household credit outlook
TRANSCRIPT
Household Credit Outlook
Presented by:
Mark M. Zandi,Chief Economist
Presented by:
Mark M. Zandi,Chief Economist
2
In the Sweet Spot of the Credit Cycle...
All household liabilities, 4-qrt MA
7
8
9
10
11
12
13
00 01 02 03 04 05 061.4
1.6
1.8
2.0
Sources: CF.com, FRB
Loan growth (L)
Severe derogatory rate (R)
3
...the Very Sweet Spot
Subprime share of liabilities
20
21
22
23
24
25
26
27
00 01 02 03 04 05 06
Source: CF.com
4
Mortgage Lending Has Soared…
% change year ago, 4 qtr. MA
0
5
10
15
'00 '01 '02 '03 '04 '05 '06
Sources: FRB, Moody's Economy.com
Cards
Installment x cards
Total liabilities
Mortgage
5
…and Quality Has Improved Across the Board
Delinquency rate, 4 qtr. MA
0
1
2
3
4
5
6
'00 '01 '02 '03 '04 '05 '06
Bank card
Total liabilitiesFirst mortgage
HELOCs
Auto bank
Source: CF.com
6
An Unprecedented Housing Market...
Real house price growth
2
4
6
8
10
12
'00 '01 '02 '03 '04 '05 '06
Sources: OFHEO, BEA
7
...and Better Job Market…
Unemployment rate
3.5
4.5
5.5
6.5
'00 '01 '02 '03 '04 '05 '06
Source: BLS
8
…is Evident Across the Country
Severe derogatory rate, all household liabilities, $
Source: CF.com
Weaker qualityAverage qualityBetter quality
9
The Credit Cycle is Set to Turn….
0.4
0.6
0.8
1.0
'00 '01 '02 '03 '04 '05 '06 '077
8
9
10
11
12
Chargeoffrate (L)
Liabilitiesgrowth (R)
4-qrt MA
Source: FRB, MEDC
10
...Particularly for Mortgage Lenders...
3.8
4.2
4.6
5.0
5.4
'00 '01 '02 '03 '04 '05 '06 '078
10
12
14
16
Delinquency rate (L)
Liabilitiesgrowth (R)
4-qrt MA
Source: MBA, MEDC
11
-6
-4
-2
0
2
4
'65 '70 '75 '80 '85 '90 '95 '00 '05
…as Monetary Policy Tightens
Difference between 10 yr. T-yield and Fed Funds Rate
Sources: FRB, MEDC
12
Housing Affordability is Eroding...
100
110
120
130
140
90 95 00 055
6
7
8
9
10
11Affordability index (L)
Sources: Realtors, FHFB
Effectivemortgage rate (R)
13
...in Many Parts of the Country...
50
75
100
125
150
U.S. D.C. Miami Las Vegas Riverside Seattle
01q4 06q1
Source: Moody's Economy.com
Housing affordability index
14
...Despite Very Aggressive Lending
0
5
10
15
20
25
98 99 00 01 02 03 04 05
IO ARM Option ARM
Source: LoanPerformance
Share of non-conforming mortgage originations
15
Housing Appears Increasingly Expensive…
0
5
10
15
99 00 01 02 03 04 05 Current
Yield
S&P 500
Office space
3-mo. T-bill
U.S. housing
10-yr T-bond
D.C. housing
16
...Undermining Investor Demand
Investor share of non-conforming mortgage originations
0
2
4
6
8
10
12
14
16
18
98 99 00 01 02 03 04 05
Investor2nd home buyer
Source: LoanPerformance
17
Metro Areas at Risk
San Diego
Sarasota
Newark, Edison
Riverside
Albany, KingstonSan Francisco-Oakland
Los Angeles-Santa Ana
Chicago
Hagerstown, Baltimore
Minneapolis
Las Vegas
Sacramento Providence
Cape Coral
Tampa
Charleston
Orlando
TucsonPhoenix
Honolulu
Washington - Bethesda
Madison
Palm Bay
Jacksonville
Reading
New York, Nassau
Ocala
Rockford
ChampaignKankakee
Davenport
Waterloo
LexingtonKnoxville
Chattanooga
Sioux Falls
Jackson
Lansing
Mobile
Miami-Fort Lauderdale
DeltonaGainesville
Dover
New Orleans
Gulfport
Milwaukee
Highly overpriced 2 SD above historic averageBased on the NAR median house price, 2006Q1Source: Moody's Economy.com, NAR
18
Real Price Declines in Half of Metro Areas
% MSAs With Price Growth Below Inflation, Next 3 Yrs, OFHEO
0
5
10
15
20
25
30
<= -10% -10% to -5% -5% to 0 0 to 5% 5% to 10%
19
Metro Areas Projected to Experience Lower Prices
10% or more decline Less than 5% decline
Carson City, NV Riverside, CA
Prescott, AZ Edison, NJ
Reno, NV Essex County, MA
Las Vegas, NV St. George, UT
Nassau, NY Atlantic City, NJ
Barnstable Town, MA
Between 5% to 10% decline Santa Ana, CA
Phoenix, AZ Boston, MA
Yuma, AZ Salinas, CA
Washington, VA Los Angeles, CA
Bethesda, MD New York, NY
Miami, FL Fort Lauderdale, FL
Poughkeepsie, NY Worcester, MA
Tucson, AZ Pascagoula, MS
Santa Barbara, CA Merced, CA
Stockton, CA Bakersfield, CA
Gainesville, FL
20
Housing Goes From a Positive to a Negative...
Percentage point contribution to real GDP growth
-0.5
-0.3
0.0
0.3
0.5
0.8
1.0
00 01 02 03 04 05 '06 '07
Wealth effectHomebuilding
Source: MEDC
21
...Particularly in Some Areas
Real estate-related employment as share of total, %
0 2 4 6 8 10 12 14 16
Delaware
Nevada
Arizona
Colorado
Maryland
Florida
Utah
Virginia
Idaho
California
United States06Q1
00Q1
22
Higher Rates, Rising Debt Service, Credit Problems
-2
0
2
4
6
8
10
12
'90 '92 '94 '96 '98 '00 '02 '04 '06 '080.4
0.6
0.8
1.0Debt service growth,lagged 2 years (L)
Chargeoff rate,4-qrt MA (R)
23
Higher Rates Threaten New Homeowners...
Cumulative distribution of homeowners' equity, %
0
10
20
30
40
50
60
<-5% <0% <5% <10% <15% <20% <25%
% Homeowners' equity
FixedARM
Source: First American
24
...Which Could Spook Global Investors
Foreign holdings of U.S. mortgage-backed debt
15
20
25
30
96 97 98 99 00 01 02 03 04 05400
800
1,200
1,600
2,000
2,400
2,800
3,200Source: FRB $ bil (R)
Share of foreignholdings of U.S. financial assets,% (L)
25
Higher Energy Prices are a Threat...
0
1
2
3
4
5
6
7
8
9
10
Lowest 20% Second 20% Middle 20% Fourth 20% Top 20%
Fuel oilElectricityNatural gasGas
% of consumer spending, 2004 Consumer Expenditure Survey
26
...Particularly to Lower Income Households
Share of families with debt burdens greater than 40%
0
5
10
15
20
25
30
Share
<20% 20-40 40-60 60-80 80-90 >90%
Percentile of income
19952004
Source: Federal Reserve SCF
27
Outlook Summary
The credit cycle is at its sweet spot. Loan growth is robust and loan quality is pristine. Behind the stellar conditions are the heretofore roaring housing market and strong job market.
The credit cycle is set to turn with the tightening in monetary policy.
Housing and mortgage markets are weakening. Home sales are falling, unsold inventory is surging, and house prices have gone flat. New construction remains strong, however.
House prices will decline by as much as 10% peak-to-trough throughout much of the Southwest, Florida, and parts of the Northeast. Half dozen markets will experience a crash.
Matters of concern include the job market’s reliance on housing, negative wealth effect, confident builders, even higher rates.
The most substantial threat is that weakening mortgage credit quality will trigger a financial market event, resulting in a more serious decline in housing and economic activity.
Even higher energy prices also remains a threat.