Friday, August 26, 2011

Chart(s) of the Week: Housing Starts Redux

by Stephen Malpezzi, Professor and Lorin and Marjorie Tiefenthaler Distinguished Chair in Real Estate

A few weeks ago, when I inaugurated Chart of the Week, we looked at U.S. housing starts using annual data from 1890 to 2010. There is usually more than one way to design a chart, especially for such a key data series. I promised then to do a follow-up with more about starts, and here we are. We’ll use this opportunity to highlight three important elements of charting data: (1) re-expression; (2) periodicity; and (3) seasonal adjustment.

First, re-expression. Two friends -- Nino Pedrelli and Ann Danner -- asked how the key chart would look if we made an adjustment for the changing size of the U.S. population. In 1890, US population was about 63 million; and with average household size of about five, we had about 13 million resident households. Today's population stands at about 310 million, or with a household size of 2.6, about 118 million households.

Let's look at the simple transformation of our annual housing data we presented two weeks ago. (Take a look at that chart first, to refresh your memory.)

Today’s first chart simply divides the annual number of total housing starts by the number of households in the U.S., represented by the thick blue line and the first y-axis. In the starts chart from our first posting, prewar housing starts of half a million to a million didn’t look terribly impressive compared to the postwar starts ranging between 1-2 million and above (until recently). But compared to the number of households, in today’s chart, we see that the 20s were a real boom and bust.

Part of the reason for the relatively high rate of starts many decades ago was higher population growth. Today’s Figure 1 also shows the annual rate of population growth, using the red line and the second y-axis. Pre-Depression U.S. population growth usually ran at 1½ to 2% per year, quite a bit higher than today's 1%. (Note also the decline in population growth during the Depression, and the big one-time shifts in resident population associated with movements to and from overseas during the World Wars). Other factors, not addressed directly in the chart, include changes in the rate of depreciation of typical units, rising incomes and concomitant demand for larger and better units, geographic mobility, and the fact that average household size was declining more rapidly a century ago than it’s declining today.

Next let’s look at the issues of periodicity and seasonal adjustment. Many basic real estate and economic indicators come with varying “time signatures,” e.g. annual, quarterly, monthly and so on. We looked at annual starts before partly because annual data are available for the longest time span, back to 1890. Monthly housing starts data for the U.S. are available after 1959. These are available both as seasonally adjusted, and unadjusted.

Figure 2 presents both these monthly series starting in 1987. We start in 1987 instead of 1959 here simply to allow the reader to see patterns within years more clearly.

Seasonal adjustment arises because when we look at one month (or quarter) of data and compare it to the previous period, we often wish to somehow account for regular and fairly predictable changes in certain months or quarters. For example, weather affects construction – more new houses are started in May than in January for obvious reasons (at least in Wisconsin).

Many time series, then come two ways – seasonally adjusted (often expressed at annual rates), or not seasonally adjusted. The seasonal pattern in Figure 2 is obvious, with unadjusted starts spiking in April or May of most years, hitting low points in December and January.

Figure 3 presents the seasonally adjusted data all the way back to 1959; and our final chart combines all three elements by presenting monthly housing starts per 1000 population.

Two key results are evident from Figure 4. First, we see a declining trend in starts per capita over the last 50 years; this trend remains even if we omit the last few years of data. Second, even after accounting for this trend, recent housing starts are the lowest that we've observed per capita since collection of the monthly data began in 1959.

Friday, August 19, 2011

Are interest rates low enough to get the housing market moving again?

Yesterday, Madison's Channel 3000 News interviewed Professor Stephen Malpezzi on the outlook on the housing market given historically low mortgage interest rates. (Homebuyers Take Advantage Of Low Mortgage Rates, Aug 19, 2011 - video embedded below)

While the added incentive will likely pickup the housing market, experts don't expect it to be enough to pull the U.S. out of its slump."Getting employment back up is going to have a lot to do with getting that housing market problem healed and getting us back on track," said Steve Malpezzi, a business professor at the University of Wisconsin-Madison.

Professor Morris A. Davis was interviewed on Wisconsin Public Radio on Monday (Mortgage Rates Drop, But Getting a Good Rate Can Be Tough, Aug 15, 2011 + audio): while mortgage rates have reached record lows,

Morris Davis, Associate Professor in the Department of Real Estate at UW-Madison's School of Business, says there's a catch, "It's harder to get a mortgage than it used to be. Underwriting standards are much more strict than they were just a few years ago."

However, (from Channel 3000)
What Malpezzi does caution against right now is flipping a home. He said home values are still fluctuating and could even dip, so it would be difficult to buy a home, fix it up and sell it for a profit within a couple of years.

Tuesday, August 16, 2011

Welcome MBA Class of 2013

This week marks the kick-off of orientation activities for the incoming Class of 2013 MBA students in Real Estate and other specializations at the Wisconsin School of Business. We call this orientation period The Wisconsin MBA Experience.

The official beginning of a student’s career as a Wisconsin MBA student is the Wisconsin MBA Experience, an interactive pre-MBA program that takes place prior to the start of formal classes. Over the nine-day experience, students are introduced to the facilities, resources and technology available at the Wisconsin School of Business. They also get to know faculty advisors and fellow classmates, including those in the respective career specialization. Students gain a clear view of the expectations and demands of the Wisconsin MBA program, as well as its policies and procedures.

The 2011 Wisconsin MBA Experience is scheduled for August 17 – August 25 and is mandatory. Classes begin on Friday, September 2, 2011.

Scheduled activities for the 2011 Wisconsin MBA Experience include:

Career Resources
• Overview of MBA Career Development
• Resume Review and Guidance
• Employer Panel Discussion

Teambuilding Events
• Team-building activities led by Facilitator [including the Badger Dash scavenger hunt for Real Estate students--more on that to come!]
• Student, Faculty and Staff Dinner

Review Sessions
• Case Study Analysis and Presentation Review
• Seminars on Leadership, Communication, Strategy
and Teams.
• Math and Excel Review sessions

Enrollment and Advising
• Academic Program Advising
• Payroll and Benefits Review (Merit- Based Aid Recipients)

Click here for more information on the 2011 Wisconsin MBA Experience.

Click here to past stories on this blog about student orientation activities.

And welcome back to the Class of 2012!

Tuesday, August 9, 2011

Comments on the economy

It's been an active few days and weeks for economic developments around the world, and everyone wants to know what it all means. Experts on all sides have been weighing in.

Paul Krugman's Sunday column "Credibility, Chutzpah and Debt" has generated a lot of buzz in the media and blogosphere. Associate Professor and Graaskamp Center Academic Director Morris A. Davis says he agrees with about two-thirds of the article.

[And] Neither do market participants ... Treasury yields fell today! So the decline in stocks is about risk or a revision on future growth expectations. (I don't agree with Krugman's assessments that our budget problems are so painlessly fixed).

Davis also notes that the S&P is down nearly 17% in the past 2 weeks which may signal the start of Europe's (2nd) financial crisis and wonders if the big European banks are insolvent.

The housing market continues to depress the U.S. economy ("Why the housing market is still dragging down the recovery," Washington Post, 8/9/11)

A weak housing market can have other adverse effects, too. Some 28 percent of homeowners with a mortgage owe more than their property is worth. That’s bad for obvious reasons—those homeowners are more likely to default and be foreclosed on—but it can also hurt economic output, if it prevents people from moving to take jobs. “A homeowner who is underwater might hesitate to take an opportunity in a different location, because they’d have to move and write their bank a check at closing,” says Morris Davis, an associate professor of real estate and urban land economics at the Wisconsin School of Business—though, he cautions, this effect still isn’t entirely visible in the data.

Beyond wondering about the big picture, the next question people are asking is what does it mean for consumers? See "Downgrade on US debt could translate into higher interest rates on credit cards and mortgages" from yesterday's Washington Post.

And just like a lower consumer credit score implies that a borrower is a less reliable, a lower credit rating for government bonds implies there is more risk involved in lending money to the government.

Prices for U.S. government debt rose in the first few hours of trading on Monday, a sign of increased demand despite the downgrade. But it is unclear what will happen in the long term, because of the unprecedented nature of the lower rating and the decisions by Moody’s and Fitch to keep their highest ratings for now.

S&P’s downgrade may have several implications for homeowners.

For starters, early Monday S&P downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac, which are both backed by the U.S. government. That could mean higher mortgage rates for new borrowers.

Variable rate mortgages and home equity loans could become more expensive as well.

The high failure rate for adjustable rate mortgages during the housing meltdown means that today the number of new home loans with adjustable rates is minimal — less than 5 percent of the market, according to Stephen Malpezzi, an economics professor at the University of Wisconsin Business School who follows the housing market.

But Malpezzi still has concerns. Consumers should be aware--even in the best of times, but especially now--of the terms of their financial contracts like mortgages and credit cards. "An amazing number of people don't even know if they have an ARM or a fixed rate," said Malpezzi.

Start with these questions from the Associated Press's article "How to learn if the US downgrade could affect you"

Do you have a fixed-rate mortgage or an adjustable-rate mortgage? What might cause your interest rate to change? How often could it adjust? And what about your credit cards? Do they have a fixed or variable rate?

Research shows many people can't answer these questions.

Consumers need to check the fine print of mortgage documents and credit card agreements.

Here are some questions to ask as you try to assess whether your loans could be affected by the market turmoil:
  • Can my interest rate increase?
  • What benchmark or index is my loan or card tied to?
  • How much might my monthly payments increase?
  • How many times per year can my rate adjust?

Davis does see a glimmer in the unemployment figures.

...unemployment rates among professionals remain much lower than the overall unemployment rate. The nation's jobless rate was 9.1% overall in July but 4.7% for management, professional and related occupations, according to the Bureau of Labor Statistics.

That relatively strong job market for professionals bodes well for developers building upscale apartments, said Morris Davis, University of Wisconsin-Madison associate professor of real estate.

Tuesday, August 2, 2011

Wisconsin MBA is hitting the road

The Wisconsin MBA program is hitting the road, participating in MBA forums around the country and-for the first time-across the Atlantic in London (this Thursday!).

This year we are participating in the Kaplan Road to Business School and the QS World MBA Tour in cities including London, Atlanta, Dallas, Chicago, Seattle, San Francisco, LA, Boston, DC, New York, Minneapolis, and Salt Lake City.

So come to a forum in a town near you, meet with us, and find out how you can put our unique specialized MBA to your advantage. Wisconsin Real Estate alumni will be on hand in several cities to talk about their experience in our program and answer your questions.

Visit our Facebook page for the complete list of cities and dates. Then say hi to Erin and Maria when you see them!