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 a crash Not touching down

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

Longest U.S. Economic Expansions Current expansion began in June, 2009 • 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 Contractions Average contraction since 1945 lasts 11 months • 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 Source: National Bureau of Economic Research

Monthly Increase in Jobs 2011 to present 300K Source: Bureau of Labor Statistics; Federal Reserve Bank of St. Louis

Rate of Wage Growth 1960 to present 9% 4% Source: Federal Reserve Bank of St. Louis

Job Openings in America Looking for Workers 7.5 million jobs open in March Source: Bureau of Labor Statistics

Household Net Worth since 2000 Now exceeds $104 trillion Source: Federal Reserve Bank of St. Louis

100 110 120 130 140 150 30 40 50 60 70 80 90 Nov-00 Consumer Confidence Index May-01 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 Nov-04 May-05 Source: The Conference Board 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 Lots of fuel left! 1980 Source: Federal Reserve Bank of St. Louis

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

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

Early Warning Detection System

Corporate Profits Source: Federal Reserve Bank of St. Louis

Small Business Confidence: “Now is a Good Time to Expand” Percent of Respondents 40 30 20 10 0 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 Source: National Federation of Independent Business

Small Business Confidence: “Hiring Plans in the Next Three Months” Net Percent of Respondents 30 25 20 15 10 5 0 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 Source: National Federation of Independent Business

Large Corporate Hiring Plans: Next 6 Months Q1-19 Q4-18 Q3-18 Q2-18 More Jobs 48% 56% 56% 58% Less Jobs 16% 14% 13% 13% Source: Business Roundtable

Leading Index of Economic Indicators 1982 to present Source: Federal Reserve Bank of St. Louis

Where Do Interest Rates Go From Here?

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

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

Economists Have Overestimated Inflation Consistently Since 2007 Predicted Inflation Actual Inflation 2008 Source: University of Michigan and Federal Reserve Bank of St. Louis

Inflation Rate since 1960 15% Oil shocks of 1974 and 1979 2.5% 1975 1980 Source: Federal Reserve Bank of St. Louis

Inflation Rate since 1960 15% Oil shocks of 1974 and 1979 2.5% 1975 1980 Source: Federal Reserve Bank of St. Louis

Houston and Dallas Employment Monthly Change Since 1990

Existing Home Sales Houston 10,000 9,000 8,000 2018 2017 7,000 2016 6,000 5,000 2019 4,000 3,000 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec Source: Real Estate Center at Texas A&M

Mar-18 Mar-17 Mar-16 Inventory of Unsold Homes Mar-15 Mar-14 Mar-13 Source: Real Estate Center at Texas A&M Mar-12 Mar-11 Mar-10 Mar-09 Houston Mar-08 Mar-07 Mar-06 Mar-05 Mar-04 Mar-03 Mar-02 Mar-01 Mar-00 Mar-99 Mar-98 Mar-97 9 8 7 6 5 4 3 2 1 0 Months

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.