the current status and outlook for the housing market recovery and mortgage finance
DESCRIPTION
Prepared by: LaVaughn M. Henry, Ph.D. VP & Sr. Regional Officer FRBC, Cincinnati Branch May 16, 2013TRANSCRIPT
Specially Prepared for the
National Association of RealtorsMidyear Legislative Meetings and
Trade Expo
Prepared by:LaVaughn M. Henry, Ph.D.VP & Sr. Regional OfficerFRBC, Cincinnati BranchMay 16, 2013
The Current Status and Outlook for the Housing Market Recovery and
Mortgage Finance
What are the Economic Realities that are Driving the Current Housing Recovery?· The alignment in the housing market of supply and demand fundamentals appears to
substantiate the position that a sustained recovery is under way.
· House prices, as measured by a variety of national indexes have risen since the beginning of 2012.
· The recovery of house prices has been broad based geographically, with 90 percent of local markets having experienced price gains over the year ending in February.
· Since the beginning of 2012, housing starts and permits have risen by nearly 30 percent, while new and existing home sales have also seen double-digit growth rates.
· Homebuilder sentiment has improved notably, and real estate agents report stronger traffic of people shopping for homes. In national surveys, households report that low interest rates and house prices make it a good time to buy a home; they also appear more certain that house price gains will continue.
· While lending for residential real estate is increasing, underwriting standards remain tight, thus slowing the rate of recovery in the market.
· Reductions in mortgage originations has been most pronounced among borrowers with lower credit scores.
THE FUNDAMENTALS OF THE HOUSING MARKET
The Current Status and Outlook for:
3
House Prices a recovering strongly at the national level…
Janu
ary
2001
Janu
ary
2002
Janu
ary
2003
Janu
ary
2004
Janu
ary
2005
Janu
ary
2006
Janu
ary
2007
Janu
ary
2008
Janu
ary
2009
Janu
ary
2010
Janu
ary
2011
Janu
ary
2012
Janu
ary
2013
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
12
-mo
nth
Gro
wth
Ra
te
Source: Standard & Poor's/Case-Shiller 20-metro Composite Index4
1983 - Q1 1988 - Q3 1994 - Q1 1999 - Q3 2005 - Q1 2010 - Q30.8
0.9
1.0
1.1
1.2
1.3
1.4
1.5
1.6
1.7
Rati
o
Average from 1983-2000 = 1.0Band indicates +/- 1 standard deviation
Equilibrium
* Ratio of Case-Shiller home prices to Owner’s Equivalent RentSource: Robert Shiller, Bureau of Labor Statistics
…while the ratio of Home Prices to Rent indicates that home prices have recovered to a “fair” value.
5
Demand for housing continues to show increasing signs of strength...
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
May
-11
Jan-
12
Sep-
120
200
400
600
800
1000
1200
1400
1600
1800
0
1000
2000
3000
4000
5000
6000
7000
Single Family Home Sales
New Homes Existing Homes
Th
ou
sa
nd
s
6 Source: U.S. Census Bureau, National Association of Realtors
…as low mortgage rates and house prices have helped to increase Housing Affordability to historic levels.
Jan-
00
Sep-
00
May
-01
Jan-
02
Sep-
02
May
-03
Jan-
04
Sep-
04
May
-05
Jan-
06
Sep-
06
May
-07
Jan-
08
Sep-
08
May
-09
Jan-
10
Sep-
10
May
-11
Jan-
12
Sep-
1290
110
130
150
170
190
210
230
3
4
5
6
7
8
9
NA
R H
ou
sin
g A
ffo
rda
bil
ity I
nd
ex
FH
FA
Co
ntr
act
Inte
rest
Ra
te
7 Source: FHFA, National Association of Realtors
Homebuilders are responding by gradually rebuilding a diminished housing supply.
Jan 1990 Jan 1994 Jan 1998 Jan 2002 Jan 2006 Jan 20100
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Single Family Multi Family
Th
ou
sa
nd
s,
SA
AR
8 Source: Census Bureau
CONSUMER INCOME AND CREDIT CONDITIONS
The Demand for Mortgage Credit:
9
10
Both Real Disposable Personal Income and Consumption are advancing at a slow pace…
2000 2002 2004 2006 2008 2010 2012-4
-2
0
2
4
6
8
Consumption Real DPI
Fou
r q
uart
er
perc
en
t ch
an
ge
Source: Bureau Economic Analysis
1 9 17 2550
100
150
200
250
Equities Real Estate
Perc
en
t of
dis
posab
le in
com
e
…while Household Wealth continues its recovery to pre-financial crisis levels.
11 Source: Federal Reserve Board
Growth in Consumer Credit Outstanding has returned to pre-financial crisis levels…
2000-012001-042002-072003-102005-012006-042007-072008-102010-012011-042012-07-10%
-5%
0%
5%
10%
15%
20%
-1
1
12 M
onth
perc
enta
ge C
hange
12 Source: Federal Reserve Board of Governors
…however, consumers have substantially reduced their use of Revolving Debt.
2001-01 2002-11 2004-09 2006-07 2008-05 2010-03 2012-01-15%
-10%
-5%
0%
5%
10%
15%
20%
NonrevolvingRevolving
12
-mo
nth
Gro
wth
Ra
te
13 Source: Federal Reserve Board of Governors
Low interest rates are helping households to continue to deleverage…
1980Q1 1984Q2 1988Q3 1992Q4 1997Q1 2001Q2 2005Q3 2009Q410%
11%
12%
13%
14%
15%
16%
17%
18%
19%
20%
Financial Obligations Ratio Debt Service Ratio
Source: Federal Reserve Board of Governors
1980 1984 1989 1994 1998 2003 2008 201260
70
80
90
100
110
120
130
140
Deb
t as a
% o
f D
isp
osab
le
Incom
e
…reversing the 30-year trend of increasing Household Debt to Disposable Income.
15
Source: Federal Reserve Board
TRENDS IN LENDINGThe Supply of Mortgage Credit:
16
Foreclosure Rates continue to decline across all major loan types…
17
1998
Q1
1999
Q2
2000
Q3
2001
Q4
2003
Q1
2004
Q2
2005
Q3
2006
Q4
2008
Q1
2009
Q2
2010
Q3
2011
Q4
2013
Q10
1
2
3
4
5
6
Prime LoansSubprime LoansFHA Loans
Source: Mortgage Bankers Association National Delinquency Survey
…while delinquency rates of 90 days and greater also are declining from their highs.
18
1998
Q1
1999
Q2
2000
Q3
2001
Q4
2003
Q1
2004
Q2
2005
Q3
2006
Q4
2008
Q1
2009
Q2
2010
Q3
2011
Q4
2013
Q10
2
4
6
8
10
12
14
16
Prime LoansSubprime LoansFHA Loans
Source: Mortgage Bankers Association National Delinquency Survey
In response, Commercial Bank Charge-Off Rates continue to decline to pre-Financial Crisis Levels.
2000
Q1
2001
Q3
2003
Q1
2004
Q3
2006
Q1
2007
Q3
2009
Q1
2010
Q3
2012
Q10
2
4
6
8
10
12
Credit Card LoansOther ConsumerSF Residential Mortgages
Rate
19 Source: Federal Reserve Board of Governors
However, Lenders remain reticent in Loosening Tight Underwriting Standards on Mortgage Loans…
2007
Q2
2008
Q1
2008
Q4
2009
Q3
2010
Q2
2011
Q1
2011
Q4
2012
Q3
2013
Q2-20
0
20
40
60
80
100
120
PrimeNontraditionalSubprime
Net
Perc
en
tag
e o
f S
urv
ey
Resp
on
den
ts
20 Source: Federal Reserve Board of Governors Sr. Lending Officer Opinion Survey
…but are selectively increasing lending in response to growth in the demand for residential mortgages.
2007
Q2
2008
Q1
2008
Q4
2009
Q3
2010
Q2
2011
Q1
2011
Q4
2012
Q3
2013
Q2-120
-100
-80
-60
-40
-20
0
20
40
60
80
PrimeNontraditionalSubprime
Net
Perc
en
tag
e o
f S
urv
ey
Resp
on
den
ts
21 Source: Federal Reserve Board of Governors Sr. Lending Officer Opinion Survey
While growth in mortgage applications is more balanced among sectors as the recovery expands.
Janu
ary
2007
July 2
007
Janu
ary
2008
July 2
008
Janu
ary
2009
July 2
009
Janu
ary
2010
July 2
010
Janu
ary
2011
July 2
011
Janu
ary
2012
July 2
012
Janu
ary
2013
-100.0%
-50.0%
0.0%
50.0%
100.0%
150.0%
200.0%
ConventionalGovernment
12
-mo
nth
pe
rce
nta
ge
Gro
wth
22 Source: MBA Applications Survey
MONETARY POLICYThe Current Status and Outlook for:
23
In response to the Financial Crisis, the Fed undertook non-traditional policies to accommodate the recovery…
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
Federal Agency Securi-ties
Credit Markets
Lending to Financial Insti-tutions
Long Term Treasuries
Traditional
Millions
24 Source: Federal Reserve Board of Governors
…helping to reduce mortgage interest rates to historically low levels.
Jan-
90
Feb-
92
Mar
-94
Apr-9
6
May
-98
Jun-
00
Jul-0
2
Aug-
04
Sep-
06
Oct-0
8
Nov-1
0
Dec-1
20
2
4
6
8
10
12
Federal Funds Effec-tive Rate10-yr Constant Ma-turity Treasury30-year Fixed Rate Mortgage
25 Source: Federal Reserve Board of Governors
26
Interest Rate Thresholds (May FOMC Mtg.)· “…the Committee…currently anticipates that [the]
exceptionally low range for the federal funds rate will be appropriate at least as long as:
- the unemployment rate remains above 6-1/2 percent,
- inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal,
- and longer-term inflation expectations continue to be well anchored.”
27
Key Points (from May FOMC Meeting)· The economy continues to grow, albeit at a
moderate pace.· Labor market conditions have shown some
improvement in recent months…but the unemployment rate remains elevated.
· The housing sector has strengthened further.· The Committee expects that, with appropriate
policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline…
28
Asset Purchases (May FOMC Meeting)· “…the Committee decided to continue purchasing
additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”
· “The Committee will continue its purchases of Treasury and agency mortgage-backed securities… until the outlook for the labor market has improved substantially in a context of price stability.”
The majority of the FOMC do not to anticipate rate tightening until 2015…
Source: Federal Reserve Board of Governors, March 2013 Projections
…with an increasing majority in agreement as time passes.
Source: Federal Reserve Board of Governors
31
Thank You.