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U.S. Housing Market What Went Wrong Looking to the Future Joe Hanauer Chairman of the Board, IRPF Chairman of the Board MOVE, Inc. (Realtor.com) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey Percent Change (%) Housing Market Declines are Steep and Accelerating Changes in dollar values are adjusted for by inflation by the CPI-U for all items. New sales and median existing house prices include single-family units only. Data estimates for 2008 are estimates based on the first two quarters. Sources: U.S. Census Bureau, New Residential Construction | NATIONAL ASSOCIATION OF REALTORS®,Median Existing Single-Family Home Price | Freddie Mac | Federal Reserve Board, Flow of Funds Accounts (Harvard University- Joint Center for Housing Studies) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 2 Single-Family Housing Starts Thousands of Units January 1959 – August 2008 (Seasonally Adjusted Annual Rate) Source: U.S. Census Bureau | National Bureau of Economic Research 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 3 Housing Starts Since 2004 Source: ECONODAY™/ NASDAQ, 2008 U.S. Economic Events & Analysis 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 4 National ExistingHome Sales Thousands of Units (1998 Levels) Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS® 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 5 Now…The Downturn Low interest rates and low underwriting standards sparked record price appreciation Source: PMI Economic Real Estate Trends – Winter 2007 / Office of Federal Housing Enterprise Oversight 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 6 Delinquency Rates Delinquency rates on 1-4 Family Mortgage Loans at Commercial and Savings Banks. Source: Eric S. Rosengren, President & Chief Executive Officer – Federal Reserve Bank of Boston, Current Challenges in Housing and Home Loans: Complicating Factors and the Implications for Policy Makers (May 30, 2008) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 7 So…What Went Wrong??? Sources: Freddie Mac | NATIONAL ASSOCIATION OF REALTORS® | Bureau of Labor Statistics | Mortgage Brokers Association | Federal Reserve | “America’s House Party” Time Magazine (June 13, 2005) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 8 Interest Rates (Long and Short) Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS® 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 9 The National Homeownership Rate The National Homeownership Rate peaked before subprime lending took off. 30% of Households presents huge market opportunity. Source: U.S. Census Bureau, Housing Vacancy Survey; Inside Mortgage Finance, 2008 Mortgage Market Statistical Annual (Harvard University- Joint Center for Housing Studies) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 10 Banks and Wall Street Saw An Opportunity Expand Market Size of Mortgage Originations • • • • • • Lower Down Payments Lower Underwriting Standards Lower Initial Interest Rates Create Mortgage Backed Securities Insure Secure Ratings 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 11 The Key Players… Investor Borrower CDS Insurer Securitizer Rating Agency Bank Mortgage Banker Appraiser 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 12 The Key Players… Source: RJ Matson, “Subprime Mortgage Mess” St. Louis Post–Dispatch (August 8, 2007) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 13 Leverage, Leverage and More Leverage Bank Turns $10 billion of Capital into $150 billion to purchase mortgages •Mortgage portfolio falls 2% or $3 billion. Result – bank’s capital is reduced by 30% down to $7 billion. ($10 billion capital less $3 billion loss.) •Bank must reduce its $150 billion borrowing by $45 billion in order to remain in compliance. (Capital of $7 billion only permits $105 billion balance sheet. •Bank needs to sell mortgages before it can lend again…..but there is no market for the mortgages. • Bank unable to lend 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 14 Leverage, Leverage, and More Leverage • Banks can lend $15 for each dollar of capital • FNMA and Freddie Mac required just 2% capital therefore able to buy $50 loan for each $1 of capital • Wall street highly unregulated with enormous leverage • Insurance companies state regulated and highly leveraged 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 15 Home Prices Grew Faster Than Rents Source: CBRE Torto Wheaton Research – Fortune Magazine/CNNMoney.com (November, 7 2007) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 16 CHMPI-Adjusted Median Home Prices Catapulted Ahead of Income Faster and Longer than Ever Before All measures are indexed to compare percent changes during the booms. Indexes set values at start quarter to 100. Income adjustments use average household income. Boom periods begin when income-adjusted house prices reach troughs. Mid 1970’s period is Q1:1976-Q3:1982. Mid 80’s period is Q1:1985-Q3:1994. OO’s period is Q1:200 to Q2:2008. Sources: NATIONAL ASSOCIATION OF REALTORS®| U.S. Bureau of Economic Analysis | Seasonally adjusted by Moody’s Economy.com (Harvard University- Joint Center for Housing Studies) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 17 Tracking Four Key Trends Source: Robert J. Shiller, PhD - Irrational Exuberance, Second Edition (2005) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 18 New Forms of Lending Sprang Up and Then Quickly Subsided When Performance Eroded Badly Shares of interest-only and payment-option loans are based on the number of originations of prime and subprime loans. Shares of subprime loans are of the dollar volume of all originations. Sources: First American CoreLogic, Loan Performance data | Inside Mortgage Finance, Mortgage Originations by Product (Harvard University- Joint Center for Housing Studies) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 19 Results of Poor Loan Performance •Supply of mortgage products declined •Demand for housing couldn’t be financed •The rate of price increases decreased •Investors and speculators exited the market •Prices decreased 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 20 Home Price Trend Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS® 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 21 Enough Doom and Gloom! There are markets; There will be markets; and Markets will eventually expand. 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey National Total Existing-Home Sales Up Markets + Down Markets = Stable Total Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS® 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 23 The Future • Affordability improving through price drops and lower interest rates • Pent up demand eventually gets satisfied • Agencies back in the lending business • Credit relief plan hopefully returns liquidity to banks • REALTOR.com® search statistics showing improvement 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 24 Future Demand Drivers • Household growth should rebound after a slowdown unless the downturn is so long it changes behavior • Immigration should continue being a strong contributor to demand • Minorities, foreign-born, singles and seniors will be fastest growing demand segments • Homeownership rate could return to previous peak once credit markets settle and economy expands again Source: Harvard University- Joint Center for Housing Studies 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 25 Percent Change (%) Although Recessions Often Exacerbate Downturns, Housing is Usually Quick to Recover Dates shown mark the beginning and end of each recession. Quarterly data are derived from sums of monthly data, seasonally adjusted by Moody’s Economy.com. Source: U.S. Census Bureau, New Residential Construction (Harvard University- Joint Center for Housing Studies) 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 26 The Future • Inventories need to get worked off • New home construction exceeded normal demand by 1 million+ units per year • Existing-home sales exceeded normal demand by 1.5+ million homes per year • Speculators and unqualified buyers represented 25%+ of market • Bottom Line – Existing inventories need to find stronger hands. • Many differences between markets. Some will recover sooner…some not so quickly At least a three year struggle before prices and new construction start moving again in over-built markets 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 27 • Home Has Been the Heart of the U.S. Economy •Housing sector - the main driver of U.S. economic growth in recent years •Over the past four years, consumer spending and residential construction have accounted for 90% of the total growth in GDP. •Over 40% of all private sector jobs created since 2001 have been housing related sectors, such as construction, real estate and mortgage banking.” source: The Economist, 2007 • Mortgage equity withdrawal soared from $93 billion in 1993 to $229 billion in 2000 and $700+ billion by 2006. • From 1959 through 1992 the savings rate varied between 6% and 12% of disposable income. Since that time, however, the rate has steadily declined, reaching minus 0.7% in 2007 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 28 Thank You Joe Hanauer Chairman, IRPF Chairman, Move, Inc. [email protected] 14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey 29