Special Report - Housing Bubble? The Dynamics of the Real Estate Market in Central Wisconsin David Schalow, Ph.D., CLU, ChFC, CFA, CFP
CENTRAL WISCONSIN
SPRING 2021 REPORT
HOUSING BUBBLE? The Dynamics of the Real Estate Market in Central Wisconsin
by David Schalow, Ph.D., CLU, ChFC, CFA, CFP Professor of Business
UWSP
Looking to the Future The Center for Business and Economic Insight staff is looking forward to getting back to normal and that means reviving our bi-annual face-to-face breakfast meetings and physical publications, starting this December!
Table of Contents
The Economy: Where We’ve Been and Where We’re Going..............1-6 Kevin M. Bahr, CBEI Chief Analyst Economic Indicators.........................................................7-12 Scott Wallace, CBEI Director and Editor National Economic Statistics.............................................7-9 Table 1: Key Economic Indicators Table 2: Contributions to Percent Change in Real Gross Domestic Product Table 3: Lifecycle of the Expansion Labor Market Statistics....................................................... 10 Table 4: Labor Market Indicators from LAUS Table 5: WI Employment by Major Industry Sector County Economic Statistics. ...............................................11 Table 6: Help Wanted Advertising Table 7: Unemployment Claims Housing and Construction...................................................12 Table 8: National Affordability Index Table 9: Median Home Prices and Home Sales Table 10: Residential Construction Table 11: Nonresidential Construction Special Report................................................................ 13-17 Housing Bubble? The Dynamics of the Real Estate Market in Central Wisconsin David Schalow, Ph.D., CLU, ChFC, CFA, CFP Column: Insight Spotlight.............................................. 18-19 The Creative Economy: Life After the Pandemic Greg Wright, M.A., and Jason Davis, Ph.D. UW-Stevens Point MBA Program. ................. Inside Back Cover
As we look to the future, Chief Analyst Kevin Bahr provides needed context in The Economy–Where We’ve Been and Where We’re Going . Here, Kevin describes
the economic impact of the pandemic and the contours of the upcoming economic recovery as well as the long-term challenges posed by increasing deficits and debt. Are you in the market for a new home? Are you thinking about selling your existing home? If so, you will want to pay close attention to our special report, Housing Bubble? The Dynamics of the Real Estate Market in Central Wisconsin by School of Business and Economics faculty member Dave Schalow. Dave analyzes the economic forces that propel our current real estate cycle and their impacts on home prices and availability at the national, regional, and local levels. Thanks go out to Natalie Aneskavich of Lakeland Real Estate for providing important local data from the Central Wisconsin Board of Realtors. This issue’s Insight Spotlight The Creative Economy: Life After the Pandemic features Greg Wright, executive director of CREATE Portage County, and Jason Davis, UWSP Professor of Economics, illustrating the importance of the “creative economy” as a driver of local economic development and how the pandemic has sparked new innovations that promise to fuel growth in our area.
CBEI Mission
CBEI Staff
The UW-Stevens Point Center for Business and Economic Insight (CBEI) promotes regional economic and community development through the provision of business and economic knowledge to local business, governmental, and community leaders. The primary areas of focus are Portage, Marathon and Wood counties.
Scott Wallace.................................... Director and Editor, CBEI Kevin Bahr................................................... Chief Analyst, CBEI Eva Donohoo................................... Publication Designer, CPS
The Central for Business and Economic Insight is made possible thanks to support from the UW-Stevens Point School of Buinsess and Economics.
The UW-Stevens Point School of Business and Economics creates career-ready graduates and leaders through applied learning. We serve the businesses, economy and people of the greater Central Wisconsin region. We specialize in preparing students for success by providing professional development experiences, access to employers, and in-demand skills.
The Economy: Where We’ve Been and Where We’re Going
Kevin M. Bahr CBEI Chief Analyst; Professor of Business School of Business and Economics
The United States is emerging from one of the most challenging and unique economic periods in its history. This challenging economic period was different from others. The economic downturn wasn’t the result of financial market problems or other economic imbalances; it was due to a pandemic. Over a half million Americans lost their lives to COVID-19. Like other economic crises, if there is a problem, the problem needs to be fixed before the economy can return to its normal growth. Hopefully, the significant ramp-up in vaccinations that has occurred will make the virus a bad memory by the end of 2021. This report will provide a summary of what’s been going on with the economy and financial markets as well as look forward to the challenges facing the United States beyond COVID-19. Where We’ve Been Economic Growth The decline in economic growth in 2020 ranks as the fifth worst annual decline in GDP since the Great Depression. GDP declined -3.5% in 2020; this compares to a drop of -2.5% in 2009 during the financial crisis. The Great Depression accounts for three of the worst years for economic declines, with 1932 as the worst year with a -12.9% drop in GDP. The economic contraction following World War II accounted for the second worst decline, with a GDP decrease of -11.6% in 1946. After a temporary kick-up in economic growth in 2018 due to the tax cuts, the economy began slowing in 2019. When compared to economic growth of the previous year, every quarter in 2019 had lower economic growth than the corresponding quarter of the previous year.
Percent Change from Quarter One Year Ago - Real GDP (Source: Bureau of Economic Analysis) Q1 Q2 Q3
Q4 2.5 2.3
2018 2019 2020
3.1 2.3 0.3
3.3 2.0
3.1 2.1
-9.0
-2.8
-2.4
That trend continued in 2020 but was greatly exacerbated by COVID-19. Quarterly growth was less in every quarter in 2020 relative to the prior year, with pandemic driven economic declines beginning in the second quarter. When comparing economic growth to the previous quarter of a year ago, the 2020 second quarter decline of -9.0% was the worst on record since the Bureau of Economic Analysis began tracking quarterly growth in 1947. Although the economy improved in the second half of 2020, third quarter and fourth quarter GDP still declined from the prior year, though the rates of decline fell.
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Employment The chart below presents the magnitude of the drop in employment that occurred in 2020 due to COVID-19 and the subsequent recovery. The drop in employment was much greater than what occurred during the financial crisis. Prior to the financial crisis, nonfarm employment peaked at 138.4 million in January 2008 before bottoming out at 129.7 million in February 2010. The decline in jobs lasted slightly over two years with a loss of approximately 8.7 million jobs. Following the financial crisis, employment grew steadily and consistently from 129.7 million in February 2010 to 152.5 million in February 2020. The employment growth lasted 10 years with approximately 22.8 million jobs added to the economy. During the financial crisis, employment bottomed out at 129.7 million. The onslaught of COVID-19 caused employment to drop to almost the same level in early 2020. The difference between the two downturns was the speed and magnitude of the declines. During the financial crisis, 8.7 million jobs were lost over two years. During COVID-19, 22.3 million jobs were lost over two months . Prior to the effects of COVID-19 on the economy, employment peaked at 152.5 million in February 2020. Two months later, employment dropped to 130.2 million. By April 2020 employment had declined by approximately 22.3 million. Employment gradually recovered beginning in May 2020, reaching 144 million in March 2021. Despite the increase of approximately 14 million jobs since April 2020, the March 2021 employment was still over 8 million fewer jobs than the employment peak in February 2020. The chart below shows the roller coaster for employment from January 2020 through March 2021.
All Employees, nonfarm Payrolls (seasonally adjusted) Source: Bureau of Labor Statistics
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Poverty An incredibly unfortunate side effect of COVID-19 was the dramatic impact the economic decline had on poverty rates in the United States, particularly among Black and Latino individuals, where poverty rates were already disproportionately high. The impact on COVID-19 on poverty in the U.S. was swift and devastating. According to research by the Center on Budget and Policy Priorities , from February to June 2020: • The number of non-elderly individuals living in families with combined weekly earnings below the poverty line rose by 14.1 million (28 percent), from 51.0 million to 65.1 million. • The number of non-elderly Black and Latino individuals with below-poverty family earnings rose by 3.6 million (40 percent) and 4.0 million (34 percent), respectively. Among non-elderly, non-Latino whites, the increase was 4.4 million (17 percent). • The number of children in families with below-poverty earnings rose by 4.9 million (34 percent), from 14.4 million to 19.4 million. • The percentage of non-elderly individuals living with below-poverty family earnings: • increased by 10.8 percentage points among Black individuals, from 26.9 percent to 37.7 percent, • increased by 7.8 percentage points among Latino individuals, from 22.9 percent to 30.6 percent, • increased by 3.2 percentage points among non-Latino white individuals, from 17.7 percent to 20.8 percent. The Stock Market Economic growth, employment, and poverty rates reflect what is currently going on the economy. The financial markets, particularly the stock market, reflect what is expected to happen to the economy in the future. Stock prices generally reflect expectations for the economy. If the economy grows, corporate profits generally increase, and stock prices increase. Despite the declines in economic growth throughout 2020, after the first quarter of 2020, the U.S. stock market focused on expected post-COVID economic growth. The table below shows the quarterly returns of three major U.S. stock indexes: 1) the S&P 500 – a diversified index that measures the stock performance of 500 relatively large companies (it is a “large-cap” index, generally comprised of companies having a total stock value exceeding $10 billion), 2) the NASDAQ – an index comprised of over 3000 companies listed on the NASDAQ stock exchange and heavily weighted toward technology, and 3) the Russell 2000 – a diversified index that measures the stock performance of 2000 relatively small companies (it is a “small-cap” index, generally comprised of companies having a total stock value less than $2 billion). For comparative purposes, the long-run average annual return (since 1926) on large-cap stocks is approximately 12 percent; on small-cap stocks, 16%.
Quarterly Returns U.S. Stock Market 2020 Q1 – 2021 Q1 (Source: Morningstar) 2020 Q1 2020 Q2 2020 Q3 2020 Q4
2021 Q1
S&P 500 NASDAQ
-20.00 -14.18 -30.89
19.95 30.63 25.00
8.47
11.69 15.41 30.99
5.77 2.78
11.02
Russell 2000
4.60
12.44
All three indexes significantly declined in the first quarter of 2020. The Russell 2000 (small-cap index) had the steepest drop at -30.89 percent. The S&P 500 (large-cap index) declined -20.00 percent, while the NASDAQ (technology index) fell -14.18 percent. Following the first quarter of 2020, it was up, up, and away for the all the stock indexes as the market looked forward to a post-COVID economic rebound. In the second quarter, the increase in the NASDAQ more than doubled the losses of the first quarter, as the NASDAQ was up 30.63 percent. The S&P 500 and Russell 2000 were up 19.95 and 25.00 percent, respectively, both almost fully recovering the losses of the first quarter. Strong increases continued for each of the indexes for the remainder of 2020. For the full year, the S&P 500 increased 16.26 percent and the Russell 2000 was up 18.36 percent, both higher than their historical average annual return. The NASDAQ increased an astounding 43.64 percent. All indexes increased once again in the first quarter of 2021, with the NASDAQ cooling down from its remarkable run in 2020.
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Following the 2020 first quarter, the stock market was clearly looking ahead to a post-COVID economic recovery. Pent-up demand, declining unemployment, low interest rates, and the multiple fiscal stimulus programs painted a very positive picture for economic growth based on stock market performance. Where We’re Going The Economy Since early 2020, the economy has been about COVID-19. If the pandemic could become a distant bad memory, economic growth would consistently return. After the first quarter of 2020, the stock market was already predicting a strong economic rebound after the pandemic. The major question was when, not if, that would occur. In early 2021, following the significant increase of vaccinations and multiple fiscal stimulus programs, there was a growing list of positive economic signs. • Economic Growth - Finally, in the first quarter of 2021, after a string of eight consecutive quarters in which GDP growth was lower relative to the prior year quarter, GDP growth increased. First quarter 2021 GDP growth was estimated at 0.4% compared to the first quarter 2020 GDP growth of 0.3%. • Retail and food sales - according to the U.S. Census Bureau , retail and food sales rebounded strongly in March 2021. Initial estimates were that March 2021 retail and food sales increased 9.8 percent from February 2021 and were up 27.7 percent from March 2020. Total sales for the January 2021 through March 2021 period were up approximately 14.3 percent from the same period a year ago. • First time unemployment insurance weekly claims – weekly unemployment claims continued to drop. According to the U.S. Department of Labor , for the period ending April 10 seasonally adjusted initial claims were at an estimated 576,000, a decrease of 193,000 from the prior week. This was the lowest level for initial claims since March 14, 2020 when it was 256,000. The United States economy typically chugs along at a pretty good pace unless there is a bump or shock to derail its progress. In 2020, the economic shock was a pandemic. Economic growth can get derailed by inflation (which leads to higher interest rates), a financial crisis, or even a pandemic. Following the onslaught of COVID-19, the challenge was to get the economy moving forward again. Economic numbers from the first quarter of 2021 indicate that the economy is moving forward once again. That growth should continue until the next bump or shock occurs – be it from a pandemic recurrence or some other factor. Economic growth precipitates a snowballing effect, where economic growth continues until something happens to stop it. When economic growth occurs, increased employment leads to more consumer spending, which leads to more economic growth. After four consecutive quarterly declines during the financial crisis, GDP increased in the fourth quarter of 2009 relative to the prior year quarter. Quarterly increases continued until COVID-19 hit the economy in the second quarter of 2020. The economic growth continued until the pandemic shock ended it. That’s typical for a U.S. economic recovery – growth is generally consistent and continues until the next economic bump or shock. After three consecutive quarterly declines in 2020, GDP growth returned in the first quarter of 2021. That growth should continue until the next economic bump or shock. President Biden’s Infrastructure (American Jobs) Plan On March 31 President Biden unveiled a $2 trillion wide-ranging infrastructure plan which would be implemented over an eight-year timeframe. That plan would have a significant impact on how economic growth occurs in the future. The plan includes spending in three major areas: 1) Transportation Infrastructure and Resilience - $611 billion, 2) Power Grid, Internet, and Water Systems - $337 billion, and 3) Housing, Schools, Workforce Development - $1.178 trillion. Taxes, Deficits, Debt, and Inflation The $2 trillion infrastructure plan would be financed primarily through an increase in corporate taxes. The statutory (legal) corporate tax rate was lowered from 35% to 21% in 2018. The 35% rate had been in place since 1993; the 21% rate is the lowest since prior to World War II. The statutory tax rate is the legal percentage established by law. Lowering the statutory rate certainly lowers the taxes paid by a company. However, the effective corporate tax rate, the rate that a company actually pays on pre-tax profits, can be much lower than the statutory tax rate due to tax
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credits and deductions. A 2019 study by the Institute on Taxation & Economic Policy examined the 2018 effective tax rate for 379 profitable firms included in the Fortune 500. For the 379 companies, the study analyzed the effective U.S. income tax rates on their pretax U.S. profits in 2018. Their findings included: • On average, the 379 profitable corporations paid an effective federal income tax rate of 11.3 percent on 2018 U.S. income; 57 companies had an effective federal income tax rate that exceeded the statutory rate of 21%, while 322 companies had an effective rate below the statutory rate. • 91 out of the 379 corporations paid no taxes on 2018 U.S. income; 56 companies had an effective federal income tax rate between 0% and 5%. The Biden plan would increase the statutory corporate tax rate to 28%, impose a minimum tax rate of 15% on the book income of large corporations, and eliminate offshoring tax incentives. If Congress approves the infrastructure plan, there is a reason why the plan is proposed to be financed primarily through taxes. When the U.S. government spends more on programs and services than what it takes in through taxes, a budget deficit occurs. In 2020, due to the impact of the pandemic and the needed fiscal stimulus programs, the U.S. budget deficit hit a record $3.1 trillion, more than twice the level of the $1.4 trillion deficit that occurred in 2009 during the financial crisis. To finance a budget deficit the U.S. government borrows money from the public through the issuance of U.S. government debt securities called U.S. Treasury securities. Buyers include individuals, institutional investors, certain mutual funds, and foreign investors and governments. The record 2020 budget deficit also led to a record amount of U.S. government debt outstanding, at nearly $28 trillion by the fourth quarter of 2020. U.S. debt has also more than doubled since the financial crisis, with U.S. debt peaking at $11.5 trillion at the end of the financial crisis. To better gauge its magnitude, the amount of federal debt outstanding is often compared to the Gross Domestic Product (GDP). GDP not only measures output in the economy, it also reflects income. When goods and services are created, income is also created, split between individuals, corporations, and the government. Federal debt as a percentage of GDP is a measure of a country’s ability to pay its debt. Sort of. The more income, the more debt you can generally afford. The U.S. debt-to-GDP ratio ballooned to a record 135% in 2020, up from 105% in 2019. The 2020 mark was a record for the U.S.; the 135% compares to 80% at the end of the financial crisis. The difficult question to answer: When does the debt-to-GDP ratio become too high? That’s the hard part; no one really knows. Federal debt as a percentage of GDP provides a rough measure as to how the federal debt financially burdens the country. Increasing debt does lessen the financial flexibility for a country to a certain degree because it increases the potential for financially straining the country through higher interest and principal payments. However, there are a variety of factors in gauging how the federal debt financially burdens the country. The debt-to-GDP is one factor, but other factors include the Federal Reserve, inflation, and interest rates. In the United States, the Treasury will issue debt to fund budget deficits. The Federal Reserve, which manages the country’s money supply, can buy U.S. Treasury debt in the financial markets (and consequently lower the total debt outstanding). There is a potential drawback. If the Federal Reserve buys too much debt, then inflation may increase due to the increased money supply. By the end of 2020, federal debt held by the Federal Reserve reached a record $5 trillion. This was approximately double the amount held at the end of 2019, and approximately 7 times greater than the amount of federal debt held at the end of the financial crisis. No doubt, the Federal Reserve has been buying Treasury debt, and a lot of it. The debt-to-GDP ratio peaked at 135% during the second quarter of 2020 but declined to 129% by year-end. Given the increasing money supply resulting from the Federal Reserve’s purchase of Treasury debt, what has been the impact on expected inflation? The stock market can provide a clue as to what is expected for economic growth; the bond market can provide a clue as to what is expected for inflation.
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A variety of factors affect interest rates – inflation is one of those factors. Inflation and interest rates are related. An increase in expected inflation will be reflected by an increase in interest rates, particularly medium and long-term interest rates. Investors want to have a greater return than the rate of expected inflation. As a result, increases in expected inflation will be reflected in the bond market. The chart below shows the Treasury yield curve on April 1, 2021 relative to one year ago. The Treasury yield curve shows the interest rates on Treasury bonds with different maturities – it shows relationship between short-term and long-term interest rates. Date 1 Mo 2 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr 4/1/21 0.02 0.02 0.02 0.04 0.06 0.17 0.35 0.9 1.37 1.69 2.24 2.34 4/1/20 0.03 0.07 0.09 0.14 0.16 0.23 0.28 0.37 0.51 0.62 1.04 1.27 Interest rates have increased slightly across medium and long-term maturities. The interest rate on 5-year bonds increased 53 basis points, from 0.37% to 0.90%. The interest rate on 20-year bonds increased 120 basis points, from 1.04% to 2.24%. The bond market appears to reflect a slight expected increase in inflation. However, interest rates across all maturities are still at relatively low historical levels, with the 30-year bond rate at only 2.34%. The significant increase in Treasury debt by the Federal Reserve is currently not expected to significantly increase inflation. Another issue with increasing the federal deficit and total debt - the timing of the increase. Generally, during periods of economic duress, deficits will increase as the government needs to spend money to counteract the economic downturn. In periods of economic expansion, generally deficits should at least decrease as tax revenues increase. If you can’t reduce deficits in good economic periods, you never will. A significant side effect of the 2018 tax cuts was to increase the budget deficit in a period of economic growth. That set the stage for a significant increase in the budget deficit if anything went wrong with the economy – like it did. In 2020, the stimulus programs were going to be financed with debt rather than taxes. The objective was to increase consumer spending to help the economy recover. Raising any tax in 2020 was not a viable or appropriate economic policy option when consumers and businesses were struggling. The $2 trillion infrastructure plan is proposed to be financed with primarily corporate taxes. It is expected that economic growth will return in 2021. The increase in economic growth should provide an opportunity to reduce the budget deficit through increased tax revenues. The debt-to-GDP ratio is relatively high; although there is no specific benchmark as to what is too high, a high ratio indicates any adverse movements in inflation and interest rates could significantly increase borrowing costs. As a result, the proposal is to not increase the deficit and debt in a period of economic growth given the debt level is relatively high. The $2 trillion proposal in effect reallocates spending from primarily corporations to government infrastructure programs. Summary Economic optimism returns in 2021. The 2020 stock market predicted an economic rebound, and economic indicators show signs that is beginning to happen. Although uncertainty remains over the pandemic, significant progress has been achieved in fighting the virus. The pandemic was a medical and economic problem. Fixing the problem was crucial for an economic rebound. Economic growth is expected to return in 2021. Exactly how that growth occurs in 2021 and beyond could be significantly impacted by the passage (or not) of President Biden’s $2 trillion infrastructure plan. At the very least, 2021 promises to be another interesting year economically and politically.
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ECONOMIC INDICATORS
Scott Wallace, Ph.D. Director and Editor, CBEI; Professor of Economics School of Business and Economics
With the number of vaccinations increasing and number of new COVID-19 cases falling, the economy appears to be poised for take-off. Fueled by government assistance and increased consumer savings, consumption is likely to be a leading driver in the upcoming expansion. Wisconsin as a whole has weathered the COVID-19 storm better than most states.
National Economic Statistics Table 1 Key Economic Indicators 2021 First Quarter
% ∆ Yr. Ago +2.3% +0.4% +1.0% +2.6%
Nominal Gross Domestic Product (in Billions) Real Gross Domestic Product (in Billions) Industrial Production (2012 = 100) Consumer Price Index (1982 - 84 = 100)
$22,048.9 $19,087.6
$105.6 $264.9
Description: • Nominal Gross Domestic Product (in Billions): The dollar value of all final goods and services produced in a year, using current prices • Real Gross Domestic Product (in Billions): The dollar value of all final goods and services produced in a year, using prices from a base year (2012) to adjust for inflation. • Industrial Production Index: Measures the changes in the volume of output (as a percentage of actual output in 2012) produced in the United States in manufacturing, mining, and electric & gas utilities. • Consumer Price Index: Measures the average monthly change in the price of a representative basket of goods and services bought by consumers. Analysis: • The First Quarter Real GDP number indicates that the economy is approximately where it was a year ago when the coronavirus emerged in March 2020. This certainly indicates a significant improvement over the last several quarters. The economy is still slight smaller as measured by Real GDP than it was in the third and fourth quarters of 2019 and certainly below trend. • The Industrial Production Index number increased by 1.0 % relative to one year ago to 105.6 but still remains below pre- pandemic levels. • Prices have jumped 2.6 percent since last year, raising concerns of rising inflation. Food and energy price increases primarily were responsible for higher overall prices. The Federal Reserve sees the rise in inflation numbers as reflecting “transitory factors” such as supply chain disruptions (April 28, 2021). The Federal Reserve’s goal is to maintain a 2.0% inflation rate over the long run. Until recently, inflation rates were persistently lower than 2%.
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Table 2 Contributions to Percent Change in Real Gross Domestic Product (Seasonally Adjusted at Annual Rates) Line Percent Change at an Annual Rate 2019 Q4 2020 Q1 2020 Q2 2020 Q3 2020 Q4 2021 Q1 1 Gross Domestic Product Percentage Points at Annual Rates 2.4 -5.0 -31.4 33.4 4.3 6.4 2 Personal Consumption Expenditures 1.07 -4.75 -24.0 25.44 1.58 7.02 3 Goods 0.12 0.03 -2.06 9.55 -0.32 4.94 4 Durable Goods 0.22 -0.93 0.00 5.20 -0.09 2.95 5 Nondurable Goods -0.10 0.97 -2.0 4.35 -0.23 2.00 6 Services 0.96 -4.78 -22.0 15.89 1.90 2.07 7 Gross Private Domestic Investments -0.64 -1.56 -8.77 11.96 4.41 -0.87 8 Fixed Investment 0.17 -0.23 -5.27 5.39 3.04 1.77 9 Nonresidential -0.04 -0.91 -3.67 3.20 1.65 1.29 10 Structures -0.16 -0.11 -1.11 -0.53 -0.17 -0.12 11 Equipment -0.10 -0.91 -2.03 3.26 1.32 0.93 12 Intellectual Property Products 0.21 0.11 -0.53 0.46 0.49 0.48 13 Residential 0.22 0.68 -1.60 2.19 1.39 0.49 14 Change in Private Inventories -0.82 -1.34 -3.50 6.57 1.37 -2.64 15 Net Exports of Goods and Services 1.52 1.13 0.62 -3.21 -1.53 -0.87 16 Exports 0.39 -1.12 -9.51 4.89 2.04 -0.10 17 Goods 0.19 -0.20 -6.56 4.87 1.88 -0.06 18 Services 0.20 -0.92 -2.95 0.03 0.16 -0.05 19 Imports 1.13 2.25 10.13 -8.10 -3.57 -0.77 20 Goods 1.15 1.36 7.32 -7.67 -3.12 -0.64 21 Services -0.03 0.90 2.80 -0.43 -0.45 -0.13 22 Government Consumption Expenditures and Gross Investments 0.42 0.22 0.77 -0.75 -0.14 1.12 23 Federal 0.26 0.10 1.17 -0.38 -0.38 0.93 24 National Defense 0.26 -0.01 0.18 0.17 0.17 -0.14 25 Nondefense 0.00 0.11 0.98 -0.55 -0.55 1.07 26 State and Local 0.16 0.12 -0.40 -0.37 -0.37 0.19 Bureau of Economic Analysis Description: • The above table decomposes percent changes in Real GDP into its components (consumption, investment, government, and net exports) and more specific subcomponents. Analysis: • Real GDP grew by 6.4% on an annualized basis since the fourth quarter of 2020 which followed a 4.3% increase from the third quarter of 2020, indicating a strengthening economy. • Expanding personal consumption expenditures contributed more than 100% of the growth in Real GDP. Of the 7.02% contribution to real GDP growth from consumption, goods accounted for 4.94% while services accounted for the balance at 2.07%.
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Table 3 Lifecycle of the Expansion
6/20
12
10
9/20
8
3/21
6
3/20
4
2
0
38.5
39
39.5
40
40.5
41
Average Weekly Hours
Description: • Table 3 plots the unemployment rate against average weekly hours in manufacturing on a quarterly basis since December 2019. • There are four phases: 1. In the initial phase of an expansion, unemployment is stable and remains high while there is a sharp rise in hours per week 2. In the second phase, the unemployment rate falls while hours per week tend to be relatively stable. • This graph visually demonstrates the enormous (but hopefully, temporary) impact of the pandemic on the economy which differs greatly from a “normal” business cycle. Fed Chair Jerome Powell compared the pandemic to a “natural disaster” that hit the economy. • For 2020 Q2 (6/20), we see the dramatic impact of the pandemic with unemployment skyrocketing and average weekly hours dropping. For 2020 Q3 (9/20), we witnessed a sharp rebound in economic activity, leading to a significant decrease in the unemployment rate and an increase in average weekly hours. • By 2021 Q1 (3/21), we see another increase in average weekly hours and reduction in the unemployment rate, indicating that the economy is on the mend. 3. In the third phase, the unemployment rate is stable and hours per week decline. 4. A contraction occurs when unemployment rises and hours per week falls. Analysis:
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Labor Market Statistics
Table 4 Labor Market Indicators from LAUS and retrieved from WisConomy
Labor Force
Unemployment Rate
Employment
Labor Market Area
2021 Q1 (000) % ∆ Yr. Ago
2021 Q1
2020 Q1 2021 Q1 (000) % ∆ Yr. Ago
Portage County
38.0 13.9 72.6 34.5
-0.5% 0.6% 1.2% 1.5% .03% -1.4%
4.6% 4.1% 3.8% 5.8% 3.8% 6.0%
3.9% 3.4% 3.2% 4.6% 3.2% 4.4%
36.2 13.3 69.8 32.5
-1.3% -1.3% .50% -0.2% -0.6% -3.2%
City of Stevens Point Marathon County
Wood County
Wisconsin
3,066.3 160,558
2,949.0 150,848
United States
Description: • Labor Force: Includes all people over the age 16 who are either working or actively looking for work. • Unemployment Rate: The number of unemployed as a percentage of the labor force. Analysis: • While the unemployment rates for Wisconsin and Central Wisconsin remain higher than one year ago, they are well below the national unemployment rate. • The employment numbers for state and the region have rebounded and are close to what they were a year ago, according to the household survey.
Table 5 Wisconsin Employment by Industry Sector from Payroll Employment Survey - CES and retrieved from WisConomy
Trade, Transport and Utilities
Nonfarm Jobs
Construction Jobs Manufacturing Natural Resources and Mining
Information Jobs
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2849.8 -4.30% 122.1
-3.6% 471.5 -1.4% 3.6 -5.3% 528.0 -1.4% 45.0 -4.7%
Education and Health
Leisure and Hospitality
Finance Jobs
Business Services
Other Services
Government
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
151.3
-2.4% 319.5
-0.6% 448.7 -4.0% 231.8 -17.0% 147.3 -3.3% 381.0 -7.5%
Description: • Employment data are classified using the North American Industry Classification System (NAICS). The above table categorizes data according to major industry sectors. Analysis: • The pandemic has had a disproportionate impact on the Leisure and Hospitality and Government sectors.
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County Economic Statistics
Table 6 Unemployment Claims - Portage, Marathon, and Wood Counties Portage Marathon
Wood
Weekly Average 2021 Q1
% ∆ Yr. Ago -16.1% +70.7%
Weekly Average 2021 Q1
% ∆ Yr. Ago -1.9%
Weekly Average 2021 Q1
% ∆ Yr. Ago +2.6% +96.9%
New Claims Total Claims
182
411
201
1,202
2,146
+116.3%
1,378
Description: • New Claims: Weekly average of new claims for 2020 Q1. • Total Claims: Weekly average of total claims for 2020 Q1. • Averages of new and total claims are used because of the volatility of weekly claims. Analysis: • The increase in total claims in all three counties reflect the impact of the pandemic on employment over the course of the last year. • The decline in new claims for all three counties since 2020 Q1 is a good sign that the economy and employment are rebounding.
Table 7 County Sales Tax Distribution Portage
Marathon
Wood
2021 Q1 (000) $1,790.5
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago
2021 Q1 (000)
% ∆ Yr. Ago -2.0%
County Sales Tax Distribution
+4.4% $3,425.6
-3.0% $1,585.0
Description: • The county sales tax rate of 0.5% is placed on retailers that make taxable retail sales. • Changes in county tax collections is a good indicator of changes in retail activity in Central Wisconsin.
Central Wisconsin Report - Fall 2020
11
Housing and Construction Table 8 National Affordability Index (First Quarter 2021)
Years
Median Price Existing Single Family Home
Mortgage Rate
Monthly P & I Payment
Payment as % of Income
Median Family Income
Qualifying Income
Composite
2020
300,200 317,100
3.17 2.73
1035 1,033
14.6 14.4
84,843 85,817
49,680 49,584
170.8 173.1
Feb. 2021
Description: • Composite Index measures affordability. An index of 150 means that a family earning the median family income has 150% of income necessary to quality for a conventional loan covering 80% of a median price family home. Analysis: • No analysis since Dave Schalow’s report will cover this. Table 9 Median Home Prices and Home Sales (First Quarter 2021) Wisconsin Marathon Portage Wood 2021 Q1 % ∆ Yr. Ago 2021 Q1 % ∆ Yr. Ago 2021 Q1 % ∆ Yr. Ago 2021 Q1 % ∆ Yr. Ago Median Home Prices $218,250 11.4% $169,700 9.5% $200,763 15.4% $132,500 10.5% Home Sales 15,128 6.3% 341 24.5% 134 1.5% 168 24.4% • No Description or Analysis here. Dave Schalow’s report will cover this. Table 10 Residential Construction: Village of Plover, Town of Plover, Hull, Sharon and Stockton* Permits Issued
Estimated Value of New Homes (000)
Number of Housing Units
Alteration Permits Issued
Estimated Value of Alterations (000)
2021 Q1
2020 Q1
2021 Q1
% ∆ Yr. Ago
2021 Q1
2020 Q1
2021 Q1
2020 Q1
2021 Q1
% ∆ Yr. Ago
18
13 $4,688.80 -163.1% 19
99
92
64 $1,526.50 -21.9%
• Note that Stevens Point data was not available at the time of this report.
Table 11 Nonresidential Construction: Village of Plover, Town of Plover, Hull, Sharon, and Stockton* Permits Issued Estimated Value of New Structures (000) Alteration of Business Permits Issued Estimated Value of Alterations (000)
2021 Q1
2020 Q1
2021 Q1
% ∆ Yr. Ago -100%
2021 Q1
2020 Q1
2021 Q1
% ∆ Yr. Ago 80.2%
0
3
0
6
11
$724.10
• Note that Stevens Point data was not available at the time of this report.
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Center for Business and Economic Insight
SPECIAL REPORT
Housing Bubble? The Dynamics of the Real Estate Market in Central Wisconsin
By David Schalow, Ph.D., CLU, ChFC, CFA, CFP UW-Stevens Point School of Business and Economics
About 10 years ago I did a version of this report and the real estate environment was totally different. At that point, the real estate market had gone through a steep decline, and everyone was wondering where the bottom was going to be. Today, the big question is, “When will the bubble burst?” This report will cover the key determinants of value and then apply those principles to the National, Regional, Central Wisconsin, and then the local areas of Wausau, Stevens Point, Marshfield, and Wisconsin Rapids. Real Estate Cycles Unlike the business cycle which has fluctuations over a relatively short period like 3-7 years, the real estate cycle is generally 10-20 years. As you will see, the difference between the 2010 period and the present will be an excellent example of going from a bottom, toward a top in the cycle. Further we can segment into either a Seller’s Market (the upswing) or a Buyer’s Market (the downturn). Each of these can be divided into either a stage 1 or stage 2. The first step to understanding where a market is going is to understand where the market is in the cycle
Buyer’s Stage 1: (10 years ago we were here) • Excess Supply of Properties • Prices are Down, Rents are Down • Demand is Falling/Unemployment is High • Days on Market (DOM) Dramatically Increasing/ Peaks/Reversing/Foreclosures Up • New Construction is Suffering • Investment Property Prices Dropping to Lows Buyer’s Stage 2: • Market Absorbing Over Supply • DOM Dropping • Unemployment Dropping • Rehabbing going on/Rents Starting to Increase • Investment Values Increasing • Foreclosures Decreasing (Competitive) Seller’s Stage 1: Rising Demand and Rising Prices (Early Seller’s Market) • Lowering Supply of Homes • Building Increases • Low Unemployment • Prices and Rents Rising • Demand for Housing is High • Median Days on Market (DOM) Still Declining (Based on the current data, we are probably in the latter part of Sellers’ Stage 1)
Seller’s Stage 2: • DOM Rise Dramatically • Number of Properties on Market Rising • Still a lot of Speculators • High Housing Starts (Over Building) • Prices for Construction Materials Rising • Business Slowing and Job Growth Slowing
.
Central Wisconsin Report - Fall 2020
13
Table 2: Existing Home Sales (000’s) Seasonally Adjusted E isting Home Sales (000’s)
Supply and Demand To understand what is happening in a marketplace, it is necessary to understand Supply and Demand. With this understanding it is possible to look at what has been happening to prices, and to the quantity being sold, and make an evaluation of what might be causing the observed changes in prices and units sold. Anyone who has ever had a class in economics will fondly remember the typical supply and demand graph. (Figure 1) Next, we will examine the directions of the trends in both prices and units sold. Then we can draw our conclusions on what is happening in each market. As you review the data in the tables, the most important consideration is the direction of the trend. Is it up, or is it down?
Year 2018 2019 2020
U.S.
Northeast Midwest
South West
4,742 4,765 5,066
1,192 1,183 1,264 1,190
581 581 604 620
1,972 2,016 2,175 2,370
997 985
1,023 1120
2021 (Mar) 5,300 Direction UP
UP
UP
UP
UP
Existing home sales have demonstrated the same trend as prices over the past three years with substantial increases over the past three years. The directional indicator is based on the 3-year period ending in 2020, not the YTD number. Increasing quantities of units sold can be caused by two factors: An increase in demand, OR by an increase in the supply of homes being on the market. Figure 2 illustrates the normal situation where both Prices AND Quantity increase at the same time.
Figure 1: Supply and Demand Supply and Demand
Figure 2: Demand UP
National and Regional Market Trends Table 1 and Table 2, summarizes the price and sales trends for the national and regional markets. This data is reported by the National Association of Realtors.
The strong demand is quite remarkable when you consider the pandemic conditions throughout the country during the past year. In a period where people were afraid to leave their homes, home sales were still taking place at a brisk pace. National Inventory Table 3 shows the trends in the National Inventory. Inventory is a key indicator of what is happening on the supply side of the equation. The months of Supply indicate the rate of absorption for the market i.e., how many months it would take to completely sell off the current inventory at the current rate of monthly sales.
Table 1: Median Prices Median Prices
Year South West 2018 $261,600 $289,200 $201,700 $231,600 $388,600 2019 274,600 301,900 214,500 241,900 405,200 2020 300,200 341,700 235,400 265,100 451,500 U.S. Northeast Midwest
2021 (Mar) 334,500
251,000
370,900
291,400 502,800
Direction UP
UP
UP
UP
UP
The last three years the national and regional markets have seen substantial price increases. As you can see, prices are up across the board. Increases in home prices can be caused by either an increase in demand, or by a decrease in the supply of houses. The next table will give us a better indication of which is the key determinant.
Table 3: National Inventory (000’s) National Inventory (000’s)
Year 2018 2019 2020
Inventory
Mos. Supply
4.0 3.9 3.0 2.0
1,340 1,210
880
2021 (Mar)
900 Adjusted
Direction
DOWN
DOWN
14
Center for Business and Economic Insight
income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single- family home. An increase in the HAI, then, shows that this family is more able to afford the median priced home. An index number of 247.1 means that a family earning the median family income has nearly 247% of the income necessary to purchase the median priced home. This opens home ownership to many households who could not afford to purchase if interest rates were higher or incomes lower. Unfortunately, this is tempered by the assumption in the formula that the buyer has the necessary 20% down payment. On the $230,000 median priced home in the Midwest this would mean the potential buyer would need almost $46,000 saved for a down payment. This is a big hurdle, along with the outstanding credit being required by lenders. This explains why affordability is favorable for a high demand (people who want to buy) environment, and yet effective demand (people who CAN buy) is somewhat lower. Wisconsin and the Central Region Wisconsin and the Central Region has experienced much of the same price and sales changes as the Midwest in general. The 3-year trend in Prices and Quantity Sold are both UP. The high rate of Demand is the one factor that explains both variables increasing.
The three-year supply of homes has steadily been dropping, with the last 12 months being even more dramatic. As a point of reference, 10 years ago the Months’ Supply was over 10 months. No question that the reduced supply has contributed to the rise in prices. However, if the reduced supply was the dominant factor, the actual quantity of homes sold would have declined.
Figure 3: Supply DOWN
Affordability Another very positive development is affordability. Three variables determine the affordability index: home prices, interest rates, and median income. Rising prices are a negative, low interest rates are a positive, and rising incomes are also a positive influence. The combination has led to some of the best affordability numbers in history. Table 4 illustrates the Housing Affordability Index (HAI) nationally and the Midwest specifically. The favorable Affordability numbers are a big contributor to the high demand for housing.
Table 4: Affordability Index Affordability Ind x
Table 5: Wisconsin Trends Wiscon in Tren s
Median Priced Existing Single- Family Home 261,600 274,600 300,200
Region
Median Prices
Existing Home Sales
Monthly Payment Median
2018 2019 2020
184,000 197,500 220,000
82,626 82,698 88,898
Mortgage P & I
as a % Family Qualifying
Rate* Payment of Income Income Income** Composite
Direction Central WI
UP
UP
2018 2019 2020
146.3 159.5 170.8
4.72 4.04 3.17
1088 1054 1035
17.1 76,401 52,224 15.7 80,704 50,592 14.6 84,843 49,680
Prices
Existing Home Sales
2018 2019 2020
140,500 150,000 165,000
5,534 5388 5777
Midwest
Direction
UP
UP
247.1
230,000 2.73% $1004 10.1% $88,954 $36,000
Local Area The following data on our four local markets was developed by the Central Wisconsin Board of Realtors: Marshfield, Stevens Point, Wausau, and Wisconsin Rapids. While the National/Region/State/Central area are very uniform, the local cities have a few differences. Both prices and quantities are up leading to the conclusion that Increasing Demand is the primary reason. Again, this can be illustrated by Figure 2. Looking at Table 6 shows the same UP trends for all four markets for the time period 2017-2020, but if we look at the most current year-to-date data, the picture changes quite dramatically.
The key number here is the last column, the composite index number. To interpret the indices, a value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median- priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite of 120.0 means a family earning the median family income has 120% of the
Central Wisconsin Report - Fall 2020
15
Table 6: Local Area Median Prices (000’s) Local Median Prices (000’s) Year Marshfield Stevens Pt
to a Stage 2. This is a trend that might very well continue into the summer as the pandemic loosens its grip on the economy and more homeowners decide it would be a great time to sell because of the higher prices.
Wausau Wis Rapids
2017 2018 2019 2020
122.5
165 170 185 205
145 158 168 186
98.9
135 145
117.75 121.57
Figure 5: Supply Up
143.5
134
Direction 2021 YTD YTD Trend
UP
UP
UP
UP
159.9
194
181.7 Down
120
UP
Down
Down
During the early part of 2021, the Price trend has clearly shifted downward for Stevens Point, Wausau, and Wisconsin Rapids. Only Marshfield is continuing the upward trend that is common through most of the national markets. Table 7 looks at the trends in housing units that have been sold. Here, Marshfield has seen a decline in sales while the other 3 markets are continuing to have sales increases.
Table 8 provides a summary of the four local markets.
Table 8: Supply and Demand Causation Summary T ble
3 Yr Price Trend
3 Yr Sales Trend
S and D Cause
YTD Price Trend
Last Yr Sales Trend
S and D Cause
Table 7: Local Units Sold Local Unit Sales
Marshfield
UP
DOWN Supply Down UP
DOWN Supply DOWN
Stevens Point Wausau
UP
UP
Demand UP Demand UP Demand UP
DOWN
UP
Supply UP Supply UP SUPPY UP
Year 2017 2018 2019 2020
Marshfield Stevens Pt
Wausau Wis Rapids
UP
UP
DOWN
UP
664 646 552 581
665 684 645 692
1586 1619 1581 1664
571 584 560 635
Wis Rapids
UP
UP
DOWN
UP
Buyer’s or Seller’s Market? Two additional measures are very useful in
Direction DOWN
UP
UP
UP
understanding the local health of the real estate market. Table 9 is the median number of days a house is on the market before it sells. If this number is getting larger, it is getting more difficult to sell a house, and vice versa. The longer the typical house is on the market however, the more leverage the buyer has in the transaction. One family’s problem is another family’s opportunity. When this number changes direction, it is often seen as the beginning of a change between a buyer’s and seller’s market or at least a change in the stage within a market. Table 9: Median Days On Market Median Days O Market (DOM) Year Marshfield Stevens Pt Wausau Wis Rapids 2017 142 107 111 138 2018 121 94 94 95 2019 122 91 84 96 2020 107 84 85 85 Direction DOWN DOWN DOWN DOWN 2021 YTD 125 93 93 98 Direction UP UP UP UP The three-year trend clearly shows that the market is favorable for Sellers and is consistent with the stage one analysis from the earlier section. But, when we include
What could explain the situation in Marshfield where the Prices were trending UP and Quantity Sold was going down? Figure 4 can explain the Marshfield data. The shortage of Supply seems to be the most plausible explanation for what is happening in the Marshfield area. With Supply going down, Prices would be rising, and the number of homes being sold would be decreasing.
Figure 4: Supply Down
What explains the Stevens Point, Wausau, and Wisconsin data that has Prices starting to decline and yet the number of sales is still rising. In these markets the Supply has been starting to increase which is one of the characteristics of moving from a Stage 1 Sellers’ Market
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Center for Business and Economic Insight
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