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April 17, 2009 William R. Emmons Assistant Vice President and Economist Division of Banking Supervision and Regulation F

Stabilizing Our Future 9th Annual Fair-Housing Conference. The Housing Crisis: How Did We Get Here?. April 17, 2009 William R. Emmons Assistant Vice President and Economist Division of Banking Supervision and Regulation Federal Reserve Bank of St. Louis William.R.Emmons@stls.frb.org.

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April 17, 2009 William R. Emmons Assistant Vice President and Economist Division of Banking Supervision and Regulation F

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  1. Stabilizing Our Future 9th Annual Fair-Housing Conference The Housing Crisis: How Did We Get Here? April 17, 2009 William R. Emmons Assistant Vice President and Economist Division of Banking Supervision and Regulation Federal Reserve Bank of St. Louis William.R.Emmons@stls.frb.org

  2. The Housing Crisis: How Did We Get Here? • The biggest housing boom ever: 1995-2006 • Things we liked: Rising house prices and wealth, construction boom, higher homeownership rates. • Reasons we were worried: Overvaluation, oversupply, rising household debt burdens, increasingly risky bank lending. • The housing crisis: 2007-2010 (or beyond) • The fallout: Declining wealth, construction, & home-ownership; rising foreclosures and bank failures. • The lesson: Credit-fueled bubbles are dangerous. • The future: Sustainable homeownershipis key.

  3. Important Reminder • These comments do not necessarily reflect the views of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

  4. Unmistakable Hallmark of The Boom: House Prices Rose Almost Everywhere Index values: Average levels in 1995 set equal to 100 Monthly data through Dec. 2005.

  5. As Elsewhere, House Prices in Memphis Metro Area Rose Faster Than Incomes Index values: Average levels in 1992 set equal to 100 House prices Per-capita income: A proxy for fundamental value Quarterly data through Q4.2006.

  6. Value of Houses Owned Rose Strongly Among All Demographic Groups Thousands of dollars adjusted to purchasing power in 2007 White non-hispanic families Non-white and/or hispanic families Triennial survey data through 2007.

  7. Total Value of Household Real Estate Tripled While Household Income (Merely) Doubled Billions of dollars Quarterly data through Q4.2006.

  8. Residential Construction Contributed More to GDP Than Ever Before 2004-06: Biggest three-year residential-construction share of GDP on record. Percent Annual data through 2006.

  9. Memphis Private Building Permits Topped 10,000 Three Straight Years (2004, 2005, 2006) Number of permits Annual data through 2006.

  10. Homeownership Rates Increased: From 70 to 76% Among White Non-Hispanics From 44 to 52% Among Non-Whites and/or Hispanics Percent Tri-annual survey data through 2007; US annual data through 2008.

  11. Things We Worried About: Real-Estate Values Grew Much Faster Than Incomes Percent Annual data through 2006.

  12. Things We Worried About: Real-Estate Values Grew Faster Than Replacement Costs Percent Annual data through 2006.

  13. US Housing Construction Outstripped Population Growth Ratio of housing units to number of households Recessions are indicated by vertical gray bars. Quarterly data through Q4.2008.

  14. Memphis Private Building Permits Exceeded Job Creation By 46,000 (2000-2005) 2000-2005: 56,300 private building permits 10,200 net new jobs created Number of permits Net new jobs created Private building permits issued Annual data through 2006.

  15. Feeling Ever Wealthier, Households Saved Less and Less Percent Billions of dollars Household net worth Household saving rate Annual data through 2006.

  16. All Demographic Groups Took on More Mortgage Debt Fraction (between zero and one) Triennial survey data through 2007.

  17. More Families Took On Extreme Debt Burdens (Debt Service > 40% of Income) Percent of homeowning families Triennial survey data through 2007.

  18. Risky Mortgages Accounted for More than Half of Originations by 2006 Riskier lending increased greatly. Risky loans were made by banks, thrifts, Fannie Mae and Freddie Mac and—especially—the “shadow banking system”. Source: Inside Mortgage Finance, Jan. 30, 2009.

  19. 2007-09: The Housing Crisis Unfolds • Subprime-mortgage market began to crumble • Rapidly rising subprime delinquencies and defaults. • House prices began to fall in previously hot markets. • Construction activity stalled. • Homeownership rate stopped rising. • Contagion to broader markets: Credit crisis • The “shadow financial system” began to unravel. • Global economy fell into recession. • A banking crisis emerged; credit crunch began to bite. • A violent, re-inforcing downward cycle underway.

  20. Surging Subprime-Mortgage Delinquency Rates Were the Early Warning Signs Includes most Alt-A mortgages Percent Recessions are indicated by vertical gray bars. Quarterly data through Q4.2008.

  21. Tennessee Subprime-Mortgage Problems Emerged During 2007 Percent Source: Mortgage Bankers Association. Quarterly data through Q4.2008.

  22. Foreclosure Hot Spots Across the Country Between 0.4% and 10% of HHs Between 0.1% and 0.4% of HHs Between 0.01% and 0.1% of HHs Between 0.001% and 0.01% of HHs Source: RealtyTrac. Quarterly data through Q3.2008.

  23. House Prices Mega-bubbles (2000-006) +150% or more Miami Los Angeles Washington DC San Diego +100% or more Tampa Las Vegas Phoenix San Francisco New York Mini-bubbles (+50 to 100%) Seattle Portland Boston Minneapolis Chicago Tiny bubbles (< 40%) Denver Atlanta Dallas Cleveland Detroit Miami LA DC SD Chicago Atlanta Cleveland Detroit

  24. House Prices

  25. House Prices in Metropolitan Memphis Down 20% So Far; Another 10% Possible Index values: Average levels in 1992 set equal to 100 House prices Per-capita income: A proxy for fundamental value Quarterly data through Q4.2008.

  26. Housing Construction Has Stalled Thousands of units at seasonally adjusted annual rates Quarterly data through Q1.2009.

  27. Single-Family Housing Starts Down Across the Nation About 80% From 2005-06 Peak Index values set equal to 100 during 2005 Quarterly data through Q1.2009.

  28. Homeownership Rates Now Falling Percent Tri-annual survey data through 2007; US annual data through 2008.

  29. Mortgage Originations By the “Shadow Financial System” Down About 90% From 2006 $3.9 trillion Credit crisis $2.9 trillion $1.9 trillion $1.0 trillion Quarterly figures for 2007 and 2008 expressed at an annual rate.Source: Inside Mortgage Finance, Jan. 30, 2009.

  30. Global and US Economies In Sharpest Decline Since World War II Onset of credit crisis in 2007 Percent IMF growth projections 2009: World -0.75% Emerging 2.00% Industrial -3.25% USA -2.6% 2010: World 2.00% Emerging 4.00% Industrial 0.25% USA 0.20% USA in 2008: 1.1% March 13-14, 2009.

  31. Mid-South Unemployment Rates Rising Rapidly Percent Recessions are indicated by vertical gray bars. Monthly data through Feb. 2009.

  32. Banks’ Residential Real-Estate Charge-Off Rates Will Continue Rising Large All banks Medium Small Source: San Francisco Fed’s RE InfoWeb, based on Call Reports. Quarterly data through Q4.2008.

  33. Banks’ Commercial Real-Estate Charge-Offs Will Move Much Higher Medium All banks Large Small Source: San Francisco Fed’s RE InfoWeb, based on Call Reports. Quarterly data through Q4.2008.

  34. The Future: Sustainable Homeownership is Key • Immediate priority: Dealing with the wreckage • The housing bubble will continue to deflate for several years—No stabilization likely before 2010. • Falling household wealth, tax revenues, jobs. • Millions of families have been financially devastated by foreclosure. • Foreclosure mitigation efforts are fighting against a collapsing bubble—redefaults are likely. • The banking system is seriously weakened. • Government involvement in the financial system must be reduced over time. • The Federal Reserve has been stretched beyond its traditional roles; risks to price stability are real. • What future for Fannie and Freddie, FHA/VA, FDIC?

  35. The Future: Sustainable Homeownership is Key • Our long-term goal must be to establish policies that support sustainable homeownership. • New policies should address: • “Out-of-control” mortgage lending. • Predatory lending practices; massive mortgage fraud. • Boom-and-bust cycles driven by global credit conditions. • The shadow financial system—reform and rebuild it, or use this opportunity to reduce its market share and influence? Can banks take up the slack? • Too many financially illiterate households—homeownership and mortgage debt are serious business, requiring specialized knowledge. • Undue political influence of special-interest lobbies that “oversold” housing and mortgages to the detriment of all.

  36. Major-Market House Prices Down 30% Through Jan. 2009—Another 10% Likely S&P/Case-Shiller Composite-10 Metro-Area House-Price Index set equal to 100 in May 2006 May 2006 Actual data Forward curve on Apr. 3, 2009, based on contracts traded at the Chicago Mercantile Exchange. January 2009

  37. Tennessee Mortgage Problems Rising Fast, But Trailing US Percent Source: Mortgage Bankers Association. Quarterly data through Q4.2008.

  38. Tennessee Prime-Quality Fixed-Rate Mortgage Problems Rising, Too Percent Source: Mortgage Bankers Association. Quarterly data through Q4.2008.

  39. Homeownership in Memphis Remains Lower Than in Other Metro Areas Percent Annual data through 2008.

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