Duncan, doug

Transition to “Normal”?

Doug Duncan S i Vice Senior Vi President P id t and d Chi Chieff E Economist i t October 10, 2013

© 2011 Fannie Mae. Trademarks of Fannie Mae.

© 2013 Fannie Mae. Trademarks of Fannie Mae.

1

Disclaimer Opinions, analyses, Opinions analyses estimates estimates, forecasts 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 bj t to t change h without ith t notice. ti How H this thi information i f ti affects ff t Fannie F i Mae M will ill 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 i accurate, current, or suitable is i bl ffor any particular i l purpose. Ch Changes iin the h 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 for Today  General Macroeconomic Environment  Credit C dit C Conditions diti  Real Estate Market  Real Estate Finance

3

General Macroeconomic Environment

Š 2011 Fannie Mae. Trademarks of Fannie Mae.

4

Consumers are Uncertain About the Economy In general, do you think our economy is on the right track or is it on the wrong track?

Wrong Track

Right Track

76% 71% 61%

58%

63%

61%

58%

55%

37%

34%

32%

29%

30%

29%

58%

35%

56%

39%

53%

39%

56%

57% 54% 55%

39%

39% 40% 37%

23%

Source: Fannie Mae National Housing Survey, September 2013

Sep p '13

Aug g '13

Jull '13

Jun n '13

May y '13

Aprr '13

Marr '13

Feb b '13

Jan n '13

Decc­12

Nov v­12

Occt­12

Sep p­12

Aug g­12

Ju ul­12

Jun n­12

May y­12

Aprr­12

Marr­12

Feb b­12

Jan n­12

Decc­11

Nov v­11

Occt­11

Sep p­11

Aug g­11

Ju ul­11

Jun n­11

May y­11

Aprr­11

Marr­11

Feb b­11

Jan n­11

Decc­10

Nov v­10

Occt­10

Sep p­10

Aug g­10

Ju ul­10

Jun n­10

16%

5

I fl ti Inflation-Adjusted, Adj t d After-Tax Aft T Per P Capita C it Income I Growth G th Has Stagnated 8.0%

6.0%

4.0%

2.0%

0.0%

-2.0%

-4 0% -4.0%

-6.0% '60

'65

'70

'75

'80

Historical Average 1960-Present = 2.1%

Source: Bureau of Economic Analysis

'85

'90

'95

'00

'05

'10

Real Disposable Personal Income Per Capita (Year-over-Year % Change)

6

Consumers’ Income Expectations Six Months Ahead 40.0

40

1982-1986 Avg.=18.8

35

30.0 1991-1995 Avg.=9.1

2001-2005

30

Avg.=9.6

20.0 2009-2013

25

Avg.= -2.5

10.0

20

15

0.0 10

-10.0 5

-20.0

0

80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 Recession

Expectations 6 Months Hence: Income (%, SA)

Note: Share of survey respondents expecting their income to rise MINUS those expecting their income to decline over the next six months (%, SA) Sources: The Conference Board, NBER

7

The Decline in the Labor Force Participation Rate Accompanies Drop in the Unemployment Rate to Below 8 Percent 68%

12%

66%

10%

64%

8%

62%

6%

60%

4%

58%

2% '50

'55

'60

'65

'70

'75

'80

L b F Labor Force P Participation ti i ti Rate: R t 16 yr + (SA (SA, % %, L Left ft A Axis) i )

Source: Bureau of Labor Statistics

'85

'90

'95

'00

'05

'10

U Unemployment l tR Rate: t 16 yr + (SA (SA, % %, Ri Right ht A Axis) i )

8

-6.0%

Source: Bureau of Economic Analysis

Jul--13

Apr--13

Jan--13

Oct--12

Jul--12

Apr--12

Jan--12

Oct--11

Jul--11

Apr--11

Jan-11

Oct--10

Jul--10

Apr--10

Jan--10

Oct--09

Jul--09

Apr--09

Jan--09

Oct--08

Jul--08

Apr--08

Jan--08

Oct--07

Jul--07

Apr--07

Jan--07

Consumer Spending Growth Continues to be Soft

Real Personal Consumption Expenditures (3-Month Annualized % Change) 6.0%

4.0%

2.0%

0.0%

-2.0%

-4.0%

9

The Economy is Underperforming, but Improving U S Annual GDP Growth (%) U.S. 8%

6%

4%

2%

0%

-2%

-4% 77

79

81

83

85

87

89

91

93

95

97

99

01

03

05

07

09

11

13*

* Based on August 2013 Fannie Mae Economic and Strategic Research Group Forecast Sources: Bureau of Economic Analysis, Fannie Mae ESR Group

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Federal Fiscal Imbalances Are Likely to Weigh on the Economy

Federal Government Receipts and Outlays as a Percent of GDP Receipts

Outlays

Deficit

18.0

19.8

-1.8

1.1

1.9

2009-2012 2009 2012

15.4

24.1

-8.7

OMB Forecast

18.3

21.8

-3.5

Historical 1950 to 2008 Standard deviation

Policy Choices Higher Taxes Less Spending Growth Inflation

2013 to 2018

Source: Office of Management and Budget FY 2014

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Credit Conditions

Š 2011 Fannie Mae. Trademarks of Fannie Mae.

12

Long-Term Long Term Rates Move on “Fed Fed Speak Speak” and Jobs Reports 10-Year U.S. Treasury Yield (%) 3.1%

FOMC Minutes FOMC Statement, no taper

Bernanke emphasizes highly accommodative policy for foreseeable future 2.9%

FOMC Statement

Dudley and Lockhart suggest “flexibility” 2.7%

FOMC Statement, Projections, Press Conference FOMC Minutes, Bernanke Testifies on Capitol Hill

2.5%

2 3% 2.3%

Soft August jobs report Modest July jobs report Strong June jobs report

Williams suggests summer taper

2.1%

Plosser signals coming taper 1.9%

St Strong May M jobs j b reportt

“Taper” first discussed in FOMC Minutes

1.7%

Strong April jobs report

Source: The Federal Reserve Board

9//24/2013

9//10/2013

8//27/2013

8//13/2013

7//30/2013

7//16/2013

77/2/2013

6//18/2013

66/4/2013

5//21/2013

55/7/2013

4//23/2013

44/9/2013

3//26/2013

3//12/2013

2//26/2013

2//12/2013

1//29/2013

1//15/2013

11/1/2013

1.5%

13

Bond Volatility Has Increased in 2013 From Low Levels Merrill Option Volatility Estimate (MOVE) Index* 300

Global credit crisis Tapering concern 250

Bear Sterns

LTCM bail-out Enron collapsed Surprised fed funds rate hike

200

1st Gulf war

Sept. 11 attack

Subprime crisis

European debt crisis

150

100

50

0 '90

'95

'00

'05

'10

*The Merrill Lynch y Option p Volatility y Estimate ((MOVE)) Index reflects a market estimate of future Treasury y bond volatility. y It measures bond market volatility by gauging options contracts on one-month Treasury issues. The index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options weighted on the 2, 5, 10, and 30 year contracts.

Sources: Merrill Lynch, Bloomberg

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Quantitative Easing Boosts Fed Holdings of Treasury Securities and Agency MBS on the Asset Side and Reserve Balances Held on the Liability Side Federal Reserve Assets (Trillions of $)

Federal Reserve Liabilities (Trillions of $)

$4.0

$4.0

$3.5

$3.5

$3.0

$3.0

$2.5

$2.5

$2.0

$2.0

$1.5

$1.5

$1.0

$1.0

$0.5

$0.5

$0.0 2008

$0.0 2008

2009

2010

Treasury securities Source: The Federal Reserve Board

2011

2012

Agency MBS

2013

Other assets

2009

2010

Currency in circulation

2011

2012

2013

Reserve balances

Other 15

Total Fed Purchases of MBS Exceed $40 Billion per Month due to Reinvestments of Maturing Securities and Pre-Pays Fed Purchases of MBS (Billions of $)

Source: New York Fed

Total

Net

Reinvestments

O 12 Oct-12

$ 21 $72.1

$40 0 $40.0

$32 1 $32.1

Nov-12

$74.0

$40.0

$34.0

Dec-12

$70.3

$40.0

$30.3

Jan-13

$78.4

$40.0

$38.4

Feb-13

$71.0

$40.0

$31.0

Mar-13

$69.0

$40.0

$29.0

Apr-13

$69.6

$40.0

$29.6

May 13 May-13

$67 0 $67.0

$40 0 $40.0

$27 0 $27.0

Jun-13

$67.2

$40.0

$27.2

Jul-13

$70.5

$40.0

$30.5

Aug-13

$65.0

$40.0

$25.0

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Real Estate

Š 2011 Fannie Mae. Trademarks of Fannie Mae.

17

We Forecast that Homebuilding Activity will Reach “Normal� Levels in 2016 2015-2020

Source: Fannie Mae ESR Group

Demand (thousands): Ch Change iin H Households h ld Change in Vacancies Net Removals Total Demand

1,370 1 370 160 230 1,760

Supply (thousands): Single-Family M l if il Multifamily Manufactured Total Supply

1,260 400 100 1 760 1,760 18

Consumers’ Confidence in the Housing Market Has Consumers Dampened Expected Home Price Change In The Next 12 Months 4.5%

Share of Respondents Who Say It Is A… 80%

4.0%

70% 72%

3.5%

3.1% 60%

3.0%

50%

2.5%

40%

2.0%

30%

1.5%

38%

20%

1.0%

10%

0.5%

Source: Fannie Mae National Housing Survey, September 2013

Good Time To Buy

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

Jun-12

May-12

Apr-12

Sep-13

Aug-13

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

Jun-12

May-12

Apr-12

0 0% 0.0%

Mar-12

0%

Good Time To Sell

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Both Multifamily and Single-Family Single Family Building Activity Has Retreated Recently Ho sing Starts (SA Housing (SA, Tho Thousands sands of Units)

2,000

600

1,800 500

1,600 1,400

400

1,200 1,000

300

800 200

600 400

100

200 0

0 '90

'95

'00 Single-Family (Left Axis)

Source: Census Bureau

'05

'10

Multifamily (Right Axis) 20

New Housing Supply is Low‌ Low 600

14

550 12

500 450

10

400 350

8

300 6

250 200

4

150 100

2 '65 65

'70 70

'75 75

'80 80

'85 85

'90 90

'95 95

'00 00

'05 05

'10 10

New 1-Family Houses For Sale: United States (SA, Thousands, Left Axis) New 1-Family Houses For Sale: Months Supply (SA, Ratio, Right Axis) Months Supply Historical Average = 6 6.2 2 Months

Source: Census Bureau

21

…as as is Existing Housing Supply 4.0

14

3.5

12

3.0

10

2.5 8 2.0 6 1.5 4

1.0 0.5

2

0.0

0 '83

'88

'93

'98

'03

'08

'13

Existing Single-Family House for Sale (NSA, Millions, Left Axis) Months' Supply of Existing Single Family Houses (Months, Right Axis) Months' Supply Historical Average = 7.2

Source: National Association of REALTORS®

22

Tight Supply Helps Boost Home Prices 25%

2.0

20%

3.0

15%

4.0

10%

50 5.0

5%

6.0

0%

7.0

-5%

8.0

-10%

9.0

-15%

10.0

-20%

11.0

-25%

12.0 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12

CoreLogic House Price Index (Year-over-Year % Change, Left Axis) Months' Supply of Single-Family Existing Homes (Advanced 4 Months, Inverted, Right Axis)

Sources: CoreLogic, National Association of REALTORS速

23

Home Sales Remain Mixed 8.0

1.4

7.0

1.2

6.0

1.0

5.0 0.8 40 4.0 0.6 3.0 04 0.4

2.0 1.0

0.2

0.0

0.0 '00

'01

'02

'03

'04

'05

'06

'07

'08

'09

'10

'11

'12

'13

Existing Home Sales (Left Axis, SAAR, Millions) New Single-Family Home Sales (Right Axis, SAAR, Millions) Sources: Census Bureau, National Association of REALTORS速

24

Real Estate Finance

Š 2011 Fannie Mae. Trademarks of Fannie Mae.

25

Rates are Still Low From a Historical Perspective 30-Year FRM Rate 18%

16%

14%

12%

10%

8%

6%

4%

2%

0% '82

Source: Freddie Mac

'84

'86

'88

'90

'92

'94

'96

'98

'00

'02

'04

'06

'08

'10

'12

26

Refi Activity has Weakened as Anticipated 10,000

600

9 000 9,000 500 8,000

7,000 400 6,000

5,000

300

4,000 200 3,000

2,000 100 1,000

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

Jul-02

Jan-02

Jul-01

Jan-01

Jul-00

0

Jan-00

0

MBA: Volume Index: Mortgage Loan Applications for Refinancing(SA Refinancing(SA, Mar-16-90=100) Mar 16 90=100) MBA: Volume Index: Mortgage Loan Applications for Purchase (SA, Mar-16-90=100)

Source: Mortgage Bankers Association

27

The Mortgage Default Backlog is Trending Down Steadily, Steadily but Not Evenly Across the Country Foreclosure Inventory y Rate byy State Foreclosure Legal g System (NSA, %)

Serious Delinquency Rate* Rate (NSA, (NSA %) 10%

8%

9%

7%

8%

6%

7%

5%

6%

4% 5%

3% 4%

2% 3%

1%

2%

0%

1%

'06

'07

'08

'09

'10

'11

'12

0% '80

'85

'90

'95

'00

'05

'10

Judicial

Non-Judicial

Difference

*Serious Delinquency Rate or SDQ rate includes all mortgages 90 days or more past due in addition to all mortgages in foreclosures inventory.

Source: Mortgage Bankers Association

28

Purchase P h Originations O i i ti as a Share Sh off Total T t l Mortgage M t Production is Expected to Increase as Refinance Burnout Hits Mortgage Originations (Billions of $, 1-4 units) 4,000 3,500 , 3,000 2,500 2,000 1,500 1,000 500

Purchase

2014 4*

2013 3*

201 12

201 11

201 10

200 09

200 08

200 07

200 06

200 05

200 04

200 03

200 02

200 01

200 00

199 99

199 98

199 97

199 96

199 95

199 94

199 93

199 92

199 91

199 90

0

Refinance

*Based on August 2013 Fannie Mae ESR Group Forecast Source: Fannie Mae ESR Group

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Speaker Biography Douglas g G. Duncan is Fannie Mae’s Senior Vice President and Chief Economist. He is responsible for managing Fannie Mae’s Economic & Strategic Research Group and oversees corporate strategy. In this leadership role, Duncan provides all economic, housing, and mortgage market forecasts and analyses, and serves as the company’s thought leader and spokesperson on economic and mortgage market issues.

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 ork on the Financial Instit Institutions tions Project at the U U.S. S Department of Agric Agriculture. lt re He has been elected to the Board of Directors for the National Association of Business Economists, is a member of the American Economics Association and the American Real Estate and Urban Economics Association, and is past president of the Housing Statistics Users Group.

Named one of Bloomberg / BusinessWeek’s 50 Most Powerful People in Real Estate and one of Inman News’ 100 Most Influential Real Estate Leaders for 2013, Duncan is a frequent speaker on national and state economic, housing, and mortgage market conditions.

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, Duncan Senior Vice President & Chief Economist Fannie Mae 3900 Wisconsin Avenue 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

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