NEW YORK FOREIGN PRESS CENTER, 150 E. 52ND STREET, 5TH FLOOR
MR. THORN: Good afternoon, everybody. I’d like to welcome everyone to the New York Foreign Press Center teleconference, “Current Trends in U.S. Real Estate Markets.” Joining us today are Dr. Susan Wachter, professor of real estate and finance at the University of Pennsylvania Wharton School of Business, and Jed Smith, managing director of quantitative research of the National Association of Realtors.
Before we begin, I just want to mention that participating journalists can press *1 at any time if they want to enter the question queue. That said, I will now turn the call over to Jed. Jed, welcome and thank you.
MR. SMITH: Thank you very much. It’s nice to be here today with you. I’m with the National Association of Realtors here in Washington, D.C. And our membership are the people that sell existing homes. Every year, they sell millions of homes. Last year, it was 4,260,000 existing homes were sold, and this year we’re forecasting about 4.5 million. In other words, we think that the market’s going to increase by about 5 percent. As you probably are aware, there have been some problems with the U.S. real estate market. At one point, we were selling in the neighborhood of 6- to 7 million homes. We’re now down to about 4.5 million.
At the same time, prices have declined over the last few years. They were bid quite high during the run-up, and then we had the great recession and prices have declined. We think they’re now starting to stabilize. So overall, looking at the housing market, we think that we’re in a modest, slow recovery where we’re going to get back to about 4.5 million sales this year. Putting this into perspective, before the big run-up, we had about 5 million sales. We then ran up to about 7 million. Now we’re back down to about 4.5 million and starting to recover.
In terms of price, depending upon the region of the country that the people were in, we lost somewhere between 25 and 35 percent of the value of a home. Now we see prices starting to stabilize. We actually think there will be a very modest price increase of about 1 percent this year. So we’re really saying prices are stabilizing. And the reason that we’re optimistic is we see that as we’ve come out of the great recession, we’re getting economic growth somewhere in the neighborhood of 2 to 3 percent, and we’re starting to get additional jobs come onto the market. So both jobs and GDP are going to drive the housing recovery, which is slow.
However, according to our membership – and we take polls of our members every month in terms of how – what’s their opinion on things and how are things doing – they are optimistic about the outlook for housing right now. They’ve had a significant increase in optimism and many of them are predicting price stability. So we think we’re in a slow but measured recovery.
Now, as you know, interest rates are quite low right now, and prices are quite low relative to where they had been, so we think these are favorable aspects of the market. In terms of things that are tending to hold the market back right now, a lot of households are upside down in their mortgages. That is, they owe more than the value of the house. That’s tending to hold back the market a little bit. Similarly, credit availability is less than desired. Interest rates are low, but many banks are requiring much higher credit standards than would normally be the case, so that’s tending to slow the recovery somewhat.
And of course, the unemployment issue is a major one right now. As you know, we have major levels of unemployment. They are starting to come down, but the duration of unemployment – that is the number of weeks which people are out of work before they find a job and the level of unemployment – that’s the percentage of people unemployed – are still quite high. So we have some favorable aspects to the market and we have some unfavorable aspects, so that’s why we see a sort of a relatively slow recovery.
We have a lot of distressed properties on the market. These are houses that have been foreclosed or are involved in short sales. This is providing some real value to people that buy them. They’ll be able to buy houses much more cheaply than would otherwise be the case, although it’s also a major tragedy to the people that are losing the house. Nonetheless, the size of the distressed market will tend to keep prices down rather than have them accelerate in the near future. So I think we have a measured recovery.
Now longer term, we have some major issues. You’re probably aware of the debate in this country about government expenditures and taxes. It’s a rather rancorous debate. But it basically boils down to a couple of issues. Either we raise taxes or we cut government expenditures or we run major deficits, which doesn’t seem to be an option in the long run. So depending upon how that goes, it’s putting quite a bit of uncertainty in some people’s minds, and that’s tending to hold back expansion, at least in the real estate market. We are getting an improved economy, but there continue to be issues, as I said, about financing.
Now in terms of new homes, we’re coming off of a very low number, approximately 300,000 homes last year. We’re going to get up to probably 3- to 400,000 homes this year that are built. That’s new construction, and possibly half a million new homes next year. Normally you would expect somewhere around 1.2- to 1.7 million new homes to be built, so again, that’s a part of the housing market that’s somewhat slow but is in recovery. So as I look at the overall U.S. economy and the U.S. housing markets, we’ve been through a lot – prices down, volume down, lots of upside down homes, lots of foreclosures, credit problems, and so forth.
However, we’ve seemed to have come around the bend and we’re coming out of that. It’s in a slow fashion, but nonetheless getting there. We see interest rates continuing low for the foreseeable future. We see prices low but slowly recovering. And more importantly, we see unemployment coming down, GDP going up, and consumer confidence starting to recover. And when people start to have more confidence, they tend to buy a house. As I said, our membership has become very optimistic in the last couple of months that we’ve seen the worst of this, so we see the forthcoming year as one of expansion. But as I say, it’s going to be a slow expansion, not the type of barnburner that we went through a couple years ago. And since it’ll be a slow expansion, that should give us – make the market behave in a rational manner and prevent future problems.
So that’s the NAR view of the market, and I’d like to turn this over now to Dr. Wachter.
DR. WACHTER: Thank you so much, Jed. This is Susan Wachter. I’m a professor of real estate and finance at the Wharton School of the University of Pennsylvania, and I am also the co-director of the Institute of Urban Research at the University of Pennsylvania.
It’s a pleasure to be here today, and I would like to begin my comments by reinforcing the message that Jed just provided on the near-term outlook and the implications for the overall economy. As – excuse me one moment – as Jed just said, the weak housing market is hindering the overall economy’s growth. This is unusual since this in a typical cyclical recovery, housing leads the overall economy. But this cycle is not typical because the great recession of 2009, from which we are recovering, followed a financial crisis whose epicenter was the residential mortgage sector in the housing market. The overall recovery will not occur and not be complete until the mortgage and housing markets recover. And this will require a return in confidence rather than today’s uncertainty. The uncertainty that prevails today is in part a function of high current housing inventories and the so-called shadow supply as well as uncertainty about financing of homes.
The consensus forecast, with which I agree, is that housing prices will stabilize this year, at least in nominal terms. This is consistent with fundamentals that show that housing prices are in line with rents and with income. In fact, homes have historically never been more affordable. Nonetheless, due to the excess inventory, housing starts remain historically depressed and at a pace of 700,000 a year, which is far off the historic pace average of about 1.5 million. This is behind the dearth of construction jobs and is in part the reason for the lagging job market. Starts will not come back until prices rise to levels that cover the costs of new building, and we are far from those levels except in the one bright spot of the construction industry, which is multifamily. This in part reflects the increasing number of households who are choosing to become renters with ownership falling from a height of 69 percent to the current 66 percent, which was last reached at almost 15 years ago in 1998.
Continued price weakness in the single family market is due to actual inventory, which is in fact declining, and the so-called shadow supply. The latter includes approximately 3 million homes with mortgages that are either seriously delinquent or in default. And in addition, there are 10- to 11 million homes with mortgages that are underwater. That’s 23 percent of all homes with a mortgage. So-called strategic default is possible, where borrowers stop paying their mortgages even though they can pay. But so far, this is not happening for the most part. The threat is there, however.
This is why there is an active debate about principal forbearance (inaudible) principal reduction, how we are going to resolve the shadow supply, and the delinquent and defaulting mortgages. In order to keep people in their homes who cannot pay their existing mortgages, negotiating to lower payments through forbearing on collecting the loan payment due today with an extension of loan duration or a balloon payment is one way out. Alternatively, forgiveness of principal due will solve the strategic default problem, but – as well as a simple inability to pay, but at a possible cost of discouraging underwater borrowers from continuing to pay their mortgages, the so-called moral hazard problem.
Refinancing mortgages to today’s extraordinarily low mortgage rates is another way out. But there, too, there are questions since many of these mortgages are subject to issues involving the lender, who may be responsible for poor underwriting and violation of reps and warranties to investors. Thus new lenders do not want to take on these loans and these liabilities. Thus there are real questions about housing financing and also about the shadow supply inventories that may be added to through the shadow supply and the properties that are currently in delinquency or in default, which may contribute to an increase in inventory going forward.
So demand is depressed for owner occupancy because of the uncertainty of housing prices. Buyers are reluctant to put their cash in down payments for home purchases when their equity could be wiped out by a price decline. Also, of course, those who have lost their homes do not have the money or credit for a down payment to buy a home. Moreover, even for those who wish to take advantage of today’s historically low interest rates and historically low housing prices in many markets to become a homeowner, there is the question of financing the purchase through a mortgage. And this is the other major issue that’s holding back the recovery along with excess supply. That is, even though we have historically low interest rates, lenders today have ratcheted up lending standards to levels that exceed those prevailing before the crisis, and this is hindering borrowing.
In part, this pro-cyclical ratcheting up of lending standards is a delayed response and backlash to the crisis itself and to the widespread failure to maintain underwriting standards. It in part involves attempts to buttress the weak financial condition of the institution that’s imposing the stringent credit conditions, which is the case, for example – well, it’s across the board, really. There’s also concern about the availability of financing going forward. That is, what’s the shape of the future housing finance system in the United States since our current system is clearly broken? What’s going to replace Fannie and Freddie, for example, our two primary providers of mortgages today, which, along with FHA, provide 90 percent of financing for mortgages?
Buyers today know that their ability to sell their homes in the future depends on there being financing for future home purchases, but there is uncertainty about what the housing finance system of the future will look like. What will be the future of the replacement of Fannie and Freddie? How will FHA respond to the current market duress? Will there be government support for housing finance going forward?
To the extent I can, I will be pleased to discuss these issues in the question period, which I understand now follows. Thank you for the opportunity to speak with you.
OPERATOR: Thank you. At this time, we are ready for the question-and-answer session. If you’d like to ask a question, please press *1. To withdraw your question, please press *2. Once again, to ask a question, please press *1. One moment. Once again, to ask a question, please press *1. One moment.
There are no questions at this time.
MR. THORN: All right. Let me just ask, if I may, in terms of the national market, how does it – how do the same statistics compare to what’s happening and what has been happening in New York City, in the New York City metropolitan market?
MR. SMITH: Well, I’d be happy to take a stab at that. This is Jed Smith at NAR in Washington.
The New York City market – and by that, I’m referring to the metropolitan New York market, not just the city, which is heavily dominated by a few transactions – but the overall metropolitan New York market is proceeding about like the national market. It’s a very large market. New York City, when you consider its suburbs, is 20 million and plus people. It’s recovering slowly. It hasn’t had a lot of the problems that some of the worst foreclosures have had, but it hasn’t also had the tremendous job creation that some other places have had. So it’s just sort of moving along. And there we see all of the other problems that we see around the country – people that are upside down, people that can’t move, people with credit issues, price issues – all of the things that we’re seeing.
And it’s sort of indicative of a market that is slowly recovering and probably will continue to recover, the big issues here being, of course, consumer confidence, availability of credit, and a continued economic recovery. Now we see improvements in all three of those areas, although, again, as I keep saying, it’s not a barnburner; it’s a slow recovery.
OPERATOR: We do have a couple questions over the phone.
MR. THORN: Please.
OPERATOR: Our first question, Louise With, with Borsen. You may ask your question.
QUESTION: Yes, hello. Thank you for your time. I have a similar question to the one before about the regional differences in – across the U.S., or when you look at a map, there’s clearly big differences between states and regional metropolitan markets. So if you could talk to that a little bit, that would be great. Thank you.
DR. WACHTER: Well, I will take the first go at that. The crisis itself played out very differently across the country, even though it was a national crisis from the financial institutions’ perspective. There was a seizing up of financing, which affected the entire United States. Nonetheless, the markets which were particularly impacted were those where subprime lending had a major share in the run-up to the crisis. And those were particular markets – and those are the so-called sand states. And these are also the markets not only with a large share of subprime, but the markets where prices rose substantially were often markets where you had an inelastic supply of housing so that as demand increased, prices rose substantially in response to demand.
The – this is not true across the U.S. It’s not true even in the Southwest, where a number of the states where you did have price rises – for example, Texas, not much price rises there, very – not much price declines. Compare that to California, Nevada, Arizona, where prices decline in some of the areas in those states by more than 50 percent, and Florida as well. The recovery is occurring differentially in these markets. That is, there are some markets where we’ve already turned around in these areas and recovered where there is strong demand – for example, San Francisco. But many of these markets, you still have prices which are way off their peaks. And although sales are occurring in many of these markets and they’re picking up dramatically – thinking of, for example, the south of Florida and in many spots in California, sales have turned the corner – we have a long way to go to the point where we would have new construction.
MR. SMITH: This is Jed Smith at NAR. I’d like to add just one point. If you want to look for where the market’s going to do well, right now the key issue is jobs. Those areas of the country with lots of jobs or more jobs or where jobs are increasing are tending to recover much more quickly than those areas where jobs are fewer or still declining. And so jobs are a key issue. Other things that are important, of course, are whether people are upside down in their mortgages and can get a mortgage. But really in the final analysis, it’s jobs, possibly with the exception of Florida, where jobs are important, but also people coming to Florida from up north are important also because people retire to Florida and buy houses, and there’s been some uptick in that, although, again, it’s slow. So overall, jobs is the key.
OPERATOR: Once again, if you’d like to ask a question, please press *1.
Our next question, Norbert Kuls with FAZ, you may ask your question.
QUESTION: Yes. Hi. You talked about the expectations of a modest price recovery. Could you point to a current data that would underscore that? What kind of data are you looking at? Because if you look at the price – the Case-Shiller Index, for example, it seems to be going down.
MS. WACHTER: If I may, the current pricing across the board, with the exception of the NAR’s index, is in fact down as the questioner just raised. Case-Shiller, the national composite fell by 3.8 percent during the fourth quarter of 2011 and was down 4 percent versus the quarter – fourth quarter of 2010. But of the 10-city and 20-city composites fell by 1 percent in December over November. So there is a decline month to month.
Nonetheless, these are – and certainly also with the Federal Housing Finance Association. They – FHFA they’re down two and a quarter, 2.43 from quarter last year, 2010. But actually, on a month to month, FHFA’s data shows a 0.7 percent on a seasonally adjusted basis, and also a 1 percent rise from October to November. So there are some signs – although, we’re down over the year across the board – that the most recent data, at least from FHFA, is showing a slight pickup nominally, and I wanted to emphasize nominally, and that is true from my understanding of NAR as well, but we’ll let Jed speak to that. That is inflation is at a pace of 2 to 3 percent, so with a 1 percent growth in prices, although that is an increase, it doesn’t keep up with inflation. Nonetheless, the increase is extremely important because with every increase, we have fewer homeowners underwater. So this is a positive sign for the overall economy and for getting out of this persistent issue of shadow supply.
MR. SMITH: This is Jed Smith at NAR. We always talk about nominal dollars. We do a survey of our membership every month, and the majority of them, probably 60 to 70 percent of them, foresee higher prices this year. And if you try to understand what’s going on there, first of all, price to income in many areas now is back down at the area – back down at the level where it used to be so to speak in terms of stability. On top of that, in addition to price to income, we think that with additional jobs being created, that will help a little bit. There’s a limited supply of housing because there’s not too much new construction. Rents are rising. There are lots of little things that suggest prices are stabilizing and starting to go up in many areas. In fact, they are headed up, and approximately 30 of the MSAs that we track – we track about 150 – and they’re stabilized in a number of the others. So we are projecting a very modest increase, but 1 percent is really very modest.
As far as Case-Shiller goes, we don’t really think that that’s entirely indicative of the U.S. housing market because it tends to be weighted very heavily towards those areas which just happen to have had some of the worst markets. There are a lot of other markets that are not in Case-Shiller that are actually doing much better. So Case-Shiller is indicative, along with a lot of the other indices, though, there were problems, but I – we really don’t track our – don’t try to predict the future based on Case-Shiller.
OPERATOR: Our next question, Talia Shamir with Calcalist. You may ask your question.
QUESTION: Hi. I have two questions. One is: When do you think or if you think the markets will reach full recovery or there are places that will never fully recover? And the other question is if you can give examples of places that are experiencing the best recovery right now.
MR. SMITH: Dr. Wachter, do you want to handle that or –
MS. WACHTER: No. Actually, I’m not a good forecaster. That’s not my field.
MR. SMITH: Okay. Well, Dr. Wachter noted that there’s a substantial inventory of shadow inventory out there, and until that inventory is resolved, I don’t think you’re going to see what we call a normal market. And so we’ve got a couple years, two to three years before the market really gets back to where we’d like to see it be. So that’s the first part of the question. And what was the second part?
QUESTION: You said there are places that are doing much better than others, so I was wondering if you can give examples of those places.
MR. SMITH: Sure. Actually, Texas and North Dakota immediately come to mind. I guess that’s probably due to oil and gas. Parts of Florida have turned around and are coming back. Through the Midwest, there’s some increasing stability, and I think there are some pockets of optimism over there on the West Coast, but that’s still largely an area that’s still ready to recover, although San Francisco is, I think, in a recovery mode. So it varies around the country, again, significantly a function of jobs.
MS. WACHTER: And I will add that if you look at a map of the United States, you will see a swath straight down the middle – North Dakota, Wyoming, Montana, all the way down to Texas where prices didn’t go up very much, and they didn’t fall very much, and therefore – and also jobs are growing there not only because of the energy boom, but also because they’re not suffering from construction industry dearth – expansion and dearth that some of these other markets are.
OPERATOR: Our next question, Ani Sandu with Radio Romania. You may ask your question.
QUESTION: Hello. I’m wondering how renting versus owning a home evolved in the last years. Do you have some statistics, how many Americans own houses, how many prefer to rent, and if there are regional differences in that respect.
MS. WACHTER: There are major regional differences from high-priced markets in California where home ownership rates are down to levels like 50 percent to areas where housing is quite affordable where ownership is over 70 percent.
The dramatic events of the past five years had led first to an increase in home ownership, which peaked in 2004 at 69 percent. That is an increase from the post-World War II average starting in the ’70s and ’80s of about 65 percent. The period of the ’90s, homeownership went up from 65, 66 percent to – steadily increased through, as I said, 2004, where they reached their peak of 69 percent.
We were, prior to World War II in this country, a country of renters. We were a majority of renters, minority of homeowners, about 45 percent homeownership coming out of the – World War II. We had a rapid increase through the ’60s to homeownership of 60 percent and then increase back to this post-World War II norm of 66 percent. We are back down to 66 percent as of the fourth quarter of 2011.
And the question is: What happens next and whether this new normal, which is, by the way, not so far away from the normal after World War II, prevails or whether we fall through the floor. And this is a complex issue involving many different factors, but I’ll just mention a few. One is the current situation right now where there’s great uncertainty about becoming a homeowner; secondly, the inability to get financing unless you have pristine credit; and third, if you lack a job and you don’t have confidence in whether you’re going to be able to get a job or perhaps you’re worried that you might lose your job, this will impact your ability to – your willingness, your confidence in the market and your willingness to become a homeowner as apart from renter.
The other side of that is, as Jed as mentioned, is that rental rates are increasing. There’s demand for rentership in – across many markets, and rents are going up. And in many markets, they’re going up faster than inflation, although right now rents are not – in general in the U.S. are just about at the level of inflation.
So as we go forward, it’s quite possible that we’ll have a situation where the rental market continues to be strong and rents continue to increase at the same time that people – in part because people are choosing to become renters. What’s holding this back, demand for rentership and homeownership in part right now also, is that household formation is quite low. Last year, household formation was at a zero rate, but in the end – year to year, but over the past few months, it’s picked up dramatically. Net immigration fell to zero, but that’s picked up, although it’s – these numbers are coming with a lag. Perhaps Jed can have more updated information on that, but – and also forecasts on household formation. But a lot depends on household formation and whether we get back to the normal of 1.5 million household formation from these dramatic low levels of household formation that are currently occurring right now. What that obviously involves is children who are coming out of college and going back and staying with their parents because they perhaps don’t have jobs or they’re concerned about their job security. This doubling up is quite a new phenomenon for the U.S. and has implications going forward for a changed environment.
MR. SMITH: If I could interject one comment here, the – I think the future housing market will be very, very, very strongly influenced by what we refer to the millennial generation. Used to call them Generation Y, but we’ve got a better name for them now, the millennial generation, which are people in their 20s and early 30s. And based upon studies of their opinions, opinion polls, et cetera, surveys, they seem to feel pretty much the same way towards housing that other generations have felt. They’d like to have a house, they see it as desirable. The big difference here is that a significant number of them don’t have a house. A lot of this, though, seems to be more related to their stage in life – they’re younger, they have less money, they’re paying off debts, et cetera – than anything else. So as they work their way through the pipeline, one would expect that the millennial generation, based upon current knowledge, will behave much the same way as everybody else, and we won’t fall through the floor; we’ll continue to have a significant demand for housing.
QUESTION: Thank you.
OPERATOR: Our next question, Zdenek Fucik with Czech News Agency. You may ask your question.
QUESTION: What do you think the government should have or still should do to revive the housing market, and what is your view of the latest steps announced by the Obama Administration to help the people with underwater mortgages and so on?
MS. WACHTER: That program is a very good program. It is targeted so that it will help. And for those it helps, it’s a major – will be major to about a million homeowners potentially, which doesn’t really address the huge problem. It’s a start, and it might be a template for future resolution on the – from the private sector. There’s also a announcement yesterday on refinancing FHA mortgages into lower rates which prevail today, and that also is a win-win both for the borrowers and for the country as a whole as we have, as a result of that, fewer defaulting and delinquent mortgages going forward since mortgage payment burden will be lessened.
MR. SMITH: I think NAR is in favor of measures that will facilitate the markets to keep people in their homes and so forth. Now, the government programs are very widespread in terms of various objectives and details and so forth, and we agree with some of the parts and disagree with other parts, but overall, we welcome government help in terms stabilizing the market.
OPERATOR: Once again, if you’d like to ask a question, please press *1. One moment.
Once again, if you’d like to ask a question, please press *1. One moment. Our next question, Bukola Shonuga with Global Media Productions, you may ask your question.
QUESTION: Yes, hi. Can you hear me? I was just wondering what can be done at this moment to regain consumer confidence (inaudible). Not only that, I’m not sure (inaudible) looking for presently in terms of job security (inaudible) consider someone looking for a loan, a first-time owner.
MS. WACHTER: I’m sorry, I didn’t hear the second part of that question.
QUESTION: I said I was wondering what length of employment the banks are looking for right in order to consider someone that’s looking for a loan, someone that (inaudible) first time home buyer.
MS. WACHTER: Well, certainly having a job is key to that. There’s income to cover the mortgage payment. That’s obviously being checked very carefully, unlike the situation during – in the run-up to the crisis. But there’s also issues of creditworthiness and whether credit score is sufficient to qualify the borrower for a mortgage. And of course, there’s the issue of if you’ve been in a home and you’ve been delinquent and defaulting and foreclosed upon, you’re probably not going to be able to borrow again for some time.
So putting this all together, since the recession has harmed people’s credit scores, and of course, we have a population of people, unfortunately, who are – have been foreclosed upon, that weighs down the market. But as you asked in the first part of the question, confidence is all, and confidence has, in fact, increased. Consumer confidence has increased recently, and I think it’s very much a matter of jobs. As jobs increase, the overall economy improves. I think that’s going to bolster confidence.
MR. SMITH: I guess I would just add that, in my opinion, it’s going to be a slow recovery because confidence took quite a hit. Jobs will help. The other thing that people are very concerned about is the loss of household wealth. If you – depending upon how you measure it, somewhere around $13- to $15 trillion worth of household wealth was lost during the great recession. We’ve regained some of that right now, but that’s just about the level of our GDP in a year. So when you’ve lost a year’s pay, it’s kind of difficult to be real confident immediately. So the recovery is slow. The household wealth is coming back one way or another, and the consumer confidence is coming back, but I think it’s going to be a slow recovery.
OPERATOR: Our next question, Louise With with Borsen. You may ask your question.
QUESTION: Yes, thank you. Hello again. I just had a follow-up on the elections and the current election cycle, whether that’s likely to have any effect, positive or negative, and what are the – what’s the experience from previous elections, whether people sort of hold out to wait and see what happens and what policy is going to be in place, or is that not significant for the housing market? Thank you.
MS. WACHTER: I do think the elections are significant no matter what the outcome is, just in terms of getting more certainty and more focus on housing policy. And that will be important.
OPERATOR: There are no further questions.
MR. THORN: Okay. With that, let me just add, and ask the same, if there is anybody else that has another question that they want to ask while we still have some time. Otherwise, I’m going to say thank you to everyone, to all of our journalists who participated and our presenters, and let you know that as soon as there is an audio link and transcript available, it will be forwarded to you. I’m always available to you at my email address, and once again, I want to thank everybody for their participation today. Thank you.
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