Oahu housing and economic policy trends · Longer-run trends in real Oahu mean single-family home...

Copyright 2018

Paul H. Brewbaker, Ph.D., CBE

Oahu housing and economic policy trends

prepared for the

Honolulu Board of Realtors

Windward Regional Groupby Paul H. Brewbaker, Ph.D., CBE

TZ Economics, Kailua, Hawaii

July 26, 2018

1

Slide copyright 2018

Oahu housing market trends: still good news; still going?

[This slide intentionally left blank]

2


Oahu 2010s existing home sales growth more modulated than during

late-1990s/early-2000s overexuberance; even slow things must pass

Monthly sales volumes, s.a. (log scale)

800

600

500

400

300

200

100

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Lehman

Brothers

Source: Honolulu Board of Realtors Monthly Housing Statistics (various); monthly data through June 2018, seasonal adjustment by TZ Economics

U.S. recessions shaded

3


Slight pile-up in seasonally-adjusted Oahu months of inventory

remaining in 2018 not inconsistent with housing market slowdown

0

2

4

6

8

10

12

14

Months of inventory remaining, s.a.

2004 2006 2008 2010 2012 2014 2016 2018

U.S. recession shaded2.802.51

2.27

2.46

Source: Honolulu Board of Realtors Monthly Housing Statistics (various); monthly data through June 2018, seasonal adjustment by TZ Economics

4


734

Quarterly units, s.a. (log scale)

2,000

1,000

700

500

300

200

1980 1985 1990 1995 2000 2005 2010 2015 2020

Sources: Honolulu City & County Department of Planning and Permitting, Hawaii DBEDT (http://dbedt.hawaii.gov/economic/qser/selected-county-tables), author’s records; seasonal adjustment and extraction of

stepwise trend components by TZE


Quarterly Oahu new housing units authorized by building permit:

2010s recovery positioned to extend if not cut off by policy changes

http://dbedt.hawaii.gov/economic/qser/selected-county-tables

5


Oahu conventional mortgage debt service-to-income ratio, a measure

of housing affordability, remains within the affordable zone in 2010s

Sources: Bank of Hawaii, Honolulu Board of Realtors, U.S. Department of Housing and Urban Development, Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/series/MORTGAGE30US); TZE calculations on annual

data for single-family homes (only) 1977-2017, conventional mortgage lending assumptions

*Fannie Mae (May 30, 2017) Selling Guide (https://www.fanniemae.com/content/guide/selling/b3/6/02.html)†FHFA (https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Limiting-Fannie-Mae-and-Freddie-MacLoan-Purchases-to-Qualified-Mortgages.aspx)

20

30

40

50

60

1980 1985 1990 1995 2000 2005 2010 2015 2020

Mortgage payment at median prices as percent of median income

34.8%

Debt-to-

income

thresholds

45%*

43%†

[3.5]−1Affordable

Not Affordable

https://fred.stlouisfed.org/series/MORTGAGE30US

https://www.fanniemae.com/content/guide/selling/b3/6/02.html

https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Limiting-Fannie-Mae-and-Freddie-MacLoan-Purchases-to-Qualified-Mortgages.aspx

6


-30

-20

-10

0

10

20

Thousand

persons

2011 2012 2013 2014 2015 2016 2017

Housing market balance because residents are leaving? 2010s Oahu net

domestic out-migration rose from from −8k (2011) to −22k (2017)

18.7 19.6 19.0 19.5 18.9

−8.2 −10.0

−10.8

−15.2 −15.1

−19.8−21.9

20.7 17.8

Int. migr.

Births

Deaths

Domestic

migration

Sources: Hawaii DBEDT (http://files.hawaii.gov/dbedt/census/popestimate/2017-county-population-hawaii/CO_EST2017_alldata.xlsx)

http://files.hawaii.gov/dbedt/census/popestimate/2017-county-population-hawaii/CO_EST2017_alldata.xlsx

7


Hawaii housing valuation: collateral dynamics


8


Thousand dollars, s.a., log scale

500

400

300

250

200

150

100

1990 1995 2000 2005 2010 2015 2020

For the last 7 years, monthly existing home price appreciation rates

on Oahu have remained remarkably steady, with narrow bandwidth

Single-family

Condominium

$430.1k

$761.1k

Source: Honolulu Board of Realtors Monthly Housing Statistics (various); monthly data through June 2018, seasonal adjustment, regression-based projections by TZ Economics

9


Thousand dollars, s.a., log scale

800

700

600

500

400

300

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

A closer look at monthly existing home prices on Oahu since mid-

2011 suggests that single-family appreciation rates are decelerating

5.3%

2.4%

Single-family

Condominium

$434.4k

±2 standard error bandwidth

Source: Honolulu Board of Realtors Monthly Housing Statistics (various); monthly data through June 2018, seasonal adjustment, regression-based projections by TZ Economics

10


Index, 2000 = 100 (log scale)

200

160

120

80

60

40

201975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Broader FHFA All-Transactions Indexes of housing valuations display

convergence to longer-run trends, absence of asset pricing bubble

Source: Federal Housing Finance Agency (https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qat); trend regression by TZE

5.6%

Honolulu MSA (Oahu)

Kahului-Wailuku-Lahaina MSA (Maui)

Other Hawaii Non-Metro

https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qat

11


Index, 2000 = 100 (log scale)

200

160

120

80

60

40

201975 1980 1985 1990 1995 2000 2005 2010 2015 2020

Broader FHFA All-Transactions Indexes of housing valuations display

convergence to longer-run trends, absence of asset pricing bubble

Source: Federal Housing Finance Agency (https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qat); trend regression by TZE

5.6%

Honolulu MSA (Oahu)

https://www.fhfa.gov/DataTools/Downloads/Pages/House-Price-Index-Datasets.aspx#qat

12


Alternatively, model the trend component of real Oahu FHFA house

valuations from its stationary component (note slight curvature)

Real FHFA index, 2017 = 100

100

80

60

40

20

1975 1980 1985 1990 1995 2000 2005 2010 2015 2020


Japan

Bubble

Sub-prime

Bubble

Sources: Federal Housing Financial Administration, U.S. Bureau of Labor Statistics; seasonal adjustment, index re-basing, deflation using quarterly interpolated Honolulu CPI-U, non-linear trend regression by TZE

2%-ish

New

Wave

13


Longer-run trends in real Oahu mean single-family home prices may be

converging shy of constant-dollar $1 million, more striking curvature

Oahu real single-family mean annual home prices

in million constant, 2017, dollars (log scale)

1.0

0.8

0.6

0.4

0.3

0.2

0.1

1960 1970 1980 1990 2000 2010 2020

$982k

(1990)

$1.023m

(2005)+𝜎

−𝜎

Source: Robert C. Schmitt (1976) Historical Statistics of Hawaii, UH Press; Bank of Hawaii; Honolulu Board of REALTORS® Monthly Housing Statistics; U.S. Bureau of Labor Statistics (https://data.bls.gov/cgi-

bin/surveymost?r9); regression-based projection based on Akaike Information Criterion-minimizing nonlinear regression by TZ Economics

$980k-ish

(mid-2018)

https://data.bls.gov/cgi-bin/surveymost?r9

14


Annual Oahu existing home sale price distributions:

snapshots and changing shapes of purchasing power


15


Oahu existing home prices (2017) in $100,000 increments (n = 9,850):

88% < $1 million; 98% < $2 million; 99% < $3 million

Source: Honolulu Board of REALTORS® (2017), histogram estimated by TZ Economics

0

200

400

600

800

1000

1200

1400

0.0 0.5 1.0 1.5 2.0 2.5

Truncated to

include 98.9%

Median $545,000

Mean

$649,00

$1 million

Sales

16


Estimated empirical gamma distribution of all 2017 Oahu existing

home sales prices: 4 out of 5 transactions were below $1 million

Source: Honolulu Board of REALTORS® (2017), empirical gamma distribution estimated by TZ Economics

Oahu Island-wide

Metro Region

.0000

.0002

.0004

.0006

.0008

.0010

Frequency

0.5 1.0 1.5 2.0 $2.5 million

50% 32% 18%

Median $545,000

Mean

$649,00

$1 million

17


Dynamics of 2010s housing cycle from perspective of annual Oahu

existing home sale price distributions: rough start, steady advance

[This slide intentionally left blank; next slides are animated sequence in slideshow, in PDF go through them really fast]

18


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500

Oahu all existing home sales price empirical gamma distribution 2009

Frequency

Source: Honolulu Board of REALTORS®; special correspondence); estimated empirical gamma approximations to the distribution of annual Oahu existing single-family home sales prices by TZE

/ truncated

19


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


20


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


21


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


22


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


23


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


24


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


25


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


26


0.00000

0.00050

0.00100

0.00150

0 500 1000 1500 2000 2500


Frequency

/ truncated


27


Real GDP growth, growth forecasts


28


Quarterly real GDP during the 2010s expansion has grown at trend

rates of 2.17 percent/annum (U.S.), and 1.72 percent/annum (Hawaii)

Hawaii (billion chained 2009 dollars)

76

72

68

64

60

U.S. (trillion chained 2009 dollars)

17

16

15

14

13

2006 2008 2010 2012 2014 2016 2018

Hawaii(left scale)

U.S.(right scale)

U.S. recession shaded Lehman

Brothers

Sources: Bureau of Economic Analysis, U.S. Department of Commerce (https://bea.gov/national/index.htm#gdp and https://bea.gov/regional/index.htm); quarterly data, compound annual percent changes ( ො𝑦) calculated by TZE

from slopes (𝛽) of linear regressions of the natural logs of real GDP (𝑙𝑛 𝑦 ) on time (𝑡 in quarters) ො𝑦 = 100 𝑒4𝛽 − 1 , for the U.S. ො𝑦 = 2.17 from 2009Q2-2018Q1, and for Hawaii ො𝑦 = 1.72 from 2009Q3-2017Q4.

2.2%

https://bea.gov/national/index.htm#gdp

https://bea.gov/regional/index.htm

29


June 2018 NABE forecast survey expectation for U.S. real GDP growth:

3.1 percent 2nd quarter, subsiding to average 2.1 percent by end-2019

-8

-6

-4

-2

0

2

4

Annualized percent change

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20192008

3.1%

2.1%

Sources: Bureau of Economic Analysis, U.S. Department of Commerce (https://bea.gov/regional/index.htm) quarterly data through 2018Q1; National Association for Business Economics (public site at

http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx), quarterly forecasts 2018Q2 - 2019Q4.

Annualized growth 2009Q2 – 2018Q1: 2.12%

Tohoku

Seismic

Event

Polar

Vortex

Superstorm

Sandy

The Great Recession

+𝜎

−𝜎

https://bea.gov/regional/index.htm

http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx

30


-4

-2

0

2

4

1995 2000 2005 2010 2015 2020 2025

Percent

Federal Reserve Board FOMC projections for annual U.S. real GDP growth:

2.7 percent this year, decelerating to longer run potential of 1.7 percent

2.72.4

Sources: Bureau of Economic Analysis, U.S. Department of Commerce (https://bea.gov/national/xls/gdplev.xlsx); annual data through 2017; Federal Reserve Board, Federal Open Market Committee median projections

2018-2020 and longer run, along with range from high and low (of 15 projections)(https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20180321.htm).


2.0

1.7

https://bea.gov/national/xls/gdplev.xlsx

https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20180321.htm

31


June 2018 NABE Survey: “…When do you expect the next recession?”

one-third say not before 2021; two-thirds say most likely by early-2020

Source: National Association for Business Economics Economic Outlook Survey (June 2018) (http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx); Question: “When (in what

year and quarter) do you expect the beginning of the next recession?”

0

10

20

30

Percent of respondents

2018 2019 2020 Later

2.6%

15.4%

20.5%

10.3%

33.3%

2.6%

15.4%


32


Where are we in the real estate cycle and when is the next downturn?

June 2018 U.S. survey results from RCLCO (real estate consulting)

End-2017 Mid-2018

Next

Downturn?

≥ 2021

2020

2019

2018

It started

Source: Len Bogorad, Managing Director, and John Rendleman, Associate (June 28, 2018) RCLCO Mid-Year 2018 Sentiment Survey Results (http://www.rclco.com/pub/doc/RCLCO-Advisory-Sentiment-Survey-

2018-Mid-Year.pdf), used with permission of the publisher

http://www.rclco.com/pub/doc/RCLCO-Advisory-Sentiment-Survey-2018-Mid-Year.pdf

33


Monetary policy and the outlook for interest rates


34


Macro backdrop: FRB policy statement

▪ “The [Federal Reserve Board, Federal Open Market] Committee expects that

further gradual increases in the target range for the federal funds rate will be

consistent with sustained expansion of economic activity, strong labor market

conditions, and inflation near the Committee's symmetric 2 percent objective

over the medium term. Risks to the economic outlook appear roughly balanced.”

▪ “In view of realized and expected labor market conditions and inflation, the

Committee decided to raise the target range for the federal funds rate to 1-3/4 to

2 percent. The stance of monetary policy remains accommodative, thereby

supporting strong labor market conditions and a sustained return to 2 percent

inflation.”

Source: Federal Reserve Board (https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm)

https://www.federalreserve.gov/newsevents/pressreleases/monetary20180613a.htm

35


-100

-50

0

50

100

150

200

Billion $

per month

2008 2009 2010 2011 2012 2013 2014 2015 2016

Mortgage-backed securities

Federal agency debt

Treasury securities

Three rounds of Quantitative Easing concluded

at the end of 2014; now it’s time to unwind

Source: Federal Reserve Board (H.4.1 Factors Affecting Reserve Balances of Depository Institutions); average monthly changes in U.S. Treasury notes and bonds (including TIPS), federal agency debt securities, and

mortgage-backed securities (http://www.federalreserve.gov/releases/h41/)

QE1

QE2

QE3

Change in Federal Reserve securities holdings

http://www.federalreserve.gov/releases/h41/

36


-5

-4

-3

-2

-1

0

1

2

3

4

5

2003 2005 2007 2009 2011 2013 2015 2017

Fed to “begin implementing a balance sheet normalization program this

year [2017], provided that the economy evolves broadly as anticipated”

Sources: Monthly averages of weekly averages, Federal Reserve Board (Statistical Release H.4.1); compiled through June 2018; Federal Reserve Governor Jerome H. Powell (June 01, 2017) Thoughts on the Normalization of

Monetary Policy, presented at the Economic Club of New York (https://www.federalreserve.gov/newsevents/speech/powell20170601a.htm)

Assets

Liabilities

U.S. Treasury securities

Mortgage-backed securities

Credit, liquidity facilities

Federal Reserve notes in circulation

Reserve deposits of depository institutions

Reverse reposLehman Brothers fails

Other liabilities

Trilli

on d

olla

rs

Agency debt

https://www.federalreserve.gov/newsevents/speech/powell20170601a.htm

37


0

1

2

3

4

5

Percent

2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022

U.S. Treasury yields through mid-June 2018, FOMC fed funds projections

(June 2018); FOMC overshooting to longer-run “neutral” fed funds rate

FOMC fed funds rate

projections, June 2018Taper

Tantrum

Source: Federal Reserve Board, Selected Interest Rates H.15 through June 2018 (https://www.federalreserve.gov/releases/h15/) and FOMC forecast from June 2018 meeting

(https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20180613.htm).

Trump Tax

Jump Cut30y

2.9%

U.S. recession shaded

10y

Lehman

Brothers

3.4%

https://www.federalreserve.gov/releases/h15/

https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20180613.htm

38


We can use the co-movement of yields on 10-year U.S. Treasury

Notes and 30-year fixed-rate mortgages to infer their outlook

0

4

8

12

16

Percent

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

30-year fixed-rate mortgage rate

10-year T-Note yield

Sources: Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/series/MORTGAGE30US), Federal Reserve Board (https://www.federalreserve.gov/releases/h15/data.htm)


https://www.federalreserve.gov/releases/h15/data.htm

39


Based on a comparatively stable econometric relationship, 1998-2018,

add 173 basis points to the forecast for yields on 10-year T-Notes

-0.8

-0.4

0.0

0.4

0.8

1.2

3

4

5

6

7

8

Percent points (both scales)

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Residual (left scale)

Actual 30-year rate

Fitted from model

Actual (right scale)

Model (right scale)

Financial crisis shaded

+𝜎

−𝜎

Sources: Federal Reserve Bank of St. Louis (https://fred.stlouisfed.org/series/MORTGAGE30US), Federal Reserve Board (https://www.federalreserve.gov/releases/h15/data.htm); linear regression of former on latter by TZE


https://www.federalreserve.gov/releases/h15/data.htm

40


0 10 20

Responses

2.0

2.5

3.0

3.5

4.0

4.5

Percentage points

0 10 20

Responses

2.0

2.5

3.0

3.5

4.0

4.5

Percentage points

0 10 20

Responses

2.0

2.5

3.0

3.5

4.0

4.5

Percentage points

0 10 20

Responses

2.0

2.5

3.0

3.5

4.0

4.5

Percentage points

3.00%3.25%

3.58%

NABE June 2018 forecast for yields on 10-year U.S. Treasury Notes

plus 173 b.p. gives you 30-year fixed-rate mortgage rate projection

Source: National Association for Business Economics (http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx)

3.45%

2018Q2 2018Q4 2019Q2 2019Q4

Mortgage rate:

4.73%

Mortgage rate:

4.98%

Mortgage rate:

5.18%

Mortgage rate:

5.31%


41


How much do federal policy changes affect economic outcomes?


42


February 2018 NABE Survey: “Tax Cuts and Jobs Act…will increase the

growth rate of real GDP [ ො𝑦] over the next year by (in percentage points)?”

Source: National Association for Business Economics Economic Policy Survey (February 2018) (http://files.constantcontact.com/668faa28001/6279cc45-156e-41dc-8cbc-c22c7aeea425.pdf?ver=1519611505000)

3

4

19

45

18

7

3

0 5 10 15 20 25 30 35 40 45 50

Don't know / no opinion

0%

0 < ො𝑦 < 0.25%

0.25 - 0.49%

0.5 - 0.74%

0.75 - 0.99%

Additional growth ( ො𝑦) ≥ 1.0%

from tax cuts

Percent of respondents

http://files.constantcontact.com/668faa28001/6279cc45-156e-41dc-8cbc-c22c7aeea425.pdf?ver=1519611505000

43


0.0%

0.0%

7.3%

2.4%

29.3%

61.0%

0% 10% 20% 30% 40% 50% 60% 70%


< 0

0

0.01-0.19

0.20-0.39

0.4

June 2018 NABE Survey: “How much do you forecast federal fiscal

policy changes…add to or subtract from real GDP growth (in 2018)?”

Median: 0.4%

> 60% say no less than 0.4%

Source: National Association for Business Economics Economic Outlook Survey (June 2018) (http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx); Question: “How much do

you forecast federal fiscal policy changes will add to or subtract from real GDP growth? (measured Q4/Q4)”


44


0.0%

7.3%

9.8%

12.2%

39.0%

31.8%

0% 10% 20% 30% 40% 50% 60% 70%


< 0

0

0.01-0.19

0.20-0.39

0.4

June 2018 NABE Survey: “How much do you forecast federal fiscal

policy changes…add to or subtract from real GDP growth (in 2019)?”

Median: 0.3%

> 60% say less than 0.4%

Source: National Association for Business Economics Economic Outlook Survey (June 2018) (http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx); Question: “How much do

you forecast federal fiscal policy changes will add to or subtract from real GDP growth? (measured Q4/Q4)”


45


U.S. withdrew from Paris Climate Accord, abandoned Trans-Pacific

Partnership, dumped NAFTA, annoyed G-7, and started a Trade War


46


June 2018 NABE Survey: “…net effect of trade policy on U.S. real

GDP growth?” 75 percent say negative, 12 percent say positive

0

2.4

26.8

46.3

12.2

9.8

2.4

0.0%

0 10 20 30 40 50

Don’t know / no opinion

Strongly negative

Moderately negative

Marginally negative

No net effect

Marginally positive

Moderately positive

Strongly positive

Source: National Association for Business Economics Economic Outlook Survey (June 2018) (http://nabe.com/NABE/Surveys/Outlook_Surveys/June_2018_Outlook_Survey_Summary_v2.aspx); Question: “What is your

current forecast regarding the net effect of trade policy on U.S. GDP growth through the end of 2019?”


47


June 2018 NABE Survey: “…net effect of interest rates on capital

expenditures?” 54 percent say negative, 10 percent say positive


current forecast regarding the net effect of interest rates on business capital expenditures through the end of 2019?”

0

0

17.1

36.6

36.6

4.9

4.9

0.0%

0 10 20 30 40 50


Strongly negative

Moderately negative

Marginally negative

No net effect

Marginally positive

Moderately positive

Strongly positive


48


June 2018 NABE Survey: “…net effect of energy prices on U.S. real

GDP growth?” 55 percent say negative, 17.5 percent say positive

0

0

22.5

32.5

27.5

7.5

10.0

0.0%

0 10 20 30 40


Strongly negative

Moderately negative

Marginally negative

No net effect

Marginally positive

Moderately positive

Strongly positive


current expectation regarding the net effect of energy prices on U.S. real GDP growth through the end of 2019?”


49


Pau


Oahu housing and economic policy trends · Longer-run trends in real Oahu mean single-family home...

Documents

Transcript of Oahu housing and economic policy trends · Longer-run trends in real Oahu mean single-family home...