nofhaft uconn housing conf 5 10 2007

Economic & Housing Market Outlook: 

Economic & Housing Market Outlook 2007 Connecticut Housing Conference Cromwell, CT May 10, 2007 Frank E. Nothaft Chief Economist

U.S. Expansion Continues: 

U.S. Expansion Continues Economic growth About 2% in first half ‘07 GDP growth picks up to 3.0% in second half 2007 Unemployment rate remains below 5% through 2007 Tame inflation will keep interest rates low Core inflation is now above upper limit preferred by policy makers Fed funds likely to stay at 5.25% through year Mortgage market continues to slow Loan originations: 2007 volume 6% lower than 2006 because of a 12% drop in refi volume ARM share will drop, perhaps as low as to 1-in-7 loans in 2007 Risks to the outlook Energy: high oil and natural gas prices act like a tax on the economy

U.S. Unemployment Rate Will Remain Below 5% through 2007: 

U.S. Unemployment Rate Will Remain Below 5% through 2007 Unemployment Rate (Percent) Forecast Source: U.S. Department of Labor United States Connecticut Q1 Mean US: 4.5% CT: 4.2%

Expect About 1.4 Million New Jobs in 2007, None in Mortgage Industry: 

Expect About 1.4 Million New Jobs in 2007, None in Mortgage Industry Source: U.S. Bureau of Labor Statistics Change in Non-Farm Payroll Employment (U.S. in thousands) “Jobless” Recovery “Jobloss” Recovery ? Forecast Change in Mortgage Related Employment (U.S. in thousands)

Core Inflation Remains Above Fed’s Preferred Level: 

Core Inflation Remains Above Fed’s Preferred Level Source: Bureau of Economic Analysis, U.S. Department of Labor Inflation Less Food and Energy (Percent change from year earlier) Core Personal Consumption Expenditure Core Consumer Price Index Fed’s Upper Range 2.3% 2.5%

High Home Prices Have Reduced Housing Affordability: 

High Home Prices Have Reduced Housing Affordability Source: National Association of Realtors Composite Housing Affordability Index – (% of median priced home affordable on median income with conventional financing 30-Year fixed-rate mortgage and 20% down); Freddie Mac Primary Mortgage Market Survey ®, Moody’s Economy.com Index Percent NAR Affordability Index (left scale) 30-year Fixed Mortgage Rate (right scale) 1971-2007Q1 Average Interest Rate = 9.3% Index = 100 means median income buys median priced home Forecast

Single-family Building Hit a Record in 2005, but Is 33% Lower 18 Months Later: 

Single-family Building Hit a Record in 2005, but Is 33% Lower 18 Months Later 1- to 4-Family Housing Starts (thousands of units, SAAR) Source: Bureau of Census Third Quarter 2005 record: 1.8 million units Forecast First Quarter 2007: 1.2 million units

Building Permits Have Dropped in U.S. and Connecticut Over Last 18 Months: 

Building Permits Have Dropped in U.S. and Connecticut Over Last 18 Months Housing Permits U.S. (Thousands) Source: National Association of Realtors, Bureau of Census United States Connecticut Housing Permits Connecticut (Thousands) 27% Drop 33% Drop

Existing Home Sales Down in U.S. and Connecticut during 2006: 

Existing Home Sales Down in U.S. and Connecticut during 2006 Source: National Association of Realtors (Existing Single-Family Houses, Apartment Condos & Co-ops) U.S. Existing Home Sales (Thousands) Connecticut Existing Home Sales (Thousands) Home Sales Growth 2005Q4 – 2006Q4 United States -10% Connecticut -17% United States Connecticut

Existing Home Sales are Down in Most States : 

Existing Home Sales are Down in Most States Existing Home Sales Nationwide Down 10% Down more than 10% Up Down less than 10% Percent change in the existing home sales Fourth quarter 2005 through Fourth quarter 2006 Source: National Association of Realtors -31% -17% -17% -20% -2% -15%

Inventories of Homes-for-sale Are Up: 

Inventories of Homes-for-sale Are Up Months Supply of Homes for Sale Source: National Association of Realtors, Bureau of Census New Homes Existing Homes

Time-on-Market Up in Most Markets: 

Time-on-market (# of days) Source: National Association of Realtors City Time-on-Market Up in Most Markets } Up 21 days } Up 22 days } Up 28 days } Up 28 days } Up 22 days } Up 17 days } Up 11 days } Up 16 days } Up 2 days } Down 6 days } Up 27 days } Up 24 days } Down 3 days } Up 59 days } Up 14 days } Up 20 days

Investor and Second Home Share of Purchase-Money Mortgages Is High: 

Investor and Second Home Share of Purchase-Money Mortgages Is High Non-Owner Occupied Share Second Home Purchase Share Source: LoanPerformance, a unit of First American Corp (December 2006); *MSAs with second home shares larger than investor shares are shown in green. MSAs with the Highest 2nd Home and Investor Shares in 2006 Investor and Second-Home Share 2nd Home and Investor Share of Prime Conventional Conforming Loan Originations Denotes a 25-29% share San Francisco Honolulu* Tucson* Jacksonville* Miami Phoenix* San Antonio Austin Denotes a 30-37% share West Palm Beach* Orlando* Las Vegas* Tampa-St Pete* Monterey

Sales Slump Has Pushed Homeowner Vacancy Rates To Record Levels: 

Sales Slump Has Pushed Homeowner Vacancy Rates To Record Levels Vacancy Rates for 2+ Units (Percent) 2+ units (Left Scale) 1 unit (Right Scale) Source: Bureau of Census (1971-1990:Annual Data, 1991Q1–2007Q1:Quarterly Data) Vacancy Rates for 1+ Units (Percent) Annual Data Quarterly Data 8.8% 2.5%

House Price Growth in Connecticut Has Been Above the National Trend: 

House Price Growth in Connecticut Has Been Above the National Trend Source: Freddie Mac, Conventional Mortgage Home Price Index Annual Home Price Growth Rate (percent) 25-Year Annualized Growth Rate 4Q 1981 – 4Q 2006 United States 5.5% Hartford-West Hartford-East Hartford, MSA 5.8% United States Hartford-West Hartford-East Hartford, MSA Forecast

Mortgage Rates Are Projected to Gradually Trend Up: 

Mortgage Rates Are Projected to Gradually Trend Up Source: Freddie Mac’s Primary Mortgage Market Survey® 1998 Refi Boom 2001-2004 Refinance Boom 1.7 points 3.36% 1-Year, ARM Rate 30-Year, Fixed Rate 6.5% 8.2% 8.6% 7.3% Weekly Mortgage Interest Rate (Percent) 3.9 points 3.4 points 5.2% Forecast

Fewer Refis Mean About A 6% Drop in Mortgage Originations in 2007: 

Fewer Refis Mean About A 6% Drop in Mortgage Originations in 2007 Forecast Source: U.S. Department of Housing and Urban Development, Freddie Mac’s estimate Total Single-Family Mortgage Originations (Billions of Dollars)

Non-traditional Loan Originations Grew Rapidly But Are Now Declining: 

Non-traditional Loan Originations Grew Rapidly But Are Now Declining Source: LoanPerformance-a unit of First American Corp (Securities issues through September 2006), Federal Housing Finance Board Monthly Interest Rate Survey Interest-Only & Negative Amortization Share of Originations in Private Label Securities (percent of loans) Interest Only Interest-Only & Neg Am 2005 State Median Home Sales Price in $1000’s Interest-Only + Negative Amortization Share of Home Purchase Loans (percent of loans originated in 2005) Correlation = 0.7 DC PA NV CA VA AZ MD NJ NY CT RI

Job Loss Is the Leading Hardship Reason Among All Delinquent Borrowers: 

Job Loss Is the Leading Hardship Reason Among All Delinquent Borrowers Source: Freddie Mac; data cover period 2001-2006; 2006 data exclude delinquent loans in Louisiana and Mississippi due to hurricane effects.

Employment Growth Is Strongest in West, Southwest and South Atlantic States: 

Employment Growth Is Strongest in West, Southwest and South Atlantic States National employment up 1.4% Connecticut up 1.2% 0.0% to 0.9% 1.0% to 1.4% Above 2.0% 1.5% to 2.0% Percent change in the non-farm payroll employment March 2006 through March 2007 Source: U.S. Bureau of Labor Statistics Below 0.0%

Prime Delinquencies Are Lowest in the Northeast and West: 

Prime Delinquencies Are Lowest in the Northeast and West National = 0.86% Seriously Delinquent Connecticut = 0.55% Seriously Delinquent (90+ days delinquent or in foreclosure, prime conventional) Data as of December 2006 0.20-0.39% 0.40-0.59% 1.64-2.15% 0.60-0.99% 1.00-1.40% Source: Mortgage Bankers Association of America 2.21-2.81%

Prime Delinquency Rates Jumped In Markets With Flat or Falling House Values: 

Prime Delinquency Rates Jumped In Markets With Flat or Falling House Values < -0.10% -0.10 to 0.00% 4Q ’05 to 4Q ’06 Change in Level of Serious Delinquency Rate (90+ days or in foreclosure, Prime Conventional Loans) National Average Change = 0.00% Connecticut Average Change = 0.16% Data as of December 2006 0.01 to 0.09% 0.10 to 0.19% Source: Mortgage Bankers Association of America 0.20 to 0.38% Percentage Point Difference

Subprime Delinquencies Also Are Lowest in West: 

Subprime Delinquencies Also Are Lowest in West 3.6 to 5.0% 5.1 to 6.5% 12.0 to 15.6% National = 8.50% Seriously Delinquent Connecticut = 7.11% Seriously Delinquent (90+ days delinquent or in foreclosure, Subprime Loans) Data as of December 2006 6.6 to 8.5% 8.6 to 9.9% Source: LoanPerformance (a unit of First American Corp) 10.0 to 11.9%

Default and Home Value Growth Are Inversely Related: 

Default and Home Value Growth Are Inversely Related Source: Mortgage Bankers Association, Freddie Mac’s CMHPI and Estimate Percent of Connecticut prime conventional loans delinquent 90+ days or in foreclosure (Right Scale) Annual Connecticut House Price Growth (Left Scale) Connecticut House Price Growth Connecticut Delinquency Percent

Slide25: 

Subprime Loans Accounted for Over Half of Foreclosures in 2006 Number of Foreclosures Started (Annualized Rate in Thousands) Source: Mortgage Banker’s Association National Delinquency Survey; Freddie Mac Projection extrapolates 2005H2 to 2006H2 foreclosure change into 2007. 34% 31% 33% 34% 32% 29% 37% 11% 17% 20% 22% 58% 52% 47% 44% 35% 29% 36% 31% 9% 60% Extrapolated 34% 29% 37% 32% 13% 55%

Where to Get More Information: 

Where to Get More Information Look for regular updates to our economic forecast, commentary and data at www.freddiemac.com/news/finance and www.freddiemac.com/news/finance/data.html Contact us at chief_economist@freddiemac.com Opinions, estimates, forecasts and other views contained in this document are those of Freddie Mac's Office of the Chief Economist, do not necessarily represent the views of Freddie Mac or its management, should not be construed as indicating Freddie Mac's business prospects or expected results, and are subject to change without notice. Although the Office of the Chief Economist attempts to provide reliable, useful information, it does not guarantee that the information is accurate, current or suitable for any particular purpose. Information from this document may be used with proper attribution. Alteration of this document is prohibited. © 2007 by Freddie Mac.