February 4, 2008
Housing Construction Developments
The nationwide falloff in residential investment activity is unfolding along various channels and to varying degrees across U.S. regions. Falling residential activity is being felt in consumer spending, manufacturing production (e.g. construction equipment, appliances, and materials), the financial sector (e.g. mortgage and development financing), real estate (sales) and, of course, in home building itself. In home building activity, slow-growing regions such as those in the Midwest may be somewhat advantaged. That is because construction activity does not comprise as large a share of total regional employment in comparison to fast-growing regions. And so, a proportionate decline in home building activity does not tend to slow the region’s overall economy as greatly.
The table below reports payroll employment for the overall construction sector in major U.S. regions and in the Seventh District. States in the West and in the South such as Nevada, Arizona, California, and Florida report construction employment as comprising 6–11 percent of the state’s total employment for the year 2006 (see column 3). In contrast, the District’s construction industry makes up 4-5 percent of total payroll jobs—a share which lies below the national average of 5.6 percent.
Click to enlarge.
The upshot of these differences is that a falloff in construction activity can be expected to be felt more keenly in those regions whose work forces are more concentrated in home building. At least this is true if construction activity declines are proportionate across regions. And if the rate of decline in construction activity were more rapid in regions outside of the Midwest, this would additionally contribute to some favorable convergence toward the Midwest pace of economic activity. By some reports, speculative home buying activity had been running very hot in many coastal states in recent years.
Data trends also indicate that the pace of recent declines in Seventh District home building activity have been on par with the U.S. Constructed square feet of residences from the McGraw-Hill Construction Dodge reports currently indicate that home-building has in fact been declining about the same as the remainder of the U.S. Since January 2006, the pace of home building has averaged declines of 25 percent year-over-year on a monthly basis in the Seventh District versus 26 percent in the overall U.S. over the same time period. Similarly, the pace of housing starts in the graphs below indicates that Seventh District declines have largely paralleled the U.S. since 2006, though the U.S. level of activity had climbed to a higher peak over the decade. Accordingly, though the construction sector covers more than residential activity alone, steeper-than-average job declines reported in the table above (column 6) are consistent with greater drops in home-building activity in the top construction-job states.
Click to enlarge.
Click to enlarge.
On the flip side, however, in many parts of the Midwest lagging general economic growth has tended to limit home buying and associated construction activity. In particular, Michigan’s construction employment peaked long ago during the fourth quarter of 2004 (see table above, column 4) and has fallen by 16 percent since then. So, too, housing starts (above) have fallen more steeply in Michigan versus both the U.S. and other District states.
But aside from Michigan’s woes, the pace of national construction employment growth (decline) has been converging (on average) with that of the Seventh District over the 2006-2007 period. The chart below illustrates the year-over-year pace of construction employment growth in the Seventh District versus the nation.
Click to enlarge.
This convergence cannot be attributed to home building activity alone because construction employment includes the nonresidential sector as well. As measured by jobs, residential building and construction make up 43 percent of the total. However, available data on commercial construction activity also indicates a pace of growth in the Seventh District that is roughly coincident with that of the nation. Consequently, the fact that the Midwest economy has a lesser share of total jobs devoted to new housing construction is likely contributing in some small measure to convergence of District employment growth with the nation’s.
To be sure, this convergence of construction employment will not spare Midwest households from financial loss and dislocation associated with a slowing national economy. As economist Leslie McGranahan demonstrates in a recent analysis, local economic conditions are one of the primary determinants of home foreclosure in addition to a state's foreclosure procedures and the degree of subprime and FHA borrowing. Accordingly, because automotive industry structuring has been weighing heavily on the Midwest economy, home foreclosure rates in Seventh District states are now running ahead of national averages (see figure below). An expected slowing of national economic growth during the first half of 2008 will continue to pressure many Midwestern homeowners who are stretching to meet their mortgage obligations.
Click to enlarge.
Note: Emily Engel and Vanessa Haleco-Meyer assisted this blog.
Posted by Testa at 10:53 AM | Comments (0)
May 29, 2007
Seventh District Housing Market Update
For several years running, the national pace of investment in housing greatly exceeded historic norms. Accordingly, housing market observers speculated that strong rates of home building and price appreciation would falloff markedly at some point in the near future. Nationally, real residential investment growth averaged 9 percent from 2003-2005; average home prices rose by 6.8 percent in 2003, 10.7 percent in 2004, and 13.1 percent in 2005.
During the first half of last year, the pace of home construction and home price appreciation finally slowed. Since then, home building activity and sales have declined sharply and, by some measures, changes in home prices are now running in negative territory. Since the fourth quarter of 2005, U.S. residential investment has been declining, averaging over 11 percent on an annualized basis. The growth of the OFHEO measure of national average home prices has slowed to 5.9 percent year-over-year for the last quarter of 2006 (new data will be released on May 31).
During the current decade, home prices appreciated in the Midwest as well, though less so than in the nation and much less so than several southern and coastal markets such as San Diego, Las Vegas, and many parts of Florida. For this reason, during the years of strong price appreciation, some observers believed that the Midwest would be spared the eventual price and building falloffs that would unfold in other regions. So far, this does not seem to be the case. Most major residential real estate indicators currently show the Midwest region with comparable or weaker fundamentals than the national average. The chart below illustrates the pace of new home construction starts in the Seventh District states versus the U.S. Measured on a year-over-year basis, home starts in the Midwest have been running below the nation since early 2006.
Click to enlarge.
For the most part, the weaker Midwest economy lies behind its weaker housing markets versus the national average. The current slowing of the U.S. economy has been accompanied by a marked slowing in manufacturing which has, in turn, softened the housing market in many local Midwest communities. In addition, ongoing structural upheaval in automotive-oriented communities is reflected in several housing market indicators including home purchases, home prices, and in foreclosures of existing properties.
Residential real estate market conditions are highly local. The maps below juxtapose home price appreciation and unemployment rates in Seventh District metropolitan areas. Looking at the top map, unemployment rates in many Michigan communities are notably higher than the general pattern in the other Seventh District metropolitan areas. Retrenchment in domestic automotive assembly operations and suppliers in Michigan has resulted in significant work force upheaval. Automotive-oriented communities in other states of the Seventh District—such as Kokomo, Indiana—have had similar experiences. After Michigan, Indiana is the second most automotive intensive state in the Seventh District.
Click to enlarge.
Click to enlarge.
The second map (above) displays year-over-year house price appreciation for the same metropolitan areas. To some degree, areas with a slack labor market are experiencing less home price appreciation. This is especially evident in Michigan and Northwest Indiana where the domestic automotive industry troubles are centered.
The linkage in these states between the local economy and the housing market is consistent with available information on home loans. The pace of loan delinquencies and mortgage foreclosures in both of these states are now running higher than both the nation and other states of the Seventh District.
Home price appreciation is stronger in Chicago and in many other metropolitan areas in Illinois and Wisconsin. In the Chicago area, job growth in business services, travel-tourism, and financial services industries have continued to expand. In other metropolitan areas to the west of Indiana and Michigan, manufacturing tends to be concentrated in more buoyant product lines, such as construction and farm machinery or food processing. As a result, home prices are generally holding up better in those areas.
Labor market conditions fare well in many Iowa metropolitan areas. Yet, average home price appreciation there is generally tepid. To some degree, home price appreciation has been very steady in Iowa over many years and the current pace of appreciation does not differ markedly from the norm of the past 15 years (see below).
Click to enlarge.
Nationally, residential real estate activity continues to adjust downward to align with its rapid expansion of recent years. In particular regions and communities, the extent of adjustment varies with both the stock of existing housing and with local trends in economic growth which drive the demand for housing. Generally, new construction activity and price appreciation have softened in the Seventh District but local conditions can be seen to vary with local economic indicators.
Posted by Testa at 8:37 AM | Comments (2)
September 20, 2006
Midwest housing market update
Following unprecedented home price appreciation nationwide in recent years, homeowners are much concerned about price reversal. In their current Economic Perspectives article, Chicago Fed economists Jonas Fisher and Saad Quayyum find that, on average, much of the recent surge in housing can be attributed to fundamentals such as rising income and favorable demographics, as well as innovations in home lending markets that have allowed renters to become homeowners. (Many of these innovations—such as interest-only loans and adjustable rate mortgages—were discussed in detail at the Chicago Fed's Bank Structure Conference this spring. The proceedings of the conference were summarized in the September issue of the Chicago Fed Letter.)
While such arguments may provide some comfort to those who worry about the possibility of a bubble in average U.S. home prices, experiences and current conditions differ widely from place to place. Should Midwestern homeowners be more or less concerned about the cooling of residential real estate markets?
Senior Business Economist Mike Munley has been tracking home price developments in the Midwest. Mike reports that, on September 5, the Office of Federal Housing Enterprise Oversight (OFHEO) released its estimates for home price appreciation in the second quarter of 2006. The report included data on the national average of home price changes as well as state averages.
Home prices for the U.S. increased at a 4.8% annual rate between the first and second quarters, the slowest quarterly appreciation since the end of 1999 and just below the average since 1980. As measured year over year, U.S. home prices were up 10% from the second quarter of 2005, which was also slower than the rate of appreciation has been—it topped out at 14% in the middle of 2005.
Recent home price appreciation here in the Midwest has also slowed noticeably, and the long term back drop has been much less robust. For the most part, home prices in the Seventh District states have been increasing more slowly than the national average of home prices (see figure 1). On a year-over-year basis, price appreciation in every District state lagged behind the national average in the second quarter of 2006, and Michigan had the lowest appreciation of any state in the nation. In comparison to the first quarter, home values in Indiana and Michigan actually declined. (Maine, Massachusetts, and Ohio were the only other states with declines.) However, home values in Iowa managed to rise slightly faster than the national average.
Click to enlarge.
The city-level data told a similar story. Of the District MSAs (Metropolitan Statistical Areas) covered by OFHEO, only Michigan City-La Porte, IN, showed year-over-year appreciation (10.6%) faster than the national average. Of the bottom 20 MSAs in the U.S., 14 were in the Seventh District, and Ann Arbor, MI, was at the bottom with home prices, down 1.3% from a year ago.
The OFHEO home price data is only one of several sources of information about home prices for the U.S. and some cities. The National Association of Realtors (NAR) releases data on the median sale price of existing single-family homes. In general, the two data series tend to tell the same story—that is, the trends in both data series are similar over time. But, their results are often different in a given month (for regional and national data) or quarter (for city data). The NAR data tends to be more volatile. The NAR data set measures exactly what it sounds like: it is the price of the typical home sold during that quarter. Still, the median price depends on the mix of homes sold during that quarter. If, for example, a large number of inexpensive, starter homes were sold in the second quarter, this would lower the median sale price. By contrast, the OFHEO index is designed to track how the value of an individual home changes over time. OFHEO looks at the appraised value of homes each time a new mortgage is taken out—it is updated when a home gets sold or when the homeowner decides to refinance. OFHEO looks at the value of a large number of homes and is able to estimate the index quarterly. One drawback to the OFHEO index is that it only looks at home mortgages serviced by Fannie Mae and Freddie Mac, and those agencies only service mortgages that are less than $417,000—so the OFHEO index excludes most luxury housing.
The NAR publishes price breakdowns for regions and select metropolitan areas (but not states). In the second quarter of 2006, median home prices nationally were up 3.7% from a year earlier, while median sales prices in the Midwest (which includes the Seventh District, Ohio, and some plains states) were down 2.0%. Of the 24 District MSAs covered by the NAR, five (Chicago, Champaign, Milwaukee, Peoria, and Waterloo, IA) beat the national average, and 14 saw home sale prices down from a year ago. Although the NAR data are more volatile, this data series does confirm that home prices in the Midwest have been increasing more slowly than prices nationally.
There are a couple of reasons why home values have been rising more slowly in the Midwest than the rest of the country. Looking over the long term, the Midwest has generally seen slower home price appreciation since the early 1980s. As shown in figure 1, home values nationally have increased an average of 5.4% per year since then, whereas average appreciation in the District states has ranged from 3.5% in Iowa to 5.1% in Illinois. In part this difference reflects the slower population growth in the Midwest than in the rest of the nation. Since 1980, the U.S. population has increased an average of 1.1% per year, while population growth in Seventh District states has averaged only 0.4%. It follows that demand for housing in the District is not growing as rapidly, which in turn puts relatively less pressure on prices.
Regional differences in home prices also arise from the supply side of the market. In many metropolitan areas, available land for home building is limited by natural barriers such as mountains and waterways. In the face of rising demand for housing, such barriers to expanded supply tend to drive up land and home prices, especially for single-family homes. Further, some areas have chosen to place legal restrictions on home building by imposing growth boundaries or strict zoning requirements and building codes. In some cases where regulations are not well-crafted, evidence suggests that the effect is the same; rising demand for homes is met by rapidly rising prices rather than by expansion of the housing stock. A recent survey report of land use regulations verifies that the Midwest is not especially noted for manmade barriers to housing expansion. Over the long term, the elastic nature of home building in the Midwest region has likely contributed to less pressure on home prices.
More recently, much of the relative weakness in home prices can further be explained by the relatively sluggish economic growth in the region. As I discussed in my recent Mid-Year Jobs Report, job growth here has lagged behind national job growth. That limits income growth in the Midwest, which in turn restricts demand for housing. So while the U.S. has seen a sharp rise in home price appreciation in the past several years, the run-up in the District was less extensive or non-existent. (See figure 2.)
Click to enlarge.
Among states, home price appreciation has recently been running in direct relation to the pace of economic growth. In particular, appreciation has been lowest in Michigan and Indiana, the two states with economies weighed down by structural change in automotive industries.
The figure below illustrates home price appreciation over the past year among metropolitan areas. Those metro areas experiencing depreciation tend to be found in Michigan and in central Indiana. A look back at the metropolitan area map of auto industry job concentration in figure 1 of last week’s blog shows a fairly close correlation between auto-intensity and weak home price appreciation.
Click to enlarge.
The relative stability of home prices in some Midwest locations is a double-edged sword for the region. Homeowners in other parts of the country were able to cash in on the sharp increases in the value of their homes and use those funds to support their spending. Midwesterners weren't able to cash in as extensively, limiting growth in retail sales locally.
On the plus side, given all of the popular concerns about a home price bubble, steady appreciation helps abate those worries here. If a sharp run-up in prices is a warning sign of a potential bubble, that sign is largely absent in the Midwest. But this is not to say that the Midwest is immune from the risk of a slowdown in appreciation or price declines going forward. Certainly, overall economic conditions will feed into home prices, as they have in parts of Michigan.
Less appreciation in home prices can also be advantageous in that it keeps homes here more affordable. According to the NAR's affordability index, homes have historically been affordable in the Midwest in relation to other regions and recently this affordability advantage has improved. Midwestern cities can use this attribute to help attract new businesses and workers.
Posted by Testa at 10:24 AM | Comments (0)