NIFA: 2009 Housing Innovation MarketplaceNIFA: 2009 Housing Innovation Marketplace Ernie Goss Ph.D. Professor of Economics, Ernie Goss Ph.D. Professor of Economics,

Creighton University & MacAllister ChairholderCreighton University & MacAllister Chairholder Websites: Websites: www.ernestgoss.comwww.ernestgoss.com www.outlook-economic.comwww.outlook-economic.com

Podcast: Itunes Podcast: Itunes http://coba3.creighton.edu/econoutlook/goss-rss3.xmlhttp://coba3.creighton.edu/econoutlook/goss-rss3.xml

The Recession of 2009:

What Indicators Should We Watch?

Investment ClimateH

ousi

ngJob M

arket

New jobs interest rates & competitiveness

Short Term Drivers of U.S., and regional economies

HousingHousing

U.S. home ownership andU.S. home ownership andFannie & Freddie interest proceeds, 1995-2008Fannie & Freddie interest proceeds, 1995-2008

62.0

63.0

64.0

65.0

66.0

67.0

68.0

69.0

70.0

$0

$500,000,000,000

$1,000,000,000,000

$1,500,000,000,000

$2,000,000,000,000

$2,500,000,000,000

$3,000,000,000,000

Home ow nership rate (left scale)

Loan proceeds (Fannie & Freddie) (right scale)

U.S. housing vacancy rates andU.S. housing vacancy rates andHousing price growth, 1999-2008 (Quarterly Case-Shiller Index)Housing price growth, 1999-2008 (Quarterly Case-Shiller Index)

1.0%

1.2%

1.4%

1.6%

1.8%

2.0%

2.2%

2.4%

2.6%

2.8%

3.0%

Vacan

cy r

ate

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Case-S

hil

ler

ho

usin

g p

rices

Vacancy rates (left scale)

Housing prices (right scale)

U.S. Housing Affordability,1987-2008 U.S. Housing Affordability,1987-2008

1.0%

21.0%

41.0%

61.0%

81.0%

101.0%

121.0%

141.0%

161.0%

181.0%

201.0%

Ho

usin

g p

rices /

per

cap

ita i

nco

me

Ratio housing prices to income (actual)

Expected

How big is the problem (bailout)?How big is the problem (bailout)? Homeownership rates:Homeownership rates: 1995 64.8%1995 64.8% 2005 68.9% (highest ever)2005 68.9% (highest ever) Relaxing standards brought 4.5 million new and Relaxing standards brought 4.5 million new and

mostly unqualified buyers into marketmostly unqualified buyers into market With no growth in per capita income, housing prices With no growth in per capita income, housing prices

would have to drop by another 14% by the end of would have to drop by another 14% by the end of 2009 to return to historical ratio2009 to return to historical ratio

This estimates assumes housing prices do not This estimates assumes housing prices do not plummet below pre-bubble trendplummet below pre-bubble trend

A partial solution: 1) Tax credit for all for home A partial solution: 1) Tax credit for all for home purchases, 2) Reduce the hours to achieve active purchases, 2) Reduce the hours to achieve active home investor status (500 to 50)home investor status (500 to 50)

Investment ClimateInvestment Climate

Stock values vs. U.S. economy, 1952-2008Stock values vs. U.S. economy, 1952-2008

2.5

4.5

6.5

8.5

10.5

12.5

14.5

Graph profiles value of S&P divided by value of U.S. economy (times 100)Graph profiles value of S&P divided by value of U.S. economy (times 100)

Carter Presidency begins

Clinton Presidency begins

Housing Prices, Omaha v. U.S. 2006 - 2007Housing Prices, Omaha v. U.S. 2006 - 2007

58%

59%

60%

61%

62%

63%

64%

65%

66%

67%

2006.IV 2007.I 2007.II 2007.III 2007.IV

Om

ah

a

pric

es a

s

%

of

U.S

.

$100

$120

$140

$160

$180

$200

$220

$240

Med

ian

h

ou

se

pric

e

in

tho

usan

ds

Omaha as % of U.S. (left scale)

U.S. (right scale)

Omaha (right scale)

Oil prices, 1999-2008Oil prices, 1999-2008

$0

$20

$40

$60

$80

$100

$120

$140

U.S. companies European companies

$49 of the run-up in oil prices to $133 was due to decline in value of dollar

JobsJobs

The Mainstreet EconomyThe Mainstreet Economy

A monthly survey of community bank CEOSA monthly survey of community bank CEOS Colorado, Illinois, Iowa, Kansas, Missouri, Colorado, Illinois, Iowa, Kansas, Missouri,

Nebraska, South Dakota, WyomingNebraska, South Dakota, Wyoming Intended to gauge the economic conditions in Intended to gauge the economic conditions in

the non-urban areas of regionthe non-urban areas of region Average community size is 1,300 populationAverage community size is 1,300 population Available at: Available at: www.outlook-economic.comwww.outlook-economic.com www.economictrends.blogspot.comwww.economictrends.blogspot.com

The Mainstreet EconomyThe Mainstreet Economy(index over 50 indicates expansion)(index over 50 indicates expansion)

Jan-08 Dec-08 Jan-09Area economic index 55.7 25.0 24.6Loan volume 51.7 44.7 48.3Checking deposits 70.0 62.9 60.8Certificates of deposit 60.8 63.6 57.6Farmland prices 81.0 37.1 36.6Farm equipment sales 71.1 31.6 29.4Home sales 24.6 15.9 26.7Hiring in area 46.6 25.8 18.3Retail business 42.4 20.9 24.2Confidence index 43.2 15.6 25.9

The Mainstreet Economy, 2006-09The Mainstreet Economy, 2006-09

0

10

20

30

40

50

60

70

80

90Overall economy Hiring Farm land price growth

Other outcomes from recent surveys:Other outcomes from recent surveys: Less than 13 percent of bankers indicate Less than 13 percent of bankers indicate

that they will participate in the latest U.S. that they will participate in the latest U.S. Treasury preferred stock “buyout” plan.Treasury preferred stock “buyout” plan.

Farmland price growth turned negative Farmland price growth turned negative for a third straight month.for a third straight month.

Rural Mainstreet Economy slows to Rural Mainstreet Economy slows to record low.record low.

Bank indicators remain healthy.Bank indicators remain healthy. Bankers expect high input prices to pose Bankers expect high input prices to pose

the biggest economic threat for 2009.the biggest economic threat for 2009. 43.9% of the bankers have tightened 43.9% of the bankers have tightened

credit standardscredit standards

The Regional Economy:The Regional Economy:Survey of Purchasing Managers& Survey of Purchasing Managers&

Business LeadersBusiness Leaders

A Partnership Among Creighton A Partnership Among Creighton University, and State Purchasing University, and State Purchasing Management AssociationsManagement Associations

Monthly Survey of Business ConditionsMonthly Survey of Business Conditions

Leading Economic Indicator Leading Economic Indicator Released First Business Day of Each Released First Business Day of Each

Month to MediaMonth to Media Released Via WWWeb:Released Via WWWeb: www.outlook-economic.orgwww.outlook-economic.org www.ernestgoss.comwww.ernestgoss.com Appears in media throughout U.S.Appears in media throughout U.S. Survey of supply managers in over 900 Survey of supply managers in over 900

firmsfirms

Business Conditions Index, 2003-08Business Conditions Index, 2003-08

20

30

40

50

60

70

80

U.S. Mid-America

Prices Paid Index, 2003-08Prices Paid Index, 2003-08

15

25

35

45

55

65

75

85

95

105

U.S.Mid-America

OutlookOutlook Decline in output growth for U.S. and Mid-America Decline in output growth for U.S. and Mid-America

until last quarter of 2009 (less negative for Mid-until last quarter of 2009 (less negative for Mid-America) RECESSIONAmerica) RECESSION

Negative employment growth for U.S. and Mid-Negative employment growth for U.S. and Mid-America for all of 2009 (less negative for Mid-America for all of 2009 (less negative for Mid-America) RECESSIONAmerica) RECESSION

Mortgage rates will fall below 5.0% in the months Mortgage rates will fall below 5.0% in the months ahead. ahead.

Housing prices will decline by another 14% by the Housing prices will decline by another 14% by the end of 2009.end of 2009.

Advancing dollar will help restrain inflation next Advancing dollar will help restrain inflation next three months. (However, dollar will lose value in three months. (However, dollar will lose value in 2009)2009)

Inflation is in the pipeline and significantly above Inflation is in the pipeline and significantly above Fed’s target for 2010Fed’s target for 2010

Decline in farm income will slow the Mid-American Decline in farm income will slow the Mid-American for 2009.for 2009.

Outlook will be influenced significantly by oil prices.Outlook will be influenced significantly by oil prices.

Important indicators: keep an eye Important indicators: keep an eye on:on:

The January PMI released February 2nd will be an economic indicator that will The January PMI released February 2nd will be an economic indicator that will be very, very closely examined. ( be very, very closely examined. ( www.outlook-economic.comwww.outlook-economic.com and and www.ism.wswww.ism.ws ). ). Another index below 35.0 will be a very, very bearish sign. I expect the leading Another index below 35.0 will be a very, very bearish sign. I expect the leading economic indicator to rise a bit to a still weak number.economic indicator to rise a bit to a still weak number.

4th Quarter advance GDP will be released by the Bureau of Economic Analysis 4th Quarter advance GDP will be released by the Bureau of Economic Analysis on Jan. 30th (on Jan. 30th (www.bea.govwww.bea.gov). I expect the number to show that the economy ). I expect the number to show that the economy declined at an annualized rate of 4.0%. declined at an annualized rate of 4.0%.

The employment report for January will be released on Feb. 6th I expect the The employment report for January will be released on Feb. 6th I expect the report to show job losses (and large) for a fourteenth straight month and an report to show job losses (and large) for a fourteenth straight month and an increase in the unemployment rate to 7.5%.. (increase in the unemployment rate to 7.5%.. (www.bls.govwww.bls.gov) )

First time and continuing claims for unemployment insurance. Released every First time and continuing claims for unemployment insurance. Released every Thursday. First time claims below 450,000 and continuing claims less than 3.3 Thursday. First time claims below 450,000 and continuing claims less than 3.3 million would be bullish. I don’t expect this though. They will be worse. (million would be bullish. I don’t expect this though. They will be worse. (www.doe.govwww.doe.gov ). ).

Keep an eye on the yield for 10-year U.S. Treasuries. Current yields are Keep an eye on the yield for 10-year U.S. Treasuries. Current yields are artificially low and reflect unprecedented fear among investors. Large increases artificially low and reflect unprecedented fear among investors. Large increases will tell us that either 1) global investors are taking funds out of the U.S. market, will tell us that either 1) global investors are taking funds out of the U.S. market, or 2) inflation expectations have increased, or 3) investors have reduced the risk or 2) inflation expectations have increased, or 3) investors have reduced the risk perceptions and are pulling money out of treasuries and putting it into equity perceptions and are pulling money out of treasuries and putting it into equity markets (markets (http://http://finance.yahoo.comfinance.yahoo.com ) )

The Risk Factors (Long & Short Term)The Risk Factors (Long & Short Term) International uncertainty—terrorism, tariffs International uncertainty—terrorism, tariffs

and trade restrictions, abolition of 2001 and and trade restrictions, abolition of 2001 and 2003 tax cuts, and even slower EU and 2003 tax cuts, and even slower EU and Asian growth.Asian growth.

The biggest risk is housing prices dropping The biggest risk is housing prices dropping by another 25% for 2009 (overwhelming by another 25% for 2009 (overwhelming pessimism)pessimism)

Dollar weakens dramatically (not likely in Dollar weakens dramatically (not likely in short-term ) short-term )

Asian reduced buying of U.S. Treasuries Asian reduced buying of U.S. Treasuries (Chinese de-link their currency to dollar). (Chinese de-link their currency to dollar).