The Current State and Outlook for the U.S. Economy and Residential Real Estate in 2011
“Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually.�
Federal Reserve Chairman Ben Bernanke FOMC Statement March 15, 2011 2
What Economic Realities are Driving the Current Economic Recovery? Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Commodity prices have risen significantly since the summer, and concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks. Nonetheless, longer-term inflation expectations have remained stable, and measures of underlying inflation have been subdued.
3
U.S. PRODUCTION AND CONSUMPTION 4
Real GDP Growth is showing increasing strength, but remains relatively weak for a recovery… Quarterly Change at SAAR 6.0
5.0 3.2
4.0 2.0
2.3
3.7
2.9
0.9
1.6
0.6
3.5 3.1 2.6 2.1 1.7
0.0 ‐2.0
‐0.7
‐0.7
‐4.0
‐4.0
‐4.9
‐6.0 ‐8.0
Source: Bureau of Economic Analysis 5
‐6.8
, Macroeconomic Advisors
Forecast Estimate
‌but Personal Consumption Expenditures are showing continued improvement‌
Source: Bureau of Economic Analysis 6
‌with continuing improvement coming in Retail Sales‌ 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00%
Retail Sales & Food Services Retail Sales & Food Services (excluding Motor Vehicles and Parts) Source: Census Bureau 7
…while Personal Savings Rates are continuing to trend higher. Personal Savings (NIPA) 14 12
Rate
10 8 6 4 2 0
Source: Bureau Economic Analysis 8
However, growth in Real GDP remains substantially below historical norms for this stage of a recovery. 20
Percent change from previous peak Average of all previous postwar cycles Range
Current cycle
15 10 5
Blue Chip forecast
0 -5 -10 0
3
6
9
12
15
Quarters from previous peak
Sources: Bureau of Economic Analysis, Blue Chip Feb. newsletter
18
21
24
NATIONAL LABOR MARKET
10
Unemployment is off its high, but remains substantially elevated… United States
Cincinnati MSA
12.0
Unemployment Rate
10.0
9.2 8.8
8.0
6.0
4.0
2.0
Source: Bureau of Labor Statistics, Moody’s Analytics 11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
0.0
…with similar improvement in unemployment being seen across the Tri-state area. 12.0
10.4
Unemployment Rate
10.0
9.2 8.8
8.0
Indiana
6.0
Kentucky Ohio
4.0
2.0
Source: Bureau of Labor Statistics, Moody’s Analytics 12
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
May-08
Mar-08
Jan-08
Nov-07
Sep-07
Jul-07
May-07
Mar-07
Jan-07
0.0
Private Sector Job growth is beginning to accelerate‌ Growth in Total Nonfarm Employment 600 400 200 0 -200 -400 -600 -800 -1000
Source: Bureau of Labor Statistics. 13
…while State and Local Government Payrolls continue to decline. 12-month percent change
State Local
Source: Bureau of Labor Statistics.
Although, there are early signs of improvement in some recent Labor Market Indicators… Private-sector employment increased by 201,000 from February to March on a seasonally adjusted basis, according to the latest ADP National Employment Report®. Strength was evident within all major industries and across all size business tracked in the ADP Report. This month’s Report removes any remaining doubt that private nonfarm payroll employment accelerated heading into 2011. (source: ADP National Employment Report)
In the week ending March 26, the advance figure for seasonally adjusted Initial Unemployment Insurance Claims was 388,000, a decrease of 6,000 from the previous week's revised figure of 394,000. The 4-week moving average was 394,250, a increase of 3,250 from the previous week's revised average of 391,000. (source: US Dept. of Labor)
After reaching a seven-year high in 2009, Planned Layoffs in 2010 fell to its lowest level since 1997, as employers announced plans to eliminate 529,973 positions. The year came to a close with the lowest monthly job-cut total since 2000. (source: Challenger, Gray & Christmas) 15
…but the number of Discouraged Workers remains high as does the Duration of Unemployment. Discouraged Workers
30
1400
25
1200 1000
Weeks
20
800
15
600
10
400
Source: Bureau of Labor Statistics 16
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Jan-10
Nov-09
Sep-09
Jul-09
May-09
Mar-09
Jan-09
Nov-08
Sep-08
Jul-08
0 May-08
0 Mar-08
200 Jan-08
5
Thousands
Median Weeks
THE RESIDENTIAL REAL ESTATE MARKET 17
Beige Book Summaries on Residential Real Estate  Federal Reserve System - Recent activity in residential real estate varied, but overall sales and construction remained at low levels across all Districts. - The Richmond, Atlanta, and Chicago Districts reported a slight improvement in the level of recent activity, while Boston noted that activity was mixed across New England. New York described the housing market as stable with some pockets of improvement. Demand was unchanged according to reports from the San Francisco District. Philadelphia, Kansas City, and Dallas described recent activity as sluggish, and St. Louis noted sales continued to decline. - Construction activity was described as flat or down by Cleveland, Atlanta, Minneapolis, and Kansas City. Philadelphia and Atlanta contacts attributed weaker buyer traffic in January to inclement weather, and Philadelphia noted a pickup in early February. Richmond, Kansas City, and Dallas also indicated an increase in buyer traffic. - Reports on home prices were mixed. Atlanta and Kansas City observed persistent downward price pressure. Home prices continued to fall according to Philadelphia reports, but mainly at the highend of the market. Cleveland and Chicago contacts described prices as little changed. - The outlook for residential sales and construction improved marginally, although activity is expected to remain at low levels. Kansas City contacts anticipate a seasonal surge in sales activity this spring. Atlanta, Dallas and San Francisco also expect modest improvement, while little to no sales growth is expected among Philadelphia contacts. A slight uptick is expected in Chicago and San Francisco construction. Source: Federal Reserve Board of Governors, March 2, 2011 Beige Book 18
Beige Book Summaries on Residential Real Estate  Federal Reserve Bank of Cleveland - New home construction was generally flat at a low level during the past six weeks, with purchases mainly in the move-up buyer categories. - A few builders noted that most of their revenues now come from remodeling work. On a yearover-year basis, sales were mainly lower. - Contractors expect construction to remain sluggish through at least the first half of 2011. - List prices of new homes and discounting have shown little change, while some upward pressure on the cost of building materials was reported. - Little movement was seen in land positions or spec inventories. - We heard many reports of subcontractors struggling to stay in business due to very thin margins. - General contractors continue to work with lean crews, and no hiring is expected in the near term.
Source: Federal Reserve Bank of Cleveland, March 2, 2011 Beige Book 19
House Prices are showing the possibility of a “Double Dip” at the national level… 12-month Percentage Change
20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0%
Source: Standard & Poors/Case-Shiller 20-metro Composite Index
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
-25.0%
…due to pressure remaining from a continuing high level of foreclosures. Seriously Delinquent
Foreclosures
7.00
1.60
6.00
1.40 1.20
Rate
5.00
1.00
4.00
0.80 3.00
0.60
2.00
0.40
Source: Mortgage Bankers Association 21
2010Q4
2010Q3
2010Q2
2010Q1
2009Q4
2009Q3
2009Q2
2009Q1
2008Q4
2008Q3
2008Q2
2008Q1
2007Q4
2007Q3
2007Q2
2007Q1
2006Q4
2006Q3
2006Q2
0.00 2006Q1
0.00 2005Q4
0.20 2005Q3
1.00
Single-Family Housing Starts & Permits remain depressed‌ Millions of units Starts
Permits
22
Source: Census Bureau.
‌while Sales have yet to consistently recover, and remain below year earlier levels‌ Existing Home Sales 50.0% 12-month Percentage Change
40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% -30.0% -40.0% -50.0% -60.0%
Source: National Association of Realtors, Census Bureau 23
New Home Sales
‌but Pending Home Sales are slowly, very slowly, showing continued signs of improvement‌ 120.0 100.0 80.0 60.0 40.0 20.0 0.0
Source: National Association of Realtors 24
However, the Cincinnati-Middleton MSA housing market is faring slightly better in price growth. Existing Home Sales
Median Home Prices
60.0
$131.5 $131.0
$130.0
1.5% Increase
$129.5 $129.1 $129.0
39.4
40.0 30.0 20.0 10.0
$128.5 $128.0 2009Q4
2010Q4
Source: National Assoc. of Realtors, Moody’s Analytics Estimates 25
26.9% Decrease
50.0
Thousands, SAAR
Thousands
$130.5
53.9
$131.1
0.0 2009Q4
2010Q4
Existing Home Sales are approximately back to the level they were at the beginning of the prior decade‌ 60.0 55.0
Thousands
50.0 45.0 40.0 35.0 30.0 25.0 20.0
Source: National Assoc. of Realtors, Moody’s Analytics Estimates 26
‌while Housing Affordability significantly exceeds levels seen at the beginning of the decade. House Price
Price-to-Income Ratio
$150
Median House Prices
$140
1.6 1.5
$130
1.4
$120
1.3
$110
1.2
$100
1.1 1.0
$90 $80
Source: National Assoc. of Realtors, Moody’s Analytics Estimates 27
1.7
0.9 0.8
REGIONAL HIGHLIGHTS ACROSS THE TRI-STATE AREA 28
Highlights of the Ohio Economy… •
The housing market has failed to turn the corner, and foreclosures represent a major downside risk to the recovery in 2011.
•
The foreclosure rate is down from its 2008 peak, but this trend could change as the “robo-signing” scandal dissipates.
•
A relatively large inventory of foreclosed properties, particularly in Cincinnati, Toledo and Dayton, as well as more fundamental supply and demand imbalances, will place downward pressure on prices in 2011.
•
Price declines have been moderate, at 5% from peak, versus 10% nationally, based on the FHFA index.
•
The forecast calls for an additional 2% decline in 2011, before recovery begins in 2012
Sources: Moody’s Analytics 29
Highlights of the Kentucky Economy… •
Kentucky’s recovery has gained momentum in recent months, and the risk of a double-dip recession has abated.
•
Payroll employment has climbed steadily over the past year, with job growth well above the national average.
•
Personal income growth slowed in the fourth quarter but remains healthy. KY’s high concentration of manufacturing was a major weakness during the recession, but has been the primary reason the state has outperformed the U.S. over the past year as demand and hiring have picked up.
•
The state’s small house price declines and low foreclosure rate have also contributed to the solid performance.
•
The unemployment rate has held steady at above 10% for the past half-year.
Sources: Moody’s Analytics 30
Highlights of the Indiana Economy… •
Manufacturing employment is showing strength as the national economy continues its recovery.
•
Growing confidence in the recovery will help to boost spending and in the retail and leisure/hospitality sectors.
•
Housing indicators are mixed. Despite improving home prices, demand for new dwellings remains weak, causing construction payrolls to fall to a new cycle low.
•
Education/healthcare remains a bright spot. The industry has been adding jobs throughout most of the year, and payrolls have surpassed their prerecession peak.
•
Sources: Moody’s Analytics 31
Summary & Conclusions The national economic recovery is underway, and is slowly firming. The housing market remains a significant drag on the broader economic recovery - Prices remain under pressure due to >2M houses in shadow inventory - Pending sales trends are promising, but not significant enough to indicate a rapid turnaround - Underwriting remains tight and is likely to remain as such for the near term Employment is recovering, albeit slowly. There is pressure on headline inflation due to growth in commodity and food prices, but core rates remain within subdued. 32