The Current Status and Outlook for the U.S. Economy, Housing and Mortgage Markets Specially Prepared for: Mortgage Bankers...
Presentation Outline <ul><li>The PMI U.S. Market Risk Index </li></ul><ul><li>What Is the “Risk Index”? </li></ul><ul><li>...
The PMI U.S. Market Risk Index 2nd Quarter 2008 Results and Analysis
What is the U.S. Market Risk Index? <ul><li>Proprietary econometric model developed by The PMI Group, Inc. that estimates ...
Why is the U.S. Market Risk Index Important? <ul><li>Historically, it is an Accurate Predictor of Price Risk across all of...
How is the U.S. Market Risk Index Determined? <ul><li>Quarterly release of OFHEO’s House Price Index </li></ul><ul><ul><li...
How Well Does the U.S. Market Risk Index Work? Risk Rank 5 Risk Rank 4 Risk Rank 3 Risk Rank 2 Risk Rank 1
Geographic Distribution of House Price Risk 2nd Quarter 2008 – 2 nd  Qtr 2010 What is the U.S. Market Risk Index Saying ab...
Why are Risk Scores Changing? Reason #1:  Foreclosures are Rising
Foreclosure Rates, All Mortgage Loans 2 nd  Quarter 2008 Source:  Mortgage Bankers Association, National Delinquency Survey
 
 
 
Seriously Delinquent Rate Foreclosure Rate Source:  Mortgage Bankers Association, National Delinquency Survey
Seriously Delinquent Rate Foreclosure Rate Source:  Mortgage Bankers Association, National Delinquency Survey
Seriously Delinquent Rate Foreclosure Rate Source:  Mortgage Bankers Association, National Delinquency Survey
Why are Risk Scores Changing? Reason #2:  Unemployment is Rising
Employment Growth is Under Growing Pressure… Source:  Bureau of Labor Statistics
… with significant weakness in the Midwest and South. 12-month change in Payroll Employment September 2008 Source:  Bureau...
Unemployment is Rising Broadly Across the Nation. Unemployment Rates September 2008 Source:  Bureau of Labor Statistics 2....
Demeaned Unemployment Rates are also Rising Significantly in Selected MSAs Source:  Bureau of Labor Statistics
Source:  Bureau of Labor Statistics
Why are Risk Scores Changing? Reason #3:  House Price Volatility/Depreciation is Slowing
House Price “Depreciation” is Slowing Source:  Loan Performance Corporation
House Price Growth September 2008 Source:  Loan Performance Corporation -30.00% to -10.00% -10.00% to  -5.00% -5.00% to  0...
Source:  Office of Federal Housing Enterprise Oversight House Price “Depreciation” is Slowing Most Significantly in the In...
Source:  Loan Performance Corporation
Why are Risk Scores Changing? Reason #4:  Excess Housing Supply is Declining
Excess Housing Supply is Declining… (Weighted Average Value for 381 MSAs) Source:  The PMI Group
… but Big Differences Exist Across the Country. Source:  The PMI Group
Why are Risk Scores Changing? Reason #5:  Housing Affordability is Rising
Source:  The PMI Group Affordability is Improving, but Remains Challenged for Various Reasons…
… while Mortgage Rates Remain Relatively Low… 30-year Fixed Rate 1-year Adjustable Rate
Source:  Federal Reserve Board … Tighter Lending Standards Have Made a Greater Number of Mortgages Out of Reach.
The Outlook:  Where do We Go From Here?
Outlook for the General Economy <ul><li>The economy took it on the chin in September, and it is becoming clearer that it m...
Outlook for the Housing Market <ul><li>There is considerable uncertainty about the pace of home sales over the next year. ...
Outlook for the Credit Markets  <ul><li>Interest Rates and Financial Markets </li></ul><ul><ul><li>Given the lack of lendi...
Metropolitan Washington Lenders Conference   111408
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Metropolitan Washington Lenders Conference 111408

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  • Metropolitan Washington Lenders Conference 111408

    1. 1. The Current Status and Outlook for the U.S. Economy, Housing and Mortgage Markets Specially Prepared for: Mortgage Bankers Association of Metropolitan Washington Presented by: LaVaughn M. Henry, Ph.D. Director, U.S. Economic Analysis The PMI Group, Inc. November 14, 2008
    2. 2. Presentation Outline <ul><li>The PMI U.S. Market Risk Index </li></ul><ul><li>What Is the “Risk Index”? </li></ul><ul><li>Why Is It Important? </li></ul><ul><li>How Is It Determined? </li></ul><ul><li>How Well Does It Work? </li></ul><ul><li>What Is It Saying about Future Price Movements? </li></ul><ul><li>Why Are Risk Scores Changing? </li></ul><ul><ul><li>Foreclosures are Rising </li></ul></ul><ul><ul><li>Unemployment is Rising </li></ul></ul><ul><ul><li>House Price Volatility/Depreciation is Slowing </li></ul></ul><ul><ul><li>Excess Housing Supply is Declining </li></ul></ul><ul><ul><li>Housing Affordability is Rising </li></ul></ul><ul><li>The Outlook: Where Do We Go From Here? </li></ul>
    3. 3. The PMI U.S. Market Risk Index 2nd Quarter 2008 Results and Analysis
    4. 4. What is the U.S. Market Risk Index? <ul><li>Proprietary econometric model developed by The PMI Group, Inc. that estimates the probability that prices will fall in each of the nation’s 381 MSAs by the end of the next two years. </li></ul><ul><li>Based on OFHEO’s quarterly house price index for conventional, conforming loans. </li></ul><ul><li>Considers factors including price movement, housing affordability, local employment conditions, housing supply and foreclosures. </li></ul><ul><li>Utilizes more than 30,000+ observations of MSAs and quarterly combinations </li></ul><ul><li>All of the Model’s Primary Econometric Determinants are Statistically Significant at the 99% level or greater </li></ul>
    5. 5. Why is the U.S. Market Risk Index Important? <ul><li>Historically, it is an Accurate Predictor of Price Risk across all of the nation’s MSAs </li></ul><ul><li>It incorporates the latest information on local house price trends, employment, income, interest rates, and foreclosure activity </li></ul><ul><li>Using the Risk Index Over Time Helps to Identify Current and Future Trends </li></ul><ul><li>Provides Critical Information to Lending Institutions regarding Geographically-based Expansion and Contraction Opportunities </li></ul><ul><li>Supports the Concept of Sustainable Homeownership </li></ul>
    6. 6. How is the U.S. Market Risk Index Determined? <ul><li>Quarterly release of OFHEO’s House Price Index </li></ul><ul><ul><li>Historical Price data for 381 of the nation’s MSAs </li></ul></ul><ul><ul><li>Subject to historical revision </li></ul></ul><ul><ul><li>Will Change to the Loan Performance House Price Index in the Future </li></ul></ul><ul><li>Collection of Data from other External Sources </li></ul><ul><ul><li>Interest Rates </li></ul></ul><ul><ul><li>Personal Income </li></ul></ul><ul><ul><li>Unemployment Rates </li></ul></ul><ul><ul><li>MSA Housing Stocks and Completions </li></ul></ul><ul><ul><li>State-level Foreclosure Rates </li></ul></ul>
    7. 7. How Well Does the U.S. Market Risk Index Work? Risk Rank 5 Risk Rank 4 Risk Rank 3 Risk Rank 2 Risk Rank 1
    8. 8. Geographic Distribution of House Price Risk 2nd Quarter 2008 – 2 nd Qtr 2010 What is the U.S. Market Risk Index Saying about Future Price Movements?
    9. 9. Why are Risk Scores Changing? Reason #1: Foreclosures are Rising
    10. 10. Foreclosure Rates, All Mortgage Loans 2 nd Quarter 2008 Source: Mortgage Bankers Association, National Delinquency Survey
    11. 14. Seriously Delinquent Rate Foreclosure Rate Source: Mortgage Bankers Association, National Delinquency Survey
    12. 15. Seriously Delinquent Rate Foreclosure Rate Source: Mortgage Bankers Association, National Delinquency Survey
    13. 16. Seriously Delinquent Rate Foreclosure Rate Source: Mortgage Bankers Association, National Delinquency Survey
    14. 17. Why are Risk Scores Changing? Reason #2: Unemployment is Rising
    15. 18. Employment Growth is Under Growing Pressure… Source: Bureau of Labor Statistics
    16. 19. … with significant weakness in the Midwest and South. 12-month change in Payroll Employment September 2008 Source: Bureau of Labor Statistics -5.00% to -1.00% -1.00% to 0.00% 0.00% to 1.00% 1.00% to 10.00%
    17. 20. Unemployment is Rising Broadly Across the Nation. Unemployment Rates September 2008 Source: Bureau of Labor Statistics 2.0% to 4.0% 4.0% to 5.0% 5.0% to 6.0% 6.0% to 9.0%
    18. 21. Demeaned Unemployment Rates are also Rising Significantly in Selected MSAs Source: Bureau of Labor Statistics
    19. 22. Source: Bureau of Labor Statistics
    20. 23. Why are Risk Scores Changing? Reason #3: House Price Volatility/Depreciation is Slowing
    21. 24. House Price “Depreciation” is Slowing Source: Loan Performance Corporation
    22. 25. House Price Growth September 2008 Source: Loan Performance Corporation -30.00% to -10.00% -10.00% to -5.00% -5.00% to 0.00% 0.00% to 5.00%
    23. 26. Source: Office of Federal Housing Enterprise Oversight House Price “Depreciation” is Slowing Most Significantly in the Interior
    24. 27. Source: Loan Performance Corporation
    25. 28. Why are Risk Scores Changing? Reason #4: Excess Housing Supply is Declining
    26. 29. Excess Housing Supply is Declining… (Weighted Average Value for 381 MSAs) Source: The PMI Group
    27. 30. … but Big Differences Exist Across the Country. Source: The PMI Group
    28. 31. Why are Risk Scores Changing? Reason #5: Housing Affordability is Rising
    29. 32. Source: The PMI Group Affordability is Improving, but Remains Challenged for Various Reasons…
    30. 33. … while Mortgage Rates Remain Relatively Low… 30-year Fixed Rate 1-year Adjustable Rate
    31. 34. Source: Federal Reserve Board … Tighter Lending Standards Have Made a Greater Number of Mortgages Out of Reach.
    32. 35. The Outlook: Where do We Go From Here?
    33. 36. Outlook for the General Economy <ul><li>The economy took it on the chin in September, and it is becoming clearer that it moved from slow growth to recession at the end of the summer; the threat of a global recession is rising. </li></ul><ul><li>If credit crunch continues, there is a high probability that it will seriously impact the real side of the economy and slow economic activity further. </li></ul><ul><li>The $700 billion federal rescue package allows the Treasury to purchase distressed assets from financial firms. This will increase liquidity at these firms and bolster their capital positions (especially if the Treasury makes direct equity investments), hopefully leading to stronger entities that are willing to increase their lending. </li></ul><ul><li>These moves probably won’t keep the economy from slipping into recession, and the recent declines in equity markets even after the rescue plan became law is a sign that financial markets now accept that a near-term downturn is likely. But the cumulative impact of everything that the Treasury and Fed have done (and may do in coming months) should keep this downturn from becoming a deep recession (or even worse). </li></ul><ul><li>Given the sharp drop in economic activity over the past couple of months, and the worsening credit crunch, we expect virtually no growth for the third quarter and negative growth in the fourth quarter. This downturn is likely to carry over into the first quarter of 2009 before the stimulus already provided by the Fed and Treasury – as well as probable additional easing by the Fed this year and perhaps another fiscal stimulus package in the first quarter – allows the economy to rebound modestly. </li></ul>
    34. 37. Outlook for the Housing Market <ul><li>There is considerable uncertainty about the pace of home sales over the next year. On balance, we expect sales to flatten out over the remainder of 2008, before increasing again next year. </li></ul><ul><li>The pickup in the housing market in 2009 is unlikely to be a strong one, however, at least until the job market begins to expand. The housing market should rebound more strongly in 2010. </li></ul><ul><li>National home prices are forecast to fall further this year and next, but the worst national price drops are probably behind us as home price declines appear to be flattening out. </li></ul><ul><li>The decline in prices in 2009 should be less than in 2008, and by 2010 national prices should move upward again. </li></ul>
    35. 38. Outlook for the Credit Markets <ul><li>Interest Rates and Financial Markets </li></ul><ul><ul><li>Given the lack of lending and the slowdown in economic activity, it is likely that the Fed will ease again between now and the end of 2008 – probably bringing the federal funds rate down to 1.00 percent. </li></ul></ul><ul><ul><li>Financial disarray is about as bad as it can get, so there is no reason for the Fed to hold back. Moreover, there is a chance that the Treasury will end up using part of the $700 billion in funds from the rescue package to purchase equity positions in banks and other lending institutions to replenish their capital directly. </li></ul></ul><ul><ul><li>If financial market disarray worsens, the Fed and Treasury are likely to find other innovative ways to bring liquidity and stability to financial markets. </li></ul></ul><ul><ul><li>Once the Fed is confident that the economy is rebounding and financial markets have stabilized it will begin to remove the liquidity it has added – but that is unlikely to begin before late 2009. </li></ul></ul><ul><li>Mortgage Markets </li></ul><ul><ul><li>For 2008, we expect that total mortgage originations will fall to around $1.93 trillion, with the refinance share at about 48 percent (higher than last month’s estimate as a result of lower mortgage rates through year-end). </li></ul></ul><ul><ul><li>The ARM share should average only around 8 percent in 2008. For 2009, originations are projected to slip a bit more, to around $1.88 trillion (up from last month’s projection of $1.85 trillion because of lower mortgage rates and more refinance activity). </li></ul></ul><ul><ul><li>Over the course of 2009, there should be a shift away from refinancing toward purchase activity, with the refi share for the year at about 45 percent, while the ARM share edges up a little from current levels (but stays low at around 6 percent for the year). </li></ul></ul>

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