The Current Status and Outlook for the Housing Market Recovery and Mortgage Finance


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Prepared by:
LaVaughn M. Henry, Ph.D.
VP & Sr. Regional Officer
FRBC, Cincinnati Branch
May 16, 2013

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  • Real estate = PA15TOO5@FFUNDS/disposable incomeEquities = PA15TCR5@FFUNDS+PA15COG5@FFUNDS+PA15MFS5@FFUNDS/ disposable income
  • HH debt to income = XL15TCR5@FFUNDS / YPDM@USECONThe financial obligations ratio (FOR) is an estimate of the ratio of financial obligations payments to disposable personal income.The financial obligations ratio (FOR) is a broader measure than the debt service ratio. It includes automobile lease payments, rental paymentson tenant-occupied property, homeowners' insurance and property taxpayments.The household debt-service ratio (DSR) is an estimate of the ratioof debt-service payments to disposable personal income. Debt paymentsconsist of the estimated required payments on outstanding mortgage andconsumer debt.
  • The Current Status and Outlook for the Housing Market Recovery and Mortgage Finance

    1. 1. The Current Status and Outlook for the HousingMarket Recovery and Mortgage Finance
    2. 2. What are the Economic Realities that are Driving theCurrent Housing Recovery?The alignment in the housing market of supply and demand fundamentals appears tosubstantiate the position that a sustained recovery is under way.House prices, as measured by a variety of national indexes have risen since the beginning of2012.The recovery of house prices has been broad based geographically, with 90 percent of localmarkets having experienced price gains over the year ending in February.Since the beginning of 2012, housing starts and permits have risen by nearly 30 percent,while new and existing home sales have also seen double-digit growth rates.Homebuilder sentiment has improved notably, and real estate agents report stronger traffic ofpeople shopping for homes. In national surveys, households report that low interest rates andhouse prices make it a good time to buy a home; they also appear more certain that houseprice gains will continue.While lending for residential real estate is increasing, underwriting standards remain tight,thus slowing the rate of recovery in the market.Reductions in mortgage originations has been most pronounced among borrowers with lowercredit scores.
    3. 3. THE FUNDAMENTALS OFTHE HOUSING MARKETThe Current Status and Outlook for:3
    4. 4. House Prices a recovering strongly at thenational level…-25.0%-20.0%-15.0%-10.0%-5.0%0.0%5.0%10.0%15.0%20.0%12-monthGrowthRateSource: Standard & Poors/Case-Shiller 20-metro Composite Index4
    5. 5. - Q1 1992 - Q1 2001 - Q1 2010 - Q1RatioAverage from 1983-2000 = 1.0Band indicates +/- 1 standard deviationEquilibrium* Ratio of Case-Shiller home prices to Owner’s Equivalent RentSource: Robert Shiller, Bureau of Labor Statistics…while the ratio of Home Prices to Rent indicatesthat home prices have recovered to a “fair” value.5
    6. 6. Demand for housing continues to showincreasing signs of strength...02004006008001000120014001600180001000200030004000500060007000Jan-00Aug-00Mar-01Oct-01May-02Dec-02Jul-03Feb-04Sep-04Apr-05Nov-05Jun-06Jan-07Aug-07Mar-08Oct-08May-09Dec-09Jul-10Feb-11Sep-11Apr-12Nov-12ThousandsSingle Family Home SalesExisting Homes New Homes6 Source: U.S. Census Bureau, National Association of Realtors
    7. 7. …as low mortgage rates and house prices have helpedto increase Housing Affordability to historic levels.345678990110130150170190210230Jan-00Aug-00Mar-01Oct-01May-02Dec-02Jul-03Feb-04Sep-04Apr-05Nov-05Jun-06Jan-07Aug-07Mar-08Oct-08May-09Dec-09Jul-10Feb-11Sep-11Apr-12Nov-12FHFAContractInterestRateNARHousingAffordabilityIndex7 Source: FHFA, National Association of Realtors
    8. 8. Homebuilders are responding by graduallyrebuilding a diminished housing supply.02004006008001,0001,2001,4001,6001,8002,000Jan 1990 Jan 1994 Jan 1998 Jan 2002 Jan 2006 Jan 2010Thousands,SAARSingle Family Multi Family8Source: Census Bureau
    9. 9. CONSUMER INCOME ANDCREDIT CONDITIONSThe Demand for Mortgage Credit:9
    10. 10. Both Real Disposable Personal Income andConsumption are advancing at a slow pace…-4-2024682000 2002 2004 2006 2008 2010 2012FourquarterpercentchangeConsumption Real DPI10 Source: Bureau Economic Analysis
    11. 11. 501001502002501980 1984 1988 1992 1996 2000 2004 2008 2012PercentofdisposableincomeEquities Real Estate…while Household Wealth continues itsrecovery to pre-financial crisis levels.11 Source: Federal Reserve Board
    12. 12. Growth in Consumer Credit Outstanding hasreturned to pre-financial crisis levels…-11-10%-5%0%5%10%15%20% 2000-012000-062000-112001-042001-092002-022002-072002-122003-052003-102004-032004-082005-012005-062005-112006-042006-092007-022007-072007-122008-052008-102009-032009-082010-012010-062010-112011-042011-092012-022012-072012-1212MonthpercentageChange12Source: Federal Reserve Board of Governors
    13. 13. …however, consumers have substantiallyreduced their use of Revolving Debt.-15%-10%-5%0%5%10%15%20%2001-012001-072002-012002-072003-012003-072004-012004-072005-012005-072006-012006-072007-012007-072008-012008-072009-012009-072010-012010-072011-012011-072012-012012-072013-0112-monthGrowthRateNonrevolvingRevolving13Source: Federal Reserve Board of Governors
    14. 14. Low interest rates are helping households tocontinue to deleverage…10%11%12%13%14%15%16%17%18%19%20%1980Q11981Q31983Q11984Q31986Q11987Q31989Q11990Q31992Q11993Q31995Q11996Q31998Q11999Q32001Q12002Q32004Q12005Q32007Q12008Q32010Q12011Q3Financial Obligations Ratio Debt Service RatioSource: Federal Reserve Board of Governors
    15. 15. 607080901001101201301401980 1984 1989 1994 1998 2003 2008 2012Debtasa%ofDisposableIncome…reversing the 30-year trend of increasingHousehold Debt to Disposable Income.15Source: Federal Reserve Board
    16. 16. TRENDS IN LENDINGThe Supply of Mortgage Credit:16
    17. 17. Foreclosure Rates continue to decline acrossall major loan types…1701234561998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q12013Q1Prime LoansSubprime LoansFHA LoansSource: Mortgage Bankers Association National Delinquency Survey
    18. 18. …while delinquency rates of 90 days andgreater also are declining from their highs.1802468101214161998Q11999Q12000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q12013Q1Prime LoansSubprime LoansFHA LoansSource: Mortgage Bankers Association National Delinquency Survey
    19. 19. In response, Commercial Bank Charge-Off Ratescontinue to decline to pre-Financial Crisis Levels.024681012 2000Q12001Q12002Q12003Q12004Q12005Q12006Q12007Q12008Q12009Q12010Q12011Q12012Q1RateCredit Card LoansOther ConsumerSF ResidentialMortgages19Source: Federal Reserve Board of Governors
    20. 20. However, Lenders remain reticent in Loosening TightUnderwriting Standards on Mortgage Loans…-200204060801001202007Q22007Q42008Q22008Q42009Q22009Q42010Q22010Q42011Q22011Q42012Q22012Q42013Q2NetPercentageofSurveyRespondentsPrimeNontraditionalSubprime20Source: Federal Reserve Board of Governors Sr. Lending Officer Opinion Survey
    21. 21. …but are selectively increasing lending in response togrowth in the demand for residential mortgages.-120-100-80-60-40-200204060802007Q22007Q42008Q22008Q42009Q22009Q42010Q22010Q42011Q22011Q42012Q22012Q42013Q2NetPercentageofSurveyRespondentsPrimeNontraditionalSubprime21Source: Federal Reserve Board of Governors Sr. Lending Officer Opinion Survey
    22. 22. While growth in mortgage applications is morebalanced among sectors as the recovery expands.-100.0%-50.0%0.0%50.0%100.0%150.0%200.0%January2007May2007September2007January2008May2008September2008January2009May2009September2009January2010May2010September2010January2011May2011September2011January2012May2012September2012January201312-monthpercentageGrowthConventionalGovernment22Source: MBA Applications Survey
    23. 23. MONETARY POLICYThe Current Status and Outlook for:23
    24. 24. In response to the Financial Crisis, the Fed undertooknon-traditional policies to accommodate the recovery…05000001000000150000020000002500000300000035000001/2/08 1/2/09 1/2/10 1/2/11 1/2/12 1/2/13MillionsFederal AgencySecuritiesCredit MarketsLending to FinancialInstitutionsLong Term TreasuriesTraditional24 Source: Federal Reserve Board of Governors
    25. 25. …helping to reduce mortgage interest rates tohistorically low levels.024681012Jan-90Sep-91May-93Jan-95Sep-96May-98Jan-00Sep-01May-03Jan-05Sep-06May-08Jan-10Sep-11Federal FundsEffective Rate10-yr ConstantMaturity Treasury30-year Fixed RateMortgage25 Source: Federal Reserve Board of Governors
    26. 26. Interest Rate Thresholds (May FOMC Mtg.)“…the Committee…currently anticipates that [the]exceptionally low range for the federal funds ratewill be appropriate at least as long as:- the unemployment rate remains above 6-1/2 percent,- inflation between one and two years ahead isprojected to be no more than a half percentage pointabove the Committees 2 percent longer-run goal,- and longer-term inflation expectations continue to bewell anchored.”26
    27. 27. Key Points (from May FOMC Meeting)The economy continues to grow, albeit at amoderate pace.Labor market conditions have shown someimprovement in recent months…but theunemployment rate remains elevated.The housing sector has strengthened further.The Committee expects that, with appropriatepolicy accommodation, economic growth willproceed at a moderate pace and theunemployment rate will gradually decline…27
    28. 28. Asset Purchases (May FOMC Meeting)“…the Committee decided to continue purchasingadditional agency mortgage-backed securities at apace of $40 billion per month and longer-termTreasury securities at a pace of $45 billion permonth.”“The Committee will continue its purchases ofTreasury and agency mortgage-backed securities…until the outlook for the labor market has improvedsubstantially in a context of price stability.”28
    29. 29. The majority of the FOMC do not to anticipaterate tightening until 2015…Source: Federal Reserve Board of Governors, March 2013 Projections
    30. 30. …with an increasing majority in agreement astime passes.Source: Federal Reserve Board of Governors
    31. 31. 31Thank You.