Transcript Richard Brown

House Prices: Boom or Bust?
2006 Fall Construction Forecast Conference
National Association of Home Builders
Richard A. Brown
Chief Economist
Federal Deposit Insurance Corporation
October 25, 2006
U.S. housing market activity has clearly shifted into lower gear.
Existing Home Sales
(Millions SAAR)
Existing Homes on the Market
(Millions SAAR)
Median Sales Price, Existing
($ Thousands)
7.4
4.0
230
7.2
220
7.0
3.5
6.8
210
6.6
200
3.0
6.4
190
6.2
2.5
6.0
180
5.8
5.6
2004
2005
2006
2.0
2004
2005
2006
Source: Bureau of the Census, National Association of Realtors
170
2004
2005
2006
Home price increases are rapidly cooling, with condominium
prices under the most pressure.
Median Price, percent change year over year
20
Condominiums
and Co-ops
15
10
Existing 1-4 Family Homes
5
0
-5
2000
2001
2002
Source: National Association of Realtors
2003
2004
2005
2006
The number of FDIC boom markets rose from 63 in 2004 to 89
in 2005.
Number of Home Price Booms and Busts
(Note: Busts recorded below the line)
100
90
80
70
Booms:
60
Real price gain of 30% or
50
Busts:
more in 3 years
Nominal price decline of
40
at least 15% in 5 years
30
20
10
0
-10
78 79 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
Source: FDIC (OFHEO house price index, nominal, and real, using Bureau of Labor Statistics
CPI less shelter inflation index)
How have metro-area
housing booms
resolved themselves?
The Aftermath of 54 U.S.
Metro-Area Housing Booms,
1978 - 1998
Bust
(17%)
Prices fell by
at least 15
percent in
5 years
17%
Prices fell over 5year period, but not
by 15 percent
35%
Source: Angell and Williams (2005)
Prices never fell in
any year of the five
years following the
boom
35%
Prices fell in
at least one
year, but not
for the 5
year
period
13%
Stagnation (83%)
The housing markets showing year over year price declines
are concentrated in the Midwest.
MSA
Percent change in
Metro-Area OFHEO Home Price Index
June 2005 – June 2006
Sandusky, Ohio
(4.15)
Brownsville, Texas
(2.82)
Ann Arbor, Michigan
(1.28)
Anderson, Indiana
(1.10)
Kokomo, Indiana
(0.84)
Detroit, Michigan
(0.61)
Greeley, Colorado
(0.35)
Muncie, Indiana
(0.15)
Jackson, Michigan
(0.02)
Saginaw, Michigan
(0.01)
Source: OFHEO Housing Price Index
FDIC “boom” housing markets are now starting to look much
more like the rest of the nation.
377 U.S. Metro Areas
89 FDIC Boom Markets for 2005
HPI, Annualized Percent Increase
HPI, Annualized Percent Increase
60%
60%
50%
50%
Max
40%
35.4%
30%
40%
Max
30%
20%
20%
Mean
7.0%
10%
Min
0%
-10%
-10%
-6.4%
-20%
Mean
6.2%
10%
0%
-30%
58.0%
Min
-32.0%
-20%
Year Ending June
2004
2005
2006
Year Ending June
-30%
2006Q2
2004
Source: FDIC calculations based on OFHEO Home Price Index
2005
2006
2006Q2
States in the Midwest and South record the highest non-business
bankruptcies per capita.
Nonbusiness, Per Capita
Bankruptcies Q2 2006
0.2 to 0.4
0.4 to 0.56
0.56 to 0.77
0.77 to 1.3
Source: FDIC, the Administrative Office of the US Courts and Haver
Analytics
Problem loans at FDIC-insured institutions are both at their lowest
level in 23 years.
Noncurrent Loan Rate (Percent)
Loans 90+ days past due and nonaccruals
Net Charge-off Rate (Percent)
2.0
5.0
1.5
4.0
3.0
1.0
2.0
0.5
1.0
0.0
0.0
1984
Source: FDIC
1989
1995
2000
2006
1984
1989
1995
2000
2006
Regardless of home price trends, subprime ARMs are already
under stress from rising interest rates.
Michigan
Subprime
ARM
Foreclosures*
California
House Price Index
Percent change
from year earlier
30
4.0
25
3.0
20
15
2.0
10
1.0
5
0
0.0
2004
2005
2006
*Foreclosures started as a percent
of conventional subprime ARMs
Subprime
ARM
Foreclosures*
House Price Index
Percent change
from year earlier
30
4.0
25
3.0
20
15
2.0
10
1.0
5
0
0.0
2004
2005
2006
*Foreclosures started as a percent
of conventional subprime ARMs
Source: Mortgage Bankers Association, Office of Federal Housing Enterprise Oversight
Subprime lenders have figured prominently in
FDIC-insured failures since 1998.
Number of Failed Institutions
Assets of Failed Institutions,
Dollars in Millions
12
3,500
10
3,000
Subprime* Failures
1998 - 2004
By Institution
2,500
8
30%
2,000
6
1,500
4
1,000
2
500
0
0
1998
1999
2000
2001
2002
2003
By Assets
2004
Source: FDIC.
*Subprime lenders are identified by FDIC Division of
Supervision and Consumer Protection.
64%
Nontraditional mortgage originations have leveled off as a
percent of total nonprime originations.
Share of Total Nonprime Mortgage Originations
Included in Non-agency Mortgage-Backed Securitizations
60%
50%
Pay Option ARMs
40%
30%
20%
Interest-Only
ARMs
10%
0%
Mar-02
Nov-02
Jul-03
Mar-04
Nov-04
Source: LoanPerformance Corporation (Alt-A and B&C mortgage securities database).
Jul-05
Mar-06
Recent vintages of nonprime, nontraditional mortgage loans show
higher rates of delinquency.
Seriously Delinquent Pay Option Loans*
Percentage of active balance by vintage
0.8
0.7
2004
0.6
0.5
2003
2005
0.4
0.3
0.2
0.1
0.0
3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Months of Seasoning
* Seriously delinquent refers to loans that are 90+ days past due and/or in foreclosure.
Note: Vintage analysis begins 3 months following year's end. 2005 reflects January-June data
Source: LoanPerformance Corp. nonprime, non-Agency securitized mortgage originations
Net interest margins continue to tighten for large institutions.
Median Net Interest Margin
Percent
5.0
Assets < $1B
Assets $1B-$10B
Assets > $10B
4.5
4.0
3.5
3.0
1990
1992
Source: FDIC
1994
1996
1998
2000
2002
2004
2006
The relative riskiness of asset portfolios at FDIC-insured
institutions has risen steadily since the mid-1990s.
Median Risk-Weighted Assets as Percent of Total Assets, Institutions < $10 Billion
75
71%
70
65
60
55
57%
50
1991
1994
1997
2000
2003
2006*
* Through June 30
Source: FDIC
Since 2004, C&D loan growth has surpassed other loan types.
1-4 Family real estate
As of June 30
2003-2004
Credit cards
2004-2005
2005-2006
Nonfarm nonresidential
Home Equity
C&D
0
5
Source: FDIC
10
15
20
25
30
35
40
45
Average Annual percent change
C&D loan concentrations are significantly higher at mid-sized
institutions.
Construction and Development Loan Concentrations
Percent of Tier 1 capital, median by lender asset size
100
90
80
70
$ 10 Billion and Over
60
$ 1-10 Billion
50
40
Under $ 1 Billion
30
20
10
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Note: All data reflect June 30 totals.
Source: FDIC
Noncurrent construction and development (C&D) loans have
far exceeded rates for other real estate loans in times of
distress.
Noncurrent Loans as a Percent of Total Loans, Quarterly*
16%
14%
Construction and Development (C&D) Loans
12%
10%
8%
Nonfarm Nonresidential Real Estate Loans
6%
4%
1-4 Family Residential Mortgage Loans
2%
0%
1991
1993
1995
1997
1999
2001
2003
2005
Source: FDIC. * Noncurrent loans = loans 90 days or more past due or in nonaccrual status.
Data for these individual loan types began to be collected in 1991.
Discussion