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NABE - Current Outlook for the California Housing Market

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Presentation to the NABE - Silicon Valley Chapter

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NABE - Current Outlook for the California Housing Market

  1. 1. The Current Status and Outlook for the U.S. and Northern California Economies, Housing and Mortgage Markets Specially Prepared for: National Association of Business Economics, Silicon Valley Roundtable Presented by: LaVaughn M. Henry, Ph.D. Director, U.S. Economic Analysis The PMI Group, Inc. December 10, 2008
  2. 2. <ul><li>The PMI U.S. Market Risk Index </li></ul><ul><li>What Is the “Risk Index”? </li></ul><ul><li>Why Is It Important? </li></ul><ul><li>How Is It Determined? </li></ul><ul><li>How Well Does It Work? </li></ul><ul><li>What Is It Saying about Future Price Movements? </li></ul><ul><li>Why Are Risk Scores Changing? </li></ul><ul><ul><li>Foreclosures are Rising </li></ul></ul><ul><ul><li>Unemployment is Rising </li></ul></ul><ul><ul><li>House Price Volatility/Depreciation is Slowing </li></ul></ul><ul><ul><li>Excess Housing Supply is Declining </li></ul></ul><ul><ul><li>Housing Affordability is Rising </li></ul></ul><ul><li>The Outlook: Where Do We Go From Here? </li></ul>
  3. 3. 2nd Quarter 2008 Results and Analysis
  4. 4. <ul><li>Proprietary econometric model developed by The PMI Group, Inc. that estimates the probability that prices will fall in each of the nation’s 381 MSAs by the end of the next two years. </li></ul><ul><li>Based on Loan Performance Corporation’s quarterly house price index. </li></ul><ul><li>Considers factors including price movement, housing affordability, local employment conditions, housing supply and foreclosures. </li></ul><ul><li>Utilizes more than 25,000+ observations of MSAs and quarterly combinations </li></ul><ul><li>All of the Model’s Primary Econometric Determinants are Statistically Significant at the 99% level or greater </li></ul>
  5. 5. <ul><li>Historically, it is an Accurate Predictor of Price Risk across all of the nation’s MSAs </li></ul><ul><li>It incorporates the latest information on local house price trends, affordability, excess housing supply, employment, income, interest rates, and foreclosure activity </li></ul><ul><li>Using the Risk Index Over Time Helps to Identify Current and Future Trends </li></ul><ul><li>Provides Critical Information to Lending Institutions regarding Geographically-based Expansion and Contraction Opportunities </li></ul><ul><li>Supports the Concept of Sustainable Homeownership </li></ul>
  6. 6. DRAFT Note: Based on 21,218 Observations
  7. 7. What is the U.S. Market Risk Index Saying about Future Price Movements?
  8. 8. Reason #1: Foreclosures are Rising
  9. 9. Source: Mortgage Bankers Association, National Delinquency Survey
  10. 10. Source: NY Fed from FirstAmerican CoreLogic / LoanPerformance Data
  11. 11. Source: NY Fed from FirstAmerican CoreLogic / LoanPerformance Data
  12. 12. Source: Mortgage Bankers Association, National Delinquency Survey
  13. 13. Source: Mortgage Bankers Association, National Delinquency Survey
  14. 14. Reason #2: Unemployment is Rising
  15. 15. Source: Bureau of Labor Statistics
  16. 16. … with significant weakness in the Midwest and South. 12-month change in Payroll Employment November 2008 Source: Bureau of Labor Statistics
  17. 17. Unemployment is Rising Broadly Across the Nation. Unemployment Rates November 2008 Source: Bureau of Labor Statistics
  18. 18. Source: Moody’s / Bureau of Labor Statistics
  19. 19. Reason #3: House Price Volatility/Depreciation is Slowing
  20. 20. Source: Loan Performance Corporation
  21. 21. Source: Loan Performance Corporation
  22. 23. Reason #4: Excess Housing Supply is Declining
  23. 24. Source: The PMI Group
  24. 25. Source: The PMI Group
  25. 26. Reason #5: Housing Affordability is Rising
  26. 27. Source: The PMI Group Affordability is Improving, but Remains Challenged for Various Reasons…
  27. 28. … while Mortgage Rates Remain Relatively Low…
  28. 29. Source: Federal Reserve Board … Tighter Lending Standards Have Made a Greater Number of Mortgages Out of Reach.
  29. 31. <ul><li>1)      The housing market is being hit by: </li></ul><ul><ul><li>a.      A glut of homes for sale resulting in record home price declines </li></ul></ul><ul><ul><li>b.      The credit crunch, making it difficult for existing homeowners to refinance problem mortgages and for potential homebuyers to get new mortgages </li></ul></ul><ul><ul><li>c.      The downturn in the economy, causing a drop in employment growth and a rise in the unemployment rate. </li></ul></ul><ul><li>2)      We estimate that there are roughly 800-900 thousand EXCESS vacant homes for sale (not total for sale, but the number in excess of what we would normally see) </li></ul><ul><li>3)      Banks have tightened lending standards to an unprecedented degree – especially for subprime and non-traditional mortgages </li></ul><ul><li>4)      While conforming mortgage rates are falling (more below), jumbo rates (where there is no GSE or FHA activity) remain very high as there is no private label securities market and depositories have a limited appetite for adding mortgage assets to their books. </li></ul><ul><li>5)      Job losses are accelerating, with November’s decline of 533 thousand the biggest drop in almost 34 years. </li></ul>
  30. 32. <ul><li>1)      In the conforming market (including the new “super conforming” loans up to $730,000) mortgage rates are finally falling sharply – in part in response to Fed actions </li></ul><ul><ul><li>a.      Yields on prime conforming 30-year FRMs may drop below 2003’s low of 5.21 percent </li></ul></ul><ul><li>2)      Housing affordability was already high even before mortgage rates began to fall </li></ul><ul><ul><li>a.      Affordability should rise to levels not seen since the early-1970s – and perhaps to record highs. </li></ul></ul><ul><li>3)      After several years of being above-trend, home sales have been below-trend for more than 2 years – leading to an increase in pent-up demand for housing </li></ul><ul><li>4)      The Federal Reserve is easing to an unprecedented degree and another fiscal stimulus bill is almost certain early in 2009] </li></ul><ul><ul><li>a.      Expansionary policy should allow a modest recovery in the economy beginning in the second half of 2009. </li></ul></ul><ul><ul><li>b.      The Fed and other government agencies will do whatever it takes to move the economy out of recession </li></ul></ul><ul><li>5)      Home sales have always rebounded before recessions end – and well before the job market stabilizes </li></ul>
  31. 33. <ul><li>1)      Existing home sales, buoyed by foreclosure and short sales, have probably already bottomed </li></ul><ul><ul><li>a.      We project a modest 5 percent gain in existing sales in 2009, mostly in the second half of the year </li></ul></ul><ul><li>2)      New home sales have been held down by the lower-priced foreclosure sales </li></ul><ul><ul><li>a.      We project modestly lower new sales in 2009, but even new sales should stabilize in the second half of the year </li></ul></ul><ul><li>3)      House price drops are probably about 60-70 percent through their ultimate declines, with national gains occurring again 2010 </li></ul><ul><ul><li>a.      We project peak-to-trough FHFA price declines of 10-12 percent, with 30-32 percent S&P/Case-Shiller declines </li></ul></ul><ul><li>4)      Refinance activity will pick up in 2009 in response to lower mortgage rates, but only modestly because of equity constraints </li></ul><ul><li>5)      Purchase activity will fall again in 2009, as lower prices trump modestly higher sales </li></ul><ul><li>6)      The prime conforming part of the market (dominated by Fannie Mae, Freddie Mac, and FHA) will continue to be 80-90 percent of originations in 2009 </li></ul><ul><li>7)      The jumbo market will slowly come back later in 2009, but subprime and non-traditional loans will remain depressed for a while. </li></ul>