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April 17, 2009 William R. Emmons Assistant Vice President and Economist Division of Banking Supervision and Regulation F PowerPoint Presentation
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Stabilizing Our Future 9th Annual Fair-Housing Conference. The Housing Crisis: How Did We Get Here?. April 17, 2009 William R. Emmons Assistant Vice President and Economist Division of Banking Supervision and Regulation Federal Reserve Bank of St. Louis William.R.Emmons@stls.frb.org.

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slide1

Stabilizing Our Future

9th Annual Fair-Housing Conference

The Housing Crisis:

How Did We Get Here?

April 17, 2009

William R. Emmons

Assistant Vice President and Economist

Division of Banking Supervision and Regulation

Federal Reserve Bank of St. Louis

William.R.Emmons@stls.frb.org

slide2

The Housing Crisis:

How Did We Get Here?

  • The biggest housing boom ever: 1995-2006
      • Things we liked: Rising house prices and wealth, construction boom, higher homeownership rates.
      • Reasons we were worried: Overvaluation, oversupply, rising household debt burdens, increasingly risky bank lending.
  • The housing crisis: 2007-2010 (or beyond)
      • The fallout: Declining wealth, construction, & home-ownership; rising foreclosures and bank failures.
      • The lesson: Credit-fueled bubbles are dangerous.
  • The future: Sustainable homeownershipis key.
slide3

Important Reminder

  • These comments do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.
slide4

Unmistakable Hallmark of The Boom:

House Prices Rose Almost Everywhere

Index values: Average levels in 1995 set equal to 100

Monthly data through Dec. 2005.

slide5

As Elsewhere, House Prices in Memphis Metro Area Rose Faster Than Incomes

Index values: Average levels in 1992 set equal to 100

House prices

Per-capita income: A proxy for fundamental value

Quarterly data through Q4.2006.

slide6

Value of Houses Owned Rose Strongly Among All Demographic Groups

Thousands of dollars adjusted to purchasing power in 2007

White non-hispanic families

Non-white and/or hispanic families

Triennial survey data through 2007.

slide7

Total Value of Household Real Estate Tripled While Household Income (Merely) Doubled

Billions of dollars

Quarterly data through Q4.2006.

slide8

Residential Construction Contributed More to GDP Than Ever Before

2004-06: Biggest three-year residential-construction share of GDP on record.

Percent

Annual data through 2006.

slide9

Memphis Private Building Permits Topped 10,000 Three Straight Years (2004, 2005, 2006)

Number of permits

Annual data through 2006.

slide10

Homeownership Rates Increased:

From 70 to 76% Among White Non-Hispanics

From 44 to 52% Among Non-Whites and/or Hispanics

Percent

Tri-annual survey data through 2007; US annual data through 2008.

slide11

Things We Worried About: Real-Estate Values Grew Much Faster Than Incomes

Percent

Annual data through 2006.

slide12

Things We Worried About: Real-Estate Values Grew Faster Than Replacement Costs

Percent

Annual data through 2006.

slide13

US Housing Construction Outstripped Population Growth

Ratio of housing units to number of households

Recessions are indicated by vertical gray bars.

Quarterly data through Q4.2008.

slide14

Memphis Private Building Permits Exceeded Job Creation By 46,000 (2000-2005)

2000-2005:

56,300 private building permits

10,200 net new jobs created

Number of permits

Net new jobs created

Private building permits issued

Annual data through 2006.

slide15

Feeling Ever Wealthier, Households Saved Less and Less

Percent

Billions of dollars

Household net worth

Household saving rate

Annual data through 2006.

slide16

All Demographic Groups Took on More Mortgage Debt

Fraction (between zero and one)

Triennial survey data through 2007.

slide17

More Families Took On Extreme Debt Burdens (Debt Service > 40% of Income)

Percent of homeowning families

Triennial survey data through 2007.

risky mortgages accounted for more than half of originations by 2006
Risky Mortgages Accounted for More than Half of Originations by 2006

Riskier lending increased greatly.

Risky loans were made by banks, thrifts, Fannie Mae and Freddie Mac and—especially—the “shadow banking system”.

Source: Inside Mortgage Finance, Jan. 30, 2009.

slide19

2007-09: The Housing Crisis Unfolds

  • Subprime-mortgage market began to crumble
      • Rapidly rising subprime delinquencies and defaults.
      • House prices began to fall in previously hot markets.
      • Construction activity stalled.
      • Homeownership rate stopped rising.
  • Contagion to broader markets: Credit crisis
      • The “shadow financial system” began to unravel.
      • Global economy fell into recession.
      • A banking crisis emerged; credit crunch began to bite.
      • A violent, re-inforcing downward cycle underway.
slide20

Surging Subprime-Mortgage Delinquency Rates Were the Early Warning Signs

Includes most Alt-A mortgages

Percent

Recessions are indicated by vertical gray bars.

Quarterly data through Q4.2008.

slide21

Tennessee Subprime-Mortgage Problems Emerged During 2007

Percent

Source: Mortgage Bankers Association.

Quarterly data through Q4.2008.

slide22

Foreclosure Hot Spots Across the Country

Between 0.4% and 10% of HHs

Between 0.1% and 0.4% of HHs

Between 0.01% and 0.1% of HHs

Between 0.001% and 0.01% of HHs

Source: RealtyTrac. Quarterly data through Q3.2008.

slide24

House Prices

Mega-bubbles

(2000-006)

+150% or more

Miami

Los Angeles

Washington DC

San Diego

+100% or more

Tampa

Las Vegas

Phoenix

San Francisco

New York

Mini-bubbles

(+50 to 100%)

Seattle

Portland

Boston

Minneapolis

Chicago

Tiny bubbles

(< 40%)

Denver

Atlanta

Dallas

Cleveland

Detroit

Miami

LA

DC

SD

Chicago

Atlanta

Cleveland

Detroit

slide26

House Prices in Metropolitan Memphis Down 20% So Far; Another 10% Possible

Index values: Average levels in 1992 set equal to 100

House prices

Per-capita income: A proxy for fundamental value

Quarterly data through Q4.2008.

slide27

Housing Construction Has Stalled

Thousands of units at seasonally adjusted annual rates

Quarterly data through Q1.2009.

slide28

Single-Family Housing Starts Down Across the Nation About 80% From 2005-06 Peak

Index values set equal to 100 during 2005

Quarterly data through Q1.2009.

slide29

Homeownership Rates Now Falling

Percent

Tri-annual survey data through 2007; US annual data through 2008.

mortgage originations by the shadow financial system down about 90 from 2006
Mortgage Originations By the “Shadow Financial System” Down About 90% From 2006

$3.9 trillion

Credit crisis

$2.9 trillion

$1.9 trillion

$1.0 trillion

Quarterly figures for 2007 and 2008 expressed at an annual rate.Source: Inside Mortgage Finance, Jan. 30, 2009.

global and us economies in sharpest decline since world war ii
Global and US Economies In Sharpest Decline Since World War II

Onset of credit crisis in 2007

Percent

IMF growth projections

2009:

World -0.75%

Emerging 2.00%

Industrial -3.25%

USA -2.6%

2010:

World 2.00%

Emerging 4.00%

Industrial 0.25%

USA 0.20%

USA in 2008: 1.1%

March 13-14, 2009.

mid south unemployment rates rising rapidly
Mid-South Unemployment Rates Rising Rapidly

Percent

Recessions are indicated by vertical gray bars.

Monthly data through Feb. 2009.

banks residential real estate charge off rates will continue rising
Banks’ Residential Real-Estate Charge-Off Rates Will Continue Rising

Large

All banks

Medium

Small

Source: San Francisco Fed’s RE InfoWeb, based on Call Reports.

Quarterly data through Q4.2008.

banks commercial real estate charge offs will move much higher
Banks’ Commercial Real-Estate Charge-Offs Will Move Much Higher

Medium

All banks

Large

Small

Source: San Francisco Fed’s RE InfoWeb, based on Call Reports.

Quarterly data through Q4.2008.

slide35

The Future:

Sustainable Homeownership is Key

  • Immediate priority: Dealing with the wreckage
      • The housing bubble will continue to deflate for several years—No stabilization likely before 2010.
        • Falling household wealth, tax revenues, jobs.
        • Millions of families have been financially devastated by foreclosure.
        • Foreclosure mitigation efforts are fighting against a collapsing bubble—redefaults are likely.
        • The banking system is seriously weakened.
        • Government involvement in the financial system must be reduced over time.
          • The Federal Reserve has been stretched beyond its traditional roles; risks to price stability are real.
          • What future for Fannie and Freddie, FHA/VA, FDIC?
slide36

The Future:

Sustainable Homeownership is Key

  • Our long-term goal must be to establish policies that support sustainable homeownership.
      • New policies should address:
        • “Out-of-control” mortgage lending.
          • Predatory lending practices; massive mortgage fraud.
          • Boom-and-bust cycles driven by global credit conditions.
        • The shadow financial system—reform and rebuild it, or use this opportunity to reduce its market share and influence? Can banks take up the slack?
        • Too many financially illiterate households—homeownership and mortgage debt are serious business, requiring specialized knowledge.
        • Undue political influence of special-interest lobbies that “oversold” housing and mortgages to the detriment of all.
slide37

Major-Market House Prices Down 30% Through Jan. 2009—Another 10% Likely

S&P/Case-Shiller Composite-10 Metro-Area House-Price Index set equal to 100 in May 2006

May 2006

Actual data

Forward curve on Apr. 3, 2009, based on contracts traded at the Chicago Mercantile Exchange.

January 2009

slide38

Tennessee Mortgage Problems Rising Fast, But Trailing US

Percent

Source: Mortgage Bankers Association.

Quarterly data through Q4.2008.

slide39

Tennessee Prime-Quality Fixed-Rate Mortgage Problems Rising, Too

Percent

Source: Mortgage Bankers Association.

Quarterly data through Q4.2008.