US Housing Market: An Update

From the Global Housing Watch Newsletter: September 2015

What are the latest developments and emerging trends in the US housing and mortgage markets? This was the overall question that was the subject of a recent conference organized by Goldman Sachs in New York City on September 11. Here is a brief summary on the conference takeaways (extracts are taken from a note prepared by Hui Shan and Marty Young, both from Goldman Sachs).

On the housing market: “Housing starts far from normal, but hard constraints prevent a faster pace of normalization. The prolonged downturn disrupted the supply chain. For example, trade schools for construction workers disappeared, local governments cut back on their capacity in granting building permits, and builders did not begin buying lots three years ago, as they were not sure that housing had bottomed or could not secure financing. These forces add up to a slow pace of recovery.” Moreover, “There has been a seismic shift in household composition, with more singles and more families without kids. Both demographic and business cycle forces point to expanded growth in multi-family rental into the future.”

On the mortgage market: “There is still some distance to go for FHA [Federal Housing Administration] to provide certainty to mortgage lenders. Until this is achieved, lenders will continue to impose overlays when making FHA mortgages. This puts the lower-end of the housing market at a disadvantage because of its heavy reliance on FHA mortgages.” Also, it was noted that “Despite the advent of new technologies, including automated underwriting systems and automated appraisal tools, the time required to close a mortgage remains around 45 days, close to the time required during the 1990s.”

On how technology can change the housing and mortgage markets? “Compared to many other industries, housing and mortgage markets have lagged in their adoption of technology. More recently, real estate brokers have been using online search data to predict house price and home sales movements.” However, more could be done. For example, “Embracing e-Mortgage technology could potentially shorten closing timelines and reduce costs.”

On policy: “Housing policy needs to adapt to the new economy. Traditional ways of underwriting mortgages need to be changed to adapt to the evolving economy. For example, new FICO score formulas that reduce the weight of medical debt need to be incorporated. Income of borrowers such as Uber drivers needs to be underwritten properly. An inability to adjust to the changing economy can result in an inadvertent tightening of mortgage lending.”

India's Housing Market: What's happened? What's next?

From the Global Housing Watch Newsletter: September 2015

What’s happened to India’s housing market? There seems to be a slowdown and also a rising stock of unsold houses. This development has led to different views on India’s housing market. In a recent interview, Raghuram Rajan (Reserve Bank of India—RBI) said that “if real estate developers, who are sitting on unsold [housing] stocks, start bringing down prices, that will be a very big help to the sector because once there is a sense that the prices have stabilized more people will be willing to buy. (...) we also don't want to create a situation where prices stay high at the level, which means demand can't pick up (...)”. Similarly, the National Housing Bank (NHB) and Rayman Partners also agree that house prices are high. In terms of how long it will take to clear the housing inventory, Knight Frank says that “Mumbai has the highest number of unsold units in India (...). However, the NCR [National Capital Region] market will take the maximum time to liquidate its existing unsold inventory. At the current pace of sales, NCR will take more than four years to exhaust the unsold homes completely. Pune is currently the healthiest market, with the lowest QTS [quarters to sell unsold inventory] and a relatively lower age of unsold inventory”.



However, PropTiger and Farook Mahmood (Silverline Group and Chairman of NAR-India 7th Annual Convention) noted that when we talk about housing inventory data, we need to differentiate between the different types of inventory (e.g. ready-to-move-in vs. under-construction).





Also, the price of the unsold housing stock differs. For example, “69% of Mumbai’s unsold housing stock is priced above Rs. 1 Crore”, notes Ramesh Nair at Jones Lang LaSalle. Meanwhile, Irfan Razack (Prestige Group) stated that “(...) prices could come down only if the government reduced taxes related to property and ensured speedy approval of projects.” And Shashank Jain (PricewaterhouseCoopers) said “(...) developers were unlikely to drop base prices (...) if base prices were reduced, buyers may hold back purchases expecting more cuts in future. That would become counterproductive for the industry and economy.” Finally, a report by Ambit notes that there is “(...) a broad-based real estate pullback, with prices correcting in most tier I and tier II cities alongside sharp drops in transaction and new launch volumes. The drivers for this slowdown are a mix of supply-side factors (banks have pulled back lending to developers) and demand-side factors (the black money bill has created fear amongst speculators).”

What’s next for India’s housing market? “As the economic growth has started to take off, the overall buyer sentiment is expected to rise. Presumably, developers are counting on this to happen and hence holding the prices”, according to the RBI’s latest report. Meanwhile, PropTiger says that the housing market “(...) will soon be in better shape with the number of new launches likely to rise (...) when the festival season begins in October (...) the Q1 report predicts that the prices are not likely to fall in the near future.” On the unsold inventory, Knight Frank says that “(...) the unwinding process of the excess unsold inventory in these markets has already commenced since the first half of this year and (...) this process will continue for another six months in order to bring stability in the residential market. The deliberate slowdown in new launches undertaken by the real estate developer fraternity seems to be a pragmatic step in this direction and will hopefully lead the industry towards a path of sustainable development.” Finally, Shashank Jain says that “The inherent Indian demographics still makes the country’s real estate sector attractive. But if you are looking at short-term gains, then that continues to be a challenge (...) The long-term story is intact.”

The Stekler Award for Courage in Forecasting (Recessions Inaccurately)

My presentation at the Federal Forecasters Conference summarized my work on the inability or unwillingness of forecasters to predict recessions. I also suggested that to get forecasters to predict recessions (even inaccurately) we should have a Stekler Award for Courage in Forecasting. The award would be in honor of noted forecaster Herman Stekler who says that forecasters should predict recessions early and often and that he himself has predicted 9 of the last 5 recessions. If there was such an award, the 2015 award would go to Lakshman Achuthan of ECRI, who called for a U.S. recession in 2012 in September 2011. ECRI recently explained why it made the call, which is worth reading—the link is given in my presentation. In the running for the 2016 award would be Michael Shedlock (“Mish”) who at the start of this year predicted that Canada and the U.S. would slip into recession this year.

Developments in Israel's Housing Market

The IMF's latest report on Israel points out that "To contain further housing price increases, supply needs to be boosted. Concerted efforts among relevant ministries and local governments are needed. To contain the increase in leverage, macroprudential measures should be used."

Housing Market in Saudi Arabia

"The government is continuing to implement its program to provide affordable housing. In light of the growing population and reported high house prices in the major cities, this is a considerable challenge. Estimates suggest that 160-180,000 new homes will need to be built each year over the next few years to meet growing demand. The government has allocated SR 250 billion from the budget surplus fund for the program, and the Ministry of Housing is continuing to develop options to support buyers which include the provision of interest-free loans (up to SR 500,000), and the payment of interest on behalf of the borrower for mortgage loans taken out from banks. The provision of support to buyers is being allocated according to a points system that favors those with greater need. On the supply side, options being developed include the provision of free public sector land and the proposed “white lands tax” which would increase the land available for housing", according to the IMF's annual report on Saudi Arabia.

Israel’s Labor Market: High Inequality, Low Productivity

A new IMF report provides an in-depth look at Israel’s labor market:

• Inequality in Israel is among the highest in the OECD (this refers to net income inequality, that is, inequality of income after tax and transfers). The income share of the richest 10 percent of people is 13 times the share of the bottom 10 percent, a ratio that is exceeded only by the United States. Real disposable incomes of the top decile have increased since the 1980s, while incomes of the bottom decile have stagnated. Israel’s Gini coefficient of disposable income is among the highest in the OECD.

• Average incomes in Israel are similar to those in Korea and New Zealand but well below the level in richer Western European countries and the United States. There was rapid catch-up toward U.S. incomes between 1950 and the mid- 1970s, but since then Israel’s average income has stagnated at around 60 percent of US average incomes.

• Part of this stagnation is due to low productivity growth. One reason may be that Israel is the most restrictive amongst advanced economies in terms of product market regulations—state control, barriers to entrepreneurship, and barriers to trade and investment all rank amongst the highest across its peers.. In terms of sectors, Israel ranks amongst the highest in regulation of network sectors, retail trade and professional services.

Rising House Prices and Household Debt: A Twin Boom in Norway?

"The Norwegian housing market was only moderately affected by the global financial crisis, and the rising trend of house prices resumed shortly after the crisis. In the meantime, household debt reached more than 200 percent of disposable income, and it is expected to grow further", a new IMF paper examines the characteristics of household debt and the factors driving the housing boom and debt accumulation. The paper also examines the potential macroeconomic impact of a possible house price correction. Read the report here.

Metals and Oil: A Tale of Two Commodities

By IMF colleagues: Rabah Arezki and Akito Matsumoto

“It was the best of times, it was the worst of times.” With these words Charles Dickens opens his novel “A Tale of Two Cities”. Winners and losers in a “tale of two commodities” may one day look back with similar reflections, as prices of metals and oil have seen some seismic shifts in recent weeks, months and years.

This blog seeks to explain how demand — but also supply and financial market conditions — are affecting metals prices. We will show some contrast with oil, where supply is the major factor. Stay tuned for a deeper analysis of the trends in a special commodities feature, which will be included in next month’s World Economic Outlook.

Metals matter

Base metals — such as iron ore, copper, aluminum and nickel — are the lifeblood of global industrial production and construction. Shaped by shifts in supply and demand, they are a valuable weathervane of change in the world economy.

There is no doubt about the direction of the prevailing wind for metals in recent years. Prices have been gradually declining since 2011 (chart 1). While oil prices have also dropped, the decline is more recent (prices peaked in 2014), and more abrupt. That said, in both cases the downward pressure on prices result broadly from abundant production from the era of high prices. This is now coming to roost with lower demand from both emerging markets and advanced economies. There are importance nuances however in the relative strength and nature of those forces.

Appetite for production

In the early 2000s, demand for metals shifted from advanced economies in the West to emerging markets in the East. China, by far the main driving force, now accounts for half of global base metal consumption (chart 2). Compare that with China’s more modest consumption of 14% of the world’s oil which is almost exclusively used for transportation.

It is therefore no surprise that metals prices are heavily influenced by demand, and the needs of one economic giant in particular. India, Russia and South Korea have also increased their metal consumption, but remain far behind China. The slower pace of investment in China in the last few years, however, compounded by concerns over future demand amid the sharp stock market decline and currency devaluation this summer, have been exerting downward pressure on metal prices.

Oil supply glut

Oil prices tell a different tale. Our view is that supply factors are playing a bigger role than demand. See also our blog from last December. OPEC’s decision to maintain its level of production and strong shale oil production in the United States — in addition to the large production capacity from earlier investment — have contributed to an unprecedented supply glut.

Continue reading here. 

Macroprudential Policies in the Philippines

The IMF's report on the Philippines points out the macroprudential policies that have been implemented. The report says: "In light of the acceleration in credit growth in 2014 and risks of domestic asset price booms, the BSP [Central Bank of Philippines] conducted stress tests on banks’ real estate loan exposures and required corrective actions, enhanced monitoring of banks’ exposures to all types of real estate, and provided guidance on real estate mortgage loans, setting their maximum loan value at 60 percent of the appraised value. These measures have helped to restrain credit growth to the real estate sector. Single borrower limits (set at 25 percent of core capital) should be strictly enforced with the additional 25 percent allowance for exposures to PPPs allowed to lapse."

What Lies Behind Norway’s Low Unemployment Rate?

The unemployment rate in Norway is one of the lowest among OECD countries. At the same time, according to an IMF report, absence from work due to sickness “is the highest among the OECD countries, and so is expenditure on health related benefits, which is more than 5 percent of GDP. About one-fifth of the working age population receives income supports related to health problems or disability, which is nearly everybody who is not working. Disability benefit recipients are thus sometimes considered as “disguised” unemployment or early retirement in Norway. This is not surprising; there is an inverse relationship among European countries between the unemployment rates and the disability benefit recipient rates; economies with low unemployment often have high disability rates, suggesting that the two forms of labor market insurance tend to be used as substitutes.”

Norway: Peak in Oil Fortunes?

“Norway’s half century of good fortune from its oil and gas wealth may have peaked,” according to an IMF report. “Oil and gas production will continue for many decades on current projections, but output and investment have flattened out, and the spillovers from the offshore oil and gas production to the mainland economy may have turned from positive to negative. Thus far, economic policy has needed to focus on managing the windfall, and Norway’s institutions have been a model for other countries. Going forward, the challenges will become more complex. The problems of managing “Dutch disease” are not gone, but they will abate, particularly if the recent drop in oil prices is sustained. However, they will be replaced by the difficulties of managing a transition away from what has been an increasingly oil- and gas-dependent mainland economy.”

Labor Day Special: How Countries Rank on Whether Growth Creates Jobs

Does economic growth lead to job creation in the short run (over a year)? This new report ranks the G20 countries on how well they are able to translate short run growth into more jobs. Check your guesses against the answers in the report.

Turkey’s Labour and Social Security Minister Ahmet Erdem (center), surrounded by Labour and Employment Ministers of the G20, poses for a family photo during the G20 Ministerial meeting in Ankara, Turkey on Sept 3. (AFP)