Housing and the Economy: Impacts and

Forecasts 2014 Update

Geoffrey J.D. Hewings, Ph.D.Director

Regional Economics Applications Laboratory (REAL)University of Illinois

Institute 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

Outlineo Update on the economy

o Housing market and forecasts

o Launch of a companion price index for Illinois and metro areas

o In progress: Impact of foreclosures

2013 Highlights

Last half of 2012 revealed positive changes in prices

Significant increase in sales volume and sustained price recovery in 2013

Resolution of foreclosure issues saw significant increase in foreclosed properties

Consumer 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 2013

Update on the economy

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-50

0

50

100

150

Number of Jobs Gained/Lost for Illinois 2000-2013 (000s)

Four years ofsolid job creation

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-5.00%

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00% Illinois, Rest of Midwest and US Annual Employment Growth Rates (%)

Illinois

RMW

US

o 2010 and 2012, Illinois exceeded or

matched US growth rates

o Only happened twice since 1980

o But……

The hill to climb….

• State is 220,000 jobs below prior peak (November 2000) “

But…need to add considerations of: • population growth since 2000• decrease in labor force participation rates• Large number in part-time who would like full-

time employment THEN…

State of Illinois Economies

o State probably needs to add close to: 707,000 jobs to achieve equivalent level to November 2000

RECOVERY: How long will it take?

o Before this recession, longest recovery was 8 years (now > 13 years – since 2000)

o Current employment in Illinois matches that late 1990s

o Illinois still has 5 of 10 sectors with employment levels below those of 1990: Manufacturing, Information, Construction, Trade, Transportation & Utilities, and Financial activities

Illinois Metro Areas

o How well are they doing compared to Chicago and the state?

o What are the forecasts?o Developed monthly employment

analysis and 12 month ahead employment forecasts

o Also developed an Index of Leading Indicators for each MSA

The Metro Indices Compared with Chicago’s Performance

Bloomington Champaign Davenport Decatur Peoria Rockford Springfield Kankakee

Value above line indicate growth > Chicago

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0.00

10.00

20.00

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Comparing MSAs Indices with Chicago Indices

Metro Area Economic Performance last 12 months

Housing Market

How 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 Concerns

o Signals in the economy and in the housing market continue to be “noisy”

o Signs that Congress is finally accepting its responsibility to govern

o State has made some “progress” on facing fiscal issues but….

o Firms would like to locate/expand in the state but have little faith in the state’s fiscal management

Launch of the REAL Indexo REAL, along with NAR publishes a

median price indexo Problem: price changes may not fully

reflect differences in the characteristics of houses sold one month versus next month

o Case-Schiller index provides “perfect match” by comparing same house – but only available for top 20 markets

o But:o Repeat sales may not fully

represent mix of saleso Not suitable for small Metro areas

Launch of the REAL Index (2)Median Home Sales Prices

o The median is the half point between the largest and smallest value of a sample of houses.

o It is misleading when:o Sales prices do not appreciate

equally throughout the distribution (i.e. more appreciation in the lower-priced homes or in the higher-priced homes).

o 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 Indexo Starting in January, issue two indices for

Chicago and Illinoiso One based on median prices (as before)o One based on housing characteristics

o For the quarterly Metro area forecasts, provide the same two price indices

o Attempt to expand the number of characteristics associated with houses soldo Attempt to highlight whether price

appreciation is coming from different characteristics or truly represents price appreciation based on similar characteristics

o Look for your feedback next year

Impact of Foreclosures

Impact of Foreclosures

o Examined the impact of foreclosures on property prices in Chicago

o Foreclosures have negative impacts not just for the homeowner, but also on neighboring property values.

o 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 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: Resultso On average, no impacts before

the auction; -2% to -1% during the two years after the auction

o One more foreclosed property can reduce nearby property values: (calculated at median housing price of $250K)o In the first year: $2,100o In the second year: $3,000

Impacts by Vacancy Rate Quartile

Foreclosure Impactso At current rates, expect to return

to pre-recession foreclosure rates in late 2014 or 2015

Final Remarkso A recent CRAINS survey revealed

more renters in Chicago more favorable to buying – inching up homeownership rates to 68.1% compared to 66.9% in 2012

o Increasing construction of multifamily units (and new construction generally) will put pressure on rental markets

o Concerns focus on impacts on (1) housing affordability and (2) impact of increasing inequality on housing demand

Final Remarks (2)o According to NAR, year-over-year

affordability index decreased 16.1% nationwide in third quarter and 14.1% in Midwest

o US 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

L L

Monthly index of leading indicators for Chicago

Monthly Employment analysis for state and Metro areasIllinois Economic Review (monthly) with employment forecasts for next 12 months

For More Information

www.real.illinois.eduwww.illinoisrelator.org/

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