The Mortgage and Housing Market Outlook

Transcription

1 The Mortgage and Housing Market Outlook National Economists Club Washington, DC March 27, 2008 Frank E. Nothaft Chief Economist

2 Recession Risk, Housing Contraction Worsen 1-in-2 chance of recession in 2008 Maybe in recession already; fiscal stimulus propels growth in second half: Economic growth 1.9% in 2008 Job gain falls short of labor force growth; Unemployment rate up, averages 5.2% in 2008 Core inflation within range preferred by policy makers Less housing starts, sales in 2008; house values down Credit quality has deteriorated 2006 and 2007 subprime vintages have high early-payment defaults More than half of foreclosure starts since 2006 were subprime loans Banks have tightened underwriting on both prime and subprime Auto loan 60-day delinquencies at 10-year high Risks to the outlook How much will liquidity constraints affect broader economy? Current liquidity problems affecting jumbo, Alt-A markets as well as subprime Energy: high oil and natural gas prices act like a tax on the economy 1

3 Prime Conforming Mortgage Rates Remain Low By Historical Standards 9 Weekly Mortgage Interest Rate (Percent) Year, Fixed Rate Forecast Year, ARM Rate Source: Freddie Mac s Primary Mortgage Market Survey 2

4 Spread Between 30-Year Fixed Jumbo and Conforming Mortgage Rates Is at A Record High Effective Interest Rate Between Jumbo and Conforming 30-Year Fixed-Rate Mortgages (Percentage Points) % 30-Yr Jumbo FRM 7.33% 6.8 July 13, bps % March 21, bps 5.96% Yr Conforming FRM 5.6 Mar-08 Feb-08 Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07 May-07 Apr-07 Mar-07 Feb-07 Jan-07 Source: HSH Associates(last data: week ending March 21, 2008) Note: Effective rate adds fees and points to the interest rate. 3

5 Private-Label Mortgage-Backed Security Issuance Has Fallen Sharply Dollar Amount of Issuance (Billions) $200 $150 $100 $52 $30 Subprime & Other $37 Alt-A $16 $34 $8 $20 $14 $1 Prime Jumbo $19 $4 Subprime & Other Alt-A Prime Jumbo Freddie Mac & Fannie Mae $7 $50 $85 $94 Freddie Mac & Fannie Mae $99 $97 $0 March-2007 June-2007 September-2007 December-2007 $191 Billion $181 Billion $137 Billion $109 Billion Source: Inside Mortgage Finance 4

6 CMBS Spreads Have Also Reached Record High Levels AAA Less 10-Yr Treasury Yield 1561 BBB Less 10-Yr Treasury Yield CMBS Spread to 10-year Treasury (Basis Points) Dec-07 Dec-06 Dec-05 Dec-04 Dec-03 Dec-02 Dec-01 Dec-00 Dec-99 Dec-98 Dec-97 Dec-96 Source: Morgan Stanley (last data: week ending March 21, 2008) 5

7 Highest Percentage of Banks Tightening Home Mortgage Standards Since Net Percentage of Banks Tightening Mortgage Standards During Previous Three Months Subprime Prime Source: Federal Reserve Board's Senior Loan Officer Survey (Last update: February 4, 2008) 6

8 Single-family Building Hit a Record in 2005, but Was 53% Lower Two Years Later 1,900 1, to 4-Family Housing Starts (thousands of units, SAAR) Recession Third Quarter 2005 record: 1.8 million units Forecast 1,300 1, Fourth Quarter 2007: 0.8 million units Sources: Bureau of Census, Freddie Mac 7

9 Existing Home Sales Are Down Everywhere Over Last Two Years -47% -65% -48% -45% -42% -57% -52% Down less than 20% Down 20-40% Down more than 40% Source: National Association of Realtors Percent change in existing home sales Fourth quarter 2005 through Fourth quarter 2007 Existing Home Sales Nationwide Down 29% 8

10 Time-On-Market Up in Most Markets Miami, FL Boston, MA Washington-Baltimore Los Angeles, CA Las Vegas, NV New York,NY Chicago, IL Detroit, MI Philadelphia, PA Columbus, OH Minneapolis, MN St. Louis, MO Denver, CO Dallas, TX Raleigh, NC Charlotte, NC City Source: National Association of Realtors } Up 65 days } Up 61 days } Up 48 days } Up 40 days } Up 37 days } Up 33 days } Up 33 days } Up 28 days } Up 25 days } Up 19 days } Up 18 days } Up 17 days } Up 13 days September 2007 } Up 4 days September 2005 } Down 1 day } Down 7 days Time-on-market (# of days) 9

11 A Large Inventory Overhang Remains within the Housing Market 900 Excess Unsold Homes for Sale (Numbers in Thousands) Annual Data Quarterly Data Q1 Q4 Q1 Q4 Q1 Q Source: Bureau of Census ( :Annual Data, 2005Q1 2007Q4:Quarterly Data) Note: The excess unsold homes were estimated based on the average vacancy rate from 1996Q1 to 2005Q4 (1.7%). 10

12 Forty-Six States Had Falling Prices in the Fourth Quarter 2007 Pacific -17.2% Mountain -12.9% United States: -9.3% (4 th Quarter Annualized Growth) West North Central -6.1% East North Central -11.8% Middle Atlantic -2.3% New England -7.1% DC 0 5% Quarterly Change < 0% Quarterly Change West South Central -3.8% East South Central -3.6% South Atlantic -7.2% Source: Freddie Mac s Purchase-Only Conventional Mortgage Home Price Index (Annualized Quarterly Rates for 4Q2007) 11

13 Apartment Market Conditions Are Weaker 100 Market Tightness Index Market Tighter Market Looser Market Unchanged Jan-08 Jul-07 Jan-07 Jul-06 Jan-06 Jul-05 Jan-05 Jul-04 Jan-04 Jul-03 Jan-03 Jul-02 Jan-02 Jul-01 Jan-01 Jul-00 Jan-00 Jul-99 Survey question for Market Tightness Index: How are apartment market conditions in the local market that you watch? Tight markets are those with low vacancies and high rent increases. Conditions obviously vary greatly from place to place, but on balance, apartment market conditions in your markets today are: 1) Tighter than three months ago 2) Looser than three months ago 3) About unchanged from three months ago 4) Don t know or not applicable. Source: National Multi Housing Council 12

14 Fewer Refis, Sales Result in a 16% Drop in Mortgage Originations in 2008 Total Single-Family Mortgage Originations (Billions of Dollars) 4,000 3,750 Refinance Originations 3,500 Home Purchase Originations 3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1, Forecast '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 Sources: U.S. Department of Housing and Urban Development, Freddie Mac 13

15 Employment Growth Weakest In Markets With Flat or Falling House Values Above 2.0% 1.1% to 1.9% 0.6% to 1.0% Source: U.S. Bureau of Labor Statistics Percent change in the non-farm payroll employment January 2006 through January % to 0.5% Below 0.0% National employment up 0.7% 14

16 Delinquency Rates Have Jumped In Markets With Flat or Falling House Values 0.30% 0.31 to 0.40% 4Q 06 to 4Q 07 Change in Level of Serious Delinquency Rate (90+ days or in foreclosure, Prime Conventional Loans) National Average Change = 0.81% Data as of December 2007 Source: Mortgage Bankers Association Percentage Point Difference 0.41 to 0.60% 0.61 to 0.80% 0.81 to 1.21% 1.45 to 2.05% 15

17 Subprime Credit Performance Weak underwriting characterized subprime originations in recent years Early payment defaults and serious delinquencies are worse for recent vintages of subprime loans Subprime loans accounted for over half of foreclosures in 2006 and 2007 About 1.5 million loans began foreclosure in 2007 Credit problems are concentrated in economically depressed regions 16

18 Subprime and Alt-A Shares Quadrupled Between 2001 and 2006, then Fell in % 7.9% 5.9% 2.7% 14.4% 13.3% 5.4% 33.2% 6.9% 57.8% 13.4% 6.0% 20.3% 3.0% 61.0% 20.1% 16.1% 9.8% 2001 $2.2 trillion 2006 $3.0 trillion 2007 Q4 $1.8 trillion (annualized) Conventional, Conforming Prime Jumbo Prime Subprime Alt-A FHA & VA Home Equity Loans Source: Inside Mortgage Finance (by dollar amount) 17

19 2/28 ARMs Dominated Subprime Home- Purchase Loan Originations in 2006 Other ARM 4% Fixed 9% Other ARM 7% 2-year & 3-year Hybrids 61% 30-Yr ARM Balloon W/ 40-50Yr Amtz 26% Other ARM 23% ARM Hybrids 46% Fixed 31% ARM Hybrids 23% Fixed 70% Subprime Alt-A Prime Conventional Source: LoanPerformance, a subsidiary of First American Real Estate Solutions, TrueStandings Securities; MIRS. First liens only; by dollar amount. 18

20 Subprime ARM Defaults Are 12 Times Those on Prime Loans 90 days or more delinquent or in foreclosure (percent of number) Recession FHA & VA Subprime ARM 20.43% Subprime FRM 8.18% 5.18% 2 Prime Conventional 1.67% Source: Mortgage Bankers Association (Quarterly data not seasonally adjusted;1998q1-2007q4) 19

21 Subprime Loans Accounted for Over Half of Foreclosures since Number of Foreclosures Started (Annualized Rate in Thousands) Subprime: 13% of Loans Serviced (December) 54% % 55% 9% 37% 36% 37% 44% 47% 52% 11% 29% 29% 29% 13% 22% 20% 17% 34% 35% 34% 34% 33% 31% 32% 33% 37% 2003 H H H H H H H H H2 Prime (includes Alt-A) FHA & VA Subprime Source: Mortgage Bankers Association National Delinquency Survey (Data as of December 2007; number expanded to reflect 85% coverage) 20

22 Auto Loan Delinquencies Have Spiked Up Loans delinquent 60 days or more (percent) Recession 0.7 Automobile Loans Source: Auto Securities Rated by Fitch 21

23 Recession Risk, Housing Contraction Worsen 1-in-2 chance of recession in 2008 Weak economic growth first half, better second half, 1.9% for year Unemployment rate up, averages 5.2% in 2008 Less housing starts, sales in 2008; house values down Credit quality has deteriorated New foreclosures will increase above last year s 1.5 million pace Banks have tightened underwriting on both prime and subprime Price of credit risk is up 22

24 Where to Get More Information Look for regular updates to our economic forecast, commentary and data at Contact us 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 by Freddie Mac.