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)
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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
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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.”
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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
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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
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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?
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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
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Source: Hedgeye Risk Management
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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 Mae’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 Mae’s Economic and Housing Outlook at http://fanniemae.com/portal/research-and-analysis/emma.html 26