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Housing Affordability Constrains as the Expansion Matures Doug Duncan Chief Economist, Fannie Mae February 21, 2016 © 2015 Fannie Mae. Trademarks of Fannie Mae. 1 Disclaimer Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management. 2 Housing Contribution to Growth Increases, a Bit Contribution to Percent Change in Real GDP (Q4/Q4) 4.00% 3.50% 3.00% 2.50% 0.07% 0.72% 0.23% 0.21% 0.30% 0.17% 2.00% 1.50% 1.00% 2.27% 0.24% 0.18% 0.27% GDP=2.5% 1.86% GDP=1.8% 1.80% GDP=2% 0.50% 0.00% -0.50% -0.57% -0.65% -0.21% 2014 2015 2016* -1.00% Personal Consumption Expenditures Change in Private Inventories Residential Fixed Investment Nonresidential Fixed Investment Net Exports of Goods and Services Government Consumption and Investment Source: Bureau of Economic Analysis, *Fannie Mae Economic & Strategic Research February 2016 Forecast 3 Labor Conditions Are Improving Low Unemployment Rate Overstates the Health of the Job Market 84%% Wage Growth Subdued, but Builds Momentum 4.5% 12%% 80% 10% 76% 8% 72% 6% 68% 4% 64% 2% 60% 0% '48 '52 '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16 Labor Force Participation Rate: 25-64 Yr (12-month rolling ave, %, Left Axis) Unemployment Rate: 25-64 Yr (SA, %, Right Axis) Source: Bureau of Labor Statistics Avg Hourly Earnings (YoY % Change, SA) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 Total Private Employees Total Private: Production & Nonsupervisory Employees '14 '15 '16 4 The Fed Expects to Start Talking About Its Balance Sheet Later This Year $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 '08 '09 '10 Treasury securities Source: Federal Reserve Board '11 '12 Agency MBS '13 '14 '15 '16 Other assets 5 Fed’s MBS Holdings Constant for Now September FOMC Minutes • “A staff briefing provided background on the macroeconomic effects of alternative approaches to ceasing reinvestments of principal on securities held in the SOMA after the Committee begins to normalize the stance of policy by increasing the target range for the federal funds rate.” • “…The Committee made no decisions regarding its strategy for ceasing or phasing out reinvestments at this meeting.” “The Committee will continue its policy of reinvesting proceeds from maturing Treasury securities and principal payments from agency debt and mortgage-backed securities. As highlighted in our policy statement, we anticipate continuing this policy “until normalization of the level of the federal funds rate is well under way.” – Janet Yellen, December 16, 2015 Source: September 2015 FOMC Meeting Minutes 6 Intermediate Rates Have Fallen Since the Announcement of a Rate Hike 10-Year Treasury Note Yield at Constant Maturity (%, Daily Close Rate) 2.4 2.3 2.2 2.1 2.0 1.9 12/16 Fed announces interest rake hike 1.8 1.7 1.6 1.5 Source: U.S. Treasury 7 Home Purchase Sentiment IndexTM (HPSI) Suggests Growth, but Slower in 2016 120 100 𝐻𝑃𝑆𝐼 = 𝑄12 + 𝑄13 + 𝑄15 + 𝑄20𝐵 + 𝑄112𝐵 + 𝑄116 + 63.5 6 80 Question Topic 60 Q.12 Is this a good time to buy a house? Q.13 Is this a good time to sell a house? 40 Q.15 Will home prices go up, down, or stay the same over the next 12 months? 20 Q.20B Will mortgage rates go up, down, or stay the same over the next 12 months? Q.112B How concerned are you about losing your job over the next 12 months? 0 (This question was first asked in March 2011.) Home Purchase Sentiment Index (HPSI) Q.116 How does your monthly income compare with 12 months ago? Conference Board: Consumer Confidence (SA, 1985=100) University of Michigan: Consumer Sentiment (NSA, Q1-66=100) Source: Fannie Mae National Housing Survey™, The Conference Board, University of Michigan, Fannie Mae Home Purchase Sentiment IndexTM 8 Single-Family Housing Supply is Still Behind the Curve Tight Supply of Single-Family Construction Compared to Population Peak Peak 18 9/1980 12.7 2/1984 16.4 Multifamily Construction Picks Up the Pace 9 Peak 1/2006 16.5 16 8 14 7 12 6 10 5 8 4 6 3 4 Trough 10/1981 6.4 ↓49% Trough 1/1991 6.4 ↓61% Trough 3/2009 3.2 ↓81% 0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 2 Number of Single-Family (1-Unit, SAAR) Housing Starts Per 1000 Household Source: Census Bureau 2 1 0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Number of Multifamily Housing Starts (5+ units, SAAR) Per 1000 Households 9 The Increase in Housing Starts in the Current Recovery is Behind What We’ve Seen in the Past Housing Starts (1-4 Units) Year-over-Year Change in Thous. (SAAR) 500 400 300 200 100 0 -100 -200 -300 -400 -500 '60 '62 '64 '66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 Source: Census Bureau 10 Housing Affordability Moves to the Forefront Real Home Price Rising Faster Than Real Rents, but Real Rents Rising as Well Affordability Still Above Normal, but Declining NAR Affordability Index: Composite (Fixed + Arm) 250 Peak 1/2013 214.5 ↑112% Peak 3/2006 1.8 ↑ 64% Height of Housing Market Price-to-Rent Ratio 1.8 1.6 200 1.4 1.2 150 1 Postrecession low 7/2015 154.5 ↓28% 100 50 9/1981 63.9 ↓20% Low 7/2006 101.1 (High Home Prices) 0 Trough 5/2012 1.2 ↓ 33% Historical Low 1/1995 1.1 0.8 0.6 0.4 0.2 0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15 Price-to-rent ratio, (Ratio of FHFA/BLS) for United States Note: Price-to-Rent: The ratio is calculated by dividing the FHFA repeat-purchase home price index by the U.S. Bureau of Labor Statistics (BLS) consumer price sub-index on Owner's Equivalent Rent Source: National Association of REALTORS®, U.S. Bureau of Labor Statistics (BLS): CPI; FHFA 11 A Lack of More Affordable Properties May Impact Potential First-Time Homebuyers CoreLogic National Home Price Index (Jan ’00=100, Year-over-Year Change) Existing Home Inventory by Price Tier (Year-over-Year Change) 20% 50% 15% 40% 10% 30% 5% 20% 0% 10% -5% 0% -10% -10% -15% -20% -20% -25% -30% '06 '07 Tier 1 '08 '09 Tier 2 '10 '11 Tier 3 '12 Tier 4 '13 '14 '15 National HPI Note: Tier 1: 0-75% of median, Tier 2: 75%-100% of median, Tier 3: 100%-125% of median, Tier 4: 125%+ of median Source: CoreLogic Source: Fannie Mae Economic & Strategic Research Forecast '06 '07 '08 '09 Tier 1 '10 Tier 2 '11 '12 Tier 3 '13 '14 '15 Tier 4 12 Continuing to See Faster Home Price Appreciation Among Moderately Priced Homes MSA Name Atlanta Boston Chicago Denver Las Vegas Los Angeles Miami Minneapolis New York Portland Phoenix San Diego San Francisco Seattle Tampa Washington DC Low Tier Year-over-Year % Change 7.95% 8.09% 7.13% 16.30% 7.95% 8.82% 11.79% 8.17% 4.47% 13.77% 11.53% 9.88% 10.93% 8.95% 16.11% 3.61% Mid Tier Year-over-Year % Change 7.55% 5.66% 2.99% 11.24% 7.81% 6.79% 9.17% 5.72% 3.83% 10.58% 7.24% 6.16% 10.42% 8.52% 8.53% 2.10% High Tier Year-over-Year % Change 4.93% 3.80% 0.01% 8.15% 4.20% 4.72% 6.44% 1.73% 2.40% 9.43% 3.70% 5.22% 10.97% 9.28% 4.92% 1.22% Low - Mid Tier Change ▲ 0.40% ▲ 2.43% ▲ 4.14% ▲ 5.06% ▲ 0.14% ▲ 2.03% ▲ 2.62% ▲ 2.45% ▲ 0.64% ▲ 3.19% ▲ 4.29% ▲ 3.72% ▲ 0.51% ▲ 0.43% ▲ 7.58% ▲ 1.51% Low - High Tier Change ▲ 3.02% ▲ 4.29% ▲ 7.12% ▲ 8.15% ▲ 3.75% ▲ 4.10% ▲ 5.35% ▲ 6.44% ▲ 2.07% ▲ 4.34% ▲ 7.83% ▲ 4.66% ▼ -0.04% ▼ -0.33% ▲11.19% ▲ 2.39% Note: Percentage change in S&P/Case-Shiller Home Price Index (SA) from October 2014 to October 2015. Source: S&P/Case-Shiller 13 Rental Market Should Be Strong for Another 3 Years Multifamily Starts Are on a V-Shape Recovery As Rental Vacancy Rate Trends Down Sharply High Rental Demand Driving Appreciation 480 11% 400 10% 320 9% 240 8% 160 7% 80 6% SAAR, Thousands of Units 12% 0 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Rental Vacancy Rate (Left Axis) Multifamily Housing Starts (Right Axis) Source: Census Bureau, Bureau of Labor Statistics 14 Purchase and Refi Activity Remains Subdued 10,000 600 9,000 500 8,000 7,000 400 6,000 5,000 300 4,000 200 3,000 2,000 100 1,000 0 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 MBA: Volume Index: Mortgage Loan Applications for Refinancing(SA, Mar-16-90=100) MBA: Volume Index: Mortgage Loan Applications for Purchase (SA, Mar-16-90=100) Source: Mortgage Bankers Association 15 Single-Family Primary Market Trends Mortgage Originations (1-4 Unit, Trillions of $) Market Share - Top Industry Lenders Fannie Mae Whole Loan Conduit Share of Issuance 5.0 100% 4.0 80% 3.0 60% 2.0 40% 1.0 20% 0.0 0% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 39% 34% 25% Share Top 10 14% 2008 2009 2010 2011 2012 2013 2014 2015 Share Top 30 Government Originations - Institution Type Share Total Originations - Institution Type Share 100% 5% 5% 5% 5% 5% 5% 3% 5% 80% 25% 26% 28% 32% 4% 6% 34% 4% 6% 100% 39% 60% 40% 14% 7% 5% 2007 Volume Total 15% 28% 7% 1% 6% 1% 7% 2% 4% 2% 4% 2% 4% 2% 42% 44% 46% 51% 53% 59% 50% 48% 46% 43% 40% 34% 2009 2010 2011 2012 2013 2014 80% 60% 40% 66% 64% 62% 59% 56% 20% 51% 20% 0% 0% 2009 2010 Traditional Banks 2011 Mortgage Banks 2012 2013 Credit Union 2014 Traditional Banks Mortgage Banks Credit Union Other Other Note: 2015 Mortgage Originations from IMF December forecast. Share values calculated based on shares in the first three quarters of 2015 Source: Inside Mortgage Finance, Fannie Mae, Freddie Mac, Ginnie Mae, HMDA, Marketrac, SNL Financial 16 Speaker Biography Douglas G. Duncan is Fannie Mae's senior vice president and chief economist. He is responsible for providing all forecasts and analyses on the economy, housing, and mortgage markets for Fannie Mae. Duncan also oversees corporate strategy and is responsible for strategic research regarding external factors and their potential impact on the company and the housing industry. He serves as a voting member of the Fannie Mae Finance Committee. Under his leadership, in 2015 Fannie Mae’s Economic and Strategic Research Group won the NABE Outlook Award presented annually for the most accurate GDP and Treasury note yield forecasts. In addition, the Group was awarded Pulsenomics best home price forecast. Named one of Bloomberg / BusinessWeek's 50 Most Powerful People in Real Estate, Duncan is Fannie Mae's source for information and analyses on the external business and economic environment, the implications of changes in economic environment to the company's strategy and execution, and forecasting for housing activity, demographics, overall economic activity, and mortgage market activity. Prior to joining Fannie Mae, Duncan was Senior Vice President and Chief Economist at the Mortgage Bankers Association. His experience also includes service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives, and work on the Financial Institutions Project at the U.S. Department of Agriculture. Duncan received his Ph. D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University. 17 Contact Information fanniemae.com/portal/research-and-analysis/ Doug Duncan, Senior Vice President & Chief Economist Fannie Mae 3900 Wisconsin Avenue, NW Mail Stop 1H-2N/01 Washington, DC 20016 (o) 202-752-0160 (c) 202-409-5913 (fax) 202-752-4441 [email protected] Doug Duncan on Twitter @D2_Duncan 18