When Will It End?

When Will It End? Presented by: Mark M. Zandi,Chief Economist September 23, 2008

How Did We Get Into This Mess?

The Bursting Housing Bubble… Fiserv Case Shiller National House Price Index, 2000Q1=100 -20.2%

…Ignites a Mortgage Crisis… First mortgage loan defaults, ths, SAAR Sources: Equifax, Moody's Economy.com

…Undermining the Financial System… Projected losses on assets originated 2005Q1-2007Q4, $ bil At risk mortgages 15,000,000 Foreclosure rate 40% Foreclosed mortgages 6,000,000 Loss rate 50% Mortgage loss $600 bil Corporate Commercial mortgages Consumer loans Residential mortgages

…And Pushing It to the Precipice of Collapse Difference between 3 month Libor and Treasury bill yields Subprime financial shock LTCM Y2K S&L crisis Peso crisis Thai baht Tech bust Orange County

Is the Policy Response Appropriate?

An Unprecedented Policy Response…

…That Will Be Costly, But Not $1 Trillion Public Financial Writedowns as of Early September 2008

What Is the Economic Fallout?

The Negative Economic Fallout Is Significant… Real GDP growth, annualized % change

…Very Significant…

…As Credit Markets Remain Frozen… Bond issuance, $ bil, annualized, Source: Thompson

…Credit Spreads Have Ballooned… Difference with 10-yr Treasury rate, basis points Junk corporate Emerging market

…And Banks Will Continue to Tighten Net % tightening standards Source: Federal Reserve Board

Confidence Is Rock Bottom… Sources: Conference Board, NFIB Small business (R) Consumers (L)

…And the Wealth Effect Is Kicking In Sources: Census, Realtors Core retail sales growth 3 mo. MA (R) House-price growth 6 mo. lead (L)

When Will It End?

Another 10% to Go... % change from peak, Sources: Fiserv Lending Solutions, Census, Moody's Economy.com Home sales Housing starts House price Current downturn to date Current downturn forecast Early 1990s Early 1980s

...With Big Differences Across the Country Projected peak-to-trough house price decline < -30% Sources: Fiserv Lending Solutions, Moody's Economy.com, OFHEO -20 to -30% -10 to -20% 0 to -10% No decline

Housing Is Becoming More Affordable… Sources: BEA, Census, PPR, Realtors Price-rent ratio (L) Price-income ratio (R)

…Inventories Are Peaking… Number of vacant homes for sale, ths, Source: Census Housing supply 1,000,000 Single 625,000 Multi 300,000 Manufactured 75,000 Housing demand 1,500,000 Households 975,000 Obsolescence 400,000 Second homes 125,000

…And Nationalization Is A Plus 30-year fixed mortgage rate Source: Bankrate.com

A Timeline to Recovery Self-Sustaining Economic Expansion Begins Financial Failures Abate Foreclosures Peak Home Sales Bottom House Prices Resume Rising Housing Starts Bottom Stock Market Bottoms ’08q1 ’08q2 ’08q3 ’08q4 ’09q1 ’09q2 ’10q1 ’10q2 ’09q3 ’09q4 ’10q3 ’10q4 Employment Bottoms Oil Prices Peak Jobless Rate Peaks Extraordinary Writedowns End Fed Tightens House Prices Bottoms $ Rises

Serious Threats Remain.

The Financial System Remains Very Fragile… Financial stock index, Source: NYSE Financial shock strikes Bear Stearns fails Panic

…and House Price Declines Threaten to Overshoot Number of underwater homeowners, ths Sources: Equifax, Moody's Economy.com

www.economy.com

When Will It End?

When Will It End?

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