College of Business Administration
Economic Conditions for Real Estate in Nebraska
Nebraska REALTORS Association Fall Meetings
September 8, 2014
Eric Thompson
Director, Bureau of Business Research
College of Business Administration
University of Nebraska-Lincoln
ethompson2@unl.edu
www.bbr.unl.edu
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College of Business Administration
Summary
Prevailing economic conditions suggest a
favorable environment for the Nebraska
housing market due to
above-median and growing incomes
low interest rates
moderate home prices
The housing market offers high affordability
throughout Nebraska
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College of Business Administration
Outline
The environment for interest rates
Economic conditions in Nebraska and implications for jobs
and income
6-month leading indicator
longer-run economic outlook
Housing market performance and affordability
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College of Business Administration
The Environment for Interest Rates
Rates to Stay Low: Example of 10-Year Treasury Bond
Interest Rate on
10-year Treasury Bonds
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2014.2
2014.3
2014.4
2015.1
2015.2
2015.3
2015.4
2016.1
2016.2
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College of Business Administration
The Environment for Interest Rates
“There has been a change in the natural balance of
between savings and investment, leading to a decline in
normal real rate of interest.”
- Laurence Summers
Reasons for this:
1) Reduction in demand for debt financed investment –
large ventures (by market value) can be started at little
cost
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College of Business Administration
The Environment for Interest Rates
2) Declining population growth – older population which
borrows less
3) Rising income inequality- greater concentration of
income for top earners raises the propensity to save
4) Decline in the relative price of capital goods – less
borrowing
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College of Business Administration
The Environment for Interest Rates
5) Due to taxes, lower pre-tax interest rate in low inflation
environment
6) Central banks building reserves, especially in safe
dollars – willing to accept low interest rates.
I’ll add 7) – higher share of income growth in “saving”
nations (china, etc.) – also raises the propensity to save
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College of Business Administration
Economic Conditions in Nebraska
Next 6 Months
The Nebraska economy is expected to be strong during
the 2nd half of 2014
The question is: will the Nebraska economy stay strong
as 2015 begins?
The Survey of Nebraska business says “yes”
The Leading Economic Indictor – Nebraska says “maybe”
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College of Business Administration
Economic Conditions in Nebraska
Survey of Nebraska Business from UNL Bureau of Business Research
A survey of 500 businesses each month
In most months, a 25% to 35% response rate
A random selection of businesses
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College of Business Administration
Economic Conditions in Nebraska
Survey of Nebraska Business
Business Expectations
Results from Last 6 Months
2.50%
1.25%
0.45%
0.41%
0.26%
Mar 14
Apr 14
May 14
0.64%
0.34%
0.31%
0.00%
-1.25%
-2.50%
Jun 14
Jul 14
Aug 14
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College of Business Administration
Economic Conditions in Nebraska
Leading Economic Indicator – Nebraska from the UNL Bureau of Business Research
Six components:
Business expectation
Value of U.S. dollar
Single-family home building permits
Airline passenger counts
Initial claims for unemployment insurance
Manufacturing hours
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College of Business Administration
Economic Conditions in Nebraska
Leading Economic Indicator - Nebraska
Figure 2: Change in LEI - N
Last 6 Months
2.50%
2.15%
1.24%
0.95%
1.25%
0.11%
0.14%
0.00%
-1.25%
-0.75%
-2.50%
Feb 14
Mar 14
Apr 14
May 14
Jun 14
Jul 14
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College of Business Administration
Economic Conditions in Nebraska
Leading Economic Indicator - Nebraska
6-Month Forecast of
Nebraska Economcy
1.07%
1.25%
0.89%
110.00
109.50
0.51%
0.75%
109.00
0.37%
108.50
0.25%
108.00
107.50
-0.06%
-0.25%
-0.02%
107.00
106.50
-0.75%
106.00
105.50
-1.25%
105.00
Jul 14
Aug 14
Sep 14
Oct 14
Index Growth
Nov 14
Dec 14
Jan 15
Index Value
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast
Supportive local conditions for the real estate
market:
Solid or strong job growth outlook in key
industries yields solid income and population
growth in Nebraska
Strong growth: construction and services
Solid growth: retail, manufacturing, transportation
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for Construction (2% - 2.5%)
55
45
40
35
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
30
2000
1000s of Jobs
50
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for Services (1.5% - 1.8%)
420
400
360
340
320
300
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
280
2000
1000s of Jobs
380
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for Retail Trade in 2014 (1%)
115
110
100
95
90
85
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
80
2000
1000s of Jobs
105
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for Transportation (0.5% - 1.5%)
58
56
52
50
48
46
44
42
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
40
2000
1000s of Jobs
54
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for Manufacturing (0.3% - 0.7%)
120
115
105
100
95
90
85
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
80
2000
1000s of Jobs
110
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for total non-farm jobs
2.0%
1.8%
1.5%
1.5%
1.4%
1.2%
1.0%
1.0%
1.0%
0.5%
0.0%
2014
2015
United States
2016
Nebraska
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for income and population
Measure
Rate of Growth
2014
2015
2016
Personal Income
3.9%
4.3%
4.4%
Inflation
2.0%
2.4%
2.8%
Population
0.7%
0.6%
0.6%
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College of Business Administration
Economic Conditions in Nebraska
Longer-Run Forecast for Agriculture
Nebraska agriculture should thrive and maintain
most income and wealth gains
There will grow international demand for
imports from a growing global middle class
Nebraska is a highly competitive agriculture region
Production cluster yields a cost advantage
Ogallala Aquifer yields reliable water supply
Climate change may benefit state (relatively)
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College of Business Administration
Global Demand for Agricultural Imports
Source: OECD and FAO Secretariats
Annual Imports of Coarse Grains (kt)
4,000
3,900
3,800
3,700
3,600
3,500
3,400
3,300
3,200
3,100
3,000
2013
2014
2015
2016
OECD
2017
2018
2019
2020
2021
2022
Developing Countries
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College of Business Administration
Global Demand for Agricultural Imports
Source: OECD and FAO Secretariats
Annual Imports of Pigmeat (kt)
4,000
3,900
3,800
3,700
3,600
3,500
3,400
3,300
3,200
3,100
3,000
2013
2014
2015
2016
OECD
2017
2018
2019
2020
2021
2022
Developing Countries
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College of Business Administration
Economic Conditions in Nebraska
Golden Triangle
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College of Business Administration
Economic Conditions in Nebraska
Able to Adapt Well To Climate Change?
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College of Business Administration
Economic Conditions in Nebraska
Nebraska Farm Income and Farmland Prices
Year
2009
2010
2011
2012
2013
2014
2015
2016
Annual
Farm Income
$3.1 billion
$3.8 billion
$7.7 billion
$5.8 billion
$6.7 billion
$5.8 billion
$5.6 billion
$5.5 billion
Average Value of
Farm Land Per Acre
$1,340
$1,520
$1,940
$2,590
$3,050
Sources: USDA and UNL Department of Agricultural Economics
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College of Business Administration
Housing Market Performance and Affordability
Homes sold in Nebraska
Statewide trends
Housing affordability index
Definition
Statewide trends
Local trends
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College of Business Administration
Housing Market Performance and Affordability
Trends in Homes Sold in Nebraska
Homes Sold In Nebraska
25,000
20,000
15,000
10,000
5,000
0
2010
2011
2012
2013
Source: Nebraska Realtors Association
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College of Business Administration
Housing Market Performance and Affordability
Housing Affordability Index
A housing affordability index is one good way to
capture conditions in housing market.
A housing affordability index reflects:
The median price of homes
Prevailing interest rates
Median income
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College of Business Administration
Housing Market Performance and Affordability
Housing Affordability Index
A housing affordability index takes a value of 100 when:
a median income family can afford to make
monthly mortgage payments for a median price
home with 25% of their income, assuming
a 20% down payment
a 30-year fixed rate mortgage
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College of Business Administration
Housing Market Performance and Affordability
Housing Affordability Index
Nebraska housing is affordable since:
1) incomes are slightly above-median but
2) homes are relatively inexpensive
Nebraska
2013 Median Family Income $64,550
U.S.
$63,623
(Source: U.S. Census)
2013 Median Sale Price
$135,000
$197,400
(Source: Nebraska Realtors Association,
National Realtors Association)
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College of Business Administration
Housing Market Performance and Affordability
Housing Affordability Index 2010-2013
300
250
200
150
100
50
0
2010
2011
Nebraska HAI
2012
2013
U.S. HAI
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College of Business Administration
Housing Market Performance and Affordability
Housing Affordability Index Nebraska Localities June 2014
HAI June 2014
450
402
400
330
350
300
272
307
270
236
250
235
248
240
200
151
150
100
50
United States
Tri-County
Scotts Bluff County
Lincoln/Midlands
Omaha Area
Norfolk
Lincoln County
Hastings
Grand Island
Dakota County
0
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College of Business Administration
Housing Market Performance and Affordability
Summary
Housing remains affordable due to
low interest rates
solid and growing family income
moderate housing prices
A relatively supportive environment for residential
real estate in Nebraska in the coming years
high housing affordability
some population growth
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College of Business Administration
THANK YOU
Any Questions?
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