Economic Forecast 2013

transcript

Housing and the Economy: Impacts and Forecasts

Geoffrey J.D. Hewings, Ph.D.DirectorRegional Economics Applications Laboratory (REAL)University of IllinoisInstitute of Government and Public Affairs217.333.4740 217.244.9339 (fax)hewings@illinois.eduwww.real.illinois.edu

Illinois Association of REALTORS® January 2013 Public Policy Meetings

Regional Economics Applications Laboratory - University of Illinois

Founded in 1989 initially as collaborative venture with the Federal Reserve Bank of Chicago

Objective: enhance analytical capability for public policy decision-making at the urban and regional scale with an initial focus on Chicago and the Midwest

Employs doctoral students from economics, agricultural economics, urban and regional planning and geography

2012-2013 Highlights

Last half of 2012 revealed positive changes in prices Significant increase in sales volume Resolution of foreclosure issues saw significant

increase in foreclosed properties Consumer optimism dampened by “fiscal cliff issues in

Washington and the failure of Illinois state government to address deficit and unfunded pension obligations

Combination of enhanced inventory, historically low interest rates and accelerating costs of renting should fuel the housing market in 2013

State of Illinois Economies

• State is 330,000 below prior peak (November 2000) “translates” into loss state income tax revenue of $0.4 billion+ in lost sales and income tax

But…need to add considerations of: • population growth since 2000• decrease in labor force participation rates• Large number in part-time who would like full-time

employment THEN…

State of Illinois Economies

State probably needs to add close to:

• 647,000 jobs to achieve equivalent level to November 2000

• Chicago would need to add 285,000 jobs to return to 2000 level and another 100-140,000 to account for additional factors noted

RECOVERY SCENARIOS

Jobs recovered Since December 2009

Note: Best year since 1980 – Illinois added 60,000 jobsLast 12 months added 53,000 jobs

RECOVERY: How long will it take?• Before this recession, longest recovery was 8 years

(now > 12 years – since 2000)• Current employment in Illinois matches that late 1990s• Illinois has 5 of 10 sectors with employment levels

below those of 1990: Manufacturing, Information, Construction, Trade, Transportation & Utilities, and Financial activities

But in 2012, Illinois’ employment growth rate was 65% of U.S. but below that for the Rest of the Midwest (IA, WI, IN, OH, MI, MO). Usually it is 35% US

Sources of Growth – Illinois and Chicago

Both economies heavily tied to

U.S. domestic market 85% exports go to other states 15% international with strong dependence

(35%) on Canada and Mexico

40% of domestic exports and imports are with Midwest neighbors – WI, IN, OH, MI, MO, IA

Sources of Growth – Illinois and Chicago

Political leaders in Midwest fail to appreciate the negative effects of “job poaching” (e.g. the Indiana ad “Are you Illinoyed?”)

Illinois is in a sense the economic locomotive for Midwest economy

Recovery of Chicago and Illinois tied in with U.S. recovery but especially Midwest recovery

Where is the growth/decline taking place? US

Growing: • Professional & Business, Education & Health

(Chicago flat)

Declining: • Information and Financial (much greater losses

than Chicago)

Where is the growth/decline taking place? Illinois Metros

TTU Trade, Transportation Utilities; PRO: Professional Services; CON: Construction; EDU: Education; MAN: Manufacturing: GOV: Government

Illinois & National Economy

Since early 1990s, Illinois’ growth rate has fallen behind the U.S. and Rest of the Midwest, but paralleling with the latter in the last two years

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Illinois and National Economy

• Illinois’ performance is surprising in view of the fact that, unlike the Rest of the Midwest, it has a similar structure to the US

• Then, why have we underperformed US?• Lower population growth?• Loss of human capital?• Less competitive industries?• Governance issues?

Impacts of Migration & Job Losses

• Probably see continued erosion of state’s competitive position (dropped from 4th to 15th in terms of per capita income in the last 15 years)

• Average income of in-migrants lower than out-migrants leading to loss of income averaging $1billion over the 2000-2010 decade (translates into loss of 20,000 jobs)

Challenge

loss of jobs loss of people

loss of expenditure

loss of business expansion

Housing Market

• New time buyers – special credit programs• Housing turnover – people upsizing or

downsizing• Job relocation/migration• Retirement • Those currently “parked in rental properties”

Sources of Demand for HousingMarket

Housing Market: Do Incentive Programs Work?

Federal Government program successfully attracted buyers – but REAL estimated that CBO estimates were way too high (i.e., incremental sales associated with the program failed to account for sales that could normally have been expected to have been made)

Secondly, after program ended, sales plummeted for several months eroding much of the benefit of the program

In essence, all the program did was accelerate the timing of purchases

Incentive programEnded, 2010

Housing Market: Turnover

• In recent years, “time on the market” has extended to 15+ months (in the early 2000s, 2-4 months was normal)

• In December 2012, it was between 4-5 months (pre-recession, 2+ months)

Turnover generating fewer sales as consumers become more risk adverse

Housing Market: Turnover

• Market segmentation by price becoming more pronounced

• Time on market increases with price• However, note the significant decreases

across all prices ranges comparing December 2012 with 2011

Unsold Inventory by Price Range – Illinois

December 2012 on top, Dec 2011 on bottom

Housing Market: Job Relocation/Migration

• Migration rates have been declining since early 2000s - demographers are puzzled by this phenomenon

• In a buoyant housing market and expectation of price appreciation, relocation often accompanied by sale and purchase of house

Job relocation still important source of demand but fewer people changing jobs

Housing Market: Job Relocation/Migration

• Now with job mobility down, those relocating often “parking” themselves in apartments to shelter against prospect of short-term negative equity in a home

• Rental rates have thus risen in the last two years

• A Deutsche Bank A.G., the cost of renting in Chicago was 31.3% higher than average after-tax monthly mortgage payments in the third quarter in 2012

Housing Market: Retirement/Migration

• Are retirees beginning to reconsider remaining in the Midwest?

• Relative housing price declines greater in FL and AZ – suggesting that retirees could sell in IL (even below their desired price) and still afford the house they desire in FL or AZ

Housing Market: Retirement/Migration

• Retiree incomes spent in Illinois generating positive ripple effects

• Retirees remaining here are not selling their homes so there is a loss of energy in the housing market

Is net effect positive or negative for state?

Housing Market: Turnover generates impacts

• Through 2007, typical Illinois county experienced 11% turnover in households each year (5% in and 6% out)

• Further 6-12% change houses within the same county

• Rates tend to be higher in metro counties

• Illinois Total Direct Expenditures on a home sale is $28,581 (payments to REALTORS®, bank loan origination fees, state and county taxes, fix-up costs) source: recent IAR study

• In 2010 111,319 sales so direct impact was $3.2 billion

• Generates about $7.9 billion annually through ripple effect

• Each $1 billion generates about 12,000 jobs directly: total direct + indirect effect = 130,000 jobs

• 34% reduction in sales translates into loss of 50,000 jobs

• Further negative effect on states income and sales taxes

• This is in addition to the construction impacts associated with new homes

Let’s Do the Math – Cumulative Impacts on Jobs

• Decline in housing sales 50,000• Net Out-migration

20,000• Reduced spending for

road construction (down $1 b) 16,000

Total (86,000) greater than IL job growth in 2012!

Prices Inching up, still below 2010

Sales Gain: strong second half 2012 – eclipsed 2011 and 2010

Mix of Home Sales remained steady -slight decline in properties < $100,000

If sales have increased, why haven’t prices? The Foreclosure Overhang

Three parts to consider:– Filings

Occur when mortgagee cannot make payments

– SalesSale of property returned to owner of the note

– InventoryAccumulation of foreclosed properties not yet

Economic Forecast 2013

Real Estate