Making Sense of the Housing Recovery John V. Duca * Associate Director of Research and Vice President Federal Reserve Bank of Dallas Adjunct Professor Southern Methodist University * I thank Camden Cornwell for excellent research assistance. The views expressed are solely those of the author and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System. Any errors are my own.
Some Relevant Articles (John V. Duca, Federal Reserve Bank of Dallas and SMU) The Long-Awaited Housing Recovery (2014 Dallas Fed Annual Report Essay) http://www.dallasfed.org/microsites/fed/reports/2014/index.cfm The Subprime Crisis (Federal Reserve History Gateway Essay, Dec. 2013) http://www.federalreservehistory.org/events/detailview/55 When Will the U.S. Housing Market Stabilize? (Dallas Fed Economic Letter, August 2011, John Duca, David Luttrell, and Anthony Murphy) http://www.dallasfed.org/assets/documents/research/eclett/2011/el1108.pdf Housing Markets and the Financial Crisis of 2007-09: Lessons for the Future (Journal of Financial Stability 6, John Duca, John Muellbauer and Anthony Murphy, December 2010). http://www.sciencedirect.com/science/journal/15723089 House Prices and Credit Constraints: Making Sense of the U.S. Experience (Economic Journal 121, John Duca, John Muellbauer and Anthony Murphy, May 2011). http://onlinelibrary.wiley.com/doi/10.1111/j.1468-0297.2011.02424.x/pdf The Rise and Fall of Subprime Mortgages (Dallas Fed Economic Letter, Nov. 2007, Danielle DiMartino and John Duca): http://www.dallasfed.org/assets/documents/research/eclett/2007/el0712.pdf Early Signs of Home Overvaluation Emerging (Dallas Fed Southwest Economy, Spring 2004, John Duca): http://www.dallasfed.org/assets/documents/research/swe/2004/swe0402b.pdf
The Housing Boom and Bust Large run-up and decline in house prices that sparked a surge in and over-building of homes This largely stemmed from an easing of credit standards, reflected in a rise in loan-to-value ratios on mortgages for first time buyers Which later declined when subprime losses mounted and which was only partially cushioned by an expansion of FHA lending
U.S. house prices boom, bust and rebound Index, 1991:Q1 = 100 300 CoreLogic House Price Index 250 200 150 FHFA House Price Index 100 50 Boom +100% +67% 0 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Author's calculations using data from Federal Housing Finance Agency and Haver seasonal adjustments of CoreLogic data.
U.S. house prices boom, bust and rebound Index, 1991:Q1 = 100 300 CoreLogic House Price Index 250 200 150 FHFA House Price Index 100 50 Bust -31% -20% 0 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Author's calculations using data from Federal Housing Finance Agency and Haver seasonal adjustments of CoreLogic data.
U.S. house prices boom, bust and rebound Index, 1991:Q1 = 100 300 CoreLogic House Price Index 250 200 150 FHFA House Price Index 100 50 Rebound +26% +18% 0 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Author's calculations using data from Federal Housing Finance Agency and Haver seasonal adjustments of CoreLogic data.
The Housing Boom and Bust Large run-up and decline in house prices that sparked a surge in and over-building of homes This largely stemmed from an easing of credit standards, reflected in a rise in loan-to-value ratios on mortgages for first time buyers Which later declined when subprime losses mounted and which was only partially cushioned by an expansion of FHA lending
Single-family home construction peaks, plunges, picks up, pauses, picks up again Billions of 2009 dollars Millions of units 500 2.00 450 400 350 300 250 200 Real single-family construction 1.75 1.50 1.25 1.00 (Q4) 150 100 50 Single-family building permits 0.75 (Jan.) 0.50 0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Bureau of Economic Analysis and U.S. Census Bureau, with Haver seasonal adjustments. 0.25
Single-family home construction peaks, plunges, picks up, pauses, picks up again Billions of 2009 dollars Millions of units 500 2.00 450 400 350 300 250 200 Real single-family construction 1.75 1.50 1.25 1.00 (Q4) 150 100 50 Single-family building permits 0.75 (Jan.) 0.50 0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Bureau of Economic Analysis and U.S. Census Bureau, with Haver seasonal adjustments. 0.25
Single-family home construction peaks, plunges, picks up, pauses, picks up again Billions of 2009 dollars Millions of units 500 2.00 450 400 350 300 250 200 Real single-family construction 1.75 1.50 1.25 1.00 (Q4) 150 100 50 Single-family building permits 0.75 (Jan.) 0.50 0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Bureau of Economic Analysis and U.S. Census Bureau, with Haver seasonal adjustments. 0.25
Single-family home construction peaks, plunges, picks up, pauses, picks up again Billions of 2009 dollars Millions of units 500 2.00 450 1.75 400 350 300 250 200 Real single-family construction Harsh winter 1.50 1.25 1.00 (Q4) 150 100 50 Single-family building permits 0.75 (Jan.) 0.50 0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Bureau of Economic Analysis and U.S. Census Bureau, with Haver seasonal adjustments. 0.25
The Housing Boom and Bust Large run-up and decline in house prices that sparked a surge in and over-building of homes This largely stemmed from an easing of credit standards, reflected in a rise in loan-to-value ratios on mortgages for first time buyers Which later declined when subprime losses mounted and which was only partially cushioned by an expansion of FHA lending
Median LTV Ratios for 1st-time Homebuyers Using Private Mortgages Misses 100% p Cushioning Effect of 2007 Change to Gov't Insured FHA/VA Mortgages % of home purchase price 95% 90% 85% 80% median LTV ratio 1st-time home-buyers, non-government loans 75% 70% 84 88 92 96 00 04 08 12 Sources: LTV 1st-time home buyers from American Housing Survey and authors' calculations.
Median LTV Ratios for 1st-time Homebuyers Using Private Mortgages Misses % of home purchase price 100% 95% p Cushioning Effect of 2007 Change to Gov't Insured FHA/VA Mortgages median LTV ratio 1st-time home-buyers, all mortgages (including FHA) 90% 85% 80% median LTV ratio 1st-time home-buyers, non-government loans loan size limts raised on FHA/VA mortgages to cushion tighter credit standards on private mortgages 75% 70% 84 88 92 96 00 04 08 12 Sources: LTV 1st-time home buyers from American Housing Survey and authors' calculations.
100% 95% Median LTV Ratios for 1st-time Homebuyers Reflect Mortgage Innovations, % of home purchase price p Regulations, and Federal Agency Interventions median LTV ratio 1st-time home-buyers, all mortgages (including FHA) 90% 85% 80% loan size limts raised on FHA/VA mortgages to cushion tighter credit standards on private mortgages 75% 70% 84 88 92 96 00 04 08 12 Sources: LTV 1st-time home buyers from American Housing Survey and authors' calculations.
100% 95% Median LTV Ratios for 1st-time Homebuyers Reflect Mortgage Innovations, % of home purchase price p Regulations, and Federal Agency Interventions median LTV ratio 1st-time home-buyers, all mortgages (including FHA) 90% 85% 80% Saving/Loan bailout and Basel 1 GSE affordable housing goals raised Innovations and regulations foster subprime boom loan size limts raised on FHA/VA mortgages to cushion tighter credit standards on private mortgages 75% 70% 84 88 92 96 00 04 08 12 Sources: LTV 1st-time home buyers from American Housing Survey and authors' calculations.
Outline of Comments on Current and Future Housing I. Is the national housing recovery for real? Affordability, price, inventory patterns imply yes. But credit standards and income not fully back. II. What accounts for regional patterns? Differences in housing supply and labor markets. III. What s next? The pace of recovery will depend not only on future mortgage interest rates and labor market conditions, but also on how regulation, mortgage credit standards, and living arrangements evolve. Homeownership unlikely to return to subprime boom highs; in long-run may see something like early 1990s homeownership and renting patterns.
I. Is the national housing recovery for real? Prices and construction in recovery from the housing/subprime bust, winter pause 2013-2014 a hiccup Inventory conditions signal recovery House prices in line with rents, past appreciation, interest rates, and income Mortgage foreclosure rates returning toward normal
Lower inventories consistent with house price appreciation Months of supply** 2 3 4 5 Inventory low 6 7 8 Inventory high 9 Supply of single-family homes 10 11 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 *Year-over-year rate of change, lagged one quarter **Three-quarter moving average NOTE: The inflation-adjuste d house price appreciation series is lagged by two quarters to more clearly align the two series. SOURCES: Federal Housing Finance Agency; Freddie Mac; Bureau of Economic Analysis; National Association of Realtors; and author's calculations. 12
Lower inventories consistent with house House price change* (percent) 16 12 price appreciation Real FHFA house prices Months of supply** 2 3 8 4 0-4 -8 4 5 6 7 8 Inventory low Inventory high -12-16 -20 Supply of single-family homes 9 10 11-24 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 *Year-over-year rate of change, lagged one quarter **Three-quarter moving average NOTE: The inflation-adjuste d house price appreciation series is lagged by two quarters to more clearly align the two series. SOURCES: Federal Housing Finance Agency; Freddie Mac; Bureau of Economic Analysis; National Association of Realtors; and author's calculations. 12
Index, 1997:Q4 = 100 150 House price-to-rent ratio in line with mortgage interest rates 140 130 120 110 House price-to-rent ratio 100 90 80 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 SOURCES: Federal Housing Finance Agency; Federal Reserve Board; Bureau of Labor Statistics; and author's calculations.
Affordability returns to normal (Share of homes sold that are affordable to median-income family) Percent 90 80 U.S. Housing Opportunity Index 70 60 50 40 30 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 NOTE: The Housing Opportunity Index assumes that the family spends 28 percent of its gross income on a 30-year, fixed-rate mortgage with a 10 percent down payment. SOURCES: National Association of Home Builders and Wells Fargo.
The Rate of Newly Initiated Foreclosures Resumes Falling Percent, SA 2.5 Percent, SA 5 2.0 1.5 Share of Subprime Mortgages: Foreclosures Started 4 3 2 1.0 0.5 0.0 Share of All Mortgages: Foreclosures Started Share of Conventional (Prime) Mortgages: Foreclosures Started 2014 Q3 '98 '00 '02 '04 '06 '08 '10 '12 '14 1 0-1 Source: Mortgage Bankers Association.
II. What accounts for regional patterns? Where housing supply is more sensitive to house prices bigger swings in construction than in prices: Northeast vs. South Large metro areas Why is the housing recovery stronger in Texas? Partly reflects an energy boom Inventories tight Land more affordable and a stronger job market Single-family building shifts more in land-rich South House prices more volatile
Thousands* 900 Single-family permits swing more in land-plentiful South than in Northeast 800 700 600 South 500 400 300 200 Northeast 100 0 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 *Seasonally adjusted, annualized rate SOURCE: Census Bureau, with Haver seasonal adjustments.
Single-family home prices more volatile in the Northeast than in the South Median sales price (thousands of dollars) 300 Northeast 250 200 150 South 100 50 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCE: National Association of Realtors, with Haver seasonal adjustments.
House price-to-rent ratios rise and fall more in major metros where low supply sensitivity cushions demand swings less Nominal price-to-rent ratio (1997:Q4 = 100) 200 180 Metros with low sensitivity of supply 160 140 120 100 80 Metros with medium to high sensitivity of supply 60 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Federal Housing Finance Agency, Bureau of Labor Statistics, "The Geographic Determinants of Housing Supply," by Albert Saiz, Quarterly Journal of Economics, vol. 125, no. 3, 2010, pp. 1253-96; author's calculation.
Outside the Washington DC Area, Unemployment Lower in Energy, Farm, and Lower Regulation/Tax States Unemp. rate < 4.9% 5.6% U 6.9% 5.0% U 5.5% 7.0% U 7.2%
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 U.S. 63% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% New York 42% San Fran. 10% Atlanta 75% Dallas 65% Houston 66% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 2006:q4 U.S. 63% 42% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% 2% New York 42% 5% San Fran. 10% 8% Atlanta 75% 68% Dallas 65% 62% Houston 66% 56% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 2006:q4 2014:q2 Home Price Change 06:q4-14:q2 Jun. 2014 Unemployment Rate (SA) U.S. 63% 42% 63% -8% 6.1% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% 2% 18% -17% 7.4% New York 42% 5% 23% -15% 6.6% San Fran. 10% 8% 11% +27% 5.2% Atlanta 75% 68% 71% -5% 7.6% Dallas 65% 62% 56% +21% 5.4% Houston 66% 56% 56% +38% 5.4% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 2006:q4 2014:q2 Home Price Change 06:q4-14:q2 Jun. 2014 Unemployment Rate (SA) U.S. 63% 42% 63% -8% 6.1% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% 2% 18% -17% 7.4% New York 42% 5% 23% -15% 6.6% San Fran. 10% 8% 11% +27% 5.2% Atlanta 75% 68% 71% -5% 7.6% Dallas 65% 62% 56% +21% 5.4% Houston 66% 56% 56% +38% 5.4% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 2006:q4 2014:q2 Home Price Change 06:q4-14:q2 Jun. 2014 Unemployment Rate (SA) U.S. 63% 42% 63% -8% 6.1% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% 2% 18% -17% 7.4% New York 42% 5% 23% -15% 6.6% San Fran. 10% 8% 11% +27% 5.2% Atlanta 75% 68% 71% -5% 7.6% Dallas 65% 62% 56% +21% 5.4% Houston 66% 56% 56% +38% 5.4% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 2006:q4 2014:q2 Home Price Change 06:q4-14:q2 Jun. 2014 Unemployment Rate (SA) U.S. 63% 42% 63% -8% 6.1% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% 2% 18% -17% 7.4% New York 42% 5% 23% -15% 6.6% San Fran. 10% 8% 11% +27% 5.2% Atlanta 75% 68% 71% -5% 7.6% Dallas 65% 62% 56% +21% 5.4% Houston 66% 56% 56% +38% 5.4% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
Metro house price changes since 2006 reflect affordability and unemployment 2000:q1 2006:q4 2014:q2 Home Price Change 06:q4-14:q2 Jun. 2014 Unemployment Rate (SA) U.S. 63% 42% 63% -8% 6.1% Pacific and Atlantic Coastal metros Non- Atlantic Southern Metros LA 40% 2% 18% -17% 7.4% New York 42% 5% 23% -15% 6.6% San Fran. 10% 8% 11% +27% 5.2% Atlanta 75% 68% 71% -5% 7.6% Dallas 65% 62% 56% +21% 5.4% Houston 66% 56% 56% +38% 5.4% NOTE: The HOI is the percent of homes sold that are affordable to families earning the median income of that area, using a 30-year prime mortgage with 10 percent down, and the resulting mortgage payments are no higher than 28% of median income. SOURCES: National Association of Home Builders and Wells Fargo Housing Opportunity Index (HOI); and FHFA.
III. What s next? Unusual financial factors Banks and regulation limits loans for land development amid reports of lot shortages: Limited new construction, amid rising prices Some areas (TX) report construction worker shortages Homebuyers face tougher credit standards: Some justifiable, help ensure credit worthiness Some unnecessary from cumbersome regulation DFA rule-writing has allayed some uncertainty Uncertainty from possible reform of Fannie & Freddie Harder to borrow home equity to fund college for students
III. What s next? Unusual living and labor market patterns Weak labor market recovery through 2013 delays household formation among young more boomerang kids, later marriage, and lower birth rate limits numbers of new renters and homeowners Weak job and income growth through 2013, high student debt, and tighter credit standards lower homeownership rates especially for young. Shift to renting and to multi-family construction. Signs of a national pick-up in hiring and economic growth are an upside risk could help household formation recover and many qualify for mortgages
Household formation among young recovering some; but share of adults living with parents up from 1970s Percent heading own household 52 Age 25-34 household formation rate (left axis) 50 Percent of adults living with parents 16 14 48 12 46 10 44 8 42 Overall share of adults living with parents (right axis) 6 40 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 SOURCES: Census, author's calculation using the IPUM-CPS (Integrated Public Use Microdata Series-Current Population Survey) data set, and When Will the Kids Ever Move Out? by John V. Duca, December 2014, manuscript. 4
The share of adults living with their parents trends with poverty among non-elderly adults Percent of adults living with parents 16 Percent of adults (18-64) living in poverty 16 14 12 Age 18-64 poverty rate (right axis) 14 12 10 10 8 8 6 Overall share of adults living with parents (left axis) 6 4 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 4 SOURCES: Census, author's calculation using the IPUM-CPS (Integrated Public Use Microdata Series-Current Population Survey) data set, and When Will the Kids Ever Move Out? by John V. Duca, December 2014, manuscript.
III. What s next? Unusual living and labor market patterns Weak labor market recovery through 2013 delays household formation among young more boomerang kids, later marriage, and lower birth rate limits numbers of new renters and homeowners Weak job and income growth through 2013, high student debt, and tighter credit standards lower homeownership rates especially for young. Shift to renting and to multi-family construction. Signs of a national pick-up in hiring and economic growth are an upside risk could help household formation recover and many qualify for mortgages
Rise and fall of homeownership rates very pronounced among younger families Percent of households 72 70 68 66 64 62 All ages (left axis) 60 1982 1986 1990 1994 1998 2002 2006 2010 SOURCES: Census Bureau and author's calculations of adjustments for changes in decennial census-related survey procedures to make data more consistent over time.
Rise and fall of homeownership rates very pronounced among younger families Percent of households 72 44 70 42 68 40 66 38 64 36 62 All ages (left axis) Ages 35-44 (left axis) 34 60 1982 1986 1990 1994 1998 2002 2006 2010 SOURCES: Census Bureau and author's calculations of adjustments for changes in decennial census-related survey procedures to make data more consistent over time. 32
Rise and fall of homeownership rates very pronounced among younger families Percent of households 72 Percent of households 44 70 Under age 35 (right axis) 42 68 40 66 38 64 36 62 All ages (left axis) Ages 35-44 (left axis) 34 60 1982 1986 1990 1994 1998 2002 2006 2010 SOURCES: Census Bureau and author's calculations of adjustments for changes in decennial census-related survey procedures to make data more consistent over time. 32
Shift to renting: construction recovery soft for singlefamily, stronger for multi-family, incomplete overall Thousands of Units, SAAR 2400 2000 1600 1200 Single-family permits 800 400 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 SOURCES: National Bureau of Economic Research and the Census Bureau.
Shift to renting: construction recovery soft for singlefamily, stronger for multi-family, incomplete overall Thousands of Units, SAAR 2400 2000 1600 1200 Single-family permits 800 400 Multi-family permits 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 SOURCES: National Bureau of Economic Research and the Census Bureau.
Shift to renting: construction recovery soft for singlefamily, stronger for multi-family, incomplete overall Thousands of Units, SAAR 2400 2000 Total permits 1600 1200 Single-family permits 800 400 Multi-family permits 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 SOURCES: National Bureau of Economic Research and the Census Bureau.
Total residential construction peaks, plunges and picks up Millions of units Billions of 2009 dollars 2.50 900 2.25 2.00 1.75 Real residential construction 800 700 600 1.50 1.25 Q4 500 1.00 0.75 Residential building permits Feb 400 300 0.50 200 0.25 100 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Bureau of Economic Analysis and U.S. Census Bureau, with Haver seasonal adjustments.
III. What s next? Unusual living and labor patterns Weak labor recovery through 2013 delays household formation among young more boomerang kids, later marriage, and lower birth rate Limits numbers of new renters and homeowners Weak job and income growth through 2013, high student debt, and tighter credit standards lower homeownership rates especially for young. Shift to renting and to multi-family construction. Further economic recovery after 2013 could help household formation recover, and enable more young to rent or more qualify for mortgages.
III. What s next? Some Other Aspects of the Housing Recovery Fall in oil prices will shift economic growth toward non-energy states, helping housing in the Midwest, Pacific, Northeast, South Atlantic, and mid-south. Fall in homeownership, especially for the young and early middle age groups may be with us for a while. Income critical. Poor income growth a factor hurting home-buying and household formation. Income growth starting to pick up mainly from hours and employment rising than from much nominal wage growth. Further housing recovery: mainly from better income growth. Housing turnover could be low & home improvement activity high: (+) Lock-in of low fixed mortgage rates may encourage fix-ups than trade-ups (+) Housing stock old, little built during the bust and weak housing recovery (-) Cash-out refinancings more costly, so funding from withdrawing home equity will mainly come from home equity lines of credit (HELOCs)
Conclusion Better income growth will likely foster a further recovery in housing after the effects of a harsh winter fade. Any uncertainty is more about the pace than the sustainability of the housing recovery, centering on: the impact of evolving credit standards and regulations the path of mortgage rates, possible Fannie/Freddie reform evolving living patterns of young adults how labor markets recover in terms of jobs and income Recent job growth and the broadening of the economic recovery is encouraging for both housing and the overall economy.
Back-up slides
U.S. house prices boom, bust and rebound Index, 1991:Q1 = 100 300 CoreLogic House Price Index 250 200 FHFA House Price Index 150 100 50 Boom +100% +67% Bust -31% -20% Rebound +20% +15% 0 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 SOURCES: Author's calculations using data from Federal Housing Finance Agency and Haver seasonal adjustments of CoreLogic data.
Total residential construction peaks, plunges and picks up Millions of units Billions of 2009 dollars 2.50 900 2.25 2.00 1.75 Real residential construction 800 700 600 1.50 1.25 Q4 500 1.00 0.75 Residential building permits Feb 400 300 0.50 200 0.25 100 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Bureau of Economic Analysis and U.S. Census Bureau, with Haver seasonal adjustments.
Index, 1997:Q4 = 100 150 House price-to-rent ratio in line with mortgage interest rates Percent 18 140 16 130 120 110 100 90 80 70 60 House price-to-rent ratio After-tax mortgage costs house price appreciation 14 12 10 8 6 4 2 50 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 SOURCES: Federal Housing Finance Agency; Federal Reserve Board; Bureau of Labor Statistics; and author's calculations. 0
Supply conditions affect house price response to higher demand Price S Price P 1 1 S P 0 0 P 1 P 0 0 1 Q 0 Q 1 D 0 D 1 Quantity Q 0 Q 1 D 0 D 1 Quantity Low Supply Sensitive Areas (Northeast, Pacific) Medium- to High Supply Sensitive Areas (South ex. Florida)
House price-to-rent ratios rise and fall more in major metros where low supply sensitivity cushions demand swings less Nominal price-to-rent ratio (1997:Q4 = 100) 200 180 Metros with low sensitivity of supply 160 140 120 100 80 Metros with medium to high sensitivity of supply 60 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Federal Housing Finance Agency, Bureau of Labor Statistics, "The Geographic Determinants of Housing Supply," by Albert Saiz, Quarterly Jounral of Economics, vol. 125, no. 3, 2010, pp. 1253-96; author's calculation.
160 150 140 130 Outside of energy booms and busts, Dallas price-to-rent ratios near those of metros with medium to high sensitivity of supply Nominal price-to-rent ratio (1997:Q4 = 100) 120 110 100 Houston Dallas- Fort Worth 90 80 Metros with medium to high sensitivity of supply 70 60 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Federal Housing Finance Agency, Bureau of Labor Statistics, "The Geographic Determinants of Housing Supply," by Albert Saiz, Quarterly Journal of Economics, vol. 125, no. 3, 2010, pp. 1253-96; author's calculation.
160 Outside of energy booms and busts, Dallas price-to-rent ratios near those of metros with medium to high sensitivity of supply Nominal price-to-rent ratio (1997:Q4 = 100) 150 140 Oil boom Oil bust Mini energy boom 130 120 110 100 Houston Dallas- Fort Worth 90 80 Metros with medium to high sensitivity of supply 70 60 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 SOURCES: Federal Housing Finance Agency, Bureau of Labor Statistics, "The Geographic Determinants of Housing Supply," by Albert Saiz, Quarterly Journal of Economics, vol. 125, no. 3, 2010, pp. 1253-96; author's calculation.
90 U.S. Housing Affordability Near Normal, Dallas seems 'Pricey' (Share of Homes Sold That Are Affordable to Median-Income Family) Percent 80 Houston San Antonio 70 60 DFW U.S. 50 40 El Paso 30 20 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 NOTE: The HOI assumes that the family spends 28 percent of its gross income on a 30-year, fixed-rate mortgage with a 10 percent down payment. SOURCES: National Association of Home Builders and Wells Fargo.
Percent 90 Housing affordability normal for U.S., San Antonio, El Paso (Share of Homes Sold That Are Affordable to Median-Income Family) 80 San Antonio 70 60 U.S. 50 40 El Paso 30 20 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 NOTE: The HOI assumes that the family spends 28 percent of its gross income on a 30-year, fixed-rate mortgage with a 10 percent down payment. SOURCES: National Association of Home Builders and Wells Fargo.
Percent 90 U.S. Housing Affordability Normal, Dallas/Houston 'Pricey? (Share of Homes Sold That Are Affordable to Median-Income Family) 80 Houston 70 60 DFW U.S. 50 40 30 20 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 NOTE: The HOI assumes that the family spends 28 percent of its gross income on a 30-year, fixed-rate mortgage with a 10 percent down payment. SOURCES: National Association of Home Builders and Wells Fargo.
III. What s next? Unusual factors that will affect the recovery s pace Loan supply for home builder s and home-buyers affected by new regulations, restrains overall level of and affects the composition of home construction Fed tapering, eventual normalization of interest rates The recovery of low household formation and homeownership rates among young, possible longlasting upshift in adults living with their parents Labor market recovery, not just jobs also income
Overall household formation sags during Households/population (percent) 52 Age 25-34 household formation rate the Great Recession 50 Overall household formation rate 48 46 44 Upward trend from the aging of the population and evolving family structure 42 40 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 SOURCE: Author's calculations using the IPUM-CPS (Integrated Public Use Microdata Series-Current Population Survey) data set.
Percent 30 Unemployment rates more elevated among the young 25 20 Ages 16-19 15 Ages 20-24 10 5 Ages 25+ 0 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 SOURCE: Bureau of Labor Statistics.
Rise and fall of homeownership rates very Percent of households 72 pronounced among younger families Percent of households 44 70 Under age 35 (right axis) 42 68 40 66 64 62 60 All ages (left axis) Change homeownership rates Rise: 1994- Fall: 2004- Ages 2004 2012 all +5.0-3.8 <35 +5.8-6.3 35-44 +4.7-8.3 45-54 +2.0-5.8 55-64 +2.4-5.2 65+ +3.6-0.4 Ages 35-44 (left axis) 1982 1986 1990 1994 1998 2002 2006 2010 SOURCES: Census Bureau and author's calculations of adjustments for changes in decennial census-related survey procedures to make data more consistent over time. 38 36 34 32
Household formation among young recovering; share of adults living with parents up from 1970s Percent heading own household 52 50 Age 25-34 household formation rate (left axis) Percent of adults living with parents 16 14 48 12 46 10 44 8 42 40 Overall share of adults living with parents (right axis) 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 6 4 SOURCE: Author's calculation using the IPUM-CPS (Integrated Public Use Microdata Series-Current Population Survey) data set.
The share of adults living with their parents trends with poverty among non-elderly adults Percent of adults living with parents 16 Percent of adults (18-64) living in poverty 16 14 12 Age 18-64 poverty rate (right axis) 14 12 10 10 8 8 6 Overall share of adults living with parents (left axis) 6 4 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 4 SOURCES: Census and author's calculation using the IPUM-CPS (Integrated Public Use Microdata Series-Current Population Survey) data set.