The Outlook for the U.S. Housing Market:Policy Options in Troubled Times
Specially Prepared for:
The National Association for Business
Economics25th Annual Washington Economic Policy
ConferencePresented by:
LaVaughn M. Henry, Ph.D.Director, U.S. Economic Analysis
The PMI Group, Inc.
March 2, 2009
What Are the Major Issues Facing the Housing Market?
Stabilizing House Prices
Encouraging Sustainable Homeownership
Re-engaging the Private Sector in the Long-term Solution
2
Issue #1: Stabilizing House Prices
House Price Depreciation has accelerated since the onset of the credit crisis…
National housing prices fell 11.1% from a year ago.
Since US home prices peaked in July 2006, they have declined 19.3% on a cumulative basis and are currently back to the lowest price level since May 2004.
California continued to lead the way, declining 26.9% from a year ago, but Nevada (-26.5%) is closing the gap, followed by Arizona (-21.1%), Florida (-19.5%), and Rhode Island (-19.0%).
The largest acceleration in home price declines during the fourth quarter of 2008 occurred in Maine, Pennsylvania, Arkansas, Oregon and Rhode Island.
Source: First American CoreLogic, LoanPerformance
…with Peak to Current Declines in House Prices being most extreme in the Western states and Florida.
Less than -25.0%-25.0% to -10.0%-10.0% to -5.0% -5.0% to 0.0%Greater than 0.0%Source: First American CoreLogic, LoanPerformance
Where are Prices Going in the Next Two Years?Where are Prices Going in the Next Two Years?
Using quarterly economic data on house prices, interest rates, affordability, local employment conditions, housing supply and foreclosures, The PMI Group has developed a proprietary econometric model that estimates the probability that prices will fall in each of the nation’s 381 MSAs by the end of the next two years.
Based on First American/Loan Performance quarterly house price index for all loans.
• Utilizes more than 30,000+ observations of MSAs and quarterly combinations
• All of the Model’s Primary Econometric Determinants are Statistically Significant at the 99% level or greater
Historical Accuracy Rate of the PMI Risk IndexSample Period: 1st Quarter 1985 – 3rd Quarter 2006
1.7%
17.5%
25.6%
33.8%
44.7%
53.3%
66.8%
82.1%
88.2% 87.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0-10% 10-20%
20-30%
30-40%
40-50%
50-60%
60-70%
70-80%
80-90%
90-100%
Assessed Risk Score
% o
f M
SA
s E
xper
ien
cin
g P
rice
Dec
lin
es
Source: The PMI Group, Inc.
Geographic Distribution of House Price Risk3rd Quarter 2008 – 3rd Qtr 2010
What is the U.S. Market Risk Index Saying about Future Price Movements?
0.0 to 10.0 10.0 to 30.0 30.0 to 50.0 50.0 to 70.070.0 to 100.0
2000
- Q1
2000
- Q3
2001
- Q1
2001
- Q3
2002
- Q1
2002
- Q3
2003
- Q1
2003
- Q3
2004
- Q1
2004
- Q3
2005
- Q1
2005
- Q3
2006
- Q1
2006
- Q3
2007
- Q1
2007
- Q3
2008
- Q1
2008
- Q3
1,000
1,250
1,500
1,750
2,000
2,250
Th
ou
san
ds
Housing Inventory Has Apparently Peaked as the Number of Vacant Homes for Sale has Stopped Rising, but remains at historic highs…
Source: U.S. Census Bureau / Moody’s Economy.com
2000 - Jan 2001 - Oct 2003 - Jul 2005 - Apr 2007 - Jan 2008 - Oct0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
StartsPermitsSales
Th
ou
san
ds
…but the supply coming to the market from new home construction has declined significantly for the last two years…
Source: NAR / U.S. Census Bureau
…however, supply continues to be augmented by record high foreclosures.
2000
...
2000
...
2001
...
2001
...
2002
...
2002
...
2003
...
2003
...
2004
...
2004
...
2005
...
2005
...
2006
...
2006
...
2007
...
2007
...
2008
...
2008
...
0
0.5
1
1.5
2
2.5
3
3.5
West South Midwest Northeast
% o
f T
ota
l M
ort
gag
e L
oan
s
Source: Mortgage Bankers Association
Nevada Florida Michigan Arizona California0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0% 13.3%
7.0%
5.4%5.9%
2.8%
10.3%
6.0%
4.5% 4.1%
1.6%
2006Q4 2008Q4
…with the rate of adjustment in the Imbalance of Home Supply and Demand varying greatly across the Nation.
12Source: The PMI Group, Inc.
Reduce Growth in the Supply of Unsold Homes◦ Continue matching of new supply growth to current market demand
◦ Slow the rate of involuntary supply added to market through the foreclosure process
◦ The Homeowner Affordability and Stability Plan will achieve positive results in both the short and long term
Stimulate Growth in Demand through Responsible Purchase and Refinance Policies
◦ The shift has begun, and must continue, to emphasize making purchases and financing arrangements based on true long term affordability, not just meeting qualifying ratios at the closing table
◦ Support consumer demand to minimize and eventually reverse the growth in the unemployment rate (e.g., the American Recovery and Reinvestment Act.)
Options for Stabilizing House Prices
Issue #2: Encouraging Sustainable
Homeownership
Mortgage credit standards remain very tight, but did not substantially increase during the fourth quarter.
PrimeLoans
0
10
20
30
40
50
60
70
80
2008-Q3 2008-Q4
Same Tightened
Source: Federal Reserve Board
Nontraditional Loans
Subprime Loans
0
10
20
30
40
50
60
70
80
90
100
2008-Q3 2008-Q4
Same Tightened
0
20
40
60
80
100
120
2008-Q3 2008-Q4
Same Tightened
Senior Loan Officer Survey on Bank Lending Practices
15
1998
- Q1
1998
- Q3
1999
- Q1
1999
- Q3
2000
- Q1
2000
- Q3
2001
- Q1
2001
- Q3
2002
- Q1
2002
- Q3
2003
- Q1
2003
- Q3
2004
- Q1
2004
- Q3
2005
- Q1
2005
- Q3
2006
- Q1
2006
- Q3
2007
- Q1
2007
- Q3
2008
- Q1
2008
- Q3
0
1
2
3
4
5
6
7
8Prime Subprime
Seri
ou
s D
elin
qu
en
cy R
ate
…while continued increases in Serious Delinquency continue to demonstrate the need for responsible lending practices.
16Source: Mortgage Bankers Association
Administration’s proposal to require families with high total debt levels to enter HUD-certified consumer debt counseling as a prerequisite to modification is a responsible requirement
Encouraging the lending industry to continue its shift in focus to long-term affordability of a financing arrangements
Supporting low mortgage rates, coupled with effective down payment requirements, that help to improve long term affordability and sustainability
Options for Encouraging Sustainable Homeownership
Issue #3: Re-engaging the Private Sector in the Long-
term Solution
2002 2003 2004 2005 2006 2007 20080%
5%
10%
15%
20%
25%
30%
Private Mortgage Insurers & PiggybacksGov't Insured
Mortgage Default Risk has become increasingly concentrated in the Government, while the Private Sector has continued to decline due to Capital Constraints…
19
Source: Fannie Mae, CRA, Inside Mortgage Finance
1998
- Q1
1998
- Q3
1999
- Q1
1999
- Q3
2000
- Q1
2000
- Q3
2001
- Q1
2001
- Q3
2002
- Q1
2002
- Q3
2003
- Q1
2003
- Q3
2004
- Q1
2004
- Q3
2005
- Q1
2005
- Q3
2006
- Q1
2006
- Q3
2007
- Q1
2007
- Q3
2008
- Q1
2008
- Q3
0
0.5
1
1.5
2
2.5
3
3.5
4
Government Insured Privately Insured
Rate
of
Seri
ou
s
Delin
qu
en
cy
…this bodes poorly for the future as historically Government-insured mortgage default rates are multiple times higher than those insured by the private sector.
20Source: Mortgage Bankers Association
Encourage the diversification of risk between the private and public sector by addressing capacity issues in the private sector
Continue the requirement for credit enhancement on high LTV mortgages. This will help to minimize the risk of loss for lending institutions, and their need for further support by the Treasury
Work towards responsible expansion of GSE lending
Encourage private sector lenders to engage in the responsible modification of loans
Options for Re-engaging the Private Sector in the Long-term Solution
Stabilizing the decline in house prices is a key first element of any successful housing policy
Encouraging sustainable homeownership through responsible lending practices is required for renewal of long-term growth in the housing market
Re-engaging the private sector in the solution process is critical for diversifying risk in the short and long-term
Conclusions
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