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The Role of Housing in the Economic Recovery Jason Furman, Chairman, Council of Economic Advisers April 29, 2014 Residential Investment Plunged to Historic Lows Following the Great Recession Figure 1. Residential Investment Percent of GDP 8 2013:Q4 7 6 5 4 1929-2000 average 3 2 1 0 1950 Note: Shading denotes recession. Source: Bureau of Economic Analysis. 1960 1970 1980 1990 2000 2010 1 The Housing Recovery in the Great Recession Differed from Previous Recoveries Not Just in its Severity but in its Dynamics Figure 2. Real Residential Investment During Recoveries NBER-Defined Cycle Trough = 100 260 240 220 200 180 160 1991 140 120 100 80 Average 8 Postwar Recessions 60 40 20 0 -20 Source: Bureau of Economic Analysis. -16 -12 -8 -4 Trough 4 Quarters from Trough 1982 1975 2001 Current (2009:Q2 Trough) 8 12 16 20 2 As Fiscal Policy Began to Act as a Headwind to Growth, Residential Investment Turned a Corner Figure 3. Contributions of Federal Government & Residential Investment to GDP Growth (Q4/Q4 basis) Percentage points (p.p.) 0.8 Federal Sector 0.6 0.4 0.2 0.0 -0.2 -0.4 Residential -0.6 Investment -0.8 -1.0 -1.2 -1.4 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Bureau of Economic Analysis. 3 House Prices Only Started to Recover in 2012 But Have Since Grown at a Robust Pace Figure 4. National House Price Indices Index, Jan. 2012 = 100 160 150 S&P/Case-Shiller (Feb. 14) 140 130 CoreLogic (Feb. 14) 120 Zillow (Mar. 14) FHFA (Feb. 14) 110 100 90 80 2000 2002 Note: Shading denotes recession. Source: Zillow; CoreLogic; FHFA; S&P/Case-Shiller. 2004 2006 2008 2010 2012 2014 4 Credit Availability for Borrowers With Lower FICO Scores Remains Tight Percent 100% Figure 5. Mortgage Originations by FICO Score, First Lien Only 90% 80% 780+ 70% 700 to 779 60% 640 to 699 50% 620 to 639 Up to 619 40% 30% 20% 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: Figure for 2014 only includes data for January and February. Source: CoreLogic. 5 Mortgage Rates Rose in the Second Half of 2013 But Remain Low by Historical Standards Figure 6a. Contract Rates on 30-Year Fixed Mortgages Percent 20 Figure 6b. Contract Rates on 30-Year Fixed Mortgages Percent 6.0 18 5.5 16 14 5.0 12 Week ending 4/25/14 10 4.5 8 4.0 6 4 Week ending 4/25/14 2 0 1975 1980 1985 1990 Source: Federal Reserve Board, H.15. 1995 2000 2005 2010 3.5 5/3/13 3.0 2010 2011 2012 2013 2014 6 Household Formation Has Been Relatively Weak on Average Since 2000 Table 1. Contribution of Selected Determinants for Supply and Demand of Homes Millions (annual avg.) Demand Household Formation Change in Vacancies Net Removals (Residual) Total Demand Supply Single-Family Multi-Family Mobile Homes Total Supply Projections Based on JCHS Low Case Middle Case High Case 2015-2020 2015-2020 2015-2020 1970s 1980s 1990s 2000-2013 1.56 0.10 0.46 1.34 0.34 0.06 1.11 0.19 0.35 0.91 0.32 0.23 1.23 0.15 0.33 1.29 0.15 0.33 1.34 0.15 0.33 2.13 1.75 1.65 1.46 1.71 1.77 1.82 1.14 0.62 0.37 0.99 0.51 0.25 1.10 0.27 0.28 1.04 0.29 0.13 2.13 1.75 1.65 1.46 Note: 2010 JCHS projections used for Change in Vacancies and Net Removals. Sources: Joint Center for Housing Studies (JCHS). Baseline Household Projections for the Next Decade and Beyond (2014); Updated 2010- 2020 Household and New Home Demand Projections (2010). 7 The Percentage of Young Adults Living With Older Family Members Climbed to Historic Highs in 2012 Figure 7. Young Adults Living With Older Family Members Percent 48 2012 46 44 42 40 38 36 34 32 30 1976 1981 Source: Bureau of Labor Statistics; CEA calculations. 1986 1991 1996 2001 2006 2011 8 Demographic Trends Suggest that the Construction Glut Preceding the Great Recession Has Been Largely Worked Off Figure 8b. Cumulative Over- and Under-Building of Residential and Manufactured Homes, 1996–2014 Figure 8a. Cumulative Over- and Under-Building of Residential and Manufactured Homes, 1996–2014 Millions of units 6 Millions of units 3 2 Apr-2007 Relative to projected annual average demand for new units based on demographic trends 5 4 3 1 Relative to projected annual average demand for new units based on recent demographic trends Apr-2007 Feb-2014 2 0 1 -1 "Correction years" 2007–2014 "Boom years" 1996–2006 -2 0 -1 -2 Feb-2014 -3 1996 1998 2000 2002 Source: Census Bureau; CEA calculations. 2004 2006 2008 2010 2012 "Boom years" 1996–2006 2014 -3 1996 1998 2000 2002 "Correction years" 2007–2014 2004 2006 2008 2010 2012 2014 9 Going Forward, Residential Construction Should Return to Higher Levels Implied by Demographics Figure 9. Building Permits for New Residential Units Thousands, seasonally adjusted annual rate 3,000 Mar. 14 2,500 2,000 1,500 1,000 Estimate of Current Annual Average Demand 500 0 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Census Bureau; CEA calculations. 10 The Housing Sector Is One of the Most Cyclically Volatile in the Economy Figure 10. Total Private and Residential Constrution Employment 12-month percent change 15 Mar. 2014 10 5 Total Private 0 -5 -10 -15 Residential Construction -20 -25 -30 1985 Source: Bureau of Labor Statistics. 1990 1995 2000 2005 2010 11