The Housing Market and the Macroeconomy New England Mortgage Bankers Association October 2, 2009 1
The World is in a Deep Recession In the U.S. EMPLOYMENT: Job losses in August, 2009: -216,000 Job losses since December, 2007: >6.9 million Unemployment rate 9.7% REAL GDP: Falling since 2008 Q2 2
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 3
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 4
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 5
Why do home prices matter? Houses are collateral for mortgage debt If prices continue to fall, the 2008 and 2009 books could be unprofitable Some $5 trillion has been lost from household balance sheets household spending has fallen: -Equity can t be withdrawn -General drop in consumption 6
Housing Links to the Real Economy 1. Direct Effects: Housing Starts 2. Wealth Effects 3. Financial Meltdown 7
Housing Starts (Census Bureau SAAR) August 2009 Down Average Fixed Investment Per Unit (ex: Land) Total Annual Direct Lost Production Total Lost Production (multiplier: 1.4) Effect on GDP January 2006 (Peak) Annual Lost Production As Percentage of GDP 2.273 million units 598,000 units 1.68 million units $250,000 $420 billion 1.4 x $420b = $588 billion 4.2% of GDP 8
Housing Starts, Jan 1972 - June 2009 3,000 2,500 2,000 Thousands 1,500 1,000 500 0 1972-Jan 1974-Jan 1976-Jan 1978-Jan 1980-Jan 1982-Jan 1984-Jan 1986-Jan 1988-Jan 1990-Jan 1992-Jan 1994-Jan 1996-Jan 1998-Jan 2000-Jan 2002-Jan 2004-Jan 2006-Jan 2008Jan Date 9
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 10
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 11
Between 2000 and 2005 We added $10 trillion to the stock of housing: $5 trillion in land $5 trillion in structures 12
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Metro Area Peak S&P Case-Shiller Indexes -- Through June 2009 % Since Peak Released August 25, 2009 % Last Year % from April to May % from May to June % from Jan. 2000 to June 2009 Phoenix Jun 2006-53.9% -31.6% -0.9% 1.1% 4.7% Las Vegas Aug 2006-54.3% -32.3% -2.6% -2.0% 7.3% Miami Dec 2006-48.2% -23.4% -0.8% 0.5% 45.4% San Francisco May 2006-42.9% -22.0% 1.4% 3.8% 24.7% Detroit Dec 2005-45.3% -25.0% 0.2% -0.8% -30.5% San Diego Nov 2005-41.2% -16.0% 0.4% 1.6% 47.3% Los Angeles Sep 2006-41.3% -17.8% -0.1% 1.4% 60.9% Tampa Jul 2006-40.8% -19.5% 0.0% 0.4% 40.9% Minneapolis Sep 2006-33.7% -19.8% 1.2% 3.4% 13.5% Washington May 2006-30.6% -11.8% 1.3% 2.8% 74.3% Chicago Sep 2006-25.9% -16.7% 1.1% 1.1% 25.0% Atlanta Jul 2007-21.2% -13.7% 0.3% 1.7% 7.5% Seattle Jul 2007-22.2% -16.1% -0.3% 0.4% 49.5% Portland Jul 2007-20.4% -15.1% 0.1% 1.0% 48.5% New York Jun 2006-20.5% -11.9% 0.0% 0.6% 71.5% Cleveland Jul 2006-13.8% -3.0% 4.1% 4.2% 6.4% Boston Sep 2005-16.3% -5.9% 1.6% 2.6% 52.7% Denver Aug 2006-9.5% -3.6% 1.3% 2.5% 26.9% Charlotte Aug 2007-11.2% -9.6% 0.9% 0.7% 20.7% Dallas Jun 2007-5.4% -2.3% 1.9% 2.7% 19.7% Composite 10 Jun 2006-32.3% -15.1% 0.4% 1.5% 53.2% Composite 20 Jul 2006-31.3% -15.4% 0.5% 1.4% 41.9% 15
S&P Case-Shiller Index (% Change) 2.5% 2.0% 1.5% % Change from previous month 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Feb-87 Feb-88 Feb-89 Feb-90 Feb-91 Feb-92 Feb-93 Feb-94 Feb-95 Feb-96 Feb-97 Feb-98 Feb-99 Feb-00 Feb-01 Feb-02 Feb-03 Feb-04 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09-2.0% -2.5% -3.0% Month 16
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 17
Tiered Home Price Indices for Miami 400 350 <$229K >$338K 300 250 Low Tier: 2000 to Peak (2007-3): 241% Peak to 2008-11: -47% High Tier: 2000 to Peak (2006-5): 158% Peak to 2008-11: -37% 200 150 100 50 0 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 18
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 19
BOOM: Up 200% to 240% RED HOT -- Four Metros Triple Miami, Los Angeles, San Diego, Washington 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 20
BOOM: Up 140% to 180% Tampa, San Francisco, New York, Las Vegas, Phoenix 350 Miami Los Angeles 300 San Diego Washington Tampa 250 San Francisco Fran. 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 21
BOOM: Up 80% to 120% Boston, Seattle, Minneapolis, Chicago 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 22
BOOM: Up 30% to 40% Denver, Atlanta, Cleveland 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 23
BUST: Down 55% to 66% San Francisco, Las Vegas, Phoenix 350 Miami Los Angeles 300 San Diego Washington Tampa 250 San Francisco Fran. 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 24
BUST: Down 46% to 52% Miami, Los Angeles, San Diego, Washington, Tampa, Minneapolis 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 25
BOOM: Down 29% to 37% Boston, Chicago, Atlanta, Cleveland 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 26
BOOM: Down 18% to 22% Seattle, Portland, Denver 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 27
HOW DID THIS HAPPEN.????? 28
Figure 11 b: United States Total Quarterly Originations 2000-2008 Refinance Originations Housing Prices Purchase Originations Target fed funds rate 1,000.0 7 Loans Originated ($bills) 900.0 800.0 700.0 600.0 500.0 400.0 300.0 200.0 100.0 6 5 4 3 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 29
WHERE DO WE GO FROM HERE? 30
Two Market Clearing Processes Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls 31
Two Market Clearing Processes Normal times: Sellers resist, buyers lowball, sticky prices, inventories high, production falls Foreclosure auctions: prices less sticky, distressed sales 32
Home Sales Price/Per-capita Income Ratios for Selected Metro Areas, Q1 1987-Q1 2009 Price/Income Ratio 18 16 14 12 10 8 6 4 2 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 0 WA-Seattle 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 Sources: Quarter S&P Case-Shiller Index; Census Bureau; BEA; Moody's Economy.com Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 33
What s up now? GOOD NEWS: Most recent numbers: June and July 2009 Existing sales (NAR): Pending home sales: Starts (Census): New home sales: New home inventory: +15% to 5.24 million (SAAR) up since March +21% since January Rising for the last 6 consecutive months +25% since April to 598,000 (SAAR) +30% since March to 433,000 (SAAR) Down to 271,000 (65%) year over year Falling for 12 consecutive months Now 7.5 months of inventory (12.5% in January) FHFA Home Price Index +0.9% May over April 2009 S&P Case-Shiller Price Composite +1.4% June over May 2009 Increases in 18 of 20 metro areas Home buyer surveys show optimism; 5.6 million total sales out of 112.2 million households (5%) 34
Bad News: Recession Long term projections Inventory of foreclosed property 35
HOUSEHOLD FORMATIONS and HOUSING STARTS 1985 2009 Census Projections Annually 2000-2010 (SAAR) (millions) Actual Household Formation Rates (SAAR) (millions) 1985-1990 1990-1995 1995-2000 2000-2002 2002-2009 Household Formations (millions) 1.16 1.16 1.20 1.27 1.50 1.04 Housing Starts (millions) 2003 2004 2005 2006 2007 2008 2009p TOTAL 426 602 2007 1256 911 1136 882 7220 1848 1956 2068 1801 1355 906 600 10534 36
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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 38
Figure 1 Orange County: House Price Trends 300 250 200 1988 2003 2007 2008 Perceptions: Which best describes the area home price trend? Rising Rapidly 91% 76% 0% 0% Rising Slowly 9 22 22 3 Not Changing 0 1 18 6 Falling Slowly 0 0 1 28 Falling Rapidly 0 0 59 63 Expectations: It's a good time to buy because prices likely to increase. Agree 93% 77% 71% 80% 150 100 50 Los Angeles 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 39
200 150 Figure 3 Boston: House Price Trends 1988 2003 2007 2008 Perceptions: Which best describes the area home price trend? Rising Rapidly 3% 30% 1% 1% Rising Slowly 34 49 14 2 Not Changing 37 13 19 8 Falling Slowly 22 9 8 17 Falling Rapidly 3 0 59 71 Expectations: It's a good time to buy because prices likely to increase. Agree 78% 66% 72% 82% 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 40