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“Any real-estate investment is a good investment … ”

U.S. Subprime Mortgage Market Meltdown James R. Barth Auburn University and Milken Institute jbarth@milkeninstitute.org 14 th Dubrovnik Economic Conference The Croatian National Bank Dubrovnik, Croatia June 25 –28, 2008. “Any real-estate investment is a good investment … ”.

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“Any real-estate investment is a good investment … ”

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  1. U.S. Subprime Mortgage Market MeltdownJames R. BarthAuburn University and Milken Institutejbarth@milkeninstitute.org 14th Dubrovnik Economic ConferenceThe Croatian National BankDubrovnik, CroatiaJune 25–28, 2008

  2. “Any real-estate investment is a good investment … ”

  3. “Any real-estate investment is a good investment … ” … NOT!

  4. Homeownership Rate Reaches Historic High in 2004 69.2% in September 2004 67.8% in March 2008 2008 Source: U.S. Census Bureau.

  5. Home Prices Peak in 2006 Sources: U.S. Office of Federal Housing Enterprise Oversight (OFEHO), Standard & Poor's, California Association of Realtors, Moody's Economy.com.

  6. Home Price Appreciation Peaks in 2005 House-price indices, % change on a year earlier

  7. 80 60 A Longer-Term Perspective on Home Prices Source: Robert J. Shiller, 2006.

  8. History Repeats Itself: Home Prices Don’t Just Go Up Change in Home Prices in 100 plus years Percentage change, year ago Great Depression World War I World War II 1970’s Boom 1980’s Boom Current Boom Source: Robert J. Shiller, 2006.

  9. Homes for Sale Take Off Millions Millions Source: U.S. Census Bureau.

  10. Single-family Home Sales Reach New High Before Plunging New homes (Right axis) Existing homes (Left axis) Sources: U.S. Census, National Association of Realtors, Moody’s Economy.com.

  11. Existing Home Sales Are Down Everywhere Over the Past Two Years Percent change in existing home sales Fourth-quarter 2005 through fourth-quarter 2007 Existing home sales nationwide down 29% Source: Freddie Mac.

  12. Median Existing Single-family Home Price: Too Good to Last Sources: National Association of Realtors, Moody’s Economy.com.

  13. Forty-six States Had Falling Prices in the Fourth Quarter 2007 United States: - 9.3% (fourth-quarter annualized growth) Source: Freddie Mac.

  14. Single-family Housing Starts Sources: U.S. Census Bureau, Global Insight.

  15. Single-family Building Hit a Record in 2005 But Was 53% Lower Two Years Later Thousands, SAAR Source: U.S. Census Bureau.

  16. Homes Sit Longer on the Market Homes available for sale (Left axis) Months supply (Right axis) Sources: National Association of Realtors, Moody’s Economy.com.

  17. Home Prices and Credit Boom

  18. Interest Rates: Too Low Too Long? Fed Funds Rate vs. Rate on Long-term Government Bonds Government bond rate Fed funds rate Sources: Federal Reserve, Global Insight.

  19. Mortgage Rates: ARMs Appear Attractive to Many 30-yr fixed 1-yr ARM Sources: Mortgage Banker’s Association, Moody’s Economy.com.

  20. ARM Share of Mortgages Share of all applications Share of all loans Sources: U.S. Federal Housing Finance Board, Freddie Mac, Moody’s Economy.com.

  21. ARM Share of Mortgages Percent of all loans Source: Mortgage Bankers Association.

  22. ARM Mortgage Share by Loan Type Percent of loan type Source: Mortgage Bankers Association.

  23. Prime and Subprime Home Mortgage Originations Source: Inside Mortgage Finance.

  24. Mortgage Originations by ProductSubprime and Alt A shares quadruple between 2001 and 2006, then fall in 2007. Source: Inside Mortgage Finance.

  25. 2/28 ARMs Dominate Subprime Home-purchase Loan Originations in 2006 Other ARM Source: Freddie Mac.

  26. Subprime Mortgage Loans Outstanding Source: Inside Mortgage Finance.

  27. Distribution of Prime and Subprime Residential Mortgage Originations by FICO Score (2006)

  28. National Distribution of FICO Scores

  29. Origin of “Securitization” “But I don’t know any other word to describe what we are doing. You will have to use it (securitization).” Lewis Ranieri “The Origins of Securitization, Sources of Its Growth, and Its Future Potential,” A Primer on Securitization

  30. Surge in Amount and Diversity of U.S. Asset-backed Securities Outstanding Source: Securities Industry and Financial Markets Association.

  31. U.S. Asset-backed Securities Outstanding 1999, Total = US$4,235 Billions 2007, Total = US$9,682 Billions Source: Securities Industry and Financial Markets Association.

  32. Home Mortgage Security Issuance

  33. Outstanding Home Mortgage Securities

  34. Private-label Mortgage-backed Security Issuance Has Fallen Sharply March 2007 $191 Billion June 2007 $181 Billion Dec. 2007 $109 Billion Sep. 2007 $137 Billion April 2008 $102 Billion Source: Inside Mortgage Finance.

  35. Origination Shares of Mortgage Brokers Account for Majority of Home Mortgage Originations 80% Source: Wholesale Access.

  36. Monoline Insurers’ Financial Guarantees of Securities Increase, But What Happens If They Cannot Be Honored?

  37. Securitization: Originate to Distribute vs. Originate to Hold 100% Other Non-Agency Issuers 80% Government-Sponsored Enterprises and Agencies 60% Saving Institutions 40% 20% Commercial Banks 0% 1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

  38. Subprime Crisis OverviewDecember 2006–March 2008 Sources: BusinessWeek (March 31, 2008), Standard & Poor’s and Global Insight.

  39. Ratio of Median Home Price to Median Household Income Surges

  40. Home Mortgage Share of Household Liabilities Reaches a New High in 2007 Source: Federal Reserve.

  41. Leverage of U.S. Households has Increased Rapidly Since 1980 Home mortgage debts as % of disposable personal income Sources: Federal Reserve and Moody’s.

  42. Sixty-day plus Home Mortgage Delinquency Rates Are on the Rise Alt-A Sources: First American Corelogic and LoanPerformance databases.

  43. Subprime ARM Defaults Are 12 Times Those for Prime

  44. Subprime Loans Accounted for Over Half of Foreclosures Since 2006 Source: Mortgage Bankers Association National Delinquency Survey (data as of December 2007, number expanded to reflect 85% coverage).

  45. Percent Change in Delinquency Rate of Subprime ARM Loans Between 2005Q2 and 2007Q2 Sources:Mortgage Bankers Association,Milken Institute.

  46. National Subprime Foreclosure Ratesby Origination Year*

  47. California Subprime Foreclosure Ratesby Origination Year*

  48. Determinants of Delinquency andForeclosure Rates in CBSAsJanuary 1999–December 2006

  49. Determinants of Delinquency andForeclosure Ratesin CBSAsJanuary 1999–December 2005

  50. Determinants of Delinquency andForeclosure Rates in CBSAsJanuary 1999–December 2004

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