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Recovering from the Housing Recession

Virginia Government Finance Officer’s Association - Spring 2011 Conference. Recovering from the Housing Recession. Presented by Barbara Fava, Managing Director PFM Asset Management LLC One Keystone Plaza Suite 300, Harrisburg, PA 17101 ▪ 717.232.2723 ▪ www.pfm.com. Outline.

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Recovering from the Housing Recession

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  1. Virginia Government Finance Officer’s Association - Spring 2011 Conference Recovering from the Housing Recession Presented by Barbara Fava, Managing Director PFM Asset Management LLC One Keystone Plaza Suite 300, Harrisburg, PA 17101 ▪ 717.232.2723 ▪ www.pfm.com

  2. Outline • Why did housing problems bring down the economy? • Why was this recession different? • What is the federal government doing? • What can we expect the world to look like in the future?

  3. The Business Cycle Trough Interest rates low High unemployment Low inflation Peak Interest rates high Full employment High inflation Expansion Corporate profits rise Stock market gains Consumer confidence improves Production increases Interest rates rise Unemployment falls Construction rebounds Inflation increases Contraction Production slows Corporate profits fall Stock market losses Unemployment rises Interest rates decline Inflation falls

  4. The Recession is Over Gross Domestic Product January 2005 – January 2012 (projected) Official End of the Recession* Source: Bloomberg * According to the National Bureau of Economic Research

  5. GDP Growth After Recessions Quarterly Growth Rate Quarters from End of Recession Source: Bureau of Economic Analysis

  6. Housing as Percent of GDP Source: Bloomberg

  7. Impact of Housing Implosion • Unemployment • Loss of wealth • Homeowners have become stuck • Changing demographics

  8. Unemployment After Recessions Unemployment Rate Recovery January 2007 – April 2011 Unemployment Rate (%) Months from end of recession Source: Bureau of Labor Statistics

  9. Record UNDERemployment U-3 and U-6 Unemployment Rates January 2006 – April 2011 Source: Bloomberg

  10. Too Many Homes Built *Data reflected for 2011 includes an estimated projection of future performance Source: U.S. Census Bureau: Fannie Mae

  11. Housing Adds to Unemployment Source: Bloomberg

  12. Virginia Unemployment Unemployment Rate 3.3% Unemployment Rate 3.4% Unemployment Rate 3.5% Unemployment Rate 3.7% Unemployment Rate 3.8% Unemployment Rate 6.2% Unemployment Rate 4.1% Unemployment Rate 4.0% Unemployment Rate 4.5% Unemployment Rate 4.8% Unemployment Rate 5.3% Unemployment Rate 5.7% Unemployment Rate 6.1% Unemployment Rate 6.5% Unemployment Rate 6.8% Unemployment Rate 4.3% Unemployment Rate 6.1% Unemployment Rate 3.3% Unemployment Rate 6.9% Unemployment Rate 7.0% Unemployment Rate 7.0% Unemployment Rate 7.1% Unemployment Rate 7.1% Unemployment Rate 7.2% Unemployment Rate 7.2% Unemployment Rate 7.2% Unemployment Rate 7.1% Unemployment Rate 7.1% Unemployment Rate 7.0% Unemployment Rate 6.9% Unemployment Rate 6.8% Unemployment Rate 6.7% Unemployment Rate 6.7% Unemployment Rate 6.6% Unemployment Rate 6.6% Unemployment Rate 6.5% Unemployment Rate 6.4% Unemployment Rate 7.1% Unemployment Rate 6.8% Unemployment rates by county, not seasonally adjusted, Virginia Source: Bureau of Labor Statistics

  13. Loss of Wealth

  14. Consumer Wealth Source: Bloomberg

  15. Homeowners are Stuck

  16. Changing Demographics • Older Baby Boomers (55 – 64) • Healthy • Moving near children/grandchildren • Moving to urban settings • Younger Baby Boomers (46 – 54) • Underwater in the suburbs • Unable to purchase second homes • Generation X and Y (18 – 45) • Little confidence in home ownership • Renters • Prefer urban settings • Immigrants • Fastest growing group • Tend to cluster • Larger families Immigrants Generation X and Y Younger Baby Boomers Baby Boomers Source: Urban Land Institute

  17. Quantitative Easing Federal Reserve Balance Sheet Holdings January 2007 – May 2011 QE1 QE2 Long Term Treasury Purchases Liquidity to Key Credit Markets Trillion Federal Agency MBS Purchases Lending to Financial Institutions Source: http://www.clevelandfed.org/research/data/credit_easing/index.cfm -- Cleveland Federal Reserve: Credit Easing Policy Tools

  18. Rates at Historic Lows Two Year U.S. Treasury January 2006 – May 2011 Source: Bloomberg

  19. Normalization Strategy • Objectives • Maximum employment • Price Stability • Fed Funds Target Rate management • Treasury-only portfolio • Transparency • Reactive to economic conditions Source: Minutes of the Federal Open Market Committee, released 5/18/2011

  20. Housing Reform • “Reforming America’s Housing Finance Market.” • U.S. Department of Treasury • U.S. Department of Housing and Urban Development • Wind down Fannie Mae and Freddie Mac • Secure affordable housing • Attract private capital “The government is committed to ensuring that Fannie Mae and Freddie Mac have sufficient capital to perform under any guarantees issued now or in the future and the ability to meet any of their debt obligations. The Administration will not pursue policies or reforms in a way that would impair the ability of Fannie Mae and Freddie Mac to honor their obligations.”

  21. GSE Housing Debt Will Decline Fannie Mae and Freddie Mac Outstanding Debt 2000 - 2010 Source: Janney Fixed Income Strategy; Company Reports

  22. Can Private Sector Fill the Void? Share of Annual Mortgage Issuances 1995 to 2010 ? Source: Congressional Budget Office, “Fannie Mae, Freddie Mac, and the Federal Role in the Secondary Mortgage Market,” dated December 2010

  23. Proposals • Provide Federal guarantee for some mortgages • Create government entity to buy all underwater homes • Create 40 year mortgages • Eliminate any government guarantee for housing • Eliminate mortgage interest deduction • Convert to tax-credit • Limit to mortgages of $500,000 • Eliminate deduction for second residence • Eliminate deduction for home equity loans • Eliminate exclusion for sale of principal residence

  24. What to Expect • Slow recovery • Persistently high unemployment • Few new home starts • Depressed housing prices • Need for occupational retraining • Reduction in percentage of American’s that own homes • Mortgages • Higher rates • Higher down payments • Fewer tax advantages • Low interest rates for another 6 – 12 months • Shift toward urban centers • Need for more rental properties • Development of city centers

  25. Important Disclosures and Disclaimers This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation.  All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control.  Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities.

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