The Housing Market and the Macroeconomy Karl E. Case University of North Carolina February 18, 2010
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?
S&P Case-Shiller Home Price National Index 200 180 160 140 120 100 80 60 40 20 0 1987 Q1 1988 Q1 1989 Q1 1990 Q1 1991 Q1 1992 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1 1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1
OHFEO House Price Index 450 400 350 300 250 200 150 100 50 0 1975 Q1 1977 Q1 1979 Q1 1981 Q1 1983 Q1 1985 Q1 1987 Q1 1989 Q1 1991 Q1 1993 Q1 1995 Q1 1997 Q1 1999 Q1 2001 Q1 2003 Q1 2005 Q1 2007 Q1
Between 2000 and 2005 We added $10 trillion to the stock of housing: $5 trillion in land $5 trillion in structures
Balance Sheet of the U.S. Household Sector Q4 2007 Total Assets 76.5 Total Liabilities 14.4 Net Worth 62.1 Amounts in trillions of dollars
Balance Sheet of the U.S. Household Sector Q3 2009 Total Assets 67.5 Total Liabilities 14.1 Net Worth 53.4 Amounts in trillions of dollars
Household Balance Sheet Detail Q4 2007 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
Implications for Balance Sheet Known Losses Q4 2007 as of Feb. 2009 Household Assets Real Estate 20.5-4.1 Pension Fund Reserves 13.0-3.7 Equities (Direct) 9.3-4.6 Mutual Funds 5.0-2.7 Credit Instruments 4.2-0.4 Cash 7.5 - Durable Goods 4.0 - Non-Corp. Buinesses 7.9? Other 5.1? Total 76.5-15.5 Household Liabilities Home Mortgages 10.5 Consumer Credit 2.5 Other 1.4 Total 14.4 + Amounts in trillions of dollars
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 2.273 million units 571,600 units 1.701 million units $250,000 $425.3 billion 1.4 x $425.3b = $595.4 billion 4.1% of GDP
Tiered Home Price Indices for San Francisco 300 <$410K >$675K 250 200 Low Tier: 2000 to Peak (2006-8): 176% Peak to 2008-11: -54% High Tier: 2000 to Peak (2007-8): 91% Peak to 2008-11: -18% 150 100 50 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
LOW TIERS Seventeen Metros 350 Miami Los Angeles 300 San Diego Washington Tampa 250 San Francisco New York Las Vegas 200 Phoenix Boston Seattle 150 Portland Minneapolis 100 Chicago Denver Atlanta 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cleveland
HOW DID THIS HAPPEN.?????
Loans Originated ($bills) Figure 11 b: United States Total Quarterly Originations 2000-2008 Refinance Originations Housing Prices Purchase Originations Target fed funds rate 1,000.0 7 900.0 800.0 700.0 6 5 600.0 500.0 400.0 4 3 300.0 200.0 100.0 2 1 0.0 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 Q4 2000 2001 2002 2003 2004 2005 2006 2007 Time Source Greenspan and Kennedy, Federal Reserve Board of Governors, S&P Case-Shiller. 0
WHERE DO WE GO FROM HERE?
Two Market Clearing Processes Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls
Two Market Clearing Processes Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls Foreclosure auctions: prices less sticky, distressed sales
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 2006 7 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 09 7.2% 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
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
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
The Confusing The rental market is soft. The vacancy rate hit 11.1%, the highest rate recorded since the data are available in 1956. 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
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
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.
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
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, Q1 1987-Q1 2009 18 16 14 12 AZ-Phoenix CA-Los Angeles CA-San Diego CA-San Francisco CO-Denver DC-Washington FL-Miami 10 8 6 4 2 0 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
250 200 150 Figure 2 San Francisco: House Price Trends 1988 2003 2007 2008 Perceptions: Which best describes the area home price trend? Rising Rapidly 84% 29% 4% 1% Rising Slowly 13 51 38 4 Not Changing 3 14 17 4 Falling Slowly 1 6 2 33 Falling Rapidly 0 0 39 57 Expectations: It's a good time to buy because prices likely to increase. Agree 95% 82% 58% 80% 100 50 0 '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