Housing and Mortgage Market Update

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1 Housing and Mortgage Market Update VCU Real Estate Trends Conference October 14, 29 Amy Crews Cutts, PhD Deputy Chief Economist

2 Recession Risks Still Elevated, Housing Contraction Ongoing Recession risks still elevated Fiscal stimulus promotes growth in second quarter, but latter half expected to be weak Job gain falls short of labor force growth; Unemployment rate up Core inflation at upper end of range preferred by policy makers Fewer housing starts, sales in 28; house values down Risks to the outlook Financial market troubles continue How bad will it be? Energy & Food Costs: high oil and natural gas prices act like a tax on the economy 1

3 6, Non-Farm Payroll Jobs Were Lost in the First Half of 28 1,25 1, , Change in Non-Farm Payroll Employment (in thousands) United States Virginia 13,3 Jobs gained through 3Q in VA '9 '91 '92 '93 '94 '95 '96 '97 '98 '99 ' '1 '2 '3 '4 '5 '6 '7 '8 Sources: U.S. Bureau of Labor Statistics, Freddie Mac National Recession 2

4 Oil Prices Are High and Volatile and Put Stress on Consumers and Businesses 14 Nominal Oil Prices (Dollars per Bbl) Real Oil Prices (2 Dollars per Bbl) Peak Real Price $88 New High Real Price $111 June OPEC Supply Shock Mid-East Oil Embargo Kuwait Invaded; 1991 Gulf War Iraq War Starts Afghanistan War Starts Sources: U.S. Bureau of Labor Statistics (CPI Less Energy, 2=1), Federal Reserve Bank of St. Louis; Data through August 28 3

5 Prime Conforming Mortgage Rates Remain Low By Historical Standards 9 Weekly Mortgage Interest Rate (Percent) Year, Fixed Rate Year, ARM Rate 5.21% Source: Freddie Mac s Primary Mortgage Market Survey 4

6 Jumbo Spreads Have Spiked to Record Levels Effective Interest Rate Spread Between Jumbo and Conforming 3-Year Fixed-Rate Mortgages (Basis Points) S&L Crisis Recession Black Wednesday Peso Devaluation Currency Crisis 21 Recession Tech Bubble Record: 138 bps 9/19/8 Current: 135 bps 1/3/8 Iraq War Subprime Crisis Source: HSH Associates (last data: week ending October 3, 28) Note: Effective spread adds fees and points to the interest rate. 5

7 Super Conforming Mortgage Rates Are Close to Regular Conforming Rates Effective Interest Rate Between Jumbo and Conforming 3-Year Fixed-Rate Mortgages (Percentage Points) 8. 3-Year Jumbo FRM % 7.7 % July 2, bps Oct. 3, bps Super Conforming 6.45% % 6.28% 6. 3-Year Conforming FRM 5.6 Oct-8 Sep-8 Aug-8 Jul-8 Jun-8 May-8 Apr-8 Mar-8 Feb-8 Jan-8 Dec-7 Nov-7 Oct-7 Sep-7 Aug-7 Jul-7 Jun-7 May-7 Apr-7 Mar-7 Feb-7 Jan-7 Source: HSH Associates (last data: week ending October 3, 28) Note: Effective rate adds fees and points to the interest rate. 6

8 Subprime Mortgages Now Make Up 1% of Loan Originations, Down from 2% in 26 Market Share by Product Segment of Originations ($, annualized) $4, $3,945 $3,5 $3, $2,885 $2,92 $3,12 $2,98 $2,5 $2, $1,5 $1, $2,215 13% 2% 16% $2,43 3% $1,924 $2,154 14% 2% 1% $5 33% 7% $ Q28 2Q28 Conventional, FHA Jumbo Prime Subprime Alt-A Conforming Prime & VA Source: Inside Mortgage Finance, Freddie Mac (by dollar amount); Note: 2Q28 values adjusted to reflect the undercount of Fannie Mae, and FHA activity in the IMF data. Home Equity Loans 7

9 Private-Label (non-gse) Security Issuance Has Slowed Sharply Dollar Amount of Issuance (Billions) $6 $5 $4 $3 $2 $1 FRE, FNM & GNMA Prime Jumbo Alt-A Subprime $83 Other $94 $ $11 $31 $12 $38 $1 $2 $97 $61 $4 $14 $ $1 $19 $19 $6 $377 $265 $289 $39 $296 $324 $ 1Q 27 2Q 27 3Q 27 4Q 27 1Q 28 2Q 28 $537 $547 $433 $348 $345 $42 Source: Inside MBS & ABS, Freddie Mac 8

10 Highest Percentage of Banks Tightening Mortgage Standards Since 1991 Net Percentage of Banks Tightening Mortgage Standards During Three Previous Months 8 6 Subprime 8 Prime Source: Federal Reserve Board's Senior Loan Officer Survey, Freddie Mac (Last update: August 11, 28) 9

11 Banks Are Tightening Lending Standards Across All Lending Lines of Business Net Percentage of Banks Tightening Mortgage Standards During Three Previous Months Prime Residential Loans Commercial Real Estate Commercial and Industrial Credit Cards Other Consumer Loans Source: Federal Reserve Board's Senior Loan Officer Survey (Last update: August 11, 28) 1

12 3-Day and Overnight Asset-Backed Commercial Paper Spreads Have Spiked Spread to AA-rated Nonfinancial Commercial Paper (Basis Points) Aug-6 Sep-6 3-Day Asset-Backed Commercial Paper Overnight Asset-Backed Commercial Paper Oct-6 Nov-6 Dec-6 Jan-7 Feb-7 Mar-7 Apr-7 May-7 Jun-7 Jul-7 Aug-7 Sep-7 Oct-7 Nov-7 Dec-7 Jan-8 Feb-8 Mar-8 Apr-8 May-8 Jun-8 Jul-8 Sep-8 Aug bps 249 bps Source: Federal Reserve Board (last data: day ending September 19, 28) 11

13 A Word on Home Prices There are 5 widely cited series on home prices, and many other lesser known series all are showing the same trend (DOWN), but to different degrees How far will they fall? Depends on the index S&P/Case-Shiller national index is down more than 16% already OFHEO s index, based on values of homes financed by Freddie Mac and Fannie Mae, is showing declines in both its purchase-only and classic series of more than 3.5% For a discussion of home price index differences see a recent report from Freddie Mac at 12

14 House Prices Started Declining in CA and FL in Early 7: Cumulative Growth 6Q1-7Q1 Source: OFHEO 7Q4 HPI, Freddie Mac 13

15 The Steepest Declines Are at 9% Over Just One Year: Cumulative Growth 6Q2-7Q2 Source: OFHEO 7Q4 HPI, Freddie Mac 14

16 The Steepest Declines Are at 14% Over Just One Year: Cumulative Growth 6Q3-7Q3 Source: OFHEO 7Q4 HPI, Freddie Mac 15

17 The Steepest Declines Are at 2% Over Just One Year: Cumulative Growth 6Q4-7Q4 Source: OFHEO 7Q4 HPI, Freddie Mac 16

18 The Steepest Declines Are at 3% Over Just One Year: HPI Growth 7Q1-8Q1 Source: OFHEO 7Q4 HPI, Freddie Mac 17

19 The Steepest Declines Are at 35% Over Just One Year: HPI Growth 7Q2-8Q2 Source: OFHEO 7Q4 HPI, Freddie Mac 18

20 26 & 27 Early Payment Defaults Are High in Subprime and Alt-A Segments Cumulative 6-Days and Worse Delinquency Rate as a Share Number of Loans Originated 4% 35% 3% 25% 2% 15% 1% 5% % Alt-A % 35% 3% 25% 2% 15% 1% 5% % Subprime Age of Loan in Number of Months From Origination Date Source: First American CoreLogic LoanPerformance Securities data, Freddie Mac. The grey shaded area represents the upper bound of prime loan delinquencies. Note: the last twelve points on each year cohort have incomplete data not all loans have reached those ages. Data through June

21 Early Payment Defaults: Rose As Home Price Growth Slowed & Now Appear to be Decreasing Loans ever 6 days or more delinquent over first 4 months post origination (percent of number) 8% Annual House Price Growth Rate (percent) 12% 7% 1% 6% 5% 4% Subprime EPD Rate (left scale) Annual House Price Change (right scale) 8% 6% 4% 2% 3% % 2% 1% Prime EPD Rate (left scale) -2% -4% -6% % -8% Source: First American CoreLogic LoanPerformance Servicing Databases, Freddie Mac. Note: Last data point subject to revision due to possible addition of data. FACL Data as of March 28 2

22 Subprime ARM Default Rate Is 31 Times That on Prime FRMs in Virginia 24 Loans 9 days or more delinquent or in foreclosure (percent of number) 21 Recession Subprime ARM FHA & VA Subprime FRM 22.5% 18 Prime Conventional ARM Prime Conventional FRM % 6 4.5% 3 2.5%.7% Source: Mortgage Bankers Association, Freddie Mac; Prime Conventional includes Alt-A (Quarterly data not seasonally adjusted;1998q1-28q1). 21

23 Virginia Home Sales Are Up Almost 11% in 28 YTD thru June Annual Existing Home Sales (1s, SAAR) Annual Change in Home Prices (Percent) 2 25 Natl Recession 1-Yr Change in Home Value 1-4 Unit Existing Home Sales 2 15 Total SF Home Sales Sources: Moody s Economy.com, Freddie Mac Conventional Mortgage Home Price Index 22

24 Recession Risks Still Elevated, Housing Contraction Ongoing Recession risks still elevated Fiscal stimulus promotes growth in second quarter, but latter half expected to be weak Job gain falls short of labor force growth; Unemployment rate up Core inflation at upper end of range preferred by policy makers Fewer housing starts, sales in 28; house values down Risks to the outlook Financial market troubles continue How bad will it be? Energy & Food Costs: high oil and natural gas prices act like a tax on the economy 23

Where to Get More Information Look for regular updates to our economic forecast, commentary and data at www.freddiemac.com/news/finance Contact me at Amy_Crews_Cutts@freddiemac.

25 Where to Get More Information Look for regular updates to our economic forecast, commentary and data at Contact me at Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. Information from this document may be used with proper attribution. Alteration of this document is prohibited. 28 by Freddie Mac.

The Mortgage and Housing Market Outlook

The Mortgage and Housing Market Outlook National Economists Club Washington, DC March 27, 2008 Frank E. Nothaft Chief Economist Recession Risk, Housing Contraction Worsen 1-in-2 chance of recession in