Specially Prepared for the

National Association of RealtorsMidyear Legislative Meetings and

Trade Expo

Prepared by:LaVaughn M. Henry, Ph.D.VP & Sr. Regional OfficerFRBC, Cincinnati BranchMay 16, 2013

The Current Status and Outlook for the Housing Market Recovery and

Mortgage Finance

What are the Economic Realities that are Driving the Current Housing Recovery?· The alignment in the housing market of supply and demand fundamentals appears to

substantiate the position that a sustained recovery is under way.

· House prices, as measured by a variety of national indexes have risen since the beginning of 2012.

· The recovery of house prices has been broad based geographically, with 90 percent of local markets having experienced price gains over the year ending in February.

· Since the beginning of 2012, housing starts and permits have risen by nearly 30 percent, while new and existing home sales have also seen double-digit growth rates.

· Homebuilder sentiment has improved notably, and real estate agents report stronger traffic of people shopping for homes. In national surveys, households report that low interest rates and house prices make it a good time to buy a home; they also appear more certain that house price gains will continue.

· While lending for residential real estate is increasing, underwriting standards remain tight, thus slowing the rate of recovery in the market.

· Reductions in mortgage originations has been most pronounced among borrowers with lower credit scores.

THE FUNDAMENTALS OF THE HOUSING MARKET

The Current Status and Outlook for:

3

House Prices a recovering strongly at the national level…

Janu

ary

2001

Janu

ary

2002

Janu

ary

2003

Janu

ary

2004

Janu

ary

2005

Janu

ary

2006

Janu

ary

2007

Janu

ary

2008

Janu

ary

2009

Janu

ary

2010

Janu

ary

2011

Janu

ary

2012

Janu

ary

2013

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

12

-mo

nth

Gro

wth

Ra

te

Source: Standard & Poor's/Case-Shiller 20-metro Composite Index4

1983 - Q1 1988 - Q3 1994 - Q1 1999 - Q3 2005 - Q1 2010 - Q30.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

Rati

o

Average from 1983-2000 = 1.0Band indicates +/- 1 standard deviation

Equilibrium

* Ratio of Case-Shiller home prices to Owner’s Equivalent RentSource: Robert Shiller, Bureau of Labor Statistics

…while the ratio of Home Prices to Rent indicates that home prices have recovered to a “fair” value.

5

Demand for housing continues to show increasing signs of strength...

Jan-

00

Sep-

00

May

-01

Jan-

02

Sep-

02

May

-03

Jan-

04

Sep-

04

May

-05

Jan-

06

Sep-

06

May

-07

Jan-

08

Sep-

08

May

-09

Jan-

10

Sep-

10

May

-11

Jan-

12

Sep-

120

200

400

600

800

1000

1200

1400

1600

1800

0

1000

2000

3000

4000

5000

6000

7000

Single Family Home Sales

New Homes Existing Homes

Th

ou

sa

nd

s

6 Source: U.S. Census Bureau, National Association of Realtors

…as low mortgage rates and house prices have helped to increase Housing Affordability to historic levels.

Jan-

00

Sep-

00

May

-01

Jan-

02

Sep-

02

May

-03

Jan-

04

Sep-

04

May

-05

Jan-

06

Sep-

06

May

-07

Jan-

08

Sep-

08

May

-09

Jan-

10

Sep-

10

May

-11

Jan-

12

Sep-

1290

110

130

150

170

190

210

230

3

4

5

6

7

8

9

NA

R H

ou

sin

g A

ffo

rda

bil

ity I

nd

ex

FH

FA

Co

ntr

act

Inte

rest

Ra

te

7 Source: FHFA, National Association of Realtors

Homebuilders are responding by gradually rebuilding a diminished housing supply.

Jan 1990 Jan 1994 Jan 1998 Jan 2002 Jan 2006 Jan 20100

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Single Family Multi Family

Th

ou

sa

nd

s,

SA

AR

8 Source: Census Bureau

CONSUMER INCOME AND CREDIT CONDITIONS

The Demand for Mortgage Credit:

9

10

Both Real Disposable Personal Income and Consumption are advancing at a slow pace…

2000 2002 2004 2006 2008 2010 2012-4

-2

0

2

4

6

8

Consumption Real DPI

Fou

r q

uart

er

perc

en

t ch

an

ge

Source: Bureau Economic Analysis

1 9 17 2550

100

150

200

250

Equities Real Estate

Perc

en

t of

dis

posab

le in

com

e

…while Household Wealth continues its recovery to pre-financial crisis levels.

11 Source: Federal Reserve Board

Growth in Consumer Credit Outstanding has returned to pre-financial crisis levels…

2000-012001-042002-072003-102005-012006-042007-072008-102010-012011-042012-07-10%

-5%

0%

5%

10%

15%

20%

-1

1

12 M

onth

perc

enta

ge C

hange

12 Source: Federal Reserve Board of Governors

…however, consumers have substantially reduced their use of Revolving Debt.

2001-01 2002-11 2004-09 2006-07 2008-05 2010-03 2012-01-15%

-10%

-5%

0%

5%

10%

15%

20%

NonrevolvingRevolving

12

-mo

nth

Gro

wth

Ra

te

13 Source: Federal Reserve Board of Governors

Low interest rates are helping households to continue to deleverage…

1980Q1 1984Q2 1988Q3 1992Q4 1997Q1 2001Q2 2005Q3 2009Q410%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

Financial Obligations Ratio Debt Service Ratio

Source: Federal Reserve Board of Governors

1980 1984 1989 1994 1998 2003 2008 201260

70

80

90

100

110

120

130

140

Deb

t as a

% o

f D

isp

osab

le

Incom

e

…reversing the 30-year trend of increasing Household Debt to Disposable Income.

15

Source: Federal Reserve Board

TRENDS IN LENDINGThe Supply of Mortgage Credit:

16

Foreclosure Rates continue to decline across all major loan types…

17

1998

Q1

1999

Q2

2000

Q3

2001

Q4

2003

Q1

2004

Q2

2005

Q3

2006

Q4

2008

Q1

2009

Q2

2010

Q3

2011

Q4

2013

Q10

1

2

3

4

5

6

Prime LoansSubprime LoansFHA Loans

Source: Mortgage Bankers Association National Delinquency Survey

…while delinquency rates of 90 days and greater also are declining from their highs.

18

1998

Q1

1999

Q2

2000

Q3

2001

Q4

2003

Q1

2004

Q2

2005

Q3

2006

Q4

2008

Q1

2009

Q2

2010

Q3

2011

Q4

2013

Q10

2

4

6

8

10

12

14

16

Prime LoansSubprime LoansFHA Loans

Source: Mortgage Bankers Association National Delinquency Survey

In response, Commercial Bank Charge-Off Rates continue to decline to pre-Financial Crisis Levels.

2000

Q1

2001

Q3

2003

Q1

2004

Q3

2006

Q1

2007

Q3

2009

Q1

2010

Q3

2012

Q10

2

4

6

8

10

12

Credit Card LoansOther ConsumerSF Residential Mortgages

Rate

19 Source: Federal Reserve Board of Governors

However, Lenders remain reticent in Loosening Tight Underwriting Standards on Mortgage Loans…

2007

Q2

2008

Q1

2008

Q4

2009

Q3

2010

Q2

2011

Q1

2011

Q4

2012

Q3

2013

Q2-20

0

20

40

60

80

100

120

PrimeNontraditionalSubprime

Net

Perc

en

tag

e o

f S

urv

ey

Resp

on

den

ts

20 Source: Federal Reserve Board of Governors Sr. Lending Officer Opinion Survey

…but are selectively increasing lending in response to growth in the demand for residential mortgages.

2007

Q2

2008

Q1

2008

Q4

2009

Q3

2010

Q2

2011

Q1

2011

Q4

2012

Q3

2013

Q2-120

-100

-80

-60

-40

-20

0

20

40

60

80

PrimeNontraditionalSubprime

Net

Perc

en

tag

e o

f S

urv

ey

Resp

on

den

ts

21 Source: Federal Reserve Board of Governors Sr. Lending Officer Opinion Survey

While growth in mortgage applications is more balanced among sectors as the recovery expands.

Janu

ary

2007

July 2

007

Janu

ary

2008

July 2

008

Janu

ary

2009

July 2

009

Janu

ary

2010

July 2

010

Janu

ary

2011

July 2

011

Janu

ary

2012

July 2

012

Janu

ary

2013

-100.0%

-50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

ConventionalGovernment

12

-mo

nth

pe

rce

nta

ge

Gro

wth

22 Source: MBA Applications Survey

MONETARY POLICYThe Current Status and Outlook for:

23

In response to the Financial Crisis, the Fed undertook non-traditional policies to accommodate the recovery…

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

Federal Agency Securi-ties

Credit Markets

Lending to Financial Insti-tutions

Long Term Treasuries

Traditional

Millions

24 Source: Federal Reserve Board of Governors

…helping to reduce mortgage interest rates to historically low levels.

Jan-

90

Feb-

92

Mar

-94

Apr-9

6

May

-98

Jun-

00

Jul-0

2

Aug-

04

Sep-

06

Oct-0

8

Nov-1

0

Dec-1

20

2

4

6

8

10

12

Federal Funds Effec-tive Rate10-yr Constant Ma-turity Treasury30-year Fixed Rate Mortgage

25 Source: Federal Reserve Board of Governors

26

Interest Rate Thresholds (May FOMC Mtg.)· “…the Committee…currently anticipates that [the]

exceptionally low range for the federal funds rate will be appropriate at least as long as:

- the unemployment rate remains above 6-1/2 percent,

- inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal,

- and longer-term inflation expectations continue to be well anchored.”

27

Key Points (from May FOMC Meeting)· The economy continues to grow, albeit at a

moderate pace.· Labor market conditions have shown some

improvement in recent months…but the unemployment rate remains elevated.

· The housing sector has strengthened further.· The Committee expects that, with appropriate

policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline…

28

Asset Purchases (May FOMC Meeting)· “…the Committee decided to continue purchasing

additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month.”

· “The Committee will continue its purchases of Treasury and agency mortgage-backed securities… until the outlook for the labor market has improved substantially in a context of price stability.”

The majority of the FOMC do not to anticipate rate tightening until 2015…

Source: Federal Reserve Board of Governors, March 2013 Projections

…with an increasing majority in agreement as time passes.

Source: Federal Reserve Board of Governors

31

Thank You.