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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 [email protected]

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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

[email protected]


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.


  • Important Reminder

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


    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.


    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.


    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.


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

    Billions of dollars

    Quarterly data through Q4.2006.


    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.


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

    Number of permits

    Annual data through 2006.


    Homeownership Rates Increased: Straight Years

    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.


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

    Percent

    Annual data through 2006.


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

    Percent

    Annual data through 2006.


    US Housing Construction Outstripped Population Growth Than Replacement Costs

    Ratio of housing units to number of households

    Recessions are indicated by vertical gray bars.

    Quarterly data through Q4.2008.


    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.


    Feeling Ever Wealthier, Households Saved Less and Less 46,000 (2000-2005)

    Percent

    Billions of dollars

    Household net worth

    Household saving rate

    Annual data through 2006.


    All Demographic Groups Took on More Mortgage Debt 46,000 (2000-2005)

    Fraction (between zero and one)

    Triennial survey data through 2007.


    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.


    2007-09: The Housing Crisis Unfolds by 2006

    • 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.


  • 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.


    Tennessee Subprime-Mortgage Problems Emerged During 2007 Warning Signs

    Percent

    Source: Mortgage Bankers Association.

    Quarterly data through Q4.2008.


    Foreclosure Hot Spots Across the Country Warning Signs

    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.


    House Prices Warning Signs

    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


    House Prices Warning Signs


    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.


    Housing Construction Has Stalled Another 10% Possible

    Thousands of units at seasonally adjusted annual rates

    Quarterly data through Q1.2009.


    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.


    Homeownership Rates Now Falling 80% From 2005-06 Peak

    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 II

    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.


    The Future: Higher

    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?


    The Future: Higher

    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.


    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


    Tennessee Mortgage Problems Rising Fast, But Trailing US 2009—Another 10% Likely

    Percent

    Source: Mortgage Bankers Association.

    Quarterly data through Q4.2008.


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

    Percent

    Source: Mortgage Bankers Association.

    Quarterly data through Q4.2008.


    Homeownership in Memphis Remains Lower Than in Other Metro Areas

    Percent

    Annual data through 2008.


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