Housing and the Economy: Impacts and Forecasts 2014 Update

Housing and the Economy: Impacts and Forecasts 2014 UpdateGeoffrey J.D. Hewings, Ph.D.DirectorRegional Economics Applications Laboratory (REAL)University of IllinoisInstitute of Government and Public Affairs217.333.4740 217.244.9339 (fax)hewings@illinois.eduwww.real.illinois.edu

The assistance of Xian Fang, Esteban Lopez and Minshu Du is gratefully acknowledged

OutlineUpdate on the economy

Housing market and forecasts

Launch of a companion price index for Illinois and metro areas

In progress: Impact of foreclosures2013 HighlightsLast half of 2012 revealed positive changes in pricesSignificant increase in sales volume and sustained price recovery in 2013Resolution of foreclosure issues saw significant increase in foreclosed propertiesConsumer optimism dampened by fiscal cliff and Government shutdown in Washington and the failure of Illinois state government to address deficit Combination of enhanced inventory, historically low interest rates and accelerating costs of renting fueled the housing market in 2013Update on the economy2010 and 2012, Illinois exceeded or matched US growth ratesOnly happened twice since 1980ButThe hill to climb.State is 220,000 jobs below prior peak (November 2000)

Butneed to add considerations of: population growth since 2000decrease in labor force participation ratesLarge number in part-time who would like full-time employment THENState of Illinois Economies State probably needs to add close to: 707,000 jobs to achieve equivalent level to November 2000

RECOVERY: How long will it take?Before this recession, longest recovery was 8 years (now > 13 years since 2000)Current employment in Illinois matches that late 1990sIllinois still has 5 of 10 sectors with employment levels below those of 1990: Manufacturing, Information, Construction, Trade, Transportation & Utilities, and Financial activities

Illinois Metro AreasHow well are they doing compared to Chicago and the state?What are the forecasts?Developed monthly employment analysis and 12 month ahead employment forecastsAlso developed an Index of Leading Indicators for each MSAThe Metro Indices Compared with Chicagos Performance Bloomington Champaign Davenport Decatur Peoria Rockford Springfield KankakeeValue above line indicate growth > Chicago

Metro Area Economic Performance last 12 monthsHousing MarketHow Good were our Forecasts?

Illinois Housing Market: Prices

Illinois Housing Market: Sales

Chicago Housing Market: Prices

Chicago Housing Market: Sales

Illinois Housing Market: Supply

Illinois Housing Market: Price Stratification

Illinois Housing Market: Price Forecast 2014

Annual Sales Change by Month(month this year compared to last year)

Downward Trend of Concern?

But signs of upward trend last 2 months..Final ConcernsSignals in the economy and in the housing market continue to be noisySigns that Congress is finally accepting its responsibility to governState has made some progress on facing fiscal issues but.Firms would like to locate/expand in the state but have little faith in the states fiscal managementLaunch of the REAL IndexREAL, along with NAR publishes a median price indexProblem: price changes may not fully reflect differences in the characteristics of houses sold one month versus next monthCase-Schiller index provides perfect match by comparing same house but only available for top 20 marketsBut:Repeat sales may not fully represent mix of salesNot suitable for small Metro areasLaunch of the REAL Index (2)Median Home Sales PricesThe median is the half point between the largest and smallest value of a sample of houses.It is misleading when:Sales prices do not appreciate equally throughout the distribution (i.e. more appreciation in the lower-priced homes or in the higher-priced homes). Changes in consumption patterns for characteristics (i.e. preferences relative change for number of bathrooms, bedroom etc.)Launch of the REAL Index (3)

Launch of the REAL Index (4)

Launch of the REAL Index (5)

Launch of the REAL Index (6)

Launch of the REAL IndexStarting in January, issue two indices for Chicago and IllinoisOne based on median prices (as before)One based on housing characteristicsFor the quarterly Metro area forecasts, provide the same two price indicesAttempt to expand the number of characteristics associated with houses soldAttempt to highlight whether price appreciation is coming from different characteristics or truly represents price appreciation based on similar characteristicsLook for your feedback next yearImpact of ForeclosuresImpact of ForeclosuresExamined the impact of foreclosures on property prices in ChicagoForeclosures have negative impacts not just for the homeowner, but also on neighboring property values. REAL conducted a study to investigate the impact of foreclosures over time on nearby property values

Neighbourhood buffers.Nearby neighbourhood: 0-0.1 miles and distant neighbourhood: 0.1-0.2 miles and o.2-0.3 miles

Neighbourhood buffers.Nearby neighbourhood: 0-0.1 miles and Distant neighbourhood: 0.1-0.2 miles and 0.2-0.3 miles

Spatial Units

Division of foreclosure timeline. A indicates Auction; 1 unit indicates one quarter; + indicates after auction and - indicates before. Foreclosure Timeline

Foreclosure Impacts: Results

Foreclosure Impacts: ResultsOn average, no impacts before the auction; -2% to -1% during the two years after the auctionOne more foreclosed property can reduce nearby property values: (calculated at median housing price of $250K)In the first year: $2,100In the second year: $3,000

Impacts by Vacancy Rate QuartileForeclosure ImpactsAt current rates, expect to return to pre-recession foreclosure rates in late 2014 or 2015

Final RemarksA recent CRAINS survey revealed more renters in Chicago more favorable to buying inching up homeownership rates to 68.1% compared to 66.9% in 2012Increasing construction of multifamily units (and new construction generally) will put pressure on rental marketsConcerns focus on impacts on (1) housing affordability and (2) impact of increasing inequality on housing demand

Final Remarks (2)According to NAR, year-over-year affordability index decreased 16.1% nationwide in third quarter and 14.1% in MidwestUS now second to UK in income inequality (before taxes) and first after taxes empirical evidence accumulating that this has negative impact on long-term growth but debate is contentious

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Monthly index of leading indicators for ChicagoMonthly Employment analysis for state and Metro areasIllinois Economic Review (monthly) with employment forecasts for next 12 months46For More Information www.real.illinois.eduwww.illinoisrelator.org/marketstatsRankOct 2013Nov 2013RankChange**

1Chicago (1.37%)Chicago (1.38%)1(+0)

2Champaign-Urbana-Rantoul (0.99%)Champaign-Urbana-Rantoul (1.01%)2(+0)

3Davenport-Rock Island-Moline (0.77%)Springfield (0.55%)3(+1)

4Springfield (0.11%)Kankakee (0.22%)4(+1)

5Kankakee (-0.28%)Davenport-Rock Island-Moline (0.1%)5 (-2)

6Rockford (-0.92%)Rockford (-0.31%)6(+0)

7Metro-East (-1.15%)Bloomington-Normal (-1.02%)7(+1)

8Bloomington-Normal (-1.36%)Metro-East (-1.46%)8 (-1)

9Peoria (-2.16%)Peoria (-1.64%)9(+0)

10Decatur (-4.73%)Decatur (-3.24%)10(+0)

Sheet1

PERCENTAGE CHANGE FOR THE TOTAL NUMBER OF SALES(forecast range)AnnualIllinoisChicago13-Nov5.35%7.24%10.83%14.65%13-Dec9.88%13.36%14.60%19.76%14-Jan9.17%12.41%14.15%19.15%14-Feb13.04%17.64%18.96%25.65%14-Mar9.20%12.45%12.23%16.55%14-Apr4.62%6.25%5.94%8.04%14-May2.76%3.74%1.13%1.53%14-Jun4.77%6.46%5.24%7.09%14-Jul1.50%2.03%-2.83%-3.83%14-Aug4.05%5.48%-0.73%-0.99%14-Sep5.66%7.66%5.36%7.25%14-Oct11.29%15.27%8.47%11.46%14-Nov11.43%15.47%9.03%12.22%14-Dec9.67%13.09%8.95%12.11%