Download Key Issues House Prices Closing in on “Normal” Level

Key Issues
House Prices Closing in on “Normal” Level
Ratio of House Prices to Rent
10-City Case-Shiller Index divided by Owner's Equivalent Rent;
1970-1999 average = 1
2
• Adverse Feedback Loop
1.8
1.6
p or U-Shaped
p Recovery?
y
• V-Shaped
Q4
1.4
1.2
• The Risk of Deflation
Futures
1
Long-run average
0.8
1987
It Started with Subprime, then Spread to Prime
Mortgage Delinquency Rates
Percent
60-days or greater, First-lien mortgage
Feb.
9
1990
1993
1996
1999
2002
2005
2008
Households Deep in Debt…
Ratio
Ratio
0.15
1.4
1.3
8
0.14
7
1.2
2008Q4
High FICO
ARM
6
0.13
5
4
0.9
0.12
3
High FICO
fixed
0.8
2
0.7
0.11
Debt service to disposable
income ratio (left axis)
1
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
and Suffering from Fall in Wealth
14
90
95
139
138
Change
Nov.
Dec.
Jan.
Feb.
Mar.
8
5.0
05
Millions of employees; seasonally adjusted
10
5.5
00
Nonfarm Payroll Employment
12
Net worth to
income ratio
(left axis)
Saving rate
(right axis)
85
Over 5 Million Jobs Lost So Far
Percent
6.0
0.5
80
6.5
0.6
0.1
2009
Ratio
-597 K
-681 K
-741 K
-651 K
-663 K
137
136
135
6
134
133
4
4.5
1.1
1
Debt to disposable
income ratio (right axis)
Mar.
2
132
131
4.0
FRBSF
forecast
3.5
0
130
-2
59
64
69
74
79
84
89
94
99
04
09
129
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
1
V-Shaped or U-Shaped Recovery?
Arguments for
V-Shaped Recovery
Arguments for
U-Shaped Recovery
Has Housing Hit Bottom (Again)?
Home Sales
1400
1200
• Typical pattern of past severe
recessions
• P
Pent-up
t
d
demand
d ffor h
housing
i
and cars, and inventory
rebuilding
• Banking/financial crises
followed by slow recoveries;
healing of banks will take time
• Heightened uncertainty exerts
drag on investment
Thousands
Seasonally adjusted annual rate
7500
7000
New Homes
(left axis)
6500
1000
6000
800
5500
Existing Homes
(right axis)
600
Feb.
5000
• Sizable monetary and fiscal
stimulus
• Global recession
400
• Monetary policy limited by zero
bound
4500
200
4000
2001
Global Recession
2002
2003
2004
2005
2006
2007
2008
Gradual Recovery
Real Gross Domestic Product (GDP)
Real GDP
Percent
Percent change at seasonally adjusted annual rate
(2007Q4 = 100)
8
105
USA
Germany
UK
Japan
6
FRBSF
Forecast
4
2
0
100
Consensus Forecast
-2
-4
-6
Q4 Q1
95
2007
2008
2009
2010
-8
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Unemployment Continues to Rise
Unemployment Rate
The Risk of Deflation
Percent
Seasonally adjusted
10.0
Core PCE Price Inflation
3.0
Long run inflation
expectations
9.0
Mar.
Percent
Percent change from four quarters earlier
9.5
Q1
8.5
Q4
8.0
FRBSF
forecast
Well-anchored
Phillips curve
2.0
forecast
7.5
FRBSF
forecast
70
7.0
1.0
6.5
0.0
6.0
5.5
Unanchored
Phillips curve
forecast
5.0
4.5
-1.0
4.0
3.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-2.0
95
00
05
10
2