January 2012

Jobs + Consumer Confidence = Housing Market Recovery

It’s hard to pay a mortgage—or buy a home—without a job. And while Illinois job growth has kept pace with the nation over the last year it’s been a long time coming. Twenty-one years to be exact, says economist Dr. Geoffrey J.D. Hewings, director of the Regional Economics Applications Laboratory (REAL) and professor of Geography, Economics and Urban and Regional Planning for the University of Illinois.

For 2012, Dr. Hewings says expectations for the Illinois housing market are for “modest change” with sales levels similar to 2011 and continued declines in median prices leading to price recovery in 2013.

In early November, Illinois REALTOR® magazine traveled to the university’s Urbana campus to talk with Dr. Hewings and get insights into the 2012 Illinois housing market—factors working in favor and against.

Geoffrey J.D. Hewings, Ph.D.  | Director, Regional Economics Applications Laboratory (REAL), University of Illinois  

Interview by Ann Londrigan.

IR: What’s the most important factor for the housing market in the year ahead?

Dr. Geoffrey J.D. Hewings: I think it all comes down to one thing, jobs. And the reason for that is jobs provide the energy into the housing market in four major categories. 

1. New buyers. People who are entering the market for the first time, often soon after they get their first or second job.
2. Housing turnover. People who have jobs, lived in the community for a while, decide as a result of their family increasing to upsize, relocate within the same community.
3. Job relocation. When the housing market is very strong the U.S. is very different from most other countries. There is enormous job turnover, some years as many as one in four households is moving. A lot of times this is because of job relocation.
4. Retirees. The final source of energy into the housing market comes when people leave the labor market when they retire, they often sell a house in one location and move somewhere else and buy a house there.

+ RETIREES + JOB RELOCATIONS + GROWING FAMILIES = SOURCES FOR HOME SALES

As we look at the economy, particularly the Illinois economy, there’s some good news. For example the last 11 months (through September 2011) we have matched U.S. growth and we have not done that for a number of years. In fact, since 1980 Illinois has only outperformed the U.S. economy three times and that’s all been before 1990 so for the last 21 years we’ve always lagged behind what has been going on nationally. But the last 11 months we have been keeping pace with the nation.

What is even more interesting, the Rest of the Midwest (RMW: Indiana, Iowa, Michigan, Missouri, Ohio, Wisconsin) is growing more rapidly than the U.S. Why is that good news? Because 40 percent of Illinois exports go to our Midwest neighbors. So if they are recovering faster, they are creating more jobs, and potentially this will create more demand for Illinois products and as a result hopefully we will see more jobs being added.

40% of Illinois exports go to our Midwest neighbors, so if they are recovering faster, they are creating jobs, this will create more demand for Illinois products.

IR: Where are the jobs?

Hewings: What is really surprising about job growth is it is occurring in sectors that in the last 20 years have been declining. In particular, Trade, Transportation and Utilities, Construction and Manufacturing. Those are the three top performers in Illinois at the moment, and that is good news because these are relatively high-paying jobs, and as a result of the ripple effect they are likely to create additional jobs as a result of the spending that comes from these wages and salaries.

Illinois top 3 performing job sectors of the moment…are relatively high-paying jobs. Manufacturing, Construction, Transportation

IR: How will the 2012 elections affect the housing market?

Hewings: It’s clear entering an election year this is not going to be good news for the economy because on one side of the aisle we have people who hope the economy does not recover so they can use that as leverage. The other side wants the economy to recover so they have something to go to the voters and claim that things are really starting to turn around. So I think 2012 is not going to be a year where we are going to see much in movement one way or the other.

IR: How will the global economic turmoil affect the housing market?

Hewings: As we look more globally, there is still enormous concern about what is happening in Europe…and I think this is having a deleterious effect on the whole recovery of the European zone. And this is important because so much of U.S. trade is with Europe, so it is in our best interest that this part of the world recover.

Illinois is not quite as exposed to the European market as other parts of the U.S. Most of our trade relations are with Canada and Mexico and so for us the North American region is still the most vital region. But indirectly we do suffer from this meltdown that started in Greece, that may spread to Spain and Portugal and even Italy because when there is uncertainty in the world market, there is risk-averse behavior that takes places throughout and we need to be mindful that these things can still come home to haunt us.

When there is uncertainty in the world market, there is risk-averse behavior that takes place.

IR: What is the forecast for 2012?

Hewings: The housing market looks as though we might be in for at least a modest recovery over the next year at least in terms of sales but prices unfortunately continue to trend down. But let’s hope by the end of next year, with most of the foreclosed properties off the market, prices will begin to recover and in 2013 we can see some upward trend in prices.

IR: What’s working in favor of the housing market?

Hewings: What’s working in favor of the housing market right now is the low mortgage interest rates and huge inventory. So consumers have enormous choice and there is not the enormous pressure that there was during the boom where people had to grab anything they could find and did not really have time to be a little reflective. That is good news for the consumer, the buyer.

From the seller there is a little bit of continuing concern and that’s related to distressed properties. But the good news is that after achieving a peak in March of [2011] we have seen that the number of scheduled auctions has decreased in the last several months and the number of filed foreclosure notices has declined about 18 to 20 percent in August and September as compared to the same months [in 2010].

Illinois retirees may be better off taking a lower price here because they can attain an even lower price in the areas they want to relocate.

IR: What’s the expectation for home prices?

Hewings: As we look around the country we are noticing a number of metropolitan markets where there as been some slight upward movement in prices. Areas of the country that still have not recovered are California, Utah, Arizona and Florida and these are places that remain in the top five in terms of price erosion and the number of foreclosed properties.

And that’s important for us to realize because a lot of our retirees are staying put; they’re not selling their properties and moving there because their prices here have declined, but what they have not realized is that the prices in the markets where they want to relocate are declining even more rapidly. And, in fact, they may be better off taking a lower price here because they can attain an even lower price in the areas they want to relocate. 

By the end of [2012] we might be in the position where most of the properties on the market are in fact non-foreclosed properties so we will start to see some price increases.

About the REAL Forecast

Economists from the University of Illinois Regional Economics Applications Laboratory (REAL) developed the Illinois housing price forecast using an augmented distributed lag model as the framework to relate house pricing and the economic business cycle. This “ARIMA” model is considered a highly accurate forecasting method and one that can be easily updated with data provided by the Illinois Association of REALTORS® each month and quarter and selected monthly economic data available for the state and metropolitan regions. Home sales and price information is generated from a survey of Multiple Listing Service sales reported by 31 participating Illinois REALTOR® local boards and associations including Midwest Real Estate Data LLC.

Learn more about REAL at www.real.illinois.edu. The Illinois Housing Market REAL Forecasts are available to IAR members at www.illinoisrealtor.org/marketstats. Ann Londrigan is the IAR staff liaison to the REAL project.