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JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 www.jchs.harvard.edu A Preview.

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Presentation on theme: "JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 www.jchs.harvard.edu A Preview."— Presentation transcript:

1 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright A Preview of the State of the Nation’s Housing 2007 Eric Belsky NAHB Construction Forecast Conference Washington, DC April 26, 2007

2 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright The Homebuilding Correction

3 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 The Recipe for a Correction low interest rates and tight inventories spark unprecedented price appreciation 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

4 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 With Completions Slower to Respond Than Sales and Starts... 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

5 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 … Unsold Inventory Rose Significantly Source: US Census Bureau and the National Association of Realtors®. Months’ Supply of Single-Family Homes For Sale

6 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 House Prices Have Only Begun to Correct Nominal Median House Price Source: National Association of Realtors®.

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

8 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government 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 Top 75 Homebuilding Markets Notes: The top 75 markets are those with the highest permitting levels in Degree of overbuilding is measured using each market’s per-capita level of single family permitting as a percent of the median level 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 All Other Markets

9 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 After Contributing Significantly to the Economy, Housing Investment Became a Drag on Growth in 2006 Note: Annualized changes from prior quarter. Sources: Bureau of Economic Analysis, National Income and Product Accounts, Table

10 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 Despite the Housing Downturn, Home Equity Cashed Out Remained at Peak Levels, Bolstering Wealth Effects 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

11 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 After Years of Climbing, the Single-Family Vacancy Rate Has Leveled Off and Multifamily Markets Have Tightened Source: US Census Bureau, Housing Vacancy Survey. Number of Units in Structure Percent Vacant

12 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 And Apartment Values Once Again Are Rising in Line with Revenues Source: National Council of Real Estate Investment Fiduciaries. Annual Percent Change

13 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright The Home Building Outlook

14 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 The Recent Run-up in Vacancies is More Modest than at the Beginning of the Downturn, But May Continue 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 Baseline years for 2006 are Source: JCHS tabulations of US Census Bureau, Housing Vacancy Survey data.

15 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 All Types of Non-Prime Lending Have Surged Share of Total Mortgage Originations Source: Inside Mortgage Finance, Mortgage Market Statistical Annual.

16 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 While Troubled Prime Loans are Holding Steady, Troubled Subprime Loans are Increasing Source: Mortgage Bankers Association, National Delinquency Survey.

17 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 As Affordability Mortgage Products Gained in Popularity, Their Delinquency Rate Rose Sharply Share of Originations60+ Day Deliquency Rate Source: First American LoanPerformance. Note: Affordability products include interest-only and negative-amortization loans

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

19 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright Remodeling Market Activity

20 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University 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 Quarterly Retail Sales of Building Materials and Supply Dealers (Seasonally adjusted, billions of 2005 dollars) Remodeling Market Index Existing Home Sales Quarterly (Millions of units, annual rate) Percent Change Year-Over-Year

21 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 Beware Price Declines: House Price Appreciation is Strongly Associated with Remodeling Spend House Price Appreciation Under 50%50-100%Over 100% 1995 House Value (Thousands) Under $100 1,1101,5002,270 $ ,8002,4804,020 $ ,0302,9704,500 $ ,5803,1906,790 $300 or More 2,9103,7309,790 All Homes 1,5202,0903,980 Source: JCHS tabulations of the 1995 and 2005 AHS. Average spending in 2005

22 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 Remodeling Generally Lags Changes in Homebuilding

23 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 The Remodeling Market Was Less Volatile Than New Construction During Last Housing Market Correction Source: US Census Bureau.

24 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 Replacements Were Far Less Volatile Than Discretionary Additions and Alterations in the Last Cycle Source: US Census Bureau, Residential Improvements and Repairs Statistics (C-50)

25 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright Demographic Drivers

26 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright Immigrants and Their Children Are Adding Dramatically to Housing Demand Source: JCHS tabulations of the 1970 and 2005 Current Population Surveys. Note: Second generation refers to native-born children of immigrants.

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

28 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University 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 Source: US Department of Housing and Urban Development.

29 JOINT CENTER FOR HOUSING STUDIES Graduate School of Design | Kennedy School of Government Harvard University Copyright 2006 Long-Term Outlook Still see about 2 more million households formed in than (12.6 v million) Out past the turmoil, second home demand should strengthen – aging of boomers all else equal alone should lift second demand by 1 million 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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