The Housing Outlook. Mark Zandi Chief Economist. Presented by. Booming Residential Investment '60 '65 '70 '75 '80 '85 '90 '95 '00 '05

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1 The Housing Outlook Presented by Mark Zandi Chief Economist 24 Economy.com Slide 1 Booming Residential Investment 6 Residential Investment as a Share of GDP (L) 4 3 Source: Census '6 '6 '7 '7 '8 '8 '9 '9 ' ' Slide 2 1

2 Housing is Through the Roof 1 Real house price growth % chg yr ago, 4-qrt moving average Sources: OFHEO, BEA - '7 '8 '8 '9 '9 ' ' Slide 3 Record Housing Activity Thousands of units 12 month moving average Sources: Realtors, Census Single Family Starts (R) Home Sales (L) '7 '8 '8 '9 '9 ' ' Slide 4 2

3 Where Housing is Strongest Avg Annual % Chg, Past Yrs, OFHEO, U.S. = 8.% < % - 1% > 1% Slide Housing's Outsized Contribution to Growth Percentage point contribution to real GDP growth, Source: Economy.com 1..8 W ealth Effect Homebuilding..3. ' '1 '2 '3 '4 'H1 Slide 6 3

4 Households' Most Important Asset 2 Trillions $ Source: Federal Reserve Stocks Housing Slide 7 The Home Has Become a Cash Machine Cash Raised from Mortgage Borrowing $ bil Source: Economy.com HE Loans Refis Sales 2 ' '1 '2 '3 '4 'H1 Slide 8 4

5 Record Low Borrowing Costs 9 6 User Cost of Housing Source: Economy.com '7 '7 '8 '8 '9 '9 ' ' Slide 9 Plunging Transaction Costs Initial Fees and Points Source: Federal Housing Finance Board 1... '9 '92 '94 '96 '98 ' '2 '4 Slide 1

6 Nesting Share of Consumer Spending Sources: BEA, Economy.com Foreign Travel (L) Owner-occupied Housing (R) '9 '97 '99 '1 '3 ' 1. Slide 11 Household Portfolio Shifting month moving average Sources: Realtors, Wilshire House Price Growth (L) Stock Price Growth (R) -1 '9 '92 '94 '96 '98 ' '2 '4-2 Slide 12 6

7 Exotic Mortgage Lending is Surging IO ARM Option ARM 1 '98 '99 ' '1 '2 '3 '4 'q1 Source: LoanPerformance Slide 13...Especially in These Markets... IO ARM share of Orginations, 24, Source: LoanPerformance San Diego Bay Area Denver Sacramento Los Angeles Modesto Riverside Atlanta Las Vegas Slide 14 7

8 Investor Share of Origination Soars... 2 Source: Loan Performance 1 1 '98 '99 ' '1 '2 '3 '4 'q1 Slide 1...Especially in These Markets... Investor Share of Home Sales, 2q1, Source: LoanPerformance Phoenix Las Vegas Tuscon Orlando Tampa Miami Fresno Riverside Dayona Beach Slide 16 8

9 Housing Is Increasingly Overvalued Median Existing House Price $ ths Sources: Realtors, Economy.com Actual 1% Overvalued Expected Slide 17...in These Metro Areas Seattle Tacoma Salem Vallejo Sacramento Santa Rosa Reno San Francisco Stockton Oakland Modesto Fresno San Jose Salinas Visalia Las Vegas Bakersfield Denver Santa Barbara Riverside Los Angeles Phoenix Santa Ana San Diego Tucson Lansing Minneapolis Milwaukee Warren Lake County Detroit Chicago Asheville New York Rockingham Manchester Boston, Cambridge, Essex Worcester Providence Nassau Newark Edison Baltimore Bethesda Washington DC Charleston Honolulu Highly overpriced > 2 SD from historic average Overpriced > 1 SD from historic average Based on the NAR median existing house price index, 2Q1 Tampa Sarasota Cape Coral Orlando Palm Bay West Palm Beach Ft. Lauderdale Miami Slide 18 9

10 House Price Declines Under a 7% Fixed Rate % of metro areas where house prices decline on a year-over-year basis > -% decline -% to -1-1% to Slide 19 Low-End of Housing Market at Greatest Risk House price index, Weighted average of 27 MSA annualized % change Source: CSW, Economy.com Low Tier 1 1 High Tier Middle Tier ' '1 '2 '3 '4 ' Slide 2 1

11 Overbuilding.4.2. Household Growth (R) Residential Investment as a Share of GDP (L) Year Moving Average Sources: Census, BEA '6 '6 '7 '7 '8 '8 '9 '9 ' ' Slide 21 Overbuilding 4 Rental Vacancy Rate (R) New Homes for Sale, Ths (L) '84 '89 '94 '99 '4 Slide 22 11

12 Long-Term Housing Math Annual averages over the next decade Housing Demand = 1.9 Million Household Formations = 1.3 Million Second and Vacation Home =.2 Million Obsolesence =.4 Million Housing Supply = 1.9 Million Single Family = 1.3 Million MultiFamily =.3 Million Manufacturing Housing =.2 Million Slide 23 Supply-Price Balance in the Top 1 Metro Areas Oversupplied COO SWB COU TUL PRV FLI BOI SPM YOU WIC MAD ALB CHT JAC IND DES STL NAH CHR TOL PEN CIN BUF COS BIR LAE OMA MCA KAN PIT AKR KNO ELP GRN DAY OKL BRW COR ALA NEO YOR SYR AUG CAN OGD SAY LOU BAT HOU CLE SPO LEX AUS MEM GRA FTW WIS DAL ATL POR RAL FOW ALL GAR SPI LAC PEO SAZ HAI FAY ROH SHR POU REA LIT MOB RIC JAM WIL DEL DUR VIR HAR DAV PHI GRV BEA NEH TRE BRP CAM CCF CHS LAN DEN MIL SAR REN TAM PHO ASH MIN SAF TUC PRO STO POT LAS SAC TAC BAK ORL OAK PAL SEA CAB LEC HON BOS MIA SAT FRE WRE RIV CHI SAJ VIS SAE DET MOD SAN VAL WOR SAL NAS NEY SAA FOT OXN WAS SNT EDIBAL WES NEA MNC RKI LOS ESS BET Overpriced Slide 24 12

13 ...Will Soon Become More Pressed Cumulative share of 22-4 loans with rate resets, Source: Fannie Mae 7 Subprime 7 2 Jumbo Alt-A 2 PCC Slide 2 Weakening House Price Growth and Credit Quality Mortgage Delinquency Rate (R) ' '1 '2 '3 '4 ' '6 House Price Growth (L) Slide 26 13

14 Outlook Summary The single-family housing market is booming. Home sales, single family housing starts, and house price growth are robust. Single-family demand has been supported by extraordinarly low borrowing costs, falling transaction costs, aggressive lending, portfolio shifting, and nesting. Speculation is increasingly evident in housing markets in California, the Southwest, the Northeast corridor and Florida. Single-family demand and house prices will appreciably weaken with even a modest rise in mortgage rates. Mortgage credit quality will erode despite an sturdy job market. Slide 27 14