Housing, Household Tenure Choice, and the Locations We Choose

A Home for Everyone Conference 2014

Presented by: Mark J. EppliInterim Keyes Dean and Bell Chair in Real Estate

Marquette University

July 16, 2014

GDP and Jobs

The U.S. has maintained historically weak GDP growth in the 2000s at 1.83%, versus 3.25% for the period 1980-

2000 . . . .

Source: Federal Reserve of St. Louis.

. . . . which bring us to jobs . . . .

Source: St. Louis Federal Reserve.

. . . . however, the unemployment rate is not the whole story, labor force participation rates are a concern . . . .

Source: St. Louis Federal Reserve

. . . . and the U.S. labor force participation rate declines are in the young adult cohorts . . . .

Source: Vanguard’s Economic and Investment Outlook, January 2014, 16.

. . . . unemployment is not an equally distributed . . . .

Source: St. Louis Federal Reserve

GDP and employment take-aways:• U.S. GDP growth is slowly growing;• Unemployment rate declines overstate the health

of the jobs market;• Much labor force slack exists;• High school graduates struggle to find family-

supporting job; and• Without solid job growth there will not be

household growth

Wealth and Income

Net worth is back. Home prices were up 13.6% in 2013

and stocks had their best year

since 1997 with a 31.9% total return

increasing household wealth. . . .

Source: WSJ, December 10, 2013, A2.

. . . . however the net worth of U.S. families is highly concentrated . . . .

Source: Marty Hart-Landsberg, Lewis and Clark University.

. . . . Net worth of the bottom portion of the

wealth spectrum is

heavily house-wealth

dependent and 18.8% of

houses are underwater . . .

Source: Pew Research Center.

. . . . 39% of households have less than $25,000 in net worth . . . .

. . . . making a 20% house down payment is unreachable for 39% of households . . . .

Source: National Association of Realtors

. . . .which limits existing home sales . . . .

Source: National Association of Realtors

Source: Lawrence Mishel, Economic Policy Institute, April 26, 2012.

. . . . real compensation has been stagnant since 1973, making debt service payments more difficult . . . .

Wealth and income take-aways:• Net worth of U.S. households now exceeds 2007 in

real and nominal terms;• 28% of the U.S. net worth is held by the bottom

90% of the population; • 39% of households have a net worth of less than

$25,000;• Real compensation has stagnated; • Which limits housing sales and house price growth.

Interest Rates and Inflation

Mortgage interest rates remain low . . . .

Source: St. Louis Federal Reserve

. . . . due to low inflation in the U.S. Over the past 20 years inflation averaged 1.88% . . . . .

Source: Federal Reserve of St. Louis.

. . . . with ample labor, unit labor costs are well-behaved . . . .

Source: Federal Reserve of St. Louis.

. . . . and commodity prices are relatively stable. . . .

Source: Federal Reserve of St. Louis.

. . . . longer-term interest rate should remain range bound in the +/-2.54% 10-UST rate given the generally slack labor markets and continued

productivity that generate low global and U.S. inflation.

Mortgage Underwriting

Underwriting standards have not eased . . . .

Source: Wall Street Journal, March 22, 2014.

. . . . a closer look at recent tightening of underwriting standards . . . .

Source: Wall Street Journal, June 9, 2014.

. . . . more evidence of tight lending markets . . . .

Source: Federal Reserve of St. Louis.

. . . . which ultimately limits new entrants to the market . . . .

Source: Research by Shilling and Hendershott, Washington Post, March 22, 2014.

. . . . with the lock-in effect limiting new home sellers willing to list their homes for sale . . . .

Household mobility falls by 7.5 percent for every percent increase in interest rates.

. . . . however, household debt service as a percent of disposable income remains very low . . . .

Source: Federal Reserve of St. Louis.

Mortgage underwriting take aways:

• Mortgage underwriting standards tightened in 2007-2010;

• Underwriting standards have not eased much since;• Limiting new entrants to the housing market.

Single-Family Housing Market Fundamentals

Home prices are at pre-bubble levels . . . .

Source: Federal Reserve of St. Louis.

. . . . with the excess supply of homes absorbed . . . .

. . . . and a dearth of new single-family housing coming to the market . . . .

Source: Federal Reserve of St. Louis.

. . . . homeownership rates have fallen back to pre-bubble levels as well . . . .

Source: Federal Reserve of St. Louis.

. . . . household formation has significant pent up demand . . . .

Source: Joint Center for Housing Studies, State of the Nation’s Housing: 2013.

. . . . minorities and seniors will drive most all household demand growth in the coming decade . . . .

Source: Joint Center for Housing Studies, State of the Nation’s Housing: 2013.

. . . . “married couple” households have declined dramatically over time . . . .

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Percent "Other Family" and "Non-Family" Households

Source: Census and Marquette University.

. . . . the supply of multifamily starts averaged 360,000 since 1956, a level we are now reaching replacement

equilibrium rates . . . .

Source: Federal Reserve of St. Louis.

Housing market fundamentals take-aways:• Prices are at pre-bubble levels;• Market supply and demand are in equilibrium;• Pent up demand exists for new households;• However, new household formation skews toward

rental housing.

Challenges of the First-time Homebuyer

Employment growth for the first-time homebuyer’s lags . . . .

Source: St. Louis Federal Reserve

. . . .unemployment rates for high school graduates remaining high . . . .

Source: St. Louis Federal Reserve

Source: Wall Street Journal, June 14, 2014

. . . . and the average college graduate with the average student loan debt is straddled with $366 per month

(assumes a 6% rate, 10 year term)

. . . . many high school and college graduates living at with their parents. . . .

. . . . and marriage is coming later in life . . . .

Source: U.S. Census.

. . . . which leaves the housing market prospects for the first-time homebuyer challenged. . . .

Source: WSJ May 24-25, 2014, p. A2.

First-time homebuyer take-aways:• Employment growth for the 25-34 age cohorts has

been non-existent;• The high school graduate continues to struggle

with employment and real wage growth;• College graduates face of growing student loan

payments;• Leaving the first-time homebuyer market tenuous.

The owner-occupied market has both headwinds/tailwinds:Headwinds• Owning a home may no longer be the American Dream;• GDP growth and labor force participation rate concerns remain;• Stagnant wealth and income levels for most;• Tighter underwriting – higher FICO scores;• First-time homebuyers remain challenged;• Increasing house prices

Tailwinds• Single-family market fundamentals are solid• Markets are at pre-bubble levels• Markets are in equilibrium• Mortgage interest rate remain low

Housing, Household Tenure Choice, and the Locations We Choose

A Home for Everyone Conference 2014

Presented by: Mark J. EppliInterim Keyes Dean and Bell Chair in Real Estate

Marquette University

July 16, 2014