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 2011
1

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 2011
Idaho Statesman Briefing 5/10/2011
2

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 level
5

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

Immigration at state or local level means “out of area”
7

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

Optimistic!

11

Investment Demand Surged

Investment:
1.4 Mil+

Trend

Scrappage

12


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?

14

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

17

Can’t Lose on Housing ………

Where did this
money go?

18

0.00
100.00
150.00
200.00
250.00

50.00
January 1987
January 1988
January 1989
January 1990
January 1991
January 1992
January 1993
January 1994
January 1995
January 1996
January 1997

Source: http://www.standardandpoors.com/
January 1998
January 1999
January 2000
Composite 10

January 2001
January 2002

January 2003
January 2004
January 2005
January 2006
S&P/Case-Shiller Home Price Indices:

January 2007
January 2008
January 2009
January 2010
January 2011
What goes up, must come down …

19

Housing Affordability Recovering
80.0
NAHB/Wells Fargo Housing Opportunity Index: % of Houses Sold
Affordable to Median Income Household
75.0

70.0

65.0

60.0

55.0

50.0

45.0

40.0

35.0

30.0

20

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

21

Creative Financing: Force refinance
of upside down mortgages

22

Creative Financing: Uncreative Foreclosure

23

0
100
200
300
400
500
600
99:Q3
99:Q4
00:Q1
00:Q2
00:Q3
00:Q4
01:Q1
01:Q2
01:Q3
01:Q4
02:Q1
New Supply

02:Q2
02:Q3
02:Q4
03:Q1
03:Q2
03:Q3
03:Q4
04:Q1
04:Q2
04:Q3
04:Q4
05:Q1
05:Q2
05:Q3

Source:http://data.newyorkfed.org/creditconditions/
05:Q4
06:Q1
06:Q2
06:Q3
06:Q4
US Foreclosures in Thousands

07:Q1
07:Q2

07:Q3
07:Q4
08:Q1
08:Q2
08:Q3
08:Q4
09:Q1
09:Q2
09:Q3
09:Q4
10:Q1
10:Q2
10:Q3
10:Q4
11:Q1
Foreclosures = Negative Demand =

24

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
Idaho Population Change & Housing Permits

22,000
Our own
52,000
investment
17,000
demand
42,000

32,000 12,000
Population Change

Housing Permits
22,000
7,000

12,000

2,000

2,000

(8,000) -3,000

Population Change Housing Permits

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


Idaho among the worst in foreclosures

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

30

Monthly Idaho Building Permits:
Far from out of the woods
Jan. Feb. Mar. Apr. May June July Aug. Sep. Oct. Nov. Dec. Total
2005 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
2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006 2006
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
2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007 2007
Total Units 819 828 1,335 947 1,350 983 1,007 839 668 645 578 601 10,600
2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008 2008
Total Units 366 454 622 643 608 781 488 453 446 341 237 240 5,679
2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009
Total Units 430 164 254 364 342 444 506 528 404 327 308 231 4,302
2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010
Total Units 286 271 444 481 327 408 253 213 247 241 390 159 3,720
2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011 2011
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

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