House Prices: Boom or Bust?

Richard A. BrownChief Economist

Federal Deposit Insurance Corporation

October 25, 2006

2006 Fall Construction Forecast ConferenceNational Association of Home Builders

U.S. housing market activity has clearly shifted into lower gear.

Source: Bureau of the Census, National Association of Realtors

5.6

5.8

6.0

6.2

6.4

6.6

6.8

7.0

7.2

7.4

2004 2005 2006

Existing Home Sales (Millions SAAR)

2.0

2.5

3.0

3.5

4.0

2004 2005 2006

Existing Homes on the Market (Millions SAAR)

170

180

190

200

210

220

230

2004 2005 2006

Median Sales Price, Existing($ Thousands)

-5

0

5

10

15

20

2000 2001 2002 2003 2004 2005 2006

Median Price, percent change year over year

Source: National Association of Realtors

Home price increases are rapidly cooling, with condominium prices under the most pressure.

Existing 1-4 Family Homes

Condominiums and Co-ops

The number of FDIC boom markets rose from 63 in 2004 to 89 in 2005.

-10

0

10

20

30

40

50

60

70

80

90

100

78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Source: FDIC (OFHEO house price index, nominal, and real, using Bureau of Labor Statistics CPI less shelter inflation index)

Booms:Real price gain of 30% or more in 3 years Busts:

Nominal price decline ofat least 15% in 5 years

Number of Home Price Booms and Busts(Note: Busts recorded below the line)

Prices fell by at least 15 percent in

5 years17%

Prices never fell in any year of the five years following the

boom35%

Prices fell over 5-year period, but not

by 15 percent35%

Prices fell in at least one year, but not

for the 5 year

period 13%

How have metro-area housing booms resolved themselves?

The Aftermath of 54 U.S. Metro-Area Housing Booms, 1978 - 1998

Source: Angell and Williams (2005)

Bust (17%)

Stagnation (83%)

The housing markets showing year over year price declines are concentrated in the Midwest.

Source: OFHEO Housing Price Index

MSA Percent change inMetro-Area OFHEO Home Price Index

June 2005 – June 2006

Sandusky, Ohio (4.15)

Brownsville, Texas (2.82)

Ann Arbor, Michigan (1.28)

Anderson, Indiana (1.10)

Kokomo, Indiana (0.84)

Detroit, Michigan (0.61)

Greeley, Colorado (0.35)

Muncie, Indiana (0.15)

Jackson, Michigan (0.02)

Saginaw, Michigan (0.01)

Source: FDIC calculations based on OFHEO Home Price Index

89 FDIC Boom Markets for 2005 377 U.S. Metro Areas

7.0%

35.4%

-6.4%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2006Q2

HPI, Annualized Percent Increase

Year Ending June

Max

Mean

Min

6.2%

58.0%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2006Q2

HPI, Annualized Percent Increase

Year Ending June

-32.0%

Max

Mean

Min

FDIC “boom” housing markets are now starting to look much more like the rest of the nation.

States in the Midwest and South record the highest non-business bankruptcies per capita.

Source: FDIC, the Administrative Office of the US Courts and Haver Analytics

0.2 to 0.4

0.4 to 0.56

0.56 to 0.77

0.77 to 1.3

Nonbusiness, Per Capita Bankruptcies Q2 2006

0.0

1.0

2.0

3.0

4.0

5.0

1984 1989 1995 2000 2006

Noncurrent Loan Rate (Percent)Loans 90+ days past due and nonaccruals

0.0

0.5

1.0

1.5

2.0

1984 1989 1995 2000 2006

Net Charge-off Rate (Percent)

Problem loans at FDIC-insured institutions are both at their lowest level in 23 years.

Source: FDIC

Source: Mortgage Bankers Association, Office of Federal Housing Enterprise Oversight

Regardless of home price trends, subprime ARMs are already under stress from rising interest rates.

0.0

1.0

2.0

3.0

4.0

2004 2005 2006

0

5

10

15

20

25

30

SubprimeARMForeclosures*

House Price Index Percent changefrom year earlier

Michigan

*Foreclosures started as a percent of conventional subprime ARMs

0.0

1.0

2.0

3.0

4.0

2004 2005 2006

0

5

10

15

20

25

30

SubprimeARMForeclosures*

House Price Index Percent changefrom year earlier

California

*Foreclosures started as a percent of conventional subprime ARMs

By Assets

By Institution

64%

30%

Subprime* Failures 1998 - 2004

Source: FDIC. *Subprime lenders are identified by FDIC Division of Supervision and Consumer Protection.

Subprime lenders have figured prominently in FDIC-insured failures since 1998.

0

2

4

6

8

10

12

1998 1999 2000 2001 2002 2003 2004

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Number of Failed Institutions Assets of Failed Institutions, Dollars in Millions

0%

10%

20%

30%

40%

50%

60%

Mar-02 Nov-02 Jul-03 Mar-04 Nov-04 Jul-05 Mar-06

Share of Total Nonprime Mortgage OriginationsIncluded in Non-agency Mortgage-Backed Securitizations

Source: LoanPerformance Corporation (Alt-A and B&C mortgage securities database).

Pay Option ARMs

Interest-Only ARMs

Nontraditional mortgage originations have leveled off as a percent of total nonprime originations.

0.0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30Months of Seasoning

* Seriously delinquent refers to loans that are 90+ days past due and/or in foreclosure.Note: Vintage analysis begins 3 months following year's end. 2005 reflects January-June dataSource: LoanPerformance Corp. nonprime, non-Agency securitized mortgage originations

Seriously Delinquent Pay Option Loans*Percentage of active balance by vintage

2003

Recent vintages of nonprime, nontraditional mortgage loans show higher rates of delinquency.

2004

2005

3.0

3.5

4.0

4.5

5.0

1990 1992 1994 1996 1998 2000 2002 2004 2006

Assets < $1B

Assets $1B-$10B

Assets > $10B

Median Net Interest MarginPercent

Net interest margins continue to tighten for large institutions.

Source: FDIC

50

55

60

65

70

75

1991 1994 1997 2000 2003 2006*

The relative riskiness of asset portfolios at FDIC-insured institutions has risen steadily since the mid-1990s.

Median Risk-Weighted Assets as Percent of Total Assets, Institutions < $10 Billion

57%

71%

* Through June 30

Source: FDIC

0 5 10 15 20 25 30 35 40 45

Average Annual percent change

2003-2004

2004-2005

2005-2006

C&D

Home Equity

Nonfarm nonresidential

Credit cards

1-4 Family real estate

As of June 30

Since 2004, C&D loan growth has surpassed other loan types.

Source: FDIC

0

10

20

30

40

50

60

70

80

90

100

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Note: All data reflect June 30 totals.Source: FDIC

Construction and Development Loan ConcentrationsPercent of Tier 1 capital, median by lender asset size

Under $ 1 Billion

$ 1-10 Billion

$ 10 Billion and Over

C&D loan concentrations are significantly higher at mid-sized institutions.

0%

2%

4%

6%

8%

10%

12%

14%

16%

1991 1993 1995 1997 1999 2001 2003 2005

Construction and Development (C&D) Loans

Nonfarm Nonresidential Real Estate Loans

1-4 Family Residential Mortgage Loans

Noncurrent Loans as a Percent of Total Loans, Quarterly*

Source: FDIC. * Noncurrent loans = loans 90 days or more past due or in nonaccrual status .

Data for these individual loan types began to be collected in 1991.

Noncurrent construction and development (C&D) loans have far exceeded rates for other real estate loans in times of distress.

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