Transcript Home Price Declines - Television Bureau of Advertising :: TVB Online

The Economic Outlook:
Fasten Your Seatbelts
David Wyss
Chief Economist
Standard & Poor’s
September 4, 2008
CONFIDENTIAL AND PROPRIETARY.
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Copyright (c) 2008 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
The U.S. Is In Recession
• The economy has moved into recession.
• Housing has been in recession for two years, subtracting over a percentage point
from GDP growth in 2007.
• But that was offset by strength in nonresidential construction and the closing of
the trade gap, each of which added back over a half point.
• Weaker overseas growth will mean less benefit from the trade deficit, despite the
declining dollar.
• Nonresidential construction is beginning to decline
• The fiscal stimulus package will cause the fiscal 2008 deficit to more than double,
and could beat the 2004 record. But it should boost the economy late this year.
• The Fed has cut rates sharply.
• The recession should be mild because of the fiscal and monetary stimulus
• But probably long.
• And a deeper recession is possible if the financial markets remain locked up, oil
prices continue to rise, and home prices continue to drop.
CONFIDENTIAL AND PROPRIETARY.
2.
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The Housing Bubble
• Housing was too affordable, thanks to low mortgage rates
• But what happened when rates went up?
• Ratio of home price to income hit a record high in 2006,
• Which could not be maintained at higher interest rates
• We built too many houses at too high prices
• Starts and sales have dropped sharply
• Defaults and foreclosures have soared, cutting back on
willingness to lend
• Prices are down 15% from their peak
• We expect to hit bottom on starts this summer
• But prices probably won’t hit bottom until early 2009.
CONFIDENTIAL AND PROPRIETARY.
3.
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Home Prices Were Too High
(Ratio of average home price to average household disposable income)
4.5
4
3.5
3
2.5
2
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Existing
New
Quality-adjusted
Source: BEA, Census
CONFIDENTIAL AND PROPRIETARY.
4.
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Bubbles Were Almost Everywhere
(Percent increase in home prices, 1997-2005)
US
Canada
Germany
Switzerland
Netherland
Britain
Ireland
Italy
Sweden
France
Spain
Japan
Australia
China
NewZealan
Hong Kong
-100
-50
0
50
100
Source: Mortgage Bankers’ Association and S&P
CONFIDENTIAL AND PROPRIETARY.
5.
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150
200
250
Most Weakness Is In The Bubble Cities
(S&P/Case-Shiller Home Price Indexes)
Top 5
Charlotte
Dallas
Denver
Portland, OR
Seattle
2002-2005
Price/income
May-08
average
ratio (2005)
(12-month percent change)
-0.2
4.1
3.8
-3.1
2.7
3.0
-4.8
2.6
4.5
-5.2
13.1
5.0
-6.3
12.2
7.1
20-City Average
-15.8
14.3
6.3
Bottom 5
Las Vegas
Miami
Phoenix
Los Angeles
San Diego
-28.4
-28.3
-26.5
-24.5
-23.2
17.5
19.9
20.6
15.8
17.2
6.1
8.6
5.1
13.4
14.0
Detroit
-17.4
3.1
2.6
Source: Standard & Poor’s, Census Bureau
CONFIDENTIAL AND PROPRIETARY.
6.
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Home Price Declines
(1-year change in home prices, First quarter)
+3% or more
0% to +3%
0% to -3%
-3% or worse
Source: OFHEO
CONFIDENTIAL AND PROPRIETARY.
7.
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The Fed Is Done Cutting
(Percent)
10
8
6
4
2
0
1995
1997
1999
2001
Federal Funds Rate
2003
2005
2007
10-Yr Bond Yield
Source: Federal Reserve
CONFIDENTIAL AND PROPRIETARY.
8.
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2009
2011
Mortgage rate
Foreign Money Is Coming Into Private Bonds
(Net inflows of long-term capital, Millions of dollars)
1400000
1200000
1000000
800000
600000
400000
200000
0
2001 2002 2003 2004 2005 2006 2007
Treasury
Agency
Private
Source: US Treasury.
CONFIDENTIAL AND PROPRIETARY.
9.
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Equity
Quality Spreads Are Widening From Record Lows
(Spread over Treasury yields, percentage points)
12
10
8
6
4
2
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Default rate (12-month)
Old spread series
Credit spread
Source: Standard & Poor’s Global Fixed Income Research
CONFIDENTIAL AND PROPRIETARY.
10.
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The World Is Ignoring The U.S. Sniffles
• World growth remains solid
• Slower growth in the US and Europe is offset by stronger growth
in Asia
• The train has more engines attached
• And the world is thus less dependent on US growth
• We expect a slight slowdown in world growth, to 4.2% from 5.4%
in 2007
• But the big trade and capital imbalances are a risk
• And higher oil prices could still slow growth more
CONFIDENTIAL AND PROPRIETARY.
11.
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World Growth Remains Strong
(Real GDP, % change)
10
8
6
4
2
0
United
States
Western
Europe
2006
Japan
2007
Eastern
Other
Latin Mid East
SubEurope Asia-Pac America
&N
Saharan
Africa
Africa
2008
2009
Source: Global Insight and S&P
CONFIDENTIAL AND PROPRIETARY.
12.
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2010
And Comes Mostly From Asia
(IMF purchasing power weights, 2006)
Other
20%
US
20%
Other
17%
US
12%
Eurozone
9%
East Eur
7%
Japan
3%
East Eur
11%
Eurozone
15%
India
6%
Japan
6%
China
15%
Other Adv
7%
India
11%
Other Adv
11%
Percent of World GDP
China
30%
Percent of World Growth
Source: IMF
CONFIDENTIAL AND PROPRIETARY.
13.
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The Future Looks Bleak
(Government debt as % of GDP)
600
530
500
350
400
300
200
100
113
173
101
49
223
182
38 62
57
86
220
59 71
0
US
Japan
2005
UK
France
2025
Source: S&P
CONFIDENTIAL AND PROPRIETARY.
14.
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Germany
2050
Aging Populations Will Boost Government Spending
(Ratio of over 65 population to labor force)
60
50
40
30
20
10
0
US
Canada France Germany Italy
UK
Japan AustraliaMexico OECD
2000
Source: OECD
CONFIDENTIAL AND PROPRIETARY.
15.
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2020
Can the Consumer Keep Spending?
• Consumer spending has led the expansion
• But wealth is down because home prices declined and
• Stocks are weak
• Borrowing is more difficult, and home equity loans much less
available
• Confidence has dropped
• Consumers are likely to save more
• But rebates will provide some quick cash
• Most of which will be spent
CONFIDENTIAL AND PROPRIETARY.
16.
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Oil Prices Hit New Records
($/barrel, WTI and deflated by CPI;
household energy purchases as percent of disposable income)
160
140
120
100
80
60
40
20
0
1980
10%
9%
8%
7%
6%
5%
4%
3%
1985
1990
Oil price (WTI)
1995
2005 dollars
2000
2005
% of disp. income (right)
Source: BEA
CONFIDENTIAL AND PROPRIETARY.
17.
2010
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The World Is More Energy Efficient
(Tonnes of oil equivalent per $1000 dollars (2000 dollars) of real GDP)
1
0.8
0.6
0.4
0.2
0
US
France Germany UK
1971
1980
Japan
China
1995
Source: OECD
CONFIDENTIAL AND PROPRIETARY.
18.
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India
World
2004
No Savings, But Lots of Debt
(Percent of after-tax income)
10
140%
8
130%
6
120%
4
110%
2
100%
0
90%
-2
80%
1990 1993 1996 1999 2002 2005 2008 2011
Saving rate
Debt/income (right)
Source: BEA and Federal Reserve
CONFIDENTIAL AND PROPRIETARY.
19.
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Borrowing Against Your Home
$700.00
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
$0.00
1994
1996
1998
2000
Home equity cashed out
2002
2004
Home equity loans
Source: Freddie Mac
CONFIDENTIAL AND PROPRIETARY.
20.
2006
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2008
Stock Market Looks Low Relative To Bonds
(Earnings yield on stocks vs 10-year Treasury)
10
8
6
4
2
0
1990
1993
1996
Earnings/price
1999
2002
2005
Bond yield
Source: S&P and Census Bureau
CONFIDENTIAL AND PROPRIETARY.
21.
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2008
2011
Sluggish Ad Revenue
(Annual percent change)
8
6
4
2
0
-2
-4
-6
-8
-10
2005
2006
Total
2007
2008
TV
Source: McCann Universal, S&P projections
CONFIDENTIAL AND PROPRIETARY.
22.
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2009
Radio
Bottom Line: The Economy Will Recover Slowly
• The recession is expected to be mild but long
• But fiscal policy stimulus will end, keeping the recovery slow
• If financial markets remain locked up
• Home prices continue to fall
• And oil prices continue to rise
• This could turn into a deeper recession
• But we could still avoid recession if
• Financial markets regain confidence
• And oil prices fall
CONFIDENTIAL AND PROPRIETARY.
23.
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Risks to the Economy
(Real GDP, percent change year ago)
6%
4%
2%
0%
-2%
-4%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Baseline
Pessim
Source: BEA, S&P projections
CONFIDENTIAL AND PROPRIETARY.
24.
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26.
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