Housing and Credit Markets Outlook FTA Revenue Estimating Conference Springfield, IL Amy Crews Cutts, SVP Chief Economist October 7, Equifax Inc.
Government Shutdown and Debt Ceiling! As of October 1 st the government shut down for the first time since 1995 800K Federal Employees deemed non-essential furloughed The 1995-96 shutdown cost an estimated $2.5B There are other unintended consequences (home buying, hiring, economic forecasting)! The longer the shutdown drags on, the greater the negative impact to the economy! The debt ceiling is the real danger The extraordinary measures will have been used up by October 17, at which point the government will have to operate strictly on a cash flow basis Last time we flirted with the debt ceiling S&P downgraded the US Debt triggering a 6.7% one-day stock sell off The Fed does not have the means to offset another fiscal shock! A default would have catastrophic consequences globally 2
How Bad is Default?! The US has defaulted once before Mostly UNINTENTIONALLY! US posted late payments on T-Bills maturing on April 26, May 3 and May 10 in 1979 Full payment was made after a short delay Originally did not pay interest on delayed payments, but eventually did due to severe pressure in financial markets! Delay was due to unprecedented volume of participation by small investors, a failure of Congress to act on the debt ceiling and a failure of word processing software used to prep check schedules! What was the effect?! On 28-34 day (aka 1-month) Treasury Bills yields jumped 60 basis points and remained there for several months! Effect of INTENTIONAL default is an unquantifiable risk Russia s default nearly upended markets in 1997 3
Financial Market Performance Has Been Volatile Equity indexes are at all-time highs, bolstering consumer confidence Bond markets are wary of changes in Fed bond-purchase activity 1800 S&P 500 Equity Index (weekly average, NSA) 6 U.S. Treasury CM Bond Rates (%, weekly average, NSA) 1-Yr 2-Yr 3-Yr 5-Yr 10-Yr 1600 5 1400 4 1200 3 1000 2 800 1 600 0 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Source: St. Louis Federal Reserve Bank, Yahoo! Finance, NBER, Equifax; through October 3, 4
Student Loans & Auto Dominate N-M Consumer Debt Total student loan debt has grown steadily throughout Great Recession and recovery Auto growing strong, now back to January level & $9B shy of peak $2.7 $2.6 $2.6 $2.5 $2.5 $2.4 $2.4 $2.3 $2.3 $2.2 Non-Mortgage Consumer Debt (in $T, NSA) Source: Equifax (Credit Trends 4.0; data through August ) $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 Non-Mortgage Consumer Debt (in $T, NSA) Other Credit Card Student Loans Auto Vertical Axis Scales Not Aligned 5
U.S. Consumer Deleveraging: Diverging Trends Home mortgage outstanding balances, including 1 st liens and home equity lines and loans, have declined $1.47T, or 15%. Non-mortgage consumer debt fell $230B or 12%; Hit new high in July $10.0 $9.8 $9.5 $9.3 $9.0 $8.8 $8.5 $8.3 $8.0 $7.8 $7.5 Home Mortgage Debt (in $T) $2.65 $2.60 $2.55 $2.50 $2.45 $2.40 $2.35 $2.30 $2.25 $2.20 Non-Mortgage Consumer Debt (in $T) Source: Equifax (Credit Trends 4.0; data through August ) Vertical Axis Scales Not Aligned 6
Credit Delinquencies Are Recovering Auto, bankcard delinquency rates are back to pre-recession levels Mortgage delinquencies remain problematic 8 7 6 5 4 3 2 1 0 60 DPD+ Delinquency Rate (%, NSA) Recession Auto Bankcard Consumer Finance 1st Mortgage Home Equity 3.5 7.7 4.0 2.0 1.8 1.9 1.1 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Source: Equifax (Credit Trends 4.0), Data through August Notes: Excludes write-offs and REO; Mortgage DLQ rates include loans in foreclosure 7
5.5% 5.3% 5.0% 4.8% 4.5% 4.3% 4.0% 3.8% 3.5% Bank Card Performance Is Improving Payment ratios, payment amounts divided by outstanding balances, are rising Part of consumer deleveraging Utilization rates have been falling, first due to payoffs, charge-offs, etc. but now due to limit increases Payment Ratio (Monthly Payment to Outstanding Balances; NSA) Card Act Passed Effective Source: Equifax (Credit Trends 4.0); data through August 8 Card Utilization Credit Available (%, NSA) ($T, NSA) 27% 26% 25% 24% 23% 22% 21% 20% Utilization Rate (L) Credit Available (R ) $2.6 $2.4 $2.2 $2.0 $1.8 $1.6 $1.4 $1.2
6.5% 6.3% 6.0% 5.8% 5.5% 5.3% 5.0% 4.8% 4.5% 4.3% Retail Cards Differ from Bank Cards Payment ratios on retail cards started rising in Utilization rates have remained elevated on retail cards, due in part to limited credit availability but recent increases in availability have been met with increased usage Payment Ratio (Monthly Payment to Outstanding Balances; NSA) Card Act Passed Effective Source: Equifax (Credit Trends 4.0); data through August 9 20% 18% 16% 14% 12% 10% Card Utilization Credit Available (%, NSA) ($B, NSA) Utilization Rate (L) Credit Available (R ) $450 $400 $350 $300 $250 $200
Card Deleveraging Bank card balances have decreased by 21% ($150 billion) since their recession peak Retail card balances are at all-time highs, up nearly 10% ($5 billion) from prerecession levels $775 $725 Bank Card Balances ($B, NSA) Card Act Passed Effective $60 $55 Retail Card Balances ($B, NSA) $675 $50 $625 $45 $575 $40 $525 $35 $475 $30 Source: Equifax (Credit Trends 4.0); data through August 10
Card Performance Bank card serious delinquency rates are higher than retail card rates Retail rates saw little degradation in performance during the recession Both rates are at lowest levels since start of series 7.0% 6.0% Bank Card Serious Delinquency Rate (NSA) Retail Card Serious Delinquency Rate (NSA) 7.0% 6.0% 5.0% 5.0% 4.0% Balances 4.0% Balances 3.0% 3.0% 2.0% 1.0% 0.0% Card Act Passed Effective Tradelines Source: Equifax (Credit Trends 4.0); data through August ; 11 2.0% 1.0% 0.0% Tradelines Serious Delinquency = 60+DPD or in bankruptcy
Student Loans the Next Big Problem 950 850 750 Student Loan & Credit Card Balances ($B, NSA) Student Loans Credit Cards Student Loan Borrowers and Amount Owed per Borrower (In Millions) (in $1000s) 40 35 30 25 $40 $35 $30 $25 650 20 $20 550 450 15 10 5 Avg Total Owed (R ) Number of Borrowers (L) $15 $10 $5 350 0 2004 $0 Source: Equifax (Credit Trends 4.0); data through August ; credit card data include bank and retail cards. 12
Auto Loan Originations Are Rising Auto Bank Originations & Share High Prime by Vintage (# millions & % NSA) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Total Originations (left) 70% 65% 60% 55% 50% 45% 40% 35% 30% Auto Finance Originations & Share High Prime by Vintage (# millions & % NSA) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 % ERS 700+ (right) 70% 65% 60% 55% 50% 45% 40% 35% 30% The Share of high-prime borrowers among new originations is falling across both banks and auto finance companies Source: Equifax (Credit Trends 4.0); data as of August ; ERS = Equifax Risk Score) 13 13
20 18 16 14 12 10 8 6 4 2 0 Mortgage Rates in Context Defining Historically Low Monthly Average 30-Year Fixed Mortgage Rates (%, NSA) 4.08 18.45 FHA 25Yr Rate Conv. 30-Yr Rate 4.44 1949 1952 1956 1960 1964 1972 1976 1979 1983 1987 1991 1995 1999 2002 Notes: Through 1961, rates are based on 25-year mortgages. FHA was created in 1934 and the original term of FHA insured fixed-rate loans was 20 years. Gradually terms extended to 30-years. 4.8 4.6 4.4 4.2 4 3.8 3.6 3.4 3.2 3 Weekly Average 30-Year Fixed Mortgage Rates (%, NSA) Jul-11 Sep-11 Nov-11 24 New Record Lows Set Since August 30-Yr Fixed Rate Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Record Low Jan-13 Mar-13 May-13 Jul-13 Sep-13 14
Decomposing 30-Yr Fixed Mortgage Rates 5.0 4.5 4.0 3.5 3.0 2.5 2.0 Interest Rate Levels (%, NSA) 1.8 1.6 1.4 1.2 1.0 0.8 0.6 Interest Rate Spreads (%, NSA) 1.5 1.0 0.5 6/1/ 8/1/ 10/1/ 10-Yr CMT FNMA RNY 12/1/ 2/1/ 4/1/ 6/1/ 8/1/ 10/1/ 0.4 0.2 0.0 6/1/ 8/1/ RNY to CMT Spread PMR-RNY Spread The Required Net Yield is the secondary market s (Fannie Mae s) yield after servicing fees have been removed from the mortgage rate. The difference between the RNY and the Primary Market Rate is bank yield (originator & servicer). Source: Equifax, BankRate, Fannie Mae, St. Louis Federal Reserve Bank; 10/03/ 15 10/1/ 12/1/ 2/1/ 4/1/ 6/1/ 8/1/ 10/1/ 15
The Housing Market Appears To Have Finally Hit Bottom 80% 60% 40% 20% 0% -20% -40% 12-Month Percent Change in Total Home Sales, Housing Starts and CoreLogic Home Price Index (NSA Series) Home Sales (L) SF Housing Starts (L) Home prices (R) 40% 30% 20% 10% 0% -10% -20% -60% -30% Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Home sales, starts and prices are moving in lock-step. Starts are leading prices, but prices can create a feedback effect for future demand. Source: Equifax, U.S. Census Bureau, National Association of Realtors, CoreLogic (data as of September 6, ) 16
Despite Some Reports, Housing Market Is Far From Bubbly 120% 100% 80% 60% 40% 20% Home Sales, Home prices and Housing Starts Levels Relative to Pre-Recession Peaks (NSA Series;100% = Pre-recession peak) Home Sales SF Housing Starts Home prices 120% 100% 80% 60% 40% 20% 0% 0% Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Even with large percentage gains in housing measures, all major indices of housing market vitality point to a long recovery yet to come Source: Equifax, U.S. Census Bureau, National Association of Realtors, CoreLogic (data as of September 6, ) 17
Excess Housing Inventory is Now Below Trend Total Vacant Housing Units (in Thousands; NSA) 12,000 10,000 8,000 6,000 4,000 2,000 0 1965 1970 1975 1980 1985 1990 1995 2000 Excess Vacant inventory should start to mitigate pressure on home prices and rent Source: U.S. Census Bureau, (Through 2 nd Quarter ) 18
Housing Starts Are Rising to Previous Low Point! 2,000 Single Family Housing Starts (1000s, SAAR) 1,500 1,000 500 0 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 While the recovery of single family starts is in progress, the rate of growth is below expectations, particularly given the historical standard. 19
Household Size Is Still Increasing 2.30 Number of people 16 years or older per household (NSA Series) 2.25 2.20 2.15 2.10 2.05 2.00 2000-2003 Average 1.95 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 There is significant pent-up demand for household formation. Based on the averages from the early 2000 s we have a deficit of nearly 3 million households. Source: U.S. Census Bureau; Bureau of Labor Statistics; Equifax 20
220 Home-Buying Is At All-time High For Affordability Housing Affordability Index Measures whether a typical family can afford a typical house. (NSA Series) 200 180 160 140 120 100 Mortgage Rates: Current 1% Higher 2% Higher 80 60 1989 1992 1995 1998 2001 2004 An index of 100 means a family with the median income has exactly enough income to qualify for a mortgage on a median priced home. The larger the index the more affordable housing is. Source: Equifax, U.S. Census Bureau, National Association of Realtors, CoreLogic (data as of April 3, ) 21
Lending Standards Remain Tight % of Banks Tightening Lending Standards (NSA Series) Index of Current Conditions for Buying a House (NSA Series) 100% 80% 60% 40% 20% 0% -20% Current Conditions for Buying a House (R) Net Percent of Banks Tightening Lending Standards (L) -40% 180 170 160 150 140 130 120 110 Although lending standards remain tight, consumer sentiment remains positive. Source: Federal Reserve Board; University of Michigan; Equifax 22
U.S. Consumer Deleveraging: Mortgage Home mortgage outstanding balances, including 1 st liens and home equity lines and loans, have declined $1.47T, or 15 %. 27% of July Balances were originated in - $10.0 $9.8 $9.5 $9.3 $9.0 $8.8 $8.5 $8.3 $8.0 $7.8 $7.5 Home Mortgage Debt (in $T, NSA) Origination Year of Outstanding Mortgage Debt (%, NSA) 25% 20% 15% 10% 5% 0% pre-2001 2001 2002 2003 2004 As of August Source: Equifax (Credit Trends 4.0; data through August ) 23
Mortgage Originations Refi Boom Is Over $1,200 $1,000 $800 $600 $400 $200 Total Single Family Mortgage Originations ($Bil) Purchase Originations Refi Originations $1,200 $1,000 $800 $600 $400 $200 $0 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 F 2014F 2014F $0 Source: Equifax, Mortgage Banker s Association (2000-), Federal Financial Institutions Examinations Council; updated 10/01/. Forecast average from Mortgage Bankers Association, Moody s Analytics, Freddie Mac, and Fannie Mae. 24
Change in Negative Equity 70% % Mortgages with Negative Equity vs. (NSA) % Mortgages with Negative Equity June 60% 50% 40% 30% 20% 10% TX NY WA CO NC PA VA MA CA NJ MD MI OH 0% 0% 10% 20% 30% 40% AZ GA % Mortgages with Negative Equity June Source: CoreLogic Negative Equity Report; data through June IL FL NV Bubble Size = Number of Mortgage with Negative Equity
Distressed Home Sales Declining U.S. Distressed Home Sales (% Total Sales; NSA) August August 23% 12% 77% Distressed Sales 88% Non-Distressed Sales Distressed sales have fallen to 12 percent of sales, the lowest since the recession began. Source: National Association of Realtors; Equifax 26
HELOC Resets Are on the Horizon Number Outstanding (NSA, 1000s) Average Balance (NSA, $) 1,600 1,400 1,200 1,000 800 600 400 200 0 Outstanding HELOCs by Vintage Year Nonperforming Current 2000 2001 2002 2003 2004 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 2000 2001 2002 2003 2004 Source: Equifax; Data through August 27
HELOC Resets Are on the Horizon 100 90 80 70 60 50 40 30 20 10 0 2000 Outstanding Balances of HELOCs by Vintage (NSA, $billions) % < 620 at Origination (L) 2001 Nonperforming 2002 2003 2004 Current % < 620 at Present (L) 12% 10% 8% 6% 4% 2% 0% Cumulative National Home Price Change by Vintage (NSA, %) 60% These Vintage years are at very high risk for bad performance at reset Source: Equifax; Data through August ; Corelogic; Data through July 28 50% 40% 30% 20% 10% 0% -10% -20% 0 1 2 3 Total Since Origination First 10-Yrs Post Origination 4 5 6 7 8 9 0 1 2 3
5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% At the 10-Year Mark, Delinquencies on HELOCs Almost Double Share of Nonperforming Outstanding Balances of HELOCs by Vintage Year (NSA) 7.0% Origination Year 6.5% 2000 2001 6.0% 2002 2003 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Jul-13 Source: Equifax; Data through August 29
Questions? Amy Crews Cutts SVP, Chief Economist - Equifax 703.714.6388 Email: amy.cutts@equifax.com For further information please contact: The opinions, estimates and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published by Equifax s' Economic Insights group represent the views of that group as of the date indicated and do not necessarily represent the views of Equifax or its management.