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 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 Office of the Chief Economist 1
Prime Conforming Mortgage Rates Remain Low By Historical Standards 9
Weekly Mortgage Interest Rate (Percent)
9
8
Forecast
30-Year, Fixed Rate
8
7
7
6
6
5
5
1-Year, ARM Rate
4
3 1997
4
3 1998
1999
2000
2001
Source: Freddie Mac’s Primary Mortgage Market Survey®
2002
2003
2004
2005
2006
2007
2008
Office of the Chief Economist 2
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)
7.6
30-Yr Jumbo FRM
7.03 %
7.33%
7.2 July 13, 2007 22 bps
6.8 March 21, 2008 136 bps
6.81%
6.4
5.96%
6.0
30-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.
Office of the Chief Economist 3
Private-Label Mortgage-Backed Security Issuance Has Fallen Sharply Dollar Amount of Issuance (Billions) $200
$52
Subprime & Other Alt-A Prime Jumbo Freddie Mac & Fannie Mae
Subprime & Other
$30
$150
$37
Alt-A
$20
Prime Jumbo
$94
Freddie Mac & Fannie Mae
$34 $100
$50
$19
$85
$16 $8 $14
$1
$7
$4
$99
$97
September-2007
December-2007
$0
March-2007
$191 Billion Source: Inside Mortgage Finance
June-2007
$181 Billion
$137 Billion
$109 Billion Office of the Chief Economist 4
CMBS Spreads Have Also Reached Record High Levels CMBS Spread to 10-year Treasury (Basis Points)
1700 1400 1400
1700
AAA Less 10-Yr Treasury Yield BBB Less 10-Yr Treasury Yield
1561
1400
1100 1100
1100
800 500
500 325
400
400 205
116
354
300
300 73
200
200
100
100
0
0 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)
Office of the Chief Economist 5
Highest Percentage of Banks Tightening Home Mortgage Standards Since 1990 Net Percentage of Banks Tightening Mortgage Standards During Previous Three Months
80
80 Subprime
60
60 Prime
40
40
20
20
0
0
-20 1990
-20 1992
1994
1996
1998
Source: Federal Reserve Board's Senior Loan Officer Survey (Last update: February 4, 2008)
2000
2002
2004
2006
Office of the Chief Economist 6
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) Forecast
Third Quarter 2005 record: 1.8 million units
– Recession
1,600
1,300
1,000
700 Fourth Quarter 2007: 0.8 million units
Sources: Bureau of Census, Freddie Mac
2007
2004
2001
1998
1995
1992
1989
1986
1983
1980
1977
1974
1971
400
Office of the Chief Economist 7
Existing Home Sales Are Down Everywhere Over Last Two Years
-47%
-48%
-65% -45%
-42% -57%
-52%
Percent change in existing home sales Fourth quarter 2005 through Fourth quarter 2007
Down less than 20% Down 20-40% Down more than 40% Source: National Association of Realtors
Existing Home Sales Nationwide Down 29% Office of the Chief Economist 8
Time-On-Market Up in Most Markets City
} Up 65 days } Up 61 days
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
} 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
} Up 4 days } Down 1 day } Down 7 days 0
20
Source: National Association of Realtors
40 60 80 100 Time-on-market (# of days)
120
September 2007 September 2005
140
Office of the Chief Economist 9
A Large Inventory Overhang Remains within the Housing Market Excess Unsold Homes for Sale (Numbers in Thousands)
900 Annual Data
Quarterly Data
700
500
300
100 Q1
Q4 Q1
Q4
Q1
Q4
-100 1996
1999
2002
2005
Source: Bureau of Census (1996-2004: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%).
2006
2007
Office of the Chief Economist 10
Forty-Six States Had Falling Prices in the Fourth Quarter 2007 United States: -9.3%
Pacific -17.2%
(4th Quarter Annualized Growth)
Mountain -12.9%
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
East South Central West South Central -3.6% -3.8%
Source: Freddie Mac’s Purchase-Only Conventional Mortgage Home Price Index (Annualized Quarterly Rates for 4Q2007)
South Atlantic -7.2%
Office of the Chief Economist 11
Apartment Market Conditions Are Weaker Market Tightness Index 100 90 80 70 60
Market Tighter Market Unchanged
50
Market Looser
40 30 20 10 0
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
Office of the Chief Economist 12
Fewer Refis, Sales Result in a 16% Drop in Mortgage Originations in 2008 4,000 3,750 3,500 3,250 3,000 2,750 2,500 2,250 2,000 1,750 1,500 1,250 1,000 750 500 250 0
Total Single-Family Mortgage Originations (Billions of Dollars) Refinance Originations Home Purchase Originations 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
Office of the Chief Economist 13
Employment Growth Weakest In Markets With Flat or Falling House Values
Percent change in the non-farm payroll employment January 2006 through January 2007
Above 2.0% 1.1% to 1.9% 0.6% to 1.0%
0.0% to 0.5% Below 0.0%
National employment up 0.7%
Office of the Chief Economist Source: U.S. Bureau of Labor Statistics
14
Delinquency Rates Have Jumped In Markets With Flat or Falling House Values
Percentage Point Difference
≤ 0.30% 0.31 to 0.40% 0.41 to 0.60% 0.61 to 0.80% 0.81 to 1.21% 1.45 to 2.05%
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
Office of the Chief Economist 15
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
Office of the Chief Economist 16
Subprime and Alt-A Shares Quadrupled Between 2001 and 2006, then Fell in 2007 5.9% 14.4%
2.7%
7.9%
2.7%
13.3% 33.2%
5.4% 57.8%
6.9% 6.0%
13.4%
3.0%
20.3% 20.1%
2001 $2.2 trillion
61.0%
9.8% 16.1%
2007 Q4 $1.8 trillion
2006 $3.0 trillion
(annualized)
Conventional, Conforming Prime
Jumbo Prime
Source: Inside Mortgage Finance (by dollar amount)
Subprime
Alt-A
FHA & VA
Home Equity Loans
Office of the Chief Economist 17
2/28 ARMs Dominated Subprime HomePurchase Loan Originations in 2006 Other ARM 4%
2-year & 3-year Hybrids 61%
Other ARM 7%
Fixed 9%
30-Yr ARM Balloon W/ 40-50Yr Amtz 26%
Subprime
Other ARM 23%
Fixed 31%
ARM Hybrids 46%
Alt-A
Source: LoanPerformance, a subsidiary of First American Real Estate Solutions, TrueStandings Securities; MIRS. First liens only; by dollar amount.
ARM Hybrids 23% Fixed 70%
Prime Conventional Office of the Chief Economist 18
Subprime ARM Defaults Are 12 Times Those on Prime 22
Loans 90 days or more delinquent or in foreclosure (percent of number)
20
Subprime 20.43% ARM
– Recession
18 16 14 12
Subprime FRM 8.18%
10 8
FHA & VA
6
5.18%
4
Prime Conventional
2
1.67%
Source: Mortgage Bankers Association (Quarterly data not seasonally adjusted;1998Q1-2007Q4)
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0
Office of the Chief Economist 19
Subprime Loans Accounted for Over Half of Foreclosures since 2006 Number of Foreclosures Started (Annualized Rate in Thousands)
1800 Subprime: 13% of Loans Serviced (December)
1500
54%
1200 900
56% 9%
55%
600 300
37%
36%
37%
44%
47%
52% 11%
29%
29%
29%
22%
20%
17%
34%
35%
34%
34%
33%
31%
2003 H2
2004 H1
2004 H2
2005 H1
2005 H2
13% 32%
33%
37%
2006 H2
2007 H1
2007 H2
0 Prime (includes Alt-A)
2006 H1
FHA & VA
Source: Mortgage Bankers Association National Delinquency Survey (Data as of December 2007; number expanded to reflect 85% coverage)
Subprime Office of the Chief Economist 20
Auto Loan Delinquencies Have Spiked Up Loans delinquent 60 days or more (percent) 0.9 – Recession
0.8 Automobile Loans
0.7 0.6 0.5 0.4 0.3
Source: Auto Securities Rated by Fitch
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
0.2
Office of the Chief Economist 21
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
Office of the Chief Economist 22
Where to Get More Information Look for regular updates to our economic forecast, commentary and data at www.freddiemac.com/news/finance Contact us at
[email protected]
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 Office of the Chief Economist 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. © 2008 by Freddie Mac.
