housing market 101

Housing Market 101

Brian Greber, Director

Center for Business Research &

Economic Development

College of Business & Economics

Boise State University

Idaho Statesman Briefing 5/10/2011 © Brian J. Greber 20111

INTRODUCTION• Brian Greber, Ph.D.

– B.S. Forestry (WVU)– M.S. (WVU), Ph.D.(VT) Resource Economics– 19 years industry/executive experience (most recently

VP Marketing & Technology in a Fortune 100 Forest Products Firm (Weyerhaeuser))

– With Boise State since November 2009– 14 years teaching, research, policy experience at

universities (VT, OSU, BSU, CTU)• Lots of public policy work at the state & federal

levels– Have own business focused on Organizational

Effectiveness– Achieved Visions™– STAR Motorcycle Safety Instructor– President of the Board of Directors of The Arc– Live in Boise – avid fitness buff and enjoy most things

outdoors– Great family – 2 kids and “lifelong best friend”

© Brian J. Greber 20112

Idaho Statesman Briefing 5/10/2011

Today

• Goals– Provide a basis for thinking through housing markets in general

– Systematically discuss the “melt down”

– Think about what will drive housing in the Treasure Valley and Idaho in the next 5 years

– Forge an on-going relationship between The Idaho Statesman and COBE/BRED

• This is not meant to be tomorrow’s story

• Focus will be national – Idaho will not correct until the national situation corrects (Idaho will lag)


3

What Happened in US Housing?

Economists Knew There was an Overbuild, They Missed the Melt Down


4

Housing Demand: The Simple Math

New Housing Demand =

Scrappage +

New Population Demand +

2nd Home/Investment Demand =

S + NPD + INV

• S in US estimated between 190-250 thousand/year. Large component multifamily and manufactured housing

• NPD and INV can be positive or negative!

• This works at national, state, or local levelIdaho Statesman Briefing 5/10/2011

© Brian J. Greber 20115


NPD =

Current (Population by Age Class * Headship Rate by Age Class) –

Prior (Population by Age Class * Headship Rate by Age Class)

Thus 2 things cause the basic new population demand to be positive; home ownership age population rises and/or headship rates increase

• This is very stable and predictable.

• Supports roughly 1.35 million units per year in US on current trend basis.


6

Population: Natural growth + Immigration


7

Immigration at state or local level means “out of area”

Population Growth Leads to Household Growth


8

Headship Rate is Key to Household Formation


9

Housing Starts: The Simple Math

New Housing Starts =

New Housing Demand -

Manufactured Home Placement

• Last step is “Split Between Single and Multi- Family”


10

The Basic Demand in US


11

Optimistic!

Investment Demand Surged

Trend

Investment:1.4 Mil+


12

Scrappage


New Housing Demand =

Scrappage +

New Population Demand +

2nd Home/Investment Demand =

S + NPD + INV

• NPD and INV can be positive or negative! Prior year’s demand becomes current years’ supply!!!!!


13

How does new population demand become negative?


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Idaho Statesman Briefing 5/10/2011 15

Keys• Unprecedented low real interest rates – lead to

• Overheated demand in single family housing– Spurred by investment demand

• Alternatives

• Tax Treatment

• View of “Can’t lose appreciation”

• Enabled a lot of “move-up activity”

– Spurred by unnatural home ownership rates

• Loose lending standards– Spurred by mortgage backed securities

– View of “No risk appreciation”

– “Creative lending” – ARMS, teaser rates, interest only loans, etc

– Competitive returns to shareholders among lenders

– Note – loose lending requires “loose borrowing standards”


16

Cheap money ….. Boosts home ownership and investment


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Can’t Lose on Housing ………


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Where did this money go?

What goes up, must come down …

0.00

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S&P/Case-Shiller Home Price Indices: Composite 10

Source: http://www.standardandpoors.com/


19

Housing Affordability Recovering

30.0

35.0

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75.0

80.0 NAHB/Wells Fargo Housing Opportunity Index: % of Houses Sold

Affordable to Median Income Household


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But supply still outstrips demand

• Upside down loans

• Lack of investment interest– Keeps surge in foreclosures and investment

liquidation

– i.e., NPD and INV weak or negative


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Creative Financing: Force refinance of upside down mortgages


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Creative Financing: Uncreative Foreclosure


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Foreclosures = Negative Demand = New Supply

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US Foreclosures in Thousands

Source:http://data.newyorkfed.org/creditconditions/


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What Caused the Collapse?• Housing Bubble

– Artificial, not real demand supported housing quantity and price appreciation.

– Investment-based saturation of housing market in “sunshine states”

• Investment stops;• Home price appreciation stops

– Investors begin to “sell off positions” – “demand became supply” as the base of existing homes for sale grew,

» Home prices fall

• Investments on a downward spiral

• Homes significant part of economic engine• Slow down in economy generates unemployment

• “Creative” Mortgages come up for refinancing– Mortgages “upside down” – house is worth less than current note, can only refinance

portion of pay-off amount.

• Unemployment, upside down mortgages lead to foreclosures– Foreclosure sales expanded the case of existing homes for sale, again “demand became

supply”

» Home ownership on a downward spiral


25

What Caused the Collapse?

• Banking Bubble– Can’t lose investments became bad debt

– Bad debt position froze ability of banks to lend, despite low interest rates

– Fear of bank solvency heightened through press, had some withdrawing their assets from the financial system

• Further hampering lending ability

• Bank Lending constraints further slowed down housing activities

– E.g., jumbo loans


26

Who was at fault?• Fed(s)

– Create banking rules

– Allowed Mortgages backed securities

– Created tax policies favoring real estate investment

• Financial Investors– Pressures on banking community to perform

• Individuals– Consumption habits

– Ill founded economic investment assumptions

• Banks– Adopting unnecessary risk positions.


27

What Now

• Stem foreclosures

• Shore up bank reserves

• Absorb excess housing stock

• Rebuild to meet demographics

• Reset relending standards

• Consumers reset borrowing standards

• Confidence in system rebuilds

• Several Year Process – but will happen


28

ID Permits vs Population Change

-3,000

2,000

7,000

12,000

17,000

22,000

(8,000)

2,000

12,000

22,000

32,000

42,000

52,000

Hou

sing

Per

mit

s

Popu

lati

on C

hang

e

Idaho Population Change & Housing Permits

Population Change Housing Permits

Source: Population US Census Bureau, Permits US HUD (huduser.org)


Our own investment demand

Idaho among the worst in foreclosures


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Source: http://www.realtytrac.com/

Monthly Idaho Building Permits: Far from out of the woods

Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Total2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005 2005

Total Units 1,082 1,354 1,792 1,762 1,894 1,895 1,806 2,328 1,942 1,684 1,443 1,174 20,156


Total Units 1,311 1,247 1,569 1,499 1,817 1,452 1,315 1,349 1,185 990 898 739 15,371


Total Units 819 828 1,335 947 1,350 983 1,007 839 668 645 578 601 10,600


Total Units 366 454 622 643 608 781 488 453 446 341 237 240 5,679


Total Units 430 164 254 364 342 444 506 528 404 327 308 231 4,302


Total Units 286 271 444 481 327 408 253 213 247 241 390 159 3,720


Total Units 157 212 229 0 0 0 0 0 0 0 0 0 598

Source: US HUD (huduser.org)


31

Keys to Idaho Housing Recovery

• National housing market recovery– Immigration spurred by housing liquidity in other states

• Influences retirement, second homes, business relocation

• Local employment strength– Drives household formation

– Ownership rates

– Stems foreclosures

• Foreclosure relief (?)

• “Devouring the Inventory Overhang”– 1+ years worth of housing activity


32

housing market 101

Documents

idaho statesman briefin

introduction brian greber

national idaho

investment brian

trendscrappage brian

householdformation brian

area brian

us housing