Putting Housing in Context

Global Interdependence Center and the New College of Florida, Sarasota FL

Putting Housing in Context Doug Duncan Chief Economist, Fannie Mae April 28, 2016 Š 2011 Fannie Mae. Trademarks of Fannie Mae.

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Disclaimer Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose.

Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

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Agenda • U.S. outlook has elements of strength…but also drawbacks • Housing market has good long-term potential…but is not “normal”

• A definition of housing policy objectives is needed…but don’t expect legislative reform in 2016 (humor)

3

U.S. Outlook Has Elements of Strength...

•

Demographics are favorable

•

Employment has picked up

•

Current low rates hold down the debt burden

…But Also Drawbacks •

Minimal gains in productivity are holding down income growth

•

Fiscal policy is absent as an influence

•

Monetary policy is over-extended and creating distortions

4

U.S. Demographics Are Favorable For Growth and Housing Household Growth is Starting to Rebound in the Second Half of the Decade

Millennials Are a Large Wave of Potential Home Owners Population By Age and Sex, 2010 Census Females

Males

100 years and over 95 years 90 years 85 years 80 years 75 years 70 years 65 years 60 years 55 years 50 years 45 years 40 years 35 years 30 years 25 years 20 years 15 years 10 years 5 years Under 1 year

1,800 1,600

Baby Boomers

Millennials

3.0

2.5

2.0

1.5

1.0

0.5 0.0 0.5 Millions

1.0

1.5

2.0

2.5

3.0

Average Annual Household Growth (000s)

Age

1,694

1,400

1970-2014 Average

1,200

1,353 1,156

1,180

1,124

1,000 800 600

670

400 200 0

1970s

1980s

1990s

2000s

2010-2014 2015-2020 (projected)

Historical data (blue) end in 2014 because that is the last year for which American Community Survey data are available.

Source: Census Bureau, Fannie Mae Economic & Strategic Research projections, Decennial Census

5

Labor Market Conditions Have Improved But Productivity Has Not

84%

Low Unemployment Rate Overstates the Health of the Job Market

Real Labor Productivity Growth is Slowing 12%

8.0%

1

7.0% 80%

10%

1

6.0%

1

5.0% 1

76%

8%

4.0% 1

72%

6%

3.0% 1

2.0% 0

68%

4%

1.0% 0

0.0% 64%

2%

0

-1.0% -2.0%

60%

0% '48 '52 '56 '60 '64 '68 '72 '76 '80 '84 '88 '92 '96 '00 '04 '08 '12 '16 Labor Force Participation Rate: 25-64 Yr (12-month rolling avg., %, Left Axis) Unemployment Rate: 25-64 Yr (SA, %, Right Axis)

0

-3.0%

0

'60

'65

'70

'75

'80

'85

'90

'95

'00

'05

'10

'15

Business Sector: Real Output Per Hour of All Persons (SA, %Change.Yr.Ago) Ten-Year Moving Average

Source: Bureau of Economic Analysis, Bureau of Labor Statistics

6

Slowdown in Productivity Has Led to Slowing Income Growth; Labor’s Share of Income is Declining Pace of Decline Shifted Around 2000

Long Run Real Income Growth Tracks Productivity Growth 4.0%

1

120

1

115

3.5% 1

3.0%

110 1

2.5% 1

2.0%

105

1

100 0

1.5%

95 0

1.0% 0

90

0.5% 0

0.0%

85

0

'60

'65

'70

'75

'80

'85

'90

'95

'00

'05

'10

Ten-Year Rolling Average Real Labor Productivity Growth

'15

Non Farm Business Labor Share, Index 2009=100

Ten-Year Rolling Average Real Per-Worker Personal Income Growth Source: Bureau of Economic Analysis, Bureau of Labor Statistics

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Entitlements Are a Significant Risk to U.S. Fiscal Future and a Major Contributor to Debt Burden Combined Social Security Trust Funds’ Ratio

Federal Debt Held by the Public as a Percentage of GDP 120% 4.0

The dark blue line indicates CBO’s projections of expected outcomes; the dotted light blue lines indicate the 80 percent range of uncertainty around those projections from 500 simulations from CBO’s long-term model.

Actual

Projected

100% 3.0 80% 60%

Projected

2.0

40% 1.0 20% 0%

CBO: “Federal debt held by the public consists mostly of securities that the Treasury issues to raise cash to fund the federal government’s activities and to pay off its maturing liabilities. It does not include Treasury securities held by federal trust funds and other government accounts; interest payments on those securities are intragovernmental transactions, which appear in the budget as interest costs to the Treasury and receipts to the trust funds and other accounts, having no net effect on the federal deficit.”

Source: Congressional Budget Office

0.0

CBO: “The trust funds’ ratio is the balance in the Social Security trust funds at the beginning of the year, divided by outlays (benefits and administrative costs) for that year. The trust funds are exhausted when the ratio reaches zero. Under current law, the trust funds cannot incur negative balances.”

8

Monetary Policy Disguises Urgency of Fiscal Reform Components of Total Spending Actual 100%

Baseline Projections

90% 80% 70% 60%

50% 40% 30% 20% 10% 0%

Social Security

Source: Congressional Budget Office

Federal Spending on the Major Healthcare Programs

Other noninterest spending

Net interest

9

Housing Market Has Good Long-term Growth Prospects…

•

Employment growth has led to increased household formation

•

The increase in demand opens the door for greater supply growth

…But is Not “Normal” •

The “new” cost structure of housing production appears to have risen

•

The “new” cost structure of residential real estate financing appears to have risen

•

Affordability constraints are raising calls for further policy action

10

Employment Growth Has Led to Household Formation Increase Household Formation Picked Up in 2015

Demographic Forces at Play, or Just Part of the Business Cycle?

Total Number of Households, Break-adjusted (Thous) Change – Year-to-Year

6,000

66.0

4,000

64.0

2,500

2,000

2,000 62.0 1,500

0 60.0 -2,000

1,000 58.0

-4,000 -6,000

56.0

-8,000

54.0 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

500

0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15

All Employees Added: Total Nonfarm (SA, Thous, LHS) Civilian Employment/Population Ratio: 16 yr + (SA, %)

Source: Bureau of Labor Statistics, Census Bureau

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Pace of Housing Production Differs Between Owning and Renting, With Affordability a Challenge for Both Tight Supply of Single-Family Construction Compared to Population Peak Peak 18 9/1980 12.7

2/1984 16.4

Multifamily Construction Picks Up the Pace 9

Peak 1/2006 16.5

16

7

12

6

10

5

8

4

6

3

2

Trough 10/1981 6.4 ↓49%

0

Trough 1/1991 6.4 ↓61%

Peak 2/1984 8.3

8

14

4

Peak 1/1981 5.8

Peak 2/2000 4.1

2 Trough 3/2009 3.2 ↓81%

1 0

Trough 6/1982 2.4 ↓58%

Trough 12/1991 0.9 ↓89%

Trough 10/2009 0.5 ↓89%

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14

Number of Single-Family (1-Unit, SAAR) Housing Starts Per 1000 Household

Number of Multifamily Housing Starts (5+ units, SAAR) Per 1000 Households

Source: Census Bureau

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Shift in Cost Structure in Producing Homes: Labor and Land Top 10 Significant Problems Faced During 2015 and Expected to Face in 2016

Share of Single-Family Builders Reporting Labor Cost/Availability Problems 80%

Cost/Availability of Labor

70%

Cost/Availability of Developed Lots Federal Environmental Regulations and Policies

60%

Regulation of Banking/Financial Institutions

50%

Impact/Hook-up/Inspection or Other Fees

40% Inaccurate Appraisals

30%

Concern about Employment/Economic Situation Gridlock/Uncertainty in Washington Making Buyers Cautious

20%

Local/State Environmental Regulations and Policies

10%

Building Material Prices

0% 0% 10% 20% 30% 40% 50% 60% 70% 80% Faced in 2015 Source: National Association of Home Builders

Expect in 2016

2012

2013 Faced Last Year

2014

2015

2016

Expect This Year 13

Shift in the Cost Structure of Producing Mortgages Rooted in Regulatory Compliance

Direct Servicing Costs ($ per Loan) $250

Fully-Loaded Production Expenses ($ Per Loan) $9,000 $8,000

$200

$7,000 $6,000

$150 $5,000 $4,000 $100 $3,000

$50

$2,000 $1,000

$0

$0

Source: Mortgage Bankers Association; Quarterly Mortgage Bankers Performance Report, Servicing Operations Study and Forum

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Affordability Constraint Raises Calls to Loosen Credit Standards NAR Affordability Index: Composite (Fixed + ARM) 250

Peak 1/2013 214.5 ↑112%

Price-to-Rent Ratio 1.6 Peak 3/2006 1.8 ↑ 64% Height of Housing Market

1.5

200

1.4 150 1.3 Postrecession low 7/2015 154.5 ↓28%

100

50 Low 9/1981 63.9 (Low Incomes)

Low 7/2006 101.1 (High Home Prices)

0

1.2

Trough 5/2012 1.2 ↓ 33%

1.1

1.0 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 '15

'80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 '16 Note: Index=100 when median family income qualifies for an 80% mortgage on a median priced existing single-family home. A rising index indicates more buyers can afford to enter market.

Historical Low 1/1995 1.1

Price-to-rent ratio for the United States Note: The Price-to-Rent ratio is calculated by dividing the FHFA purchase-only home price index by the Owner's Equivalent Rent component of the CPI.

Source: National Association of REALTORS®, Bureau of Labor Statistics, Federal Housing Finance Agency

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A Definition of Housing Policy Objectives is Needed •

What is the right homeownership rate?

•

How much competition is the right amount?

•

How much risk should taxpayers assume?

•

What are some unfinished policy items in real estate and real estate finance?

•

How should we think about the future impact of the Federal Reserve retaining or releasing mortgage-backed securities on its balance sheet?

16

Owning and Renting Appear to be in Proper Balance U.S. Homeownership Rate, Seasonally Adjusted

Total Market: FICO and LTV Conventional Loan Averages FICO

70% 69% 68%

800 759

759

759

759

2009

2010

2011

67%

69%

70%

2009

2010

2011

751

744

749

2012

2013

2014

2015

76%

76%

77%

75%

2012

2013

2014

2015

750 700

67%

650 66% 600 65%

LTV 64%

80% 70%

63% 62% 61%

60% 50% 40% 30% 20%

60%

10% 0%

Source: Census Bureau, Fannie Mae and Freddie Mac Disclosures

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Mortgage Market Opportunity Among Existing Renters Not As Large As Some Suggest Renter Households that are currently in a financial position to own Caucasian

Minority

TOTAL

Total Renter Households

20,287,648

18,285,704

38,573,352

Head of Household is 25-45

8,780,104

43%

9,855,158

54%

18,635,262

48%

Can Afford 70% of MedianPriced Home

5,277,560

60%

3,965,480

40%

9,243,040

50%

Have $10K in Liquid Assets

978,460

19%

379,893

10%

1,358,353

15%

Credit score above 680*

352,245

36%

136,761

36%

489,007

36%

Renter Households Who Currently Could Own**

352,245

4%

136,761

1%

489,007

3%

Additional renter households who could prepare for ownership by improving their credit profile Raise credit score to 680***

140,605

1.6%

54,591

0.6%

195,195

1.0%

• Three percent of current renter households aged 25 to 45 are in a financial position to own. Some of these renters are renting for lifestyle or other reasons unrelated to qualifying for a mortgage.

• Over three years, an additional one percent of renter households could improve their credit profile sufficiently to become homeowners with a Fannie Mae mortgage. *Estimate of Renter credit score is based on research from the “Comparing Credit Profiles of American Renters and Owners” report from the Urban Institute. **Percent based on 25-45 renter population. ***Using the Urban Institute research we estimate 14% of renters’ credit score falls between 620 and 680. Based on rate of improvement demonstrated by boomerang buyers, over three years this segment of renters could raise their credit score to over 680.

Source: American Community Survey, Survey of Consumer Finances, Fannie Mae ESR Tabulations, Urban Institute

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Deconsolidation Today, But Will Structural Changes in Primary Market Lead to Consolidation?

Total Originations - Institution Type Share 100% 90% 80%

5% 5%

5% 5%

5% 5%

3% 5%

4% 6%

25%

26%

28%

32%

34%

70%

4% 6%

39%

60% 50% 40% 30%

66%

64%

62%

59%

56%

51%

20% 10% 0% 2009

2010 Traditional Banks

2011 Mortgage Banks

Source: Inside Mortgage Finance, Fannie Mae, Freddie Mac, Ginnie Mae, HMDA, Marketrac, SNL Financial

2012 Credit Union

2013

2014

Other 19

While There is Minimal Deviation From the Median For All Lender Sizes, Smaller Institutions Demonstrate Larger Spread of FICO Scores

Max Value

Upper Quartile (Q3) Median Lower Quartile (Q1)

Min Value Outlier

696

Number of Lenders 164

121

830

Number of Lenders 201

112

*2014 Data through 2014 Q3 “Other” Institution Type includes private equity firms and insurance companies (i.e. Fortress Investment, Walter Investment, Ocwen Financial, Metlife, Inc.) Note: FICO weighted by loan UPB **Q1 – (Q3-Q1)*1.5 < Outlier < Q3 + (Q3-Q1)*1.5

Source: Marketrac, HMDA, Freddie Mac, Fannie Mae

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Failure to Reform the Secondary Market Means Taxpayers Retain Uninsured Risk Mortgage-Related Securities (MRS) Share

Credit Risk Share of Originations

100%

100%

90% 80%

80%

70% 60%

60%

50% 40%

40%

30% 20%

20% 10%

0%

0% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 Fannie Mae Freddie Mac Ginnie Mae Private Label Security

'07

'08 Portfolio

'09

'10

Shared Risk

'11

'12 PLS

'13 GSE

'14

'15 *

GNMA

*Preliminary

Source: Federal Reserve, Fannie Mae, Freddie Mac, FDIC, Treasury & FHLBs

21

Source: Hedgeye Risk Management

22

Fed Holdings of Mortgage-Related Securities Constant Through Reinvestments – When is “Well Underway”? $5.0 $4.5 $4.0 $3.5 $3.0 $2.5 $2.0 $1.5 $1.0 $0.5 $0.0 '08

'09

'10 Treasury securities

Source: Federal Reserve Board

'11

'12 Agency MBS

'13

'14

'15

'16

Other assets 23

The Road Not Taken (Other Reforms Needed, Not Done) •

Reform has not fixed adverse incentives within the ratings agency industry.

•

Tax incentives in residential real estate remain unaltered.

•

Differential treatment of first and second mortgages in the crisis suggests risk was mispriced.

•

Data make clear appraisals are generally biased.

•

Secondary market structural reforms wait as taxpayers hold the contingent liability.

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Speaker Biography Douglas G. Duncan is Fannie Mae's senior vice president and chief economist. He is responsible for providing all forecasts and analyses on the economy, housing, and mortgage markets for Fannie Mae. Duncan also oversees corporate strategy and is responsible for strategic research regarding external factors and their potential impact on the company and the housing industry. He serves as a voting member of the Fannie Mae Finance Committee.

Under his leadership, in 2015 Fannie Maeâ&#x20AC;&#x2122;s Economic and Strategic Research Group won the NABE Outlook Award presented annually for the most accurate GDP and Treasury note yield forecasts. In addition, the Group was awarded Pulsenomics best home price forecast.

Named one of Bloomberg / BusinessWeek's 50 Most Powerful People in Real Estate, Duncan is Fannie Mae's source for information and analyses on the external business and economic environment, the implications of changes in economic environment to the company's strategy and execution, and forecasting for housing activity, demographics, overall economic activity, and mortgage market activity.

Prior to joining Fannie Mae, Duncan was Senior Vice President and Chief Economist at the Mortgage Bankers Association. His experience also includes service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of Representatives, and work on the Financial Institutions Project at the U.S. Department of Agriculture.

Duncan received his Ph. D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University.

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Contact Information fanniemae.com/portal/research-and-analysis/ Doug Duncan, Senior Vice President & Chief Economist

Fannie Mae 3900 Wisconsin Avenue, NW Mail Stop 1H-2N/01 Washington, DC 20016 (o) 202-752-0160 (c) 202-409-5913 (fax) 202-752-4441

douglas_g_duncan@fanniemae.com Doug Duncan on Twitter @D2_Duncan

Check out Fannie Maeâ&#x20AC;&#x2122;s Economic and Housing Outlook at http://fanniemae.com/portal/research-and-analysis/emma.html 26