO-Denver DC-Washington FL-Miami GA-Atlanta IL-Chicago MA-Boston MN-Minneapolis NC-Charlotte NV-Las Vegas NY-New York OR-Portland WA-Seattle Sources: Quarter S&P Case-Shiller Index; Census Bureau; BEA; Moody's Economy.com

31 Figure 2 San Francisco: House Price Trends Perceptions: Which best describes the area home price trend? Rising Rapidly 84% 29% 4% 1% Rising Slowly Not Changing Falling Slowly Falling Rapidly Expectations: It's a good time to buy because prices likely to increase. Agree 95% 82% 58% 80% '87 '87 '88 '88 '89 '89 '90 '90 '91 '91 '92 '92 '93 '93 '94 '94 '95 '95 '96 '96 '97 '97 '98 '98 '99 '99 '00 '00 '01 '01 '02 '02 '03 '03 '04 '04 '05 '05 '06 '06 '07 '07 '08 '08