JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2009

www.jchs.harvard.edu

The Housing Outlook

Eric S. BelskyBig Builder

October 28, 2010

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Housing Markets Have Corrected In Significant Ways

Home prices have fallen significantly in many metros

Case-Shiller index-based house price to per capita income ratios have fallen to near 35-year lows nationally and in IL, FL, and CA, and below them in NV and AZ

Less volatile (net of nonconforming loans) Freddie Mac index shows fewer places back to long-run lows

Low interest rates have helped bring payment-to-income ratios on median priced homes in the majority of large metros to well below 1990s average levels

Steep production cuts have brought national 10-year total housing production back in line with 10-year average trends

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Worst Home Building Downturn Since World War II

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

1925-1933

1941-1944

1950-1953

1955-1957

1959-1960

1963-1966

1968-1970

1972-1975

1978-1982

1986-1991

2005-2009

Percent Change in Housing Starts

Sources: US Census Bureau, New Residential Construction data and Historical Statistics of the United States, Colonial Times to 1970.

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

The Last 10 Years of Completions and Placements Nearing Low Point of 27 10-year Periods Back to 1974-83

1414.5

1515.5

1616.5

1717.5

18

1980-1989 1990-1999 2000-2009 2001 - 2010(e) Median 10-Year Rate

Lowest 10-Year

(1988-97)

10 Year Total Completions & Placements (millions)

Note: Data go back to 1974. 2010 annual completions and placements are estimated by the following methodology: Jan-Jul 2010 is 13.873% below 2009 levels, so annual is taken to be same amount below 2009 annual. Jan-May placements are 8.33% below Jan-May 2009.Source: JCHS calculations of US Census Bureau data

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Housing Markets Face Strong Headwinds Household growth has slowed below normalized levels

Vacancy rates remain elevated despite sharp housing production cutbacks

Employment growth has not been enough to reduce unemployment rate or restore consumer confidence

The 2 million homes in foreclosure and 2 million more 90+days delinquent will pressure prices in many areas

Tightened underwriting has dramatically reduced pool of eligible homebuyers

Owners underwater on their mortgages cannot sell or refinance without incurring losses or handing in the keys – crimping trade up markets

Deleveraging is far from running its course

Bank debt for AD&C will likely remain tight

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Household Growth Has Clearly Slowed, But Estimates of the Degree Vary Widely

Average Annual Household Growth (Millions)

-0.75

-0.50

-0.25

0.00

0.25

0.50

0.75

1.00

1.25

1.50

AmericanCommunity Survey

Current PopulationSurvey

Housing VacancySurvey

2000-5 2005-9 Average Annual Slowdown

Notes: ACS estimates are from 2005 to 2008 only. To adjust for rebenchmarking, CPS and HVS estimates for 2002-3 are assumed to equal the average in 2000-5. Sources: US Census Bureau, American Housing Survey; Current Population Survey; and Housing Vacancy Survey.

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Strong Employment Growth Has Been More Critical To Strength of Past Demand Rebounds

0

2

4

6

-3

-2

-1

0

1982:2-1984-2 1974:4-1976:4 1991:1-1993:1

Change in Employment (Percent)

Change in Mortgage Rates (Percentage points)

Note: Changes are from a trough in new home sales through the first eight quarters of a sustained recovery.Source: JCHS tabulations of US Census Bureau, New Residential Construction Survey; Bureau of Labor Statistics, Current Employment Statistics; and Freddie Mac, Primary Mortgage Market Survey.

0

25

50

75Change in New Home Sales (Percent)

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Employment Has Started to Recover But Is Still in a Deep Hole

Note: Quarterly values are three-month averages of seasonally adjusted annual rates. Cyclical trough quarters in new home sales were 1966:4, 1975:1, 1982:2, 1991:1, and false trough in 2009:1. Sources: US Census Bureau, New Residential Construction; BLS, Establishment Survey

Aggregate Change in Total Nonfarm Employment (000s)

-8000-7000-6000-5000-4000-3000-2000-1000

010002000

-2 -1 Trough inNewSales

1 2 3 4 5 6Quarters

AfterMid 1970s Late 1970s/ Early 1980s

Late 1980s/ Early 1990s Current Downturn

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Real Home Equity Has Returnedto Its 1985 Levels

Trillions of 2009 Dollars

0.0

2.5

5.0

7.5

10.0

12.5

15.01

98

5

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

Home Equity Home Mortgage Debt 2009 Equity Level

Note: Values are adjusted for inflation using the CPI-U for All Items.Source: Federal Reserve Board, Flow of Funds.

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Large Echo-Boom Generation Should Fuel Household Growth

10

12

14

16

18

20

22

5-9 10-14 15-19 20-24

Baby-Boom Generation in 1970 Echo-Boom Generation in 2005

Age

Notes: Members of the baby-boom generation were born 1946-1964. Members of the echo-boom generation were born 1981-2000.Source: US Census Bureau, Population Estimates.

Population (Millions)

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Estimating Underlying New Home Demand

Estimates are of long-run sustainable demand – not a prediction of actual single family and multifamily completions plus manufactured home placements over the projection period

Actual construction influenced by under or over supply entering and exiting the period

Household growth projected under two immigration assumptions and with headship rates held constant at 2007-2009 average levels by race/ethnicity and age Headship rates are share of people in an age group

by race and ethnicity that head a household

Each household head is equal to one occupied housing unit

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Under Low Immigration Assumptions, Underlying Demand Should Top 16 Million 2010-20 if Headship Rates Hold

Steady at 07-09 Average Levels

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Low Immigration (Assuming Half of CensusBureau Immigration Projections)

High Immigration (Assuming Census BureauImmigration Projections)

Projected Household Growth (000s) Vacant Unit Demand Net Removals

New Housing Units 2010-2020 (Millions)

Source: JCHS Working Paper W10-9. Assumes headship rates by age and race/ethnicity hold constant at 2007-2009 average levels in Current Population Survey. High immigration is US Census Bureau 2008 baseline populationprojections and low immigration is half that assumption.

JOINT CENTER FOR HOUSING STUDIESGraduate School of Design | Harvard Kennedy School

Harvard University

Copyright 2010

Conclusions Long-run supply and demand may be closer to balance

than today’s elevated vacancy rates imply

Due to substantial headwinds, housing recovery will likely be slow unless job growth stages a more convincing rebound

Builders will continue to compete with distressed sales in many markets

The foreclosure crisis threatens the housing recovery

Immigration and extent of long-term doubling up of households bring uncertainty to long-run new home demand outlook

Awaiting Census 2010 release to get clearer picture of current population, households, headship rates, and vacancies