Transcript Hanauer US Market Presentation

U.S. Housing Market
What Went Wrong
Looking to the Future
Joe Hanauer
Chairman of the Board, IRPF
Chairman of the Board
MOVE, Inc. (Realtor.com)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
Percent Change (%)
Housing Market Declines are
Steep and Accelerating
Changes in dollar values are adjusted for by inflation by the CPI-U for all
items. New sales and median existing house prices include single-family units
only. Data estimates for 2008 are estimates based on the first two quarters.
Sources: U.S. Census Bureau, New Residential Construction | NATIONAL ASSOCIATION OF REALTORS®,Median Existing
Single-Family Home Price | Freddie Mac | Federal Reserve Board, Flow of Funds Accounts (Harvard University- Joint
Center for Housing Studies)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Single-Family Housing Starts
Thousands of Units
January 1959 – August 2008
(Seasonally Adjusted Annual Rate)
Source: U.S. Census Bureau | National Bureau of Economic Research
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Housing Starts Since 2004
Source: ECONODAY™/ NASDAQ, 2008 U.S. Economic Events & Analysis
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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National ExistingHome Sales
Thousands of Units
(1998 Levels)
Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS®
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Now…The Downturn
Low interest rates and low underwriting standards sparked record price
appreciation
Source: PMI Economic Real Estate Trends – Winter 2007 / Office of Federal Housing Enterprise Oversight
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Delinquency Rates
Delinquency rates on 1-4 Family Mortgage Loans at Commercial and
Savings Banks.
Source: Eric S. Rosengren, President & Chief Executive Officer – Federal Reserve Bank of Boston, Current Challenges in
Housing and Home Loans: Complicating Factors and the Implications for Policy Makers (May 30, 2008)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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So…What Went Wrong???
Sources: Freddie Mac | NATIONAL ASSOCIATION OF REALTORS® | Bureau of Labor Statistics | Mortgage Brokers Association | Federal Reserve | “America’s House
Party” Time Magazine (June 13, 2005)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Interest Rates (Long and Short)
Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS®
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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The National Homeownership Rate
The National Homeownership Rate peaked before subprime lending took
off. 30% of Households presents huge market opportunity.
Source: U.S. Census Bureau, Housing Vacancy Survey; Inside Mortgage Finance, 2008 Mortgage Market
Statistical Annual (Harvard University- Joint Center for Housing Studies)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Banks and Wall Street Saw An
Opportunity
Expand Market Size
of Mortgage Originations
•
•
•
•
•
•
Lower Down Payments
Lower Underwriting Standards
Lower Initial Interest Rates
Create Mortgage Backed Securities
Insure
Secure Ratings
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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The Key Players…
Investor
Borrower
CDS
Insurer
Securitizer
Rating
Agency
Bank
Mortgage
Banker
Appraiser
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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The Key Players…
Source: RJ Matson, “Subprime Mortgage Mess” St. Louis Post–Dispatch (August 8, 2007)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Leverage, Leverage and More Leverage
Bank Turns $10 billion of Capital into $150 billion
to purchase mortgages
•Mortgage portfolio falls 2% or $3 billion. Result – bank’s capital is
reduced by 30% down to $7 billion. ($10 billion capital less $3
billion loss.)
•Bank must reduce its $150 billion borrowing by $45 billion in order
to remain in compliance. (Capital of $7 billion only permits $105
billion balance sheet.
•Bank needs to sell mortgages before it can lend again…..but there
is no market for the mortgages.
• Bank unable to lend
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Leverage, Leverage, and More Leverage
• Banks can lend $15 for each dollar of capital
• FNMA and Freddie Mac required just 2% capital therefore able to
buy $50 loan for each $1 of capital
• Wall street highly unregulated with enormous leverage
• Insurance companies state regulated and highly leveraged
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Home Prices Grew Faster Than Rents
Source: CBRE Torto Wheaton Research – Fortune Magazine/CNNMoney.com (November, 7 2007)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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CHMPI-Adjusted Median Home Prices
Catapulted Ahead of Income
Faster and Longer than Ever Before
All measures are indexed to compare percent changes during the booms. Indexes set values at start
quarter to 100. Income adjustments use average household income. Boom periods begin when
income-adjusted house prices reach troughs. Mid 1970’s period is Q1:1976-Q3:1982. Mid 80’s period
is Q1:1985-Q3:1994. OO’s period is Q1:200 to Q2:2008.
Sources: NATIONAL ASSOCIATION OF REALTORS®| U.S. Bureau of Economic Analysis | Seasonally adjusted by
Moody’s Economy.com (Harvard University- Joint Center for Housing Studies)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Tracking Four Key Trends
Source: Robert J. Shiller, PhD - Irrational Exuberance, Second Edition (2005)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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New Forms of Lending Sprang Up
and Then Quickly Subsided When Performance
Eroded Badly
Shares of interest-only and payment-option loans are based on the number of originations of
prime and subprime loans. Shares of subprime loans are of the dollar volume of all originations.
Sources: First American CoreLogic, Loan Performance data | Inside Mortgage Finance, Mortgage Originations by
Product (Harvard University- Joint Center for Housing Studies)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Results of Poor Loan Performance
•Supply of mortgage products declined
•Demand for housing couldn’t be financed
•The rate of price increases decreased
•Investors and speculators exited the market
•Prices decreased
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Home Price Trend
Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS®
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Enough Doom and Gloom!
There are markets;
There will be markets; and
Markets will eventually expand.
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
National Total Existing-Home Sales
Up Markets + Down Markets
= Stable Total
Source: Lawrence Yun, PhD , Chief Economist - NATIONAL ASSOCIATION OF REALTORS®
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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The Future
• Affordability improving through price drops
and lower interest rates
• Pent up demand eventually gets satisfied
• Agencies back in the lending business
• Credit relief plan hopefully returns liquidity to
banks
• REALTOR.com® search statistics showing
improvement
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Future Demand Drivers
• Household growth should rebound after a slowdown
unless the downturn is so long it changes behavior
• Immigration should continue being a strong
contributor to demand
• Minorities, foreign-born, singles and seniors will be
fastest growing demand segments
• Homeownership rate could return to previous peak
once credit markets settle and economy expands
again
Source: Harvard University- Joint Center for Housing Studies
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Percent Change (%)
Although Recessions Often Exacerbate
Downturns, Housing is Usually Quick to Recover
Dates shown mark the beginning and end of each recession. Quarterly data
are derived from sums of monthly data, seasonally adjusted by Moody’s
Economy.com.
Source: U.S. Census Bureau, New Residential Construction (Harvard University- Joint Center for Housing
Studies)
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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The Future
• Inventories need to get worked off
• New home construction exceeded normal
demand by 1 million+ units per year
• Existing-home sales exceeded normal demand by
1.5+ million homes per year
• Speculators and unqualified buyers represented
25%+ of market
• Bottom Line – Existing inventories need to find
stronger hands.
• Many differences between markets. Some will
recover sooner…some not so quickly
At least a three year struggle before prices
and new construction start moving again in
over-built markets
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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• Home Has Been the Heart of the U.S. Economy
•Housing sector - the main driver of U.S. economic growth in recent years
•Over the past four years, consumer spending and residential
construction have accounted for 90% of the total growth in GDP.
•Over 40% of all private sector jobs created since 2001 have
been housing related sectors, such as construction, real estate and
mortgage banking.” source: The Economist, 2007
• Mortgage equity withdrawal soared from $93 billion in 1993 to $229
billion in 2000 and $700+ billion by 2006.
• From 1959 through 1992 the savings rate varied between 6% and 12%
of disposable income. Since that time, however, the rate has steadily
declined, reaching minus 0.7% in 2007
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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Thank You
Joe Hanauer
Chairman, IRPF
Chairman, Move, Inc.
[email protected]
14th Annual CEREAN Conference | October 13-15, 2008 | Istanbul, Turkey
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