The Housing Outlook - Tax Admin

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Presented by

Slide 1© 2004 Economy.com

The Housing Outlook

Mark ZandiChief Economist


3

4

5

6

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05

ResidentialInvestment as aShare of GDP (L)

Booming Residential Investment

Source: Census

2


Housing is Through the Roof

-5

0

5

10

'75 '80 '85 '90 '95 '00 '05

Real house price growth% chg yr ago, 4-qrt moving averageSources: OFHEO, BEA


Record Housing Activity

2000

3000

4000

5000

6000

7000

8000

'75 '80 '85 '90 '95 '00 '05

500

700

900

1100

1300

1500

1700Thousands of units12 month moving averageSources: Realtors, Census

HomeSales (L)

Single Family Starts (R)

3


Where Housing is StrongestAvg Annual % Chg, Past 5 Yrs, OFHEO, U.S. = 8.5%

< 5%

5 - 10%

> 10%


Housing's Outsized Contribution to Growth

0.0

0.3

0.5

0.8

1.0

'00 '01 '02 '03 '04 '05H1

Wealth Effect

Homebuilding

Percentage point contribution to real GDP growth, Source: Economy.com

4


Households' Most Important Asset

0

5

10

15

20

1960 1970 1980 1990 2000

Trillions $Source: Federal Reserve

Housing

Stocks


The Home Has Become a Cash Machine

0

200

400

600

800

'00 '01 '02 '03 '04 '05H1

HE Loans

Refis

Sales

Cash Raised from Mortgage Borrowing$ bilSource: Economy.com

5


-6

-3

0

3

6

9

'70 '75 '80 '85 '90 '95 '00 '05

User Cost of HousingSource: Economy.com

Record Low Borrowing Costs


Plunging Transaction Costs

0.0

0.5

1.0

1.5

2.0

'90 '92 '94 '96 '98 '00 '02 '04

Initial Fees and PointsSource: Federal Housing Finance Board

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0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

'95 '97 '99 '01 '03 '05

10.5

10.6

10.7

10.8

10.9

11.0

11.1

11.2Share of Consumer SpendingSources: BEA, Economy.com

Owner-occupiedHousing (R)

Foreign Travel (L)

Nesting


0

2

4

6

8

10

'90 '92 '94 '96 '98 '00 '02 '04

-20

-10

0

10

20

30

40

50House Price Growth (L)

Stock Price Growth (R)

12 month moving averageSources: Realtors, Wilshire

Household Portfolio Shifting

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0

5

10

15

20

'98 '99 '00 '01 '02 '03 '04 '05q1

IO ARM

Option ARM

Exotic Mortgage Lending is Surging...

Source: LoanPerformance


0 10 20 30 40 50

San Diego

Bay Area

Denver

Sacramento

Los Angeles

Modesto

Riverside

Atlanta

Las Vegas

...Especially in These Markets...IO ARM share of Orginations, 2004, Source: LoanPerformance

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0

5

10

15

20

'98 '99 '00 '01 '02 '03 '04 '05q1

Source: Loan Performance

Investor Share of Origination Soars...


0 5 10 15 20 25 30 35

Phoenix

Las Vegas

Tuscon

Orlando

Tampa

Miami

Fresno

Riverside

Dayona Beach

...Especially in These Markets...Investor Share of Home Sales, 2005q1, Source: LoanPerformance

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130

140

150

160

170

180

190

200

210

00 01 02 03 04 05

Median Existing House Price$ ths Sources: Realtors, Economy.com

Expected

Actual

Housing Is Increasingly Overvalued....

15% Overvalued


...in These Metro Areas

Boston, Cambridge, Essex

San Diego

MiamiFt. Lauderdale

Sarasota

Washington DC

NassauNewark

Highly overpriced > 2 SD from historic averageOverpriced> 1 SD from historic average

West Palm Beach

Riverside

New York

Oakland

Los Angeles

Chicago

Based on the NAR median existing house price index, 2005Q1

San Jose Baltimore

Minneapolis

Las Vegas

Sacramento Providence

Tacoma

San Francisco

Milwaukee

Cape Coral

Seattle

Tampa

Denver

Charleston

Reno

Orlando

Lansing

Detroit

Tucson

Palm Bay

Phoenix

Honolulu

Fresno

AshevilleBakersfield Bethesda

Edison

Lake County

Manchester

Modesto

Salem

Salinas

Santa Barbara

Santa RosaStockton

Visalia

Warren Worcester

Vallejo

Santa Ana

Rockingham

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House Price Declines Under a 7% Fixed Rate

0

5

10

15

20

25

30

05 06 07 08 09 10

> -5% decline

-5% to -1

-1% to 0

% of metro areas where house prices decline on a year-over-year basis


0

5

10

15

20

25

30

'00 '01 '02 '03 '04 '05

Low-End of Housing Market at Greatest Risk

Low Tier

MiddleTier

High Tier

House price index, Weighted average of 27 MSAannualized % changeSource: CSW, Economy.com

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3.8

4.0

4.2

4.4

4.6

4.8

5.0

5.2

5.4

'60 '65 '70 '75 '80 '85 '90 '95 '00 '05

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6

ResidentialInvestment as aShare of GDP (L)

Overbuilding

HouseholdGrowth (R)

5-Year Moving AverageSources: Census, BEA


250

300

350

400

450

500

'84 '89 '94 '99 '04

5

6

7

8

9

10

11

Rental VacancyRate (R)

Overbuilding

New Homes forSale, Ths (L)

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Long-Term Housing MathAnnual averages over the next decade

Housing Demand = 1.90 Million

Household Formations = 1.30 MillionSecond and Vacation Home = 0.20 MillionObsolesence = 0.40 Million

Housing Supply = 1.90 Million

Single Family = 1.30 MillionMultiFamily = 0.35 MillionManufacturing Housing = 0.25 Million


Ove

rsup

plie

d

Overpriced

Supply-Price Balance in the Top 150 Metro Areas

AKR

ALA

ALB

ALL

ASH

ATL

AUG

AUS

BAK

BAL

BAT

BEA

BET

BIR

BOI

BOS

BRP

BRW

BUF

CAB

CAM

CAN

CCF

CHS

CHR

CHT

CHI

CIN

CLE

COO

COS

COU

COR

DAL

DAV

DAY

DEL

DEN

DES

DET

DUR

EDI

ELP

ESS

FAY

FLI

FOT

FOW

FTW

FREGAR

GRA

GRN

GRV

HAI

HAR

HON

HOU

IND

JAM

JAC

KANKNO

LEC

LAE

LAC

LAN

LAS

LEX

LIT

LOS

LOU

MAD

MNC

MCA

MEM

MIA

MIL

MIN

MOB

MOD

NAH

NAS

NEH

NEO

NEY

NEA

OAK

OGD

OKL

OMA

ORL

OXN

PAL

PEN

PEO

PHI

PHO

PIT

POR

POT

POU

PRO

PRV

RAL

REA

REN

RIC

RIV

ROH

RKI

SAC

SAE

SAL

SAY

SAZ

SAN

SAF

SAJ

SNT

SAT

SAA

SAR

SWB

SEA

SHR

SPO

SPI

SPM

STL

STO

SYRTAC

TAMTOL

TRE

TUC

TUL

VAL

VIR

VISWRE

WAS

WES

WIC

WIL

WIS

WOR

YOR

YOU

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...Will Soon Become More Pressed

0

25

50

75

02 03 04 05 06 07

0

25

50

75

Subprime

Cumulative share of 2002-04 loans with rate resets, Source: Fannie Mae

Jumbo

Alt-A

PCC


0

4

8

12

16

'00 '01 '02 '03 '04 '05 '06

2.4

2.6

2.8

3.0

3.2

Mortgage DelinquencyRate (R)

Weakening House Price Growth and Credit Quality

House PriceGrowth (L)

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Outlook Summary

• The single-family housing market is booming. Homesales, single family housing starts, and house pricegrowth are robust.

• Single-family demand has been supported byextraordinarly low borrowing costs, falling transactioncosts, aggressive lending, portfolio shifting, and nesting.

• Speculation is increasingly evident in housing markets inCalifornia, the Southwest, the Northeast corridor andFlorida.

• Single-family demand and house prices will appreciablyweaken with even a modest rise in mortgage rates.

• Mortgage credit quality will erode despite an sturdy jobmarket.

Documents

The Housing Outlook - Tax Admin