Freddie Mac Home - Challenges and opportunities for ......01 Apr 1971 19 Feb 1976 08 Jan 1981 28 Nov...

Challenges and opportunities

for housing & mortgage markets

Sean Becketti, Chief Economist

July 2016

U.S. Housing and Mortgage Market Outlook

© Freddie MacEconomic and Housing Research 2

A Better Freddie Mac …and a better housing finance system

For families

...innovating to improve the liquidity, stability and

affordability of mortgage markets

For customers

...competing to earn their business

For taxpayers

...reducing their exposure to mortgage risks


Macro trends: Weak economic growth, but growth

Interest rates: Is there a bottom?

Housing market: The bright spot in the U.S. economy

House prices: Rapid increases, but no bubble

Mortgages: Falling mortgage rates delay origination decline

Overview


Weak growth, but growth rather than recession

Low unemployment rate masks underlying weakness

Fed in a quandary

Macroeconomic trends


Subpar growth

-3%

-2%

-1%

0%

1%

2%

3%

4%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Fcst. 2017 Fcst.

Source: Bureau of Economic Analysis, Freddie Mac.

Real Gross Domestic Product (Annual Percentage Change, Q4/Q4)


The weakest expansion since 1946

0%

5%

10%

15%

20%

25%

30%

35%

40%

0 1 2 3 4 5 6

Expansion Years

Cumulative GDP Growth: Postwar Expansions

Pre 1990

1991-2007

Current


Lower labor force participation accounts for

the “improvement” in the unemployment rate

4%

5%

6%

7%

8%

9%

10%

11%

12%

2009 2010 2011 2012 2013 2014 2015 2016

Unemployment Rate

Unemployment Rate Unemployment Rate if LFPR Remained at 65.7%


The decline in labor force participation

has accelerated

Source: BLS

62

63

64

65

66

67

68

2000 2002 2004 2006 2008 2010 2012 2014 2016

Labor force participation (%)

LFPR Trend to Jun 09 Trend after Jun 09


Wage growth remains weak

1.5

2.0

2.5

3.0

3.5

4.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Avg.

Hrly

Earn

ings (

SA

, Y

oY

% C

hange)

Hourly Earnings Growth

Source: BLS Source: Federal Reserve Bank of Atlanta


House price growth is driving inflation

-6

-5

-4

-3

-2

-1

0

1

2

3

3/1/2013 6/1/2013 9/1/2013 12/1/2013 3/1/2014 6/1/2014 9/1/2014 12/1/2014 3/1/2015 6/1/2015 9/1/2015 12/1/2015 3/1/2016

Ann

ua

lized q

uart

erl

y g

row

th r

ate

CPI Growth CPI Growth - Less Shelter

Source: Bureau of Labor Statistics


Mortgage rates on a 35-year rally

Loose connection between Fed funds rate and mortgage rate

Fed holdings of MBS sustain low mortgage rates

Macroeconomic trends


Mortgage rates remain near historic lows

0

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

01 Apr 1971 19 Feb 1976 08 Jan 1981 28 Nov 1985 18 Oct 1990 07 Sep 1995 27 Jul 2000 16 Jun 2005 06 May 2010 26 Mar 2015

Freddie Mac Primary Mortgage Market Survey®

Historic High

10/8/1981, 18.63

Historic Low

11/22/2012, 3.31

3.54

30-year FRM (%), U.S. Weekly Average through 6/16/2016


Interest rates

0

5

10

15

20

25

1971 1976 1981 1985 1990 1995 2000 2005 2010 2015

Fed Funds vs. 30-year mortgage rate

Fed Funds Rate 30-Year FRM

14© Freddie Mac

Note: Other investors include hedge funds, structured investment vehicles, pension funds, savings institutions, nonprofits and individuals. Agency MBS includes Freddie Mac,

Fannie Mae and Ginnie Mae securities.

Source: Freddie Mac, Fannie Mae, Federal Reserve, Inside MBS & ABS, National Credit Union Administration and the U.S. Treasury Department.

Data as of December 31, 2015.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

NY Fed US Banks Other Foreign MutualFunds

GSEs REITs Life Insurers CreditUnions

State/LocalGovts

$ Billions

Estimated institutional holdings of Agency MBS


Strong, but unbalanced, growth

Limited inventory of houses for sale

House prices passing previous peaks—what lies ahead?

The housing sector


Strong housing market

5.8

4.6 4.74.5 4.6

5.0

5.55.4

5.75.9

6.2

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

The Best Year in Total Home Sales Since 2007Total Home Sales, Millions (New + Existing)Source: NAR, Census/HUD, Freddie Mac May 2016 Outlook


Supply remains tight

0.5M

1.0M

1.5M

2.0M

1980 1985 1990 1995 2000 2005 2010 2015

Total housing completions

Range long-run housing demand

1.5M to 1.7M


Tight inventory

Number of Months Inventory

Six months of inventory balances supply & demand

New Homes

0

2

4

6

8

10

12

14

16

06 07 08 09 10 11 12 13 14 15 16

0

2

4

6

8

10

12

14

06 07 08 09 10 11 12 13 14 15 16

Existing Homes


The rental market is equally tight

11.1%

7.0%

4

5

6

7

8

9

10

11

12

56 60 64 68 72 76 80 84 88 92 96 00 04 08 12 16

Rental Vacancy Rate (%, NSA)Source: Current Population Survey/Housing Vacancy Survey


Shortage of supply => rapid house price appreciation

Price trends vary significantly across the US

House prices passing previous peaks—what lies ahead?

House prices


Tight supply is propping up prices

90

100

110

120

130

140

150

160

170

2000 2002 2004 2006 2008 2010 2012 2014 2016

FHFA House Price Index (Dec 2000=100)

United States

Source: FHFA, Purchase –only House Price Index (SA)


Home price performance by state

Peak (June 2006) to Current (March 2016)1

-3%

AL9%

AK

≥ 10%

0 to 9%

≤ -11%

-10 to -1%

0%

AR-20%

AZ

-8%

CA

31%

CO

CT -21%

DC 43%

DE -12%

-21%

FL

-2%

GA

9%

HI

9%

IA

-4%

ID

-18%

IL3%

IN

10%

KSKY 6%

10%

LA

-4%

ME

-11%

MI

-9%

MN

-1%

MO

0%

MS

10%

MT

NC 3%

53%

ND

9%

NE

NJ -

20%

-10%

NM

-29%

NV

-6%

NY

-5%

OH

17%

OK

6%

OR

-4%

PA

RI -21%

2%

SC

22%

SD

TN 9%

37%

TX

13%

UT-9%

VA

7%

WA

-8%

WI

4%

WV

12%

WY

-4%

VT

MD -19%

-13%

NH

1 The Freddie Mac House Price Index for the U.S. is a value-weighted average of the state indexes where the value weights are based on Freddie Mac’s single-family credit

guarantee portfolio. Other indices of home prices may have different results, as they are determined using different pools of mortgage loans and calculated under different

conventions. The Freddie Mac House Price Index for the U.S. is a non-seasonally adjusted monthly series. Percent changes were rounded to nearest whole percentage point

Source: Freddie Mac

Significant Variability by Region & State Since the Peak

MA-3%


Are house prices getting too high?

3.0

3.2

3.4

3.6

3.8

4.0

4.2

4.4

4.6

4.8

1989 1993 1997 2001 2005 2009 2013

National house Price to Income ratio

4.1

4.0

3.5

Sources: NAR, Moody’s Analytics


A possible watch list

Note: Data compiled by Economic & Housing Research. Metro area median prices are Moody's Analytics seasonally adjusted median house values, based on NAR data. Metro

area median incomes based on Moody's Analytics forecasts and interpolations of Census data. The historical range is quarterly data from 1993Q1-2003Q4.

Three states and 10 metro areas were above their PTI threshold in 4Q15

Watch list clusters in three states and the West coast


Are there non-financial reasons for unusually-high price/income

ratios?

» High demand/constrained supply

» Increase in income inequality skews the PTI metrics

Is credit quality deteriorating?

» Credit scores of recent originations

» Indexes of mortgage fraud

Is leverage increasing?

» Re-emergence of “affordability” products

» LTV of recent originations

» Cash-out refinances; HELOC origination and utilization

Key questions about house price risk


Is credit quality deteriorating?

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0 6 12 18 24 30 36 42 48

Months since origination

Cumulative default rate by vintage

2001-2003 2004-2006 2007-2008 2009-2011 2012-2014

Source: CoreLogic


1 Based on the unpaid principal balance of the single-family credit guarantee portfolio. Current LTV ratios are management estimates, which are updated on a monthly basis.

Current market values are estimated by adjusting the value of the property at origination based on changes in the market value of homes in the same geographic area since that

time.

Source: Freddie Mac. 2015 data as of December 31, 2015.

57%

63%

72%

77%78%

80%

75%

69%

66%

63%

55

60

65

70

75

80

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Current LTV of portfolio continues to improve reflecting

HPA and tighter underwriting standards

Current Loan-to-Value1 Ratio of Freddie Mac’s

Single-Family Credit Portfolio(Weighted Avg; Reflects Estimated Current Market Values)


0

5

10

15

20

25

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Homeowner equity increasing, MDO flat

1 Value of U.S. housing stock includes homes with and without underlying mortgages.

2 U.S. home equity is the difference between the value of the U.S. housing stock and the amount of U.S. single-family mortgage debt outstanding.

Source: Federal Reserve Board’s Flow of Funds Accounts, June 9, 2016, Table B. 101. Data as of March 31, 2016.

$12.5

Trillion

$9.5

Trillion

Value of US Housing Stock 1

U.S. Single-family Mortgage Debt Outstanding

U.S.

Home

Equity 2

Record:

$13.3 Trillion

(2006)

$ Trillions


43%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Percent of loans with higher loan amount

Recession

Source: Freddie Mac fourth quarter refinance statistics.

"Higher Loan Amount" refers to loan amounts that were at least 5 percent greater than the amortized unpaid principal balance (UPB) of the

original loan

Keep on eye on cash-outs and HELOCs


Falling mortgage rates delay the purchase market…

… but the purchase market will eventually limit originations

Mortgages


Freddie Mac Agency MBS Represents 16% of

Total 1-4 Residential MDO as of 2016Q1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

Total 1-4 Mortgages Agency MBS Non-Agency MBS Whole Loans

(Dollars in Trillions)

Ginnie Mae

Fannie Mae

Freddie Mac

Sources: Federal Reserve Flow of Funds, Inside Mortgage Finance.


Refinance opportunity?

33© Freddie Mac

0

1,000

2,000

3,000

4,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Fcst.

2017Fcst.

$ Billions

Refinance Originations

Home Purchase Originations

Note: Estimates and forecasts by the Office of the Chief Economist do not necessarily represent the views of Freddie Mac or its management, should not be construed as

indicating Freddie Mac's business prospects or expected results, and are subject to change without notice.

Source: U.S. Department of Housing and Urban Development and Federal Financial Institutions Examination Council. 2016 and 2017 data based on the May 2016 estimate of

Freddie Mac’s Economic and Housing Research Team

$1.8T$1.5T

Single-family mortgage originations


1/3 of Americans know someone who has—or have themselves—

been evicted, foreclosed upon, or lost their housing in the past

five years

63 percent do NOT believe the 2008 housing crisis is over

60 percent believe homeownership is a solid investment and

almost 70 percent of non-owners aspire to own…

…but 60 percent believe affordability is a serious problem and 68

percent believe it is harder today than for previous generations to

have stable, affordable housing

Post-crisis public sentiment cautious

Source: How Housing Matters, MacArthur Foundation, June 2016


Likely to be limited impact on the overall US economy

» Stronger dollar and volatility overseas may reduce growth modestly

Flight to quality will keep rates lower for a longer period

» Mortgage/Treasury spreads likely to widen and soften the impact on housing

But still much uncertainty ahead

Brexit: Impacts on the US


Economic and Housing Research:

www.freddiemac.com/news/finance

Contact:

[email protected]

Follow us:

@Freddiemac

For More Information

Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac

or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief

Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose.

Information from this document may be used with proper attribution. Alteration of this document is prohibited. © 2016 by Freddie Mac.

Freddie Mac Home - Challenges and opportunities for ......01 Apr 1971 19 Feb 1976 08 Jan 1981 28 Nov...

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