Division of Banking Supervision and Regulation. Federa

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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_at_stls.frb.org
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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 homeownership is key.

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Important Reminder

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

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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.
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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.
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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.
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Total Value of Household Real Estate Tripled
While Household Income (Merely) Doubled
Billions of dollars
Quarterly data through Q4.2006.
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Residential Construction Contributed More to GDP
Than Ever Before
2004-06 Biggest three-year residential-construct
ion share of GDP on record.
Percent
Annual data through 2006.
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Memphis Private Building Permits Topped 10,000
Three Straight Years (2004, 2005, 2006)
Number of permits
Annual data through 2006.
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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.
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Things We Worried About Real-Estate Values Grew
Much Faster Than Incomes
Percent
Annual data through 2006.
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Things We Worried About Real-Estate Values Grew
Faster Than Replacement Costs
Percent
Annual data through 2006.
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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.
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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.
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Feeling Ever Wealthier, Households Saved Less and
Less
Percent
Billions of dollars
Household net worth
Household saving rate
Annual data through 2006.
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All Demographic Groups Took on More Mortgage Debt
Fraction (between zero and one)
Triennial survey data through 2007.
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More Families Took On Extreme Debt Burdens (Debt
Service gt 40 of Income)
Percent of homeowning families
Triennial survey data through 2007.
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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 andespeciallythe shadow banking
system.
Source Inside Mortgage Finance, Jan. 30, 2009.
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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.

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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.
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Tennessee Subprime-Mortgage Problems Emerged
During 2007
Percent
Quarterly data through Q4.2008.
Source Mortgage Bankers Association.
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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.
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(No Transcript)
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House Prices
Miami LA DC SD
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 (lt 40) Denver Atlanta Dallas Clevela
nd Detroit
Chicago Atlanta
Cleveland Detroit
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House Prices
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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.
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Housing Construction Has Stalled
Thousands of units at seasonally adjusted annual
rates
Quarterly data through Q1.2009.
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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.
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Homeownership Rates Now Falling
Percent
Tri-annual survey data through 2007 US annual
data through 2008.
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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.
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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 Emerg
ing 2.00 Industrial -3.25 USA -2.6 2010 Worl
d 2.00 Emerging 4.00 Industrial 0.25 USA
0.20
USA in 2008 1.1
March 13-14, 2009.
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Mid-South Unemployment Rates Rising Rapidly
Percent
Recessions are indicated by vertical gray bars.
Monthly data through Feb. 2009.
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Banks Residential Real-Estate Charge-Off Rates
Will Continue Rising
Large
All banks
Medium
Small
Quarterly data through Q4.2008.
Source San Francisco Feds RE InfoWeb, based on
Call Reports.
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Banks Commercial Real-Estate Charge-Offs Will
Move Much Higher
Medium
All banks
Large
Small
Quarterly data through Q4.2008.
Source San Francisco Feds RE InfoWeb, based on
Call Reports.
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The Future Sustainable Homeownership is Key

• Immediate priority Dealing with the wreckage
• The housing bubble will continue to deflate for
  several yearsNo 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 bubbleredefaults 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?

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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 systemreform and rebuild
  it, or use this opportunity to reduce its market
  share and influence? Can banks take up the
  slack?
• Too many financially illiterate
  householdshomeownership 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.

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Major-Market House Prices Down 30 Through Jan.
2009Another 10 Likely
SP/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
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Tennessee Mortgage Problems Rising Fast, But
Trailing US
Percent
Quarterly data through Q4.2008.
Source Mortgage Bankers Association.
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Tennessee Prime-Quality Fixed-Rate Mortgage
Problems Rising, Too
Percent
Quarterly data through Q4.2008.
Source Mortgage Bankers Association.
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Homeownership in Memphis Remains Lower Than in
Other Metro Areas
Percent
Annual data through 2008.