Housing and Mortgage Market Outlook for 2011 NC-CCIM Commercial Real Estate Panel Charlotte, NC March 30, 2011 Frank E. Nothaft Chief Economist

Housing and Mortgage Market Outlook for 2011NC-CCIM Commercial Real Estate PanelCharlotte, NCMarch 30, 2011

Frank E. Nothaft

Chief Economist

Office of the Chief Economist2


Economic Growth, Household Formations Support Gradual Housing Recovery

Home buyer affordability high 30-year FRMs stay in 4.75% to 5.25% range for most of 2011 U.S. single-family price indexes likely to bottom by end of 2011 Home sales up about 5%, starts up about 10% in 2011

Rental market conditions gradually improve Household formation pickup helps to absorb existing inventory Vacancy rates are high but moving down from peak Rents are stabilizing/beginning to rise in better markets, projects

FHA and GSEs support the bulk of lending SF originations about one-third less in 2011, because of less refinance Multifamily originations likely to increase in 2011 over 2010 Loan defaults remain high but will slowing recede


Low Interest Rates & Lower Home Prices Have Increased Homebuyer Affordability

Source: National Association of Realtors Composite Housing Affordability Index – (% of median priced home affordable on median income with conventional mortgage and 20% down), seasonally adjusted; Freddie Mac Primary Mortgage Market Survey ® and January 2011 Outlook.

50

70

90

110

130

150

170

190

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

20

11

3

5

7

9

11

13

15

17

19Affordability Index Mortgage Rate (Percent)

NAR Affordability Index

(left scale)

30-Year Fixed Mortgage Rate

(right scale)

Index = 100 means median income buys median priced home

Forecast


Office of the Chief Economist

Household Growth Affected by Demographic and Economic Factors

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

2014

Household Growth Rate (Annual Percent Change)

Sources: Bureau of Census, NBER, Harvard University (The State of the Nation’s Housing 2010, Table A-7)

– Recession

1995-2010 Average Annual HH Growth= 1.0%

Baby Boom Forms HHs1966-81 Average Annual

HH Growth= 2.2%

Harvard JCHS 2010-2020 Projection

HH Growth= 1.1%-1.3%


$0$250$500$750

$1,000$1,250$1,500$1,750$2,000$2,250$2,500$2,750$3,000$3,250$3,500$3,750$4,000

'98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

FHA & VA

Conventional Refi

Coventional Purchase

More Purchase-Money but Less Refinance Result in 30% Decrease in 2011 SF Originations

Sources: Freddie Mac, HUD, VA

Total Single-Family Mortgage Originations (Billions of Dollars)

Forecast



National House Prices Have Experienced a Cumulative Decline of 24% Since June 2006

2.2

5.2

2.2

1.4

2.6

4.6

2.5

0.81.2

2.2

-0.9-1.5

0.7 0.8

-2.1

-4.4

-3.0

0.0

-3.0

-6.4

-2.6

2.4

-0.1

-2.1

-0.4

1.0

-3.3

-1.4

-7-6-5-4-3-2-101234567

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3

Quarterly Growth Rates (Numbers in Percentages)

Note: National home prices use the Freddie Mac House Price Index (NSA), which is a value-weighted index based on Freddie Mac’s single-family portfolio. The index is a monthly series; quarterly growth rates are calculated as a 3-month change based on the final month of each quarter.

Source: Freddie Mac



Charlotte Metro Prices: A Cumulative Decline of 7% Since June 2006 (15% Since June 2008)

0.1

2.3

0.2 0.0

2.3

1.62.2

0.81.4

3.8

0.9 0.91.2

3.5

0.0

-1.7

0.8

2.6

-3.8

-2.9

-1.1

1.6

-1.7-1.1

-0.1

-3.0

-4.4

1.2

-7-6-5-4-3-2-101234567

2004Q1 2004Q3 2005Q1 2005Q3 2006Q1 2006Q3 2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1 2010Q3

Quarterly Growth Rates (Numbers in Percentages)

Note: Philadelphia-Camden-Wilmington metro home prices use the Freddie Mac House Price Index (NSA). The index is a monthly series; quarterly growth rates are calculated as a 3-month change based on the final month of each quarter.

Source: Freddie Mac



-27%

-18%

-9%

0%

9%

18%

27%

19

79

19

80

19

82

19

83

19

85

19

86

19

88

19

89

19

91

19

92

19

94

19

95

19

97

19

98

20

00

20

01

20

03

20

04

20

06

20

07

20

09

20

10

Source: Freddie Mac House Price Index, NCREIF Property Index.

NCREIF Apartment

Appreciation (Annual Percent Change)

Apartment Values Fell 30% from Peak, Then Rebounded Second Half of 2010

Freddie Mac House Price Index


U.S. Unemployment Rate (8.9% in February) Expected to Decline Gradually

1

3

5

7

9

11

13

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

Unemployment Rate (Percent) Forecast

Sources: U.S. Department of Labor, Range projection midpoint of Federal Reserve Governors and Reserve Bank presidents as of January 2011 for fourth quarter of 2011 and 2012 (other quarters obtained through linear interpolation).

– National RecessionNov-Dec 1982:10.8%

April 2000: 3.8%

Oct 2009: 10.1%

FOMCMedian

United States

Charlotte, NC




Single-family Serious Delinquencies Have Begun to Lessen, but Remain Very High

6.2

27.5

3.8

0

4

8

12

16

20

24

28

32

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Loans 90 Days or More Delinquent or in Foreclosure (percent of number)

Source: Mortgage Bankers Association; “Prime Loans” includes Alt-A (Quarterly data not seasonally adjusted;1998Q1-2010Q4); Freddie Mac.

Subprime

Prime & Alt-A

Freddie Mac



0

10

20

30

40

50

60

70

80

90

100

Ju

l-99

Ja

n-0

0

Ju

l-00

Ja

n-0

1

Ju

l-01

Ja

n-0

2

Ju

l-02

Ja

n-0

3

Ju

l-03

Ja

n-0

4

Ju

l-04

Ja

n-0

5

Ju

l-05

Ja

n-0

6

Ju

l-06

Ja

n-0

7

Ju

l-07

Ja

n-0

8

Ju

l-08

Ja

n-0

9

Ju

l-09

Ja

n-1

0

Ju

l-10

Ja

n-1

1

Source: National Multi Housing Council (Last Update: January 2011)

Market Tightness Index

Market Unchanged

Market Tighter

Market Looser

Survey question for Market Tightness Index: How are apartment market conditions in the local markets that you watch? “Tight” markets are those with low vacancies and high rent increases. Conditions obviously vary greatly from place to place, but on balance, apartment market conditions in your markets today are: 1) Tighter than three months ago 2) Looser than three months ago 3) About unchanged from three months ago 4) Don’t know or not applicable.

Apartment Market Conditions Are Improving in Most Metro Areas



0

50

100

150

200

250

300

350

400

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

0

50

100

150

200

250

300

350

400

Total Starts For Sale

Sources: Census Bureau and National Bureau of Economic Research

Multifamily Housing Starts (Thousands of Units, Annualized)

Multifamily Housing Starts (2+)

Multifamily Housing Starts Down During 2009 with Condo, Rental Market Weakness

Third Quarter 2005: 204 ThousandFor Sale (2+)



Sales Slump Has Pushed Homeowner Vacancy Rates To Record Levels

0

2

4

6

8

10

1968

1976

1984

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

0

1

2

3

4

5

Annual Data Quarterly Data

9.8%

2.3%

Vacancy Rates for 2+ Units (Percent)

– Recession

2+ units(Left Scale)

1 unit(Right Scale)

Source: Bureau of Census (1971-1990:Annual Rates, 1991Q1–2010Q4:Quarterly Rates)

Vacancy Rates for 1+ Units (Percent)



0

2

4

6

8

10

12

14

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Census Bureau

Vacancy Rate (Percent)

Source: Census Bureau (5 or more units), REIS (U.S. metro)

REIS

Rental Vacancy Rates Are Down From Peak, but Remain High

6.6%

10.4%



-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Sources: Bureau of Labor and Statistics (rent of primary residence–Quarter Average, SA), REIS (U.S. metro)

Rent Growth (Percent, Year-over-Year)

CPI – Rent

REIS – Effective Rent

Vacancy Dip Has Led to Rent Growth Pick-up



Vacancy Rate Above but Declining to Long-Term Average in Charlotte

2

4

6

8

10

12

1990

1994

1998

2002

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

Source: REIS

2010Q4: 8.4%

Charlotte Apartment Vacancy Rate


Average Vacancy: 1990 – 2005: 7.4%

Average Vacancy: 2009: 10.2%



Rent Growth Has Recovered, but Remains Below Long-Term Average in Charlotte

-6

-4

-2

0

2

4

6

8

1990

1994

1998

2002

2006Q1

2007Q1

2008Q1

2009Q1

2010Q1

Source: REIS, effective rent

2010Q4: 2.4%

Charlotte Apartment Rent Growth (Percent, Year-over-Year)


Average Growth: 1990 – 2005: 2.5%

Average Growth: 2009: -1.2%



Banks’ Tightening of Lending Standards Has Abated for Homes and Commercial Real Estate

-30

-15

0

15

30

45

60

75

90

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

Prime Residential Loans

Commercial Real Estate

Source: Federal Reserve Board's Senior Loan Officer Opinion Survey (all residential loans through 2007Q1, prime residential starting 2007Q2; commercial real estate includes construction and land development); Last update: January 31, 2011

Net Percentage of Banks Tightening Credit Standards During Three Previous Months



Multifamily Originations Likely to Be Up in 2011

Sources: HMDA, OTS Thrift Financial Report, ACLI Investment Bulletin, MBA Commercial Mortgage Banker Origination Survey.

Multifamily Mortgage Originations (Billions of Dollars)

Forecast

$0

$25

$50

$75

$100

$125

$150

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

?



Multifamily Default Rates at Banks and Savings Institutions Have Begun to Decline

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%1

99

2

19

93

19

94

19

95

19

97

19

98

19

99

20

00

20

02

20

03

20

04

20

05

20

07

20

08

20

09

20

10

Delinquent or Noncurrent (Percent of Loans Outstanding)

Note: Noncurrent loans – loans 90 days or more past due, or in nonaccrual status. Data before 1993 exclude savings institutions that file a Thrift Financial Report; $0.2 trillion outstanding as of December 31, 2010.Source: FDIC

Noncurrent3.7%

30-89 days past due

1.1%

Where to Get More InformationLook for regular updates to our economic forecast, commentary and data at

www.FreddieMac.com/news/finance

Contact us at [email protected]

Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose.

Information from this document may be used with proper attribution. Alteration of this document is prohibited. © 2011 by Freddie Mac.

Documents

Housing and Mortgage Market Outlook for 2011 NC-CCIM Commercial Real Estate Panel Charlotte, NC March 30, 2011 Frank E. Nothaft Chief Economist