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NABE Spring Policy Conference

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Presented to the National Association of Business Economics on 3/2/09 on Housing Policy Options

Presented to the National Association of Business Economics on 3/2/09 on Housing Policy Options

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  • 1. The Outlook for the U.S. Housing Market: Policy Options in Troubled Times Specially Prepared for: The National Association for Business Economics 25th Annual Washington Economic Policy Conference Presented by: LaVaughn M. Henry, Ph.D. Director, U.S. Economic Analysis The PMI Group, Inc. March 2, 2009
  • 2. Stabilizing House Prices  Encouraging Sustainable  Homeownership Re-engaging the Private Sector in the  Long-term Solution 2
  • 3. National housing prices fell  11.1% from a year ago. Since US home prices peaked  in July 2006, they have declined 19.3% on a cumulative basis and are currently back to the lowest price level since May 2004. California continued to lead  the way, declining 26.9% from a year ago, but Nevada (- 26.5%) is closing the gap, followed by Arizona (-21.1%), Florida (-19.5%), and Rhode Island (-19.0%). The largest acceleration in  home price declines during the fourth quarter of 2008 occurred in Maine, Pennsylvania, Arkansas, Source: First American CoreLogic, LoanPerformance Oregon and Rhode Island.
  • 4. Less than -25.0% -25.0% to -10.0% -10.0% to -5.0% -5.0% to 0.0% Greater than 0.0% Source: First American CoreLogic, LoanPerformance
  • 5. Using quarterly economic data on house prices, interest rates,  affordability, local employment conditions, housing supply and foreclosures, The PMI Group has developed a proprietary econometric model that estimates the probability that prices will fall in each of the nation’s 381 MSAs by the end of the next two years. Based on First American/Loan Performance quarterly house price  index for all loans. Utilizes more than 30,000+ observations of MSAs and quarterly • combinations All of the Model’s Primary Econometric Determinants are Statistically • Significant at the 99% level or greater
  • 6. Historical Accuracy Rate of the PMI Risk Index Sample Period: 1st Quarter 1985 – 3rd Quarter 2006 100% % of MSAs Experiencing Price Declines 88.2% 87.0% 90% 82.1% 80% 66.8% 70% 60% 53.3% 50% 44.7% 40% 33.8% 30% 25.6% 17.5% 20% 10% 1.7% 0% 0-10% 10- 20- 30- 40- 50- 60- 70- 80- 90- 20% 30% 40% 50% 60% 70% 80% 90% 100% Assessed Risk Score Source: The PMI Group, Inc.
  • 7. What is the U.S. Market Risk Index Saying about Future Price Movements? 0.0 to 10.0 10.0 to 30.0 30.0 to 50.0 50.0 to 70.0 70.0 to 100.0
  • 8. 2,250 2,000 Thousands 1,750 1,500 1,250 1,000 Source: U.S. Census Bureau / Moody’s Economy.com
  • 9. Thousands 1,000 1,200 1,400 1,600 1,800 2,000 0 200 400 600 800 2000 - Jan 2000 - Jul 2001 - Jan 2001 - Jul 2002 - Jan 2002 - Jul 2003 - Jan 2003 - Jul 2004 - Jan 2004 - Jul 2005 - Jan 2005 - Jul 2006 - Jan 2006 - Jul 2007 - Jan 2007 - Jul 2008 - Jan 2008 - Jul Source: NAR / U.S. Census Bureau Sales Starts Permits
  • 10. West South Midwest Northeast 3.5 3 % of Total Mortgage Loans 2.5 2 1.5 1 0.5 0 Source: Mortgage Bankers Association
  • 11. 2006Q4 2008Q4 14.0% 13.3% 12.0% 10.3% 10.0% 8.0% 7.0% 6.0% 5.9% 5.4% 6.0% 4.5% 4.1% 4.0% 2.8% 1.6% 2.0% 0.0% Nevada Florida Michigan Arizona California Source: The PMI Group, Inc. 12
  • 12. Reduce Growth in the Supply of Unsold Homes  ◦ Continue matching of new supply growth to current market demand ◦ Slow the rate of involuntary supply added to market through the foreclosure process ◦ The Homeowner Affordability and Stability Plan will achieve positive results in both the short and long term Stimulate Growth in Demand through Responsible Purchase and  Refinance Policies ◦ The shift has begun, and must continue, to emphasize making purchases and financing arrangements based on true long term affordability, not just meeting qualifying ratios at the closing table ◦ Support consumer demand to minimize and eventually reverse the growth in the unemployment rate (e.g., the American Recovery and Reinvestment Act.)
  • 13. Senior Loan Officer Survey on Bank Lending Practices Same Tightened Same Tightened Same Tightened 80 100 120 90 70 100 80 60 70 80 50 60 40 50 60 40 30 40 30 20 20 20 10 10 0 0 0 2008-Q3 2008-Q4 2008-Q3 2008-Q4 2008-Q3 2008-Q4 Nontraditional Subprime Prime Loans Loans Loans 15 Source: Federal Reserve Board
  • 14. Prime Subprime 8 7 Serious Delinquency Rate 6 5 4 3 2 1 0 Source: Mortgage Bankers Association 16
  • 15. Administration’s proposal to require families with  high total debt levels to enter HUD-certified consumer debt counseling as a prerequisite to modification is a responsible requirement Encouraging the lending industry to continue its  shift in focus to long-term affordability of a financing arrangements Supporting low mortgage rates, coupled with  effective down payment requirements, that help to improve long term affordability and sustainability
  • 16. Private Mortgage Insurers & Piggybacks Gov't Insured 30% 25% 20% 15% 10% 5% 0% 2002 2003 2004 2005 2006 2007 2008 Source: Fannie Mae, CRA, Inside Mortgage Finance 19
  • 17. Rate of Serious Delinquency 0.5 1.5 2.5 3.5 0 1 2 3 4 1998 - Q1 1998 - Q3 1999 - Q1 1999 - Q3 2000 - Q1 2000 - Q3 2001 - Q1 2001 - Q3 2002 - Q1 Government Insured 2002 - Q3 2003 - Q1 2003 - Q3 2004 - Q1 2004 - Q3 2005 - Q1 2005 - Q3 2006 - Q1 Privately Insured 2006 - Q3 2007 - Q1 2007 - Q3 2008 - Q1 Source: Mortgage Bankers Association 2008 - Q3 20
  • 18. Encourage the diversification of risk between the private  and public sector by addressing capacity issues in the private sector Continue the requirement for credit enhancement on  high LTV mortgages. This will help to minimize the risk of loss for lending institutions, and their need for further support by the Treasury Work towards responsible expansion of GSE lending  Encourage private sector lenders to engage in the  responsible modification of loans
  • 19. Stabilizing the decline in house prices is a key  first element of any successful housing policy Encouraging sustainable homeownership  through responsible lending practices is required for renewal of long-term growth in the housing market Re-engaging the private sector in the  solution process is critical for diversifying risk in the short and long-term 22
  • 20. 23