Will The Recovery Hold? By Doug Duncan Vice President and Chief Economist Fannie Mae June 17, 2010

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1 Will The Recovery Hold? By Doug Duncan Vice President and Chief Economist Fannie Mae June 17,

2 Disclaimer Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economics & Mortgage Market Analysis (EMMA) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How the information we discuss affects Fannie Mae will depend on many factors. Although the EMMA group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the EMMA group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management. 2

3 Growth in Real GDP and Contribution to GDP Growth First Year of Economic Recoveries vs Forecast 8% (Percent Contributions) 7% 68% 6.8% 6% 5% 4% 3% 3.2% 2% 1% 0% -1% Post-WWII Recessions 2010 Forecast GDP Growth (SAAR) Gross Private Domestic Investment Government Consumption and Investment Personal Consumption Expenditures Residential Fixed Investment Net Exports of Goods and Services Note: Average of first four quarters of recoveries of the Post WWII Recessions with double-dip as a single recession. Sources: Bureau of Economic Analysis, Fannie Mae Research 3

4 800 Employment Starts to Firm 11% % 9% 8% 7% 6% 5% 4% % -800 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 2% All Employees: Total Nonfarm (SA, Thous) Difference - Month to Month Civilian Unemployment Rate: 16 yr + (SA, %) Source: Bureau of Labor Statistics 4

5 Unemployment Rates by State Seasonally Adjusted, April 2010 Source: Bureau of Labor Statistics 5

6 Consumers Take A Breather After Strong Showing Real personal consumption expenditures (month-to-month percent change) 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% -0.2% -0.4% -0.6% -0.8% -1.0% Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: Bureau of Economic Analysis 6

7 Non-manufacturing Activity it Expanding After Record Low '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Source: Institute for Supply Management ISM Nonmanufacturing Composite Index (SA) 7

8 Stock Value Falls Sharply Stock price index: Standard & Poor s 500 Composite ( = 100), monthly average through May 1,800 1,600 1,400 1,200 1, Early June '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Source: Wall Street Journal 8

9 Capital Markets 9

10 6 5 Financial Stress Drops Sharply From Peak The Federal Reserve Bank of Kansas City Financial Stress Index* New Peak - 10/2008 (5.32) Previous Peak - 10/1998 (1.15) '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 *A positive value indicates that financial stress is above the long-run average, while a negative value signifies that financial stress is below the long-run average. Source: Federal Reserve Bank of Kansas City 10

11 Bank Loans as a Percent of GDP Still Declining 55% Total Commercial Bank Loans as a Share of Real GDP (%) 50% 45% 40% 35% 30% 25% 20% '70 '75 '80 '85 '90 '95 '00 '05 Sources: Federal Reserve Board, Bureau of Economic Analysis 11

12 Net Foreign Purchases of Government Agency Debt Show (NSA, Mil. $) Little Net New Investment Interest $40,000 $30,000 $20,000 $10,000 $0 -$10,000 -$20,000 -$30,000 -$40, Jan-01 May-01 Sep-01 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 Net Foreign Private Purchases: Government Agency Bonds (NSA, Mil.$) Net Foreign Official Purchases: Government Agency Bonds (NSA, Mil.$) Source: U.S. Treasury Department

13 Rising European Risks Imply Slower Global Growth 225 (bps) / 2/ 3/ 4/ 5/ 6/ 7/ 8/ 9/ 10/ 11/ 12/ 1/ 2/ 3/ 4/ 5/ 6/ /1/2010 /1/2010 /1/2010 /1/2010 /1/2010 /1/2010 Markit itraxx Financial Index of European Swaps Source: Bloomberg, Markit

14 Greek Bond Spread Surges on Solvency Concerns 10-year government bonds minus German government bonds, basis points /1/2010 /1/2007 /1/2007 /1/2007 /1/2007 /1/2008 /1/2008 /1/2008 /1/2008 /1/2008 /1/2008 /1/2010 /1/2010 Portugal Ireland Italy Greece Spain Source: Bloomberg

15 Housing 15

16 The Housing Supply Pool Level is Still High No Lifeguard on Duty! Swim at Your Own Risk! Months Supply Foreclosures New housing completions Existing homes Condo conversions Normal Fill Level Destruction ti Apartment t New home sales Existing home withdrawals Existing home sales conversions Source: Fannie Mae 16

17 What is a Sustainable Homeownership Rate? 70 Homeownership Rate (NSA, %) '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 Source: Census 17

18 2,000 Housing Starts Remain at Very Low Levels Housing Starts (Thousands, SAAR) 1,800 1,600 1,400 1,200 1, '60 '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Census Bureau Single Family Multifamily 18

19 New Homes For Sale at the Lowest Levels Since the 1970s 600 New Single Family Houses For Sale (SA, Thousands) '65 '70 '75 '80 '85 '90 '95 '00 '05 '10 Source: Census 19

20 Existing Homes on the Market Still at Elevated Levels (Units, NSA) 4,500, ,000 4,000, ,000 3,500, ,000 3,000, ,000 2,500, ,000 2,000, , ,500, ,000 1,000, , , ,000 0 '85 '90 '95 '00 '05 '10 0 Single Family Homes (Left Axis) Condos and Coops (Right Axis) Source: National Association of REALTORS 20

21 Current Excess Supply Over Normalized Demand and Pent-Up Supply of 7 Million Units* Have the Potential ti to Further Depress Future Home Prices 3.5 % Homeowner Vacancy Rate 12.0 % Rental Vacancy Rate ,000 excess supply of homes, based on 1.7 percent normal rate M excess supply of homes, based on 7.7 percent normal rate 0.0 '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 ' '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 4,000 Vacant Homes Held off Market** 10% Seriously Delinquency Rate*** 3,500 3, ,000 units above trend 8% 5 million homes, based on 52 million total mortgages 2,500 6% 2,000 1,500 4% 1,000 2% Q Q Q Q Q Q Q Q1 0% '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 **for reasons other than for occasional use or temporarily occupied by persons with usual residences elsewhere Sources: Census Bureau, Mortgage Bankers Association, *Fannie Mae estimate ***the percentages of mortgage payments 90 days and over past due plus the percentages of inventory of mortgages in foreclosure 21

22 Mortgage Origination 22

23 10% Mortgage Rates Are Still Good 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 Sources: Federal Reserve Board, Freddie Mac Federal Open Market Committee: Fed Funds Target Rate (EOP, %) FHLMC: 1-Year Adjustable Rate Mortgages: U.S. (%) FHLMC: 30-Year Fixed-Rate Mortgages: U.S. (%) 23

24 50% Government-Insured Share of Purchase Applications is the Highest in Almost 20 Years 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 Government Share of Total Mortgage Applications Government Share of Refinance Applications Government Share of Purchase Applications Source: Mortgage Bankers Association 24

25 Serious Delinquent Rates in Each State Q Note: Data is market-wide SDQ information. Sources: Mortgage Bankers Association, National Delinquency Survey 25

26 Source: Fannie Mae National Housing Survey 26

27 Source: Fannie Mae National Housing Survey 27

28 Source: Fannie Mae National Housing Survey 28

29 Contact Information Doug Duncan, VP & Chief Economist Fannie Mae 3900 Wisconsin Ave., NW Mail Stop 1H-2N/01 Washington, DC (o) (c) (fax) d 29

ECONOMIC AND FINANCIAL HIGHLIGHTS

ECONOMIC AND FINANCIAL HIGHLIGHTS FEDERAL RESERVE BALANCE SHEET Assets and Liabilities 2-3 REAL ESTATE Construction Spending 4 CoreLogic Home Price Index 5 Mortgage Rates and Applications 6-7 CONSUMER