The Economic Outlook for The Housing Market Dr. Mark G. Dotzour - - PowerPoint PPT Presentation

The Economic Outlook for The Housing Market

• Dr. Mark G. Dotzour

College Station, TX

mdotzour@gmail.com

Beginning our Initial Approach for this Flight

Now

Still at high altitude at rapid speed, starting a gradual descent

Not touching down Not a crash

Why 2019 Will Be Slower

• Housing industry appears to have peaked
• Auto industry appears to have peaked
• Smart phone sales declined in 2017 for first time
• Low oil prices will pressure oil and gas
• Heavy duty trade negotiations with China
• Businesses not using tax benefits to expand
• Congress won’t be interested in growth
• Downdraft in stocks due to lower earnings growth

Why 2019 Will Be Slower

• Corporate earnings growth may have peaked
• Defense spending may have peaked
• Federal budget deficits can’t get too much higher
• Companies “buying ahead” inventory in front of

tariffs

• 2.4% Interest on the 10-Year Treasury

• Mar 1991 to Mar 2001

120 months

• Feb 1961 to Dec 1969

106 months

• Nov 1982 to Jul 1990

92 months

• Jun 1938 to Feb 1945

80 months

• Nov 2001 to Dec 2007

73 months Current expansion as of May 2019 is 120 months HOW LONG CAN IT LAST?

Longest U.S. Economic Expansions

Current expansion began in June, 2009

• Dec 2007 to Jun 2009

18 months

• Jul 1981 to Nov 1982

16 months

• Nov 1973 to Mar 1975

16 months

• Dec 1969 to Nov 1970

11 months

• Nov 1948 to Oct 1949

11 months

Longest U.S. Economic Contractions

Average contraction since 1945 lasts 11 months

Source: National Bureau of Economic Research

Monthly Increase in Jobs

2011 to present

Source: Bureau of Labor Statistics; Federal Reserve Bank of St. Louis 300K

Rate of Wage Growth

1960 to present

Source: Federal Reserve Bank of St. Louis 9% 4%

Job Openings in America

Looking for Workers

Source: Bureau of Labor Statistics

7.5 million jobs open in March

Household Net Worth

since 2000

Source: Federal Reserve Bank of St. Louis Now exceeds $104 trillion

Source: The Conference Board

Consumer Confidence Index

30 40 50 60 70 80 90 100 110 120 130 140 150 Nov-00 May-01 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-08 May-09 Nov-09 May-10 Nov-10 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16 May-17 Nov-17 May-18 Nov-18

Household Debt Service Payments

as a Percent of Disposable Personal Income

Source: Federal Reserve Bank of St. Louis 1980 Lots of fuel left!

Revenue Act of 1964

Enacted February 26, 1964

• Recovery from recession of 1958 was slow.
• JFK campaigned in 1960 with the slogan of

"getting America moving again."

• Proposed cutting individual tax rates from

20-91% to 14-65%

• Proposed cutting the corporate tax rate from

52% to 47%.

Percentage Change in Employment After the Kennedy Tax Cuts

Source: Federal Reserve Bank of St. Louis Enacted Feb1964 Peak Jun 1966 1960 1971

Tax Reform Act of 1986

Enacted October 22, 1986

Top rate for individuals cut from 50% to 38.5%. Major reduction of depreciation for real estate Raised tax rates on capital gains. Corporate tax rate lowered from 50% to 35%.

Index of Leading Economic Indicators After Reagan Tax Cuts

Source: Federal Reserve Bank of St. Louis Enacted Oct 1986 Peak Nov 1988

Early Warning Detection System

Corporate Profits

Source: Federal Reserve Bank of St. Louis

Small Business Confidence:

“Now is a Good Time to Expand”

10 20 30 40

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19

Percent of Respondents

Source: National Federation of Independent Business

Small Business Confidence:

“Hiring Plans in the Next Three Months”

5 10 15 20 25 30

Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Feb-18 May-18 Aug-18 Nov-18 Feb-19

Net Percent of Respondents

Source: National Federation of Independent Business

Q1-19 Q4-18 Q3-18 Q2-18 More Jobs 48% 56% 56% 58% Less Jobs 16% 14% 13% 13%

Large Corporate Hiring Plans:

Next 6 Months

Source: Business Roundtable

Source: Federal Reserve Bank of St. Louis

Leading Index of Economic Indicators

1982 to present

Where Do Interest Rates Go From Here?

10-year Treasury Rate Determines the 30-year Mortgage Rate

Inflation moves the 10-Yr Treasury Rate

Source: Federal Reserve Bank of St. Louis 15% 1985 1965 10-Year Treasury rate Inflation rate

Economists Have Overestimated Inflation Consistently Since 2007

Source: University of Michigan and Federal Reserve Bank of St. Louis Predicted Inflation Actual Inflation 2008

Inflation Rate since 1960

Source: Federal Reserve Bank of St. Louis 2.5% Oil shocks of 1974 and 1979 1975 1980 15%

Inflation Rate since 1960

Source: Federal Reserve Bank of St. Louis 2.5% Oil shocks of 1974 and 1979 1975 1980 15%

Houston and Dallas Employment

Monthly Change Since 1990

Existing Home Sales

Houston

3,000 4,000 5,000 6,000 7,000 8,000 9,000 10,000 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec

2016 2017 2018

Source: Real Estate Center at Texas A&M

2019

Inventory of Unsold Homes

Houston

1 2 3 4 5 6 7 8 9 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18

Months Source: Real Estate Center at Texas A&M

The Future of Housing

Land costs too high near urban centers Building code requirements drive up prices of new home Younger people may not want a lawn Younger people may not want a long commute Younger people may not be interested in lots of square footage Current market is solving the affordable housing crisis by developing RV parks. For average families: Future markets will be farther and farther away from urban centers. Shared work office facilities will locate with the new homes. So will retail service centers.