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EMBARGOED UNTIL WEDNESDAY, SEPTEMBER 28, 2011 AT 2:40 A.M. U.S. EASTERN TIME AND 8:40 A.M. IN STOCKHOLM; OR UPON DELIVERY Housing and Economic Recovery Eric S. Rosengren President & CEO Federal Reserve Bank of Boston Stockholm, Sweden September 28, 2011 EMBARGOED UNTIL WEDNESDAY, SEPTEMBER 28, 2011 AT 2:40 A.M. U.S. EASTERN TIME AND 8:40 A.M. IN STOCKHOLM; OR UPON DELIVERY Figure 1 Real House Prices in the United States and Sweden 1995:Q1 - 2011:Q2 Index Level 1995:Q1=100 250 Sweden 200 150 United States 100 50 1995:Q1 1997:Q1 1999:Q1 2001:Q1 2003:Q1 2005:Q1 2007:Q1 Source: OECD, Statistics Sweden, S&P/Case-Shiller, BEA / Haver Analytics 2009:Q1 2011:Q1 Figure 2 U.S. Regional Home Price Declines: S&P/Case-Shiller Metro Area Indexes March 2006 - June 2011 Index Level March 2006 = 100 110 100 110 Boston 100 110 Chicago 100 110 110 New York Denver Las Vegas 100 100 90 90 90 90 90 80 80 80 80 80 70 70 70 70 70 60 60 60 60 60 50 50 50 50 50 40 Mar-06 Oct-08 May-11 110 40 Mar-06 Oct-08 May-11 110 Los Angeles 40 Mar-06 Oct-08 May-11 110 40 Mar-06 May-11 110 Phoenix Miami Oct-08 40 Mar-06 San Francisco 100 100 100 100 90 90 90 90 90 80 80 80 80 80 70 70 70 70 70 60 60 60 60 60 50 50 50 50 50 Oct-08 May-11 40 Mar-06 Oct-08 May-11 40 Mar-06 Source: S&P/Case-Shiller / Haver Analytics Oct-08 May-11 40 Mar-06 May-11 110 San Diego 100 40 Mar-06 Oct-08 Oct-08 May-11 40 Mar-06 Oct-08 May-11 Figure 3 30-Year Fixed-Rate Share of Mortgage Originations and Selected Interest Rates January 1990 - August 2011 Percent 12 Percent 30-Year Fixed-Rate Mortgage Rate (Left Scale) 90 30-Year Fixed-Rate Share of Mortgage Originations, Annual Average (Right Scale) 10 75 8 60 6 45 4 30 2 1-Year Adjustable-Rate Mortgage Rate (Left Scale) Federal Funds Target Rate (Left Scale) 15 0 Jan-1990 0 Jan-1994 Jan-1998 Jan-2002 Source: FHLMC, FHFA, Federal Reserve Board / Haver Analytics Jan-2006 Jan-2010 Preview of Comments Housing is a small (2.2%) but volatile component of U.S. GDP Housing is generally responsive to monetary policy but reliance on long-term financing, and falling house prices, make it less responsive in the U.S. than in many other countries Impaired housing loans and securities had a big impact on U.S. financial institutions Housing policies could make it less difficult for monetary policy to affect the economy Figure 4 Growth in Real GDP Components: Current and Three Previous Recoveries Percent Change over First Two Years of Recovery 35 Current Recovery 30 Average of Three Previous Recoveries 25 20 15 10 5 0 -5 Consumption Business Fixed Investment Source: BEA, NBER / Haver Analytics Residential Fixed Investment Government Exports Figure 5 Residential Investment Share of GDP Growth: Current and Three Previous Recoveries Percent 30 25 20 Current Recovery 15 10 5 0 -5 Year 1 of Recovery Year 2 of Recovery -10 -15 1982:Q4-1984:Q4 Recovery Period 1991:Q1-1993:Q1 Recovery Period Source: BEA, NBER / Haver Analytics 2001:Q4-2003:Q4 Recovery Period 2009:Q2-2011:Q2 Current Recovery Average of Three Previous Recoveries Figure 6 Median Net Worth of Households by Race and Ethnicity 2005 - 2009 Decline in Median Net Worth from 2005 - 2009 Median Net Worth of Households All All White White Hispanic Hispanic 2005 Black Black 2009 Asian Asian 0 60,000 120,000 2009 Dollars 180,000 -80 -60 -40 -20 0 Percent Source: Pew Research Center tabulations of the Census Bureau’s Survey of Income and Program Participation Data Figure 7 Composition of Household Net Worth: Selected Components 2009 Percent 60 Own Home Rental and Other Real Estate Stocks and Mutual Funds 50 IRA and Keogh Accounts 401(K) and Thrift Accounts 40 Financial Institution Accounts 30 20 10 0 White Hispanic Black Asian Source: Pew Research Center tabulations of the Census Bureau’s Survey of Income and Program Participation Data Figure 8 Erosion of Home Equity of Households by Race and Ethnicity 2005 - 2009 Median Home Equity of Households Decline in Median Home Equity from 2005 - 2009 White White Hispanic Hispanic Black 2005 Black 2009 Asian Asian 0 60,000 120,000 2009 Dollars 180,000 240,000 -60 -40 -20 0 Percent Source: Pew Research Center tabulations of the Census Bureau’s Survey of Income and Program Participation Data Figure 9 Job Growth: Current and Three Previous Recoveries Thousands of Jobs 3,000 Total Employment Employment in Private Industries Construction Employment 2,500 2,000 1,500 1,000 500 0 -500 Current Recovery Average of Three Previous Recoveries -1,000 Total Employment Source: BLS, NBER / Haver Analytics Employment in Private Industries Construction Employment Figure 10 Employment Growth: Current and Three Previous Recoveries Percent Change Over First Two Years of Recovery 6 Total Employment Employment in Private Industries Construction Employment 4 2 0 -2 -4 -6 -8 Current Recovery Average of Three Previous Recoveries -10 Total Employment Employment in Private Industries Source: BLS, NBER / Haver Analytics Construction Employment Figure 11 Delinquency Rate: 1-4 Family Mortgage Loans 30 or More Days Past Due 1980:Q1 - 2011:Q2 Percent 12 1 10 1 8 1 6 0 4 0 2 0 0 1980:Q1 1986:Q1 1992:Q1 1998:Q1 Recession Source: Mortgage Bankers Association, NBER / Haver Analytics 2004:Q1 2010:Q1 Figure 12 Homeowner and Rental Vacancy Rates 1980:Q1 - 2011:Q2 Percent 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1980:Q1 1 1 Homeowner Vacancy Rate 1 0 0 0 1984:Q1 1988:Q1 1992:Q1 1996:Q1 2000:Q1 2004:Q1 2008:Q1 Percent 12.0 1 Rental Vacancy Rate 1 10.0 1 8.0 0 6.0 0 4.0 1980:Q1 0 1984:Q1 1988:Q1 1992:Q1 Recession Source: Census Bureau, NBER / Haver Analytics 1996:Q1 2000:Q1 2004:Q1 2008:Q1 Housing has been a Major Impediment to Stronger Growth Problems in housing have greatly complicated the U.S. recovery Residential investment has been unusually weak relative to previous recoveries Consumption, business formation, and employment have also been affected by problems in the housing sector U.S. Monetary Policy Response to Weak Recovery Short-term interest rates at the zero bound Expanded Fed balance sheet, including mortgage securities Increased holdings of long-term securities Altered communications One motivation to push long-term rates down is to generate faster growth in interestsensitive sectors like housing Figure 13 30-Year Fixed-Rate Mortgage Rate and 10-Year Treasury Yield January 1980 - August 2011 Percent 20 30-Year Fixed-Rate Mortgage Rate 16 12 8 10-Year Treasury Yield 4 0 Jan-1980 Jan-1985 Jan-1990 Jan-1995 Source: FHLMC, Federal Reserve Board / Haver Analytics Jan-2000 Jan-2005 Jan-2010 Figure 14 Housing Affordability: Median Income Relative to Income Needed to Purchase Median Priced Home 1980:Q1 - 2011:Q2 Index Level 200 150 More Affordable Index Level = 100 when Median Family Income Qualifies for 80% Mortgage on Median Priced Home 100 50 Less Affordable 0 1980:Q1 1985:Q1 1990:Q1 1995:Q1 Source: National Association of Realtors / Haver Analytics 2000:Q1 2005:Q1 2010:Q1 Figure 15 Population and Households 1980 - 2010 Millions of Persons Millions of Households 350 140 300 120 Resident Population (Left Scale) Number of Households (Right Scale) 250 100 200 80 1980 1985 1990 Source: Census Bureau / Haver Analytics 1995 2000 2005 2010 Housing Prices and Monetary Policy Falling prices discourage home purchases and many borrowers are unable to refinance This has impacted the ability of monetary policy to have its usual effect on an important interest-sensitive sector Monetary policy accommodation would have a greater impact if households were able to respond to the lower rates CoreLogic Estimates: 10.9 million, or 22.5%, of all mortgaged residential properties had negative equity Three-quarters of owners with negative equity are paying "above-market" interest rates (above 5.1%) Slightly more than half of positive-equity owners are paying "above-market" rates All in all, about 28 million borrowers are paying "above-market" rates Policies to Enable Refinancing Several proposals to facilitate refinancing Institutional impediments Loan-level price adjustments and concern with “buybacks” Junior liens and mortgage insurance Should be able to resolve impediments now that the government controls Freddie Mac and Fannie Mae More Successful Refinancing would Enhance Monetary Policy Actions Getting money into the hands of homeowners who would spend it (fuel GDP growth) Reduce one of the impediments to a more significant effect from monetary policy Facilitating the Reduction in the Number of Vacant Homes Help responsible investors purchase vacant homes; convert to rentals Room for improvement in the financing of investor properties New loan products Also – Improving the Housing Market Freddie Mac and Fannie Mae should be more focused on addressing housing market problems Rethink the foreclosure process Encourage more non-foreclosure transfers Concluding Observations Problems in U.S. Housing Sector have been a Major Impediment to Recovery Last week’s FOMC actions: Consistent with our dual mandate Downward pressure on longer-term interest rates Extending the average maturity of our holdings of securities To support conditions in mortgage markets, reinvest principal payments from holdings of agency debt and mortgage-backed securities in agency mortgage-backed securities Concluding Observations Problems in U.S. Housing Sector have been a Major Impediment to Recovery There was a substantial market reaction to FOMC announcement: 30-year Treasury yields and 30-year mortgage rates Encouraging more refinancing and home purchases than would happen in the absence of action Figure 16 Spread: 30-Year Mortgage Yield to 10-Year Treasury Yield January 4, 2010 - September 22, 2011 Basis Points 140 120 100 80 60 40 4-Jan-10 29-Mar-10 21-Jun-10 13-Sep-10 6-Dec-10 Note: Mortgage yield is 30-year FNMA current coupon yield Source: Bloomberg, Federal Reserve Board / Haver Analytics 28-Feb-11 23-May-11 15-Aug-11 Also – Important to Examine Housing Policies that Might be Changed to Help Facilitate Recovery Should be strong encouragement for GSEs to focus on the housing recovery Currently under conservatorship of the U.S. government Should play a larger role in achieving the public policy goals Monetary Policy Cannot Fully Offset Problems, but Can Mitigate Some Effects Reducing unemployment by half a percent means 750,000 jobs Unemployment at 9.1% and medium term inflation restrained Important to see the urgency of the situation and the broader economic implications
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