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Is There Bubble in US Housing Markets MIT

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Is There Bubble in US Housing Markets MIT Powered By Docstoc
					MIT Center for Real Estate




        Is There a “Bubble” in
        US Housing Markets?

                Professor William Wheaton
                 Department of Economics
                   Center for Real Estate
                            MIT
                      February 2005
MIT Center for Real Estate
   Measuring Prices: Exp = Price x Q (consumption)
E = NAR, P = OFHEO, Q = “housing quality+quantity”

        Real Home Price Index (1975 =100 for OFHEO, 1990=100 for NAR)
  160

  150

  140

  130

  120

  110

  100

   90
        1975
        1976
        1977
        1978
        1979
        1980
        1981
        1982
        1983
        1984
        1985
        1986
        1987
        1988
        1989
        1990
        1991
        1992
        1993
        1994
        1995
        1996
        1997
        1998
        1999
        2000
        2001
        2002
        2003
        2004
                       OFHEO                      NAR
MIT Center for Real Estate
     US Housing: prices versus ability to pay
         (what about the last 3 years?)
         1975 =100
         Const $2004
   160

   150

   140

   130

   120

   110

   100

    90
         1975
         1976
         1977
         1978
         1979
         1980
         1981
         1982
         1983
         1984
         1985
         1986
         1987
         1988
         1989
         1990
         1991
         1992
         1993
         1994
         1995
         1996
         1997
         1998
         1999
         2000
         2001
         2002
         2003
         2004
                       Income per Worker
                       Income per Person
                       Home Price
MIT Center for Real Estate

US Housing: stock versus unit demand: right in line with
                estimated households

       1970=100
 200
 190
 180
 170
 160
 150
 140
 130
 120
 110
 100
       1970
       1971
       1972
       1973
       1974
       1975
       1976
       1977
       1978
       1979
       1980
       1981
       1982
       1983
       1984
       1985
       1986
       1987
       1988
       1989
       1990
       1991
       1992
       1993
       1994
       1995
       1996
       1997
       1998
       1999
       2000
       2001
       2002
       2003
       2004
             Population   Employment   Single-Family Stock
MIT Center for Real Estate

Flows and Changes: highly correlated with the
       Economy (except for 2001-2004)
       % Change
   8

   6

   4

   2

   0

  -2

  -4

  -6
       1971
       1972
       1973
       1974
       1975
       1976
       1977
       1978
       1979
       1980
       1981
       1982
       1983
       1984
       1985
       1986
       1987
       1988
       1989
       1990
       1991
       1992
       1993
       1994
       1995
       1996
       1997
       1998
       1999
       2000
       2001
       2002
       2003
       2004
            E m ploy m ent   S ingle-F am ily S toc k   Real Hom e P ric e
 MIT Center for Real Estate

 What is a Real Estate “Bubble”?
• Definition A: repeated ups and downs in prices
  with the appearance of some predictability, but
  with no implication as to cause.
   – Up and down economic shocks to the Housing market?
   – Inherent cyclic dynamic by the market to shocks?
• Definition B: a run up in prices specifically
  caused by unsustainable beliefs on the part of
  market participants.
   – How to assess? Certainly not with aggregate data.
   – CSW/FISERV recent buyer survey.
   MIT Center for Real Estate
      Market dynamics with “Bubble Definition A”
Response of Prices to demand shock (greater employment):
     Intrinsic “mean reversion” as supply kicks in .
 MIT Center for Real Estate
       Market Dynamics with “Bubble Definition B”
 In response to demand “shock” new supply “overshoots”
generating repeated oscillations or “mean over-reversion” .
    MIT Center for Real Estate

            What leads to instability?
• More elastic supply, less elastic demand .
• A high rate of long term demand growth.
• Long Delivery lags for new supply(n)
• Extrapolative expectations (definition B) as
  opposed to forward, efficient expectations by
  buyers/builders.
• In any case, all models above have “mean
  reversion” (definition A) [Shiller, et. al].
• Empirical application: a 2-variable VAR?
MIT Center for Real Estate

 Texas Home Price Appreciation: none!
And there is risk of nominal price declines!
             Real Index $2004.2
             1987Q1=100
     140


     130

     120


     110
                                                                                                                                         Nation
     100
                                                                                                                                         Houston
                                                                                                                                         Austin
      90
                                                                                                                                         Dallas

      80                                                                                                                                 San Antonio


      70

      60
           1987
                  1988
                         1989

                                1990
                                       1991
                                              1992
                                                     1993
                                                            1994
                                                                   1995
                                                                          1996
                                                                                 1997

                                                                                        1998
                                                                                               1999
                                                                                                      2000
                                                                                                             2001
                                                                                                                    2002
                                                                                                                           2003

             Source: OFHEO                                                                                                        2004
MIT Center for Real Estate
Mid West Home Price Appreciation: surprisingly
    strong (50% since 1987) but little risk.
          Real Index $ 2004Q2
          1987Q1=100
  170

  160
                                                                                                                                      Detroit
                                                                                                                                      Minneapolis
  150
                                                                                                                                      Chicago
                                                                                                                                      Nation
  140
                                                                                                                                      Kansas City

  130

  120

  110

  100

   90

   80
        1987

               1988

                      1989

                             1990

                                    1991

                                           1992

                                                  1993

                                                         1994

                                                                1995

                                                                       1996

                                                                              1997

                                                                                     1998

                                                                                            1999

                                                                                                   2000

                                                                                                          2001

                                                                                                                 2002

                                                                                                                        2003

                                                                                                                               2004
                       Source: OFHEO
  MIT Center for Real Estate

  Calif. Home Price Appreciation: highest in the US
       (75% above 1987) but with great “risk”.
      Real Index $2004.2
      1987Q1=100
210
200                                                                                           San Jose

190                                                                                           San Diego
180
                                                                                              San Francisco
170
                                                                                              Oakland
160
150                                                                                           Orange County

140                                                                                           Sacramento
130
                                                                                              Los Angeles
120
                                                                                              Riverside
110
100                                                                                           Nation

 90
 80
 70
      1

          5

              9

                  13

                       17

                            21

                                  25

                                       29

                                            33

                                                 37

                                                      41

                                                           45

                                                                49

                                                                     53

                                                                          57

                                                                               61

                                                                                    65

                                                                                         69
                  Source: OFHEO
      MIT Center for Real Estate

  Northeast Appreciation: Lots of risk here too and
             only 45% ahead of 1987.
       1975= 100
300
                                             B os ton
275

250                                          N e w Y o rk

225                                          W a s h in g t o n , D C
200
                                             P h ila d e lp h ia
175
                                             N a t io n
150

125

100

 75

 50
      1975
      1976
      1977
      1978
      1979
      1980
      1981
      1982
      1983
      1984
      1985
      1986
      1987
      1988
      1989
      1990
      1991
      1992
      1993
      1994
      1995
      1996
      1997
      1998
      1999
      2000
      2001
      2002
      2003
      2004
     MIT Center for Real Estate

         So lets examine the Boston Market in more detail.
         Can Prices be forecast? What do the forecasts say?

                                       Employment growth
0.100
              MG
             EP
              EL C
             R A IN G
              NM
             UE P
0.075


0.050


0.025


0.000


-0.025


-0.050


-0.075
          1977   1980   1983   1986   1989   1992   1995   1998   2001   2004   2007   2010   2013
         MIT Center for Real Estate
          2 equation VAR (single lag): prices, stock. Conditioning
            variables: Employment, Personal Income, Mortgage
               levels/changes. Note that permits lead prices!

                                                                      Boston
                 Actual and fitted values of real pr ices                                            Single Family Permits
0.16                                                                         7200
          RHPI                                                                         PERMITS
          FORESVAR                                                                     FOREPER



0.00
                                                                             6400


-0.16
                                                                             5600


-0.32
                                                                             4800

-0.48

                                                                             4000
-0.64


                                                                             3200
-0.80


                                                                             2400
-0.96



-1.12                                                                        1600
        1977 1980 1983 1986 1989 1992 1995 1998 2001 2004   2007 2010 2013          1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
        MIT Center for Real Estate
               Model Back test (data ends forecast begins in 1998):
               under forecasts prices, over forecasts growth in stock
                 (permits). Poor performance of stock equation.
                                                                                  Boston
                   Actual and fitted values of rea price
                                                  l     s                                                          Single Family Permits
0.16                                                                                   7200
          RHPI                                                                                   PERMITS
          FORESVAR                                                                               FOREPER



0.00                                                                                   6400


-0.16
                                                                                       5600


-0.32
                                                                                       4800

-0.48

                                                                                       4000
-0.64


                                                                                       3200
-0.80


                                                                                       2400
-0.96



-1.12                                                                                  1600
        1977     1980   1983   1986   1989   1992   1995   1998   2001   2004   2007          1977   1980   1983   1986   1989   1992   1995   1998   2001   2004   2007
  MIT Center for Real Estate
Univariate Model with multiple lags (1,4,8 quarters) versus a
single lag (red). Conditioning on: employment/or population,
          personal income, mortgage levels/changes )
                                    Boston
   0.6
           H
          R PI
            R
          FO E
   0.4      R
          FO E1
            R
          FO E2
   0.2

  -0.0

  -0.2

  -0.4

  -0.6

  -0.8

  -1.0

  -1.2
         1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
 MIT Center for Real Estate

           Model back test (from 1998): pretty close
              (except for the single lag version)
                                        Boston
0.2
        RHPI
        FORE
-0.0    FORE1
        FORE2


-0.2


-0.4


-0.6


-0.8


-1.0


-1.2
       1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
 MIT Center for Real Estate


       Forecasting: the bottom Line
• VAR model says “correction” should have
  happened in 2001.
• Univariate says “correction” should have
  happened this year: 2004
• Forecast going forward is for “correction” to last
  3 years (until 2007) and for 10% -15% cumulative
  price decline in real dollars (easy to live with).
• Similar story with other MSAs.
• Is it happening? What’s different this time around
  (and hence not in the data!).
MIT Center for Real Estate

       Huge Price-Rent Wedge this time around

       1975=100
       Cons t $ 2004
 150

 140

 130

 120

 110

 100

  90

  80
       1975
       1976
       1977
       1978
       1979
       1980
       1981
       1982
       1983
       1984
       1985
       1986
       1987
       1988
       1989
       1990
       1991
       1992
       1993
       1994
       1995
       1996
       1997
       1998
       1999
       2000
       2001
       2002
       2003
       2004
                       Home Price   Rent
MIT Center for Real Estate

The Price-Rent “ wedge” reflects a huge shift into
                home ownership
          Homeownership Rate, %                     Renter Households, Millions
    70                                                                               40
    69                                                                               38
    68                                                                               36
    67                                                                               34
    66                                                                               32
    65                                                                               30
    64                                                                               28
    63                                                                               26
    62                                                                               24
    61                                                                               22
    60                                                                               20
         1965


                1970


                        1975


                               1980


                                      1985


                                             1990


                                                       1995


                                                               2000


                                                                      2005


                                                                              2010
                   Homeownership Rate, % (L)
                   Renter households if homeownership stablizes at 69%
                   Renter households if homeownership increases to 70%
MIT Center for Real Estate
 Was it demographics? The surging number of
       “prime home buying households”

        Population, Millions
   70
                                                                    Forecas t
                                               Age 20-34
   60



   50



   40
                                                        Age 45-59
   30



   20
             1960            1970       1980     1990       2000    2010


        Sources: Bureau of the Census
MIT Center for Real Estate
         Demographics explains some increase in
       ownership, but is the rest just interest rates ?
     Homeownership Rate, %                                Mortgage Rate, %
69                                                                           19

68                                                                           17

67                                                                           15

66                                                                           13

65                                                                           11

64                                                                           9

63                                                                           7

62                                                                           5

61                                                                           3
     1965
     1966
     1967
     1968
     1969
     1970
     1971
     1972
     1973
     1974
     1975
     1976
     1977
     1978
     1979
     1980
     1981
     1982
     1983
     1984
     1985
     1986
     1987
     1988
     1989
     1990
     1991
     1992
     1993
     1994
     1995
     1996
     1997
     1998
     1999
     2000
     2001
     2002
     2003
                        Actual Homeownership Rate
                        Age-Expected Homeownership Rate
                        Mortgage Rate
 MIT Center for Real Estate
     True: nominal rates have been at 30 year lows,
             but real rates have not been!
     Inflation adjus ted rate, %
12

10

 8

 6

 4

 2

 0

-2

-4
     1955



             1960



                      1965



                               1970



                                      1975



                                             1980



                                                      1985



                                                               1990



                                                                       1995



                                                                                2000
                    P rim e R ate            30-Y ear F ix ed M ortgage R ate
MIT Center for Real Estate

Ownership has soared from the explosive growth
     of the sub-Prime Lending Market!

              Homeownership Rate, %                                                                     Subprime Loan Originations, $ Bil.
 70                                                                                                                                       400

 69                                                                                                                                                                           360
 68                                                                                                                                                                           320

 67                                                                                                                                                                           280

 66                                                                                                                                                                           240

 65                                                                                                                                                                           200
 64                                                                                                                                                                           160

 63                                                                                                                                                                           120

 62                                                                                                                                                                           80
 61                                                                                                                                                                           40

 60                                                                                                                                                                           0
      1980
             1981
                    1982
                           1983
                                  1984
                                         1985
                                                1986
                                                       1987
                                                              1988
                                                                     1989
                                                                            1990
                                                                                   1991
                                                                                          1992
                                                                                                 1993
                                                                                                        1994
                                                                                                               1995
                                                                                                                      1996
                                                                                                                             1997
                                                                                                                                    1998
                                                                                                                                           1999
                                                                                                                                                  2000
                                                                                                                                                         2001
                                                                                                                                                                2002
                                                                                                                                                                       2003
  MIT Center for Real Estate

But US Housing Unit Flows (1998-2004) still
             don’t add up.
 • Household formation: 1.2m owners, 0.0m renters!
   (huge rent-to-own flow ).
 • MF construction for rent: 0.3m – 0.07m condos –
   0.07m demolitions = .16m net (+).
 • Rental vacancy has been rising .16m yearly since
   late 1990s.
 • SFU construction: 1.4m (1.6m in 2004) + condos
   = 0.3 – 0.5m “surplus”.
 • Surplus = removals? = investor/2nd homes?
                   0
                       1
                           2
                               3
                                   4
                                       5
                                           6
                                               7
                                                   8
                                                       9
                                                           10
    Philadelphia

        Chicago

       Memphis

       Nashville

      Columbus

     Milwaukee

      Cincinnati

       Baltimore

  Oklahoma City

      Cleveland
                                                                                                                                                                                                            MIT Center for Real Estate




      Pittsburgh

        Houston

   Salt Lake City

    Minneapolis

    San Antonio

  San Francisco

        Hartford

         Boston

         Fresno

     Bakersfield
                                                                V ac ant Seas onal & Oc c as ional Us e Homes as Share of A ll V ac ant Homes , %




         Tucson

    Sacramento
                                                                                                                                                         says that they are (still) tiny (3% nationally).




        Phoenix

West Palm Beach
                                                                                                                                                    The “surplus” could be second homes, but 2000 Census
MIT Center for Real Estate

Mortgage Originations however tell a very different story
       from the 2000 Census. (1-4 family only)


          Share of loans , %
    10%
     9%
     8%
     7%
     6%
     5%
     4%
     3%
     2%
     1%
     0%
            1999       2000        2001   2002      2003        2004

                      2nd Hom es                 Inves tm ent
   MIT Center for Real Estate
The 2nd home share of mortgage originations (1-4 family only)
here looks much more like what one would expect. What’s up?
    msa                                   cnt purchased cnt 2nd home    pct 2nd home
    Las Vegas, NV-AZ                            43,454          7,548        17.37%
    Phoenix-Mesa, AZ                            67,277          6,108         9.08%
    Riverside-San Bernardino, CA                47,944          5,055        10.54%
    Orlando, FL                                 29,810          4,357        14.62%
    Tampa-St. Petersburg-Clearwater, FL         36,753          3,930        10.69%
    W est Palm Beach-Boca Raton, FL             21,459          3,564        16.61%
    Fort Myers-Cape Coral, FL                   11,967          3,202        26.76%
    Fort Lauderdale, FL                         26,733          2,766        10.35%
    Miami, FL                                   30,036          2,458         8.18%
    North Carolina                              15,399          2,417        15.70%
    Sarasota-Bradenton, FL                      11,949          2,363        19.78%
    Atlantic-Cape May, NJ                        6,926          2,309        33.34%
    Myrtle Beach, SC                             4,518          2,236        49.49%
    Naples, FL                                   6,471          2,211        34.17%
    Florida                                     10,091          2,061        20.42%
    Colorado                                     9,018          2,036        22.58%
    Michigan                                    11,552          1,919        16.61%
    Daytona Beach, FL                            9,168          1,885        20.56%
    California                                  11,940          1,869        15.65%
    Los Angeles-Long Beach, CA                  58,316          1,706         2.93%
    New York, NY                                51,128          1,673         3.27%
    Chicago, IL                                 98,765          1,652         1.67%
    Atlanta, GA                                 57,192          1,551         2.71%
    San Diego, CA                               28,953          1,509         5.21%
    W hi t       DC MD VA W V                   73 174          1 500         2 05%
 MIT Center for Real Estate

                     To Wrap Up
• We have begun to exceed “fundamentals”- since
  2001
• We should have (had) some correction (by) now.
  (definition A).
• An “omitted” variable is price pressure from the
  entry level market with sub-prime lending. Hence
  we could be in for a sharper correction if rates
  rise, foreclosures flood the market….
• 2nd home buying is surging because housing is
  now perceived as a better investment than…
  Hence a sharper correction could also happen
  should that perception change. (this is definition B
  = “speculation”).

				
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