doug duncan, fannie mae chief economist, presentation at sjrei

1© 2012 Fannie Mae. Trademarks of Fannie Mae.

Private Forces Move to the ForeDoug Duncan, Chief Economist

Fannie Mae

October 2, 2014

Confidential - Internal Distribution

2

Disclaimer

Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

3Confidential - Internal DistributionSource: Blue Chip Economic Indicators

Rosy Expectations for 2014 Have Come Down After a Bumpy First Half

Blue Chip Consensus Forecast for 2014 Real GDP Year-over-Year Growth, by date

Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-141.5%

1.8%

2.1%

2.4%

2.7%

3.0%

4

The Second Quarter Rebound is Broad-Based

Contribution to Real GDP Annualized % Change

Government Consumption and Investment

Net Exports of Goods and Services

Change in Private Inventories

Residential Fixed Investment

Nonresidential Fixed Investment

Personal Consumption Expenditures

GDP

30.0%

-61.0%

166.0%

23.0%

68.0%

169.0%

400.0%

-15.0%

-166.0%

-116.0%

-17.0%

20.0%

83.0%

-210.0%

2014 Q1

2014 Q2

Confidential - Internal DistributionSource: Bureau of Economic Analysis

5Confidential - Internal DistributionSource: Fannie Mae National Housing Survey

Concerns About the Direction of the Economy May be Weighing on the Housing Recovery

6Confidential - Internal DistributionSource: Bureau of Economic Analysis

Consumer Spending on Goods Surges

Real Personal Consumption Expenditures (SAAR, % Change Annual Rate)

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22011 2012 2013 2014

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Services

Goods

7Confidential - Internal DistributionSource: Bureau of Economic Analysis

Consumer Spending on Healthcare Services Remains a Question Mark

Estimate of Real Healthcare Spending Growth in Q1 2014 (SAAR, Quarterly Annualized % Change)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

First estimate Second estimate Third estimate

8Confidential - Internal DistributionSource: Institute for Supply Management

Economic Activity Picks Up in Early Q3

530

35

40

45

50

55

60

65

ISM Nonmanufacturing Composite Index (SA)

ISM Manufacturing Composite Index (SA)

Ind

ex

(5

0+

In

dic

ate

s E

xp

an

sio

n)

9-Year High3-Year High

9Confidential - Internal DistributionSource: Bureau of Labor Statistics

After Six Consecutive Months of Payrolls Growing Over 200K, Job Growth Slows in August

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14-900

-600

-300

0

300

600

900

0%

2%

4%

6%

8%

10%

12%Total Nonfarm Employment (SA, Thousands, Left Axis)Civilian Unemployment Rate (SA, Right Axis)


The Recovery* of the Full-Time Employment to Working Age Population Ratio Will Be Slow…

Jul-0

7

Jul-0

8

Jul-0

9

Jul-1

0

Jul-1

1

Jul-1

2

Jul-1

3

Jul-1

4

Jul-1

5

Jul-1

6

Jul-1

7

Jul-1

8

Jul-1

9

Jul-2

0

Jul-2

1

Jul-2

2

80

85

90

95

100

105

110

Total Nonfarm EmploymentFull-Time Employed PersonsRatio of Total Nonfarm Employment to Working Age Popu-lationRatio of Full-Time Employment to Working Age Population

Seasonally Adjusted, December 2007 = 100

*Data starting in August 2014 are forecasted using the BLS labor force projections and assuming the prior year of employment growth remains constant.

11

…But Participation Has Fallen Considerably, for Reasons Both Structural and Cyclical


Civilian Labor Force Participation Rate, 16 yr + (SA, %)

Labor Force Participation Rate (Indexed, Recession Trough=100)

-12

-11

-10

-9-8-7-6-5-4-3-2-101234567891

0111213141516171819202122232425262728293031323334353637383940414243444546474849505152535455565758596061626364

94

96

98

100

102

104

10619751982199120012009

Months after Trough

Source: Bureau of Labor Statistics

'76'78'80'82'84'86'88'90'92'94'96'98'00'02'04'06'08'10'12'1456

58

60

62

64

66

68

70United StatesCalifornia


Labor Force Participation Has Declined for Both Men and Women in the Current Cycle

'48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 '05 '08 '11 '140%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Male

Female

Labor Force Participation Rate (SA, %)

13

Though Most Jobs Created In the Past Few Years Have Been Full Time, the Total is Still Short of the Peak and Part Time Jobs Remain Elevated


(SA, Millions) (SA, Millions)

110,000

112,000

114,000

116,000

118,000

120,000

122,000

124,000

22000

23000

24000

25000

26000

27000

28000

29000Full-Time (Left Axis)Part-Time (Right Axis)

Source: Bureau of Labor Statistics

14

State Level Payroll Growth is More Geographically Concentrated than In Most Prior Recoveries


0

10

20

30

40

50

60

70

80

90

100

1960Q

2

1963Q

2

1966Q

2

1969Q

2

1972Q

2

1975Q

2

1978Q

2

1981Q

2

1984Q

2

1987Q

2

1990Q

2

1993Q

2

1996Q

2

1999Q

2

2002Q

2

2005Q

2

2008Q

2

2011Q

2

2014Q

2

2017Q

2

Sta

te N

onfa

rm P

ayro

ll G

row

th D

iffu

sio

n (

Index, 0-1

00)

Recession History Average, Economic Expansions Forecast

Source: Bureau of Labor Statistics, Fannie Mae Economic & Strategic Research Group

15

House Price and Payroll Growth are Associated and Vary By State


*North Dakota is an outlier that is outside the range of the graph margins. Both cumulative payrolls and house price growth over the period were 25 percent.

Source: U.S. Bureau of Labor Statistics, FHFA HPI Purchase-Only Index

Correlation Coefficient: 0.64

16Confidential - Internal DistributionSource: Federal Reserve Board, Bureau of Economic Analysis

Household Debt-to-Income Ratio Normalizes to Trend

20%

40%

60%

80%

100%

120%

140%

'52 '57 '62 '67 '72 '77 '82 '87 '92 '97 '02 '07 '12

Household Debt as a Share of Disposable Personal Income Trendline: 1952-2000

17

Leading Indicators Point to Coming Wage Inflation Pressure as Job Gains Continue…


Net (SA, %) Net (SA, %)

Source: National Federation of Independent Business

1 9 17 25 33 41 49 57 65 73 81 89 97105

113121

129137

145153

161

-8%

0%

8%

15%

23%

30%

38%

0%

4%

8%

12%

16%

20%

24%

Percent Raising Worker Compensation Over Past 3-6 Months (Right Axis)Percent Planning to Raise Worker Compensation (Left Axis)

18

…Is the Fed Behind the Curve?


(SA, $/Hour Year-Over-Year % Change)

1 12 23 34 45 56 67 78 89 100

111

122

133

144

155

166

177

188

199

210

221

232

243

254

265

276

287

298

309

320

331

342

-2%

0%

2%

4%

6%

8%

10%

12%

0%

1%

2%

3%

4%

5%

Federal Funds Target Rate (Right Axis)Average Hourly Earnings: Prod & Nonsupervisory: Total Private (Left Axis)

Source: Federal Reserve Board, Bureau of Labor Statistics

19Confidential - Internal Distribution

The Fed Plans to Wind Down Asset Purchases This YearJa

n-13

Feb

-13

Mar

-13

Apr

-13

May

-13

Jun-

13

Jul-1

3

Aug

-13

Sep

-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

Feb

-14

Mar

-14

Apr

-14

May

-14

Jun-

14

Jul-1

4

Aug

-14

Sep

-14

Oct

-14

Nov

-14

Dec

-14

$0

$5

$10

$15

$20

$25

$30

$35

$40

$45

$50

U.S. Treasuries MBS

Source: Federal Reserve Board – Fannie Mae ESR Projection based on prior Fed announcements

20

Market-Wide Credit Scores For Purchase And Refinance Loans


Q1 2000

Q3 2000

Q1 2001

Q3 2001

Q1 2002

Q3 2002

Q1 2003

Q3 2003

Q1 2004

Q3 2004

Q1 2005

Q3 2005

Q1 2006

Q3 2006

Q1 2007

Q3 2007

Q1 2008

Q3 2008

Q1 2009

Q3 2009

Q1 2010

Q3 2010

Q1 2011

Q3 2011

Q1 2012

Q3 2012

Q1 2013

Q3 2013

Q1 2014640

660

680

700

720

740

760

780

Credit Score of Purchase Money Mortgages* Linear (Credit Score of Purchase Money Mortgages*)

* Credit scores are calculated as a weighted average of the entire mortgage market based on loan balance at origination for the segment indicated; Investor weights applied to adjust for CoreLogic’s uneven coverage by investor.

Average Credit Score

Sources: CoreLogic, Fannie Mae Economic & Strategic Research Group


0

500

1,000

1,500

2,000

2,500

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Household Formation (Thousands of Households)

Source: Census Bureau Housing Vacancy Survey

Household Formation Disappoints

22Confidential - Internal DistributionSource: Census Bureau

The Share of Young Adults Living at Home Continues to Edge Higher25-34 Year Olds Living at Home with Parents (%)

2006 2007 2008 2009 2010 2011 201210%

11%

12%

13%

14%

15%

16%

17%

18%

19%

CPS Annual Social and Economic Supplement

American Community Survey

23

Parents are Generally Supportive of Their Adult Children Living at Home, Though Reasons May Differ


*Employment status for the parent who indicates that they are the “primary financial decision maker” of the household.

Employment situation for households with… Adult Children

Living at HomeAges 18-22

Adult ChildrenLiving at Home

Ages 23-34

Parent* full time employed 54% 38%

Adult child full time employed 20% 48%

Please tell me whether you would prefer that [he/she] continues to live in your home or finds alternate living arrangements not in your home.

I prefer that they continue to live in my home 72% 63%

I prefer that they find alternate living arrangements not in my home

20% 30%

Source: Fannie Mae National Housing Survey

24

Number of Married Households Declining in Younger Age Cohorts


Common First-Time Home Buying Age

Millions of HH

Source: Census Bureau


Homeownership Has Fallen Even Among Young Adults Who Are “Prime”* Home Buying Candidates

All 30-32 Year-Olds

30-32 Year-Old "Prime" Home Buying Candi-

dates


dates, Non-Hispanic White

Alone

All 30-32 Year-Olds


dates


dates, Non-Hispanic White

Alone

0

10

20

30

40

50

60

70

80

90

1002000 2006 2009 2012

Ho

me

ow

ne

rsh

ip R

ate

(p

erc

en

t)

RECENT MOVERS ONLYALL HOUSEHOLDERS

*Prime homebuyers are defined as upper income households with householders in their early 30s who have college educations and are married with children.

26Confidential - Internal DistributionSource: Census Bureau Housing Vacancy Survey

In Fact, All of the Net Household Formation Since the Recession Ended Has Been in Rentals

Owner Occupied Renter Occupied-2000.0

-1000.0

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

Net Change in Households since Q2 2009 (Millions)


Both Single-Family and Multifamily Building Recently Disappoint

0

100

200

300

400

500

600

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Single-Family (Left Axis) Multifamily (Right Axis)

SA, Thousands of Units SA, Thousands of Units

28Confidential - Internal DistributionSource: Census Bureau, National Association of Home Builders/Wells Fargo

Homebuilder Confidence Has Diverged from Permit Issuance as Builders are More Profitable with Fewer Units

0

20

40

60

80

100

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Single-Family Residential Building Permits (SAAR, Millions of Units, Left Axis)

Home Builder Expectations For Sales of New Single-Family Homes: Next 6 Mo (SA, Index, All Good=100, Right Axis)

29Confidential - Internal DistributionSource: National Association of REALTORS®

Existing Home Sales and Pending Home Sales Retreat in August

70

80

90

100

110

120

130

3,000

3,500

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

Existing Home Sales (SAAR, Thousands, Left Axis)

Pending Home Sales Index (SA, Right Axis)

30

'01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

FHFA House Price Index: Purchase Only, United States Change)

CoreLogic National House Price Index

S&P/Case-Shiller Home Price Index: Composite 20

Confidential - Internal DistributionSource: S&P/Case-Shiller, CoreLogic, Federal Housing Finance Agency

Major Measures of Home Prices Show Moderating GrowthYear-over-Year % Change


Consumers See Home Price Growth Slowing as Well, but the Shrinking Gap Between Buyer and Seller Confidence Could Bring More Inventory

Share of Respondents Indicating it is a…


Average 12-Month Home Price Expectation (%)

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Jun

-10

Se

p-1

0

De

c-1

0

Ma

r-11

Jun

-11

Se

p-1

1

De

c-11

Ma

r-1

2

Jun

-12

Se

p-1

2

De

c-1

2

Ma

r-1

3

Jun

-13

Se

p-1

3

De

c-1

3

Ma

r-1

4

Jun

-14 0%

10%

20%

30%

40%

50%

60%

70%

80%

Jun

-10

Se

p-1

0

De

c-1

0

Ma

r-11

Jun

-11

Se

p-1

1

De

c-11

Ma

r-1

2

Jun

-12

Se

p-1

2

De

c-1

2

Ma

r-1

3

Jun

-13

Se

p-1

3

De

c-1

3

Ma

r-1

4

Jun

-14

Good Time to Buy Good Time to Sell


Mortgage Market Is Switching to a Purchase Market, Which Means Less Production

Mortgage Originations (NSA, 1-4 Unit, Billions of $)

Source: Fannie Mae Economic & Strategic Research Group

*Fannie Mae Forecast

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

20

11

20

12

20

13

20

14

*

20

15

*$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Purchase Refinance

33

Conditions in California

34Source: Bureau of Labor Statistics

Los Angeles-Long Beach-Santa Ana, CA (SA, %)

Riverside-San Bernardino-Ontario CA (SA, %)

San Diego-Carlsbad-San Marcos CA (SA, %)

San Francisco-Oakland-Fremont, CA (SA, %)

San Jose-Sunnyvale-Santa Clara, CA (SA, %)

California (SA, %)

United States (SA, %)

0.0 2.0 4.0 6.0 8.0

Jan-00

Nov-00

Sep-01

Jul-02

May-0

3

Mar-0

4Jan-05

Nov-05

Sep-06

Jul-07

May-0

8

Mar-0

9Jan-10

Nov-10

Sep-11

Jul-12

May-1

3

Mar-1

40.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

0

2

4

6

8

10

12

Labor Force, San Jose-Sunnyvale-Santa Clara, CA (SA, Thous) Unemployment Rate, San Jose-Sunnyvale-Santa Clara, CA (SA, %) Unemployment Rate, United States (SA, %) Unemployment Rate, California (SA, %)

California Unemployment Lags the Nation’s, but San Jose’s Job Market is Healthy

35

California Median Household Income Remains Above The Nation’s

Source: Census Bureau

'84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Median Household Income: United States

Median Household Income: California

36

In Florida, Texas, and California, People are More Likely to Think Their Personal Financial Situation Will Get Better Over the Next Year Than the

General Population

Looking ahead one year, do you expect your personal financial situation to get much better, somewhat better, stay about the same, get somewhat worse, or get much worse?

BetterStay About The Same

Worse

* Denotes state results are significantly different than the general population at the 95% confidence level


37

People in California, Florida, and Texas Expect Home Prices to Rise More Over the Next Year Than the General Population

During the next 12 months, do you think home prices in general will go up, go down, or stay the same as where they are now? Go Up Go Down

• Home prices in California are expected to rise the more than in Florida and Texas and nationwide

Stay The Same


GP Florida Texas California

Average 12 Month Home Price Change Expectation:

2.58%


3.55%


3.11%


4.08%*


38

More People In California and Florida Expect Mortgage Interest Rates to Go Up During the Next 12 Months Than in Texas

During the next 12 months, do you think home mortgage interest rates will go up, go down, or stay the same as where they are now?

Go Up Stay the same Go Down



39

Do you think it would be very difficult, somewhat difficult, somewhat easy, or very easy for you to get a home mortgage today?

Easy Difficult

People in Florida, Texas, and California are More Likely to Think it Would be Difficult to Get a Mortgage Today Than the General

Population



40 IHS Global Insight, Economics and Country Risk

Q1'00Q1'01

Q1'02Q1'03

Q1'04Q1'05

Q1'06Q1'07

Q1'08Q1'09

Q1'10Q1'11

Q1'12Q1'13

Q1'140

100,000

200,000

300,000

400,000

500,000

600,000

CA Existing Median SF Home Price ($)CA New Median SF Home Price ($)NAR Median Sales Price: Total Existing Homes, United States ($)

California Prices Have Seen Healthy Appreciation…

Q1'00Q1'01

Q1'02Q1'03

Q1'04Q1'05

Q1'06Q1'07

Q1'08Q1'09

Q1'10Q1'11

Q1'12Q1'13

Q1'140

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

CA New Home Mortgage OriginationsCA Existing Home Mortgage Originations

Source:

41

…Which Has Helped Reduce the Share of California Underwater Borrowers

United States, 12.6%

Source: CoreLogic

*Data as of June 30, 2014

42Source: Census Bureau, Bank of Tokyo-Mitsubishi

Jan-00Jul-0

0Jan-01

Jul-01Jan-02

Jul-02Jan-03

Jul-03Jan-04

Jul-04Jan-05

Jul-05Jan-06

Jul-06Jan-07

Jul-07Jan-08

Jul-08Jan-09

Jul-09Jan-10

Jul-10Jan-11

Jul-11Jan-12

Jul-12Jan-13

Jul-13

0

50

100

150

200

250

0

500

1,000

1,500

2,000

2,500

Housing Starts: California (SAAR, Thous.Units, LEFT AXIS) US Housing Starts (SAAR, Thous.Units, RIGHT AXIS)

Homebuilders Are Still Timid But the Improving Home Prices and the Potential for Profit Should Push Them to Build

43

California SDQ Rate Is Better Than U.S.’s

Source: Mortgage Bankers Association

(NSA, %)

Mar

-00

Feb-0

1

Jan-

02

Dec-0

2

Nov-0

3

Oct-04

Sep-0

5

Aug-0

6

Jul-0

7

Jun-

08

May

-09

Apr-1

0

Mar

-11

Feb-1

2

Jan-

13

Dec-1

30.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

Mortgage Payments Past Due 90+ Days: U.S. (NSA, %) Mortgage Payments Past Due 90+ Days: California (NSA, %)

(NSA, %)

Mar

-00

Feb-0

1

Jan-

02

Dec-0

2

Nov-0

3

Oct-04

Sep-0

5

Aug-0

6

Jul-0

7

Jun-

08

May

-09

Apr-1

0

Mar

-11

Feb-1

2

Jan-

13

Dec-1

30.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Mortgage Payments Past Due 30-59 Days: U.S. (NSA, %) Mortgage Payments Past Due 30-59 Days: California (NSA, %)


Speaker Biography

Representatives, and work on the Financial Institutions Project at the U.S. Department of Agriculture. He has been elected to the Board of Directors for the National Association of Business Economists, is a member of the American Economics Association and the American Real Estate and Urban Economics Association, and is past president of the Housing Statistics Users Group.

Named one of Bloomberg / BusinessWeek’s 50 Most Powerful People in Real Estate and one of Inman News’ 100 Most Influential Real Estate Leaders for 2013, Duncan is a frequent speaker on national and state economic, housing, and mortgage market conditions.

Duncan received his Ph. D. in Agricultural Economics from Texas A&M University and his B.S. and M.S. in Agricultural Economics from North Dakota State University.

Douglas G. Duncan is Fannie Mae’s Senior Vice President and Chief Economist. He is responsible for managing Fannie Mae’s Economic & Strategic Research Group and oversees corporate strategy. In this leadership role, Duncan provides all economic, housing, and mortgage market forecasts and analyses, and serves as the company’s thought leader and spokesperson on economic and mortgage market issues.

Prior to joining Fannie Mae, Duncan was Senior Vice President and Chief Economist at the Mortgage Bankers Association. His experience also includes service as a LEGIS Fellow and staff member with the Committee on Banking, Finance, and Urban Affairs for Congressman Bill McCollum in the U.S. House of

45

Contact Informationfanniemae.com/portal/research-and-analysis/

Doug Duncan, Senior Vice President & Chief Economist

Fannie Mae

3900 Wisconsin Avenue, NW

Mail Stop 1H-2N/01

Washington, DC 20016

(o) 202-752-0160

(c) 202-409-5913

(fax) 202-752-4441

[email protected]


doug duncan, fannie mae chief economist, presentation at sjrei

Real Estate

trademarks of fannie

bls labor force projections

total nonfarm employment

time jobs

views couldproduce

views oninformation

real gdp yearoveryear

millions sa