JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard...

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

Harvard University

Copyright 2006

www.jchs.harvard.edu

A Preview of the State of the Nation’s Housing 2007

Eric Belsky

NAHB Construction Forecast Conference Washington, DCApril 26, 2007


Harvard University

Copyright 2006


The Homebuilding Correction


Harvard University

Copyright 2006

The Recipe for a Correction

2001-2003 low interest rates and tight inventories spark unprecedented price appreciation

2004-2005 markets overheat, demand inflates (speculation, pulled forward demand) and builders meet demand

2006 markets do about face—affordability too eroded, creative finance runs out of steam, sales fall, prices soften, demand softens more as it deflates

Builders try to pull out of nose dive but too late – inventories balloon and month’s supply increases


Harvard University

Copyright 2006

With Completions Slower to Respond Than Sales and Starts . . .

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Dec-Feb05

Mar-May05

J un-Aug05

Sept-Nov05

Dec-Feb06

Mar-May06

J un-Aug06

Sept-Nov06

Dec-Feb07

Total Housing Starts Total Housing CompletionsExisting SF Home Sales New SF Home Sales

Note: Home sales include total existing home sales plus new single family home sales.

Sources: US Census Bureau, New Residential Construction and Economy.com.

Percent Change From Same Quarter of Prior Year


Harvard University

Copyright 2006

… Unsold Inventory Rose Significantly

0

1

2

3

4

5

6

7

8

9

Jan-0

6

Feb-0

6

Mar-

06

Apr-

06

May-0

6

Jun-0

6

Jul-

06

Aug-0

6

Sep-0

6

Oct

-06

Nov-0

6

Dec-

06

Jan-0

7

Feb-0

7

Existing Homes New Homes

Source: US Census Bureau and the National Association of Realtors®.

Months’ Supply of Single-Family Homes For Sale


Harvard University

Copyright 2006

House Prices Have Only Begun to Correct

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

$220,000

$240,000

Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07

Nominal Median House Price

Source: National Association of Realtors®.


Harvard University

Copyright 2006

Compounded Risks Lift the Likelihood of Price Declines

Note: Overbuilding and overheating are instances of prior three year average total permitting or price appreciation levels exceeding 2 standard deviations of the mean for the 75 largest metro areas as ranked by population in 2000. Small employment loss is under 5%, and large employment loss is over 5%.

Sources: JCHS tabulations of US Census Construction Data, Bureau of Labor Statistics’ ES 202 Employment Data, and Freddie Mac’s Conventional Mortgage Home Price Index.

Percent of Times that Various Conditions Led to Price Declines 1980-1999

0

10

20

30

40

50

60

70

80

90

100

SmallEmployment Loss

Alone

OverheatingAlone

Overheating withAny Employment

Loss

OverbuildingAlone

Overbuilding withAny Employment

Loss

LargeEmployment Loss

Alone

Overbuilding,Overheating, andAny Employment

Loss


Harvard University

Copyright 2006

Single-family Overbuilding is Now The Key Threat to House Prices and Starts And Does not Compare Favorably to the Last Major Correction

0

10

20

30

40

50

60

70

80

90

100

1984 to 86 2003 to 05

None Mild Moderate Severe ExtremeDegree of Overbuilding

Top 75 Homebuilding Markets

Notes: The top 75 markets are those with the highest permitting levels in 2005. Degree of overbuilding is measured using each market’s per-capita level of single family permitting as a percent of the median level 1980-2004. Categories of overbuilding are defined based on standard deviations above the mean, no overbuilding being less than the mean, mild 0-1, moderate 1-2, severe 2-3, and extreme more than 3.

Source: US Census Bureau, New Residential Construction.

Percent of Markets

0

10

20

30

40

50

60

70

80

90

100

1984 to 86 2003 to 05

All Other Markets


Harvard University

Copyright 2006

After Contributing Significantly to the Economy, Housing Investment Became a Drag on Growth in 2006

-2

-1

0

1

2

3

4

5

6

2004-I

2004-I I

2004-I I I

2004-I V

2005-I

2005-I I

2005-I I I

2005-I V

2006-I

2006-I I

2006-I I I

2006-I V

Contribution of Residential Fixed Income to Percent Change in Real GDP Percent change in Real Gross Domestic Product at Annual Rate

Real Percent Change

Note: Annualized changes from prior quarter.

Sources: Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.2.


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Copyright 2006

Despite the Housing Downturn, Home Equity Cashed Out Remained at Peak Levels, Bolstering Wealth Effects

0

50

100

150

200

250

300

350

400

450

500

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006(E)

Cash-Out Refinances Equity Cashed Out at Sale Net New Second Mortgage Debt

Sources: National Association of Realtors®, Freddie Mac and Federal Reserve Board.

Note: Adjusted for inflation by the Bureau of Labor Statistics' CPI-UX for All Items.

Billions of 2006 Dollars


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Copyright 2006

After Years of Climbing, the Single-Family Vacancy Rate Has Leveled Off and Multifamily Markets Have Tightened

4

5

6

7

8

9

10

11

12

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

1 2 or more 5 or more

Source: US Census Bureau, Housing Vacancy Survey.

Number of Units in Structure

Percent Vacant


Harvard University

Copyright 2006

And Apartment Values Once Again Are Rising in Linewith Revenues

-10

-5

0

5

10

15

2001 2002 2003 2004 2005 2006

Apartment Property Prices Net Operating Income

Source: National Council of Real Estate Investment Fiduciaries.

Annual Percent Change


Harvard University

Copyright 2006


The Home Building Outlook


Harvard University

Copyright 2006

The Recent Run-up in Vacancies is More Modest than at the Beginning of the 1987-91 Downturn, But May Continue

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1987 1989 1991 2006

For Sale Only For Rent Seasonal/ Occasional Use/ URE/ Other

Percent of Total Occupied Stock

Note: Recent Run-up is the current number of vacant units that exceeds the average from three prior 'baseline' years where vacancy rates remained relatively stable. Baseline years for 1987, 89, and 91 are 1978-1980. Baseline years for 2006 are 1999-2001.

Source: JCHS tabulations of US Census Bureau, Housing Vacancy Survey data.


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Copyright 2006

All Types of Non-Prime Lending Have Surged

0

10

20

30

40

50

2001 2002 2003 2004 2005

Subprime Alt A Home-Equity Loan FHA/ VA

Share of Total Mortgage Originations

Source: Inside Mortgage Finance, Mortgage Market Statistical Annual.


Harvard University

Copyright 2006

While Troubled Prime Loans are Holding Steady, Troubled Subprime Loans are Increasing

Source: Mortgage Bankers Association, National Delinquency Survey.

Loans in Foreclosure or 60+ Days Delinquent (Thousands)

200

400

600

8002

00

2Q

3

20

02

Q4

20

03

Q1

20

03

Q2

20

03

Q3

20

03

Q4

20

04

Q1

20

04

Q2

20

04

Q3

20

04

Q4

20

05

Q1

20

05

Q2

20

05

Q3

20

05

Q4

20

06

Q1

20

06

Q2

20

06

Q3

20

06

Q4

Prime Subprime


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Copyright 2006

As Affordability Mortgage Products Gained in Popularity, Their Delinquency Rate Rose Sharply

Percent

0

5

10

15

20

25

30

35

40

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

0

0.5

1

1.5

2

2.5

3

Share of Originations 60+ Day Delinquency Rate

Sh

are

of

Ori

gin

ati

on

s

60

+ D

ay D

eliq

uen

cy R

ate

Source: First American LoanPerformance.

Note: Affordability products include interest-only and negative-amortization loans.

2000 2001 2002 2003 2004 2005 2006


Harvard University

Copyright 2006

Short-Term Outlook

Even if stabilize at avg. Dec-Feb run rates, total starts will be 15 percent below 2006 (1.51 mil), single-family starts 19 percent (1.20 mil), new homes sales 12 percent (925K), and existing home sales -0.2 percent (6.5 mil)

Risks weighted to further slowing from tightening credit standards and large overhang still not worked off

Total production would need to fall to 1.65 million and starts to 1.55 million if overbuilding is about 500,000

Phoenix, Las Vegas, DC and Florida are bellwethers

Beware a recession down the road


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Copyright 2006


Remodeling Market Activity


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Copyright 2006

But by Late 2006, Remodeling Market Indicators Pointed to an Emerging Slowdown

Sources: US Department of Commerce, National Association of Home Builders, and National Association of Realtors.

Notes: Indicators are for the third quarter of each year. Retail sales are deflated by the producer price index for single-family construction materials. The Remodeling Market Index is a diffusion index where any score above 50 indicates that activity is increasing, and any score below 50 indicates activity is declining.

2004 2005 20062004-2005

2005-2006

Quarterly Retail Sales of Building Materials and Supply Dealers (Seasonally adjusted, billions of 2005 dollars)

69.8 72.7 72.2 4.3 -0.8

Remodeling Market Index 51.8 50.9 47.8 -1.7 -6.1

Existing Home Sales Quarterly (Millions of units, annual rate)

5.9 6.3 5.5 6.8 -12.7

Percent Change Year-Over-Year


Harvard University

Copyright 2006

Beware Price Declines: House Price Appreciation is Strongly Associated with Remodeling Spend

House Price Appreciation 1995-2005

Under 50% 50-100% Over 100%

1995 House Value (Thousands)

Under $100 1,110 1,500 2,270

$100-149.9 1,800 2,480 4,020

$150-199.9 2,030 2,970 4,500

$200-299.9 2,580 3,190 6,790

$300 or More 2,910 3,730 9,790

All Homes 1,520 2,090 3,980

Source: JCHS tabulations of the 1995 and 2005 AHS.

Average spending in 2005


Harvard University

Copyright 2006

Remodeling Generally Lags Changes in Homebuilding

(Four Quarter Moving Rate of Change)

-40%

-20%

0%

20%

40%

60%

80%

Single Family Construction Put in Place Remodeling All Owner-Occupied Properties


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Copyright 2006

The Remodeling Market Was Less Volatile Than New Construction During Last Housing Market Correction

Real Percent Change

-40%

-30%

-20%

-10%

0%10%

20%

30%

40%

50%

1987-1991 1991-1994

Remodeling Expenditures New Construction Spending

Source: US Census Bureau.


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Copyright 2006

Replacements Were Far Less Volatile Than Discretionary Additions and Alterations in the Last Cycle

Real Percent Change

-40%-30%-20%-10%

0%10%20%30%40%50%60%

1987-1991 1991-1993

Additions and Alterations Major Replacements

Source: US Census Bureau, Residential Improvements and Repairs Statistics (C-50)


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Copyright 2006


Immigrants and Their Children Are Adding Dramaticallyto Housing Demand

15 10 5 0 5 10 15

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Millions

Foreign-Born Second Generation All Others

Males Females

1970

15 10 5 0 5 10 15

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Millions

Males Females

2005

Source: JCHS tabulations of the 1970 and 2005 Current Population Surveys.

Note: Second generation refers to native-born children of immigrants.


Harvard University

Copyright 2006

Except for the Bottom Ten Percent, Income Gains in the Late 1990s Have Held Up Through Recent Losses

Note: Income deciles are equal tenths of households sorted by pre-tax income.Source: JCHS tabulations of 1996, 2001, and 2006 Current Population Surveys.

-10

-5

0

5

10

15

20

BottomTenth

2 3 4 5 6 7 8 9 TopTenth

Income Deciles

1995-2000 2000-2005 Net 10 Yr Change 1995-2005

Percent Change in Real Median Household Income


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Copyright 2006

But Even Fully Phased In, the New Federal Minimum Wage Would Not Cover Today's Rent on A Modest Apartment

Note: Housing wage is the hourly wage required to afford a modest two-bedroom apartment renting for the Fair Market Rent at 30% of pretax income. Income ranges are multiples of the Federal Minimum Wage at full roll out, expected in 2009.

Source: US Department of Housing and Urban Development.

Housing Wage

$7.25 - 14.49

$14.50 - 21.74

$21.75 or more


Harvard University

Copyright 2006

Long-Term Outlook

Still see about 2 more million households formed in 05-15 than 95-05 (12.6 v. 14.6 million)

Out past the turmoil, second home demand should strengthen – aging of boomers all else equal alone should lift second demand by 1 million 05-15

Aging housing and more urban teardowns should lift replacement demand

Total production should average about 1.95 per year – perhaps less the inventory that must be worked off

Affordability problems will act as drag

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