2011 Housing Outlook & Implications
for Maryland Bankers:
The Long and Winding Road
Clifford Rossi
Executive-in-Residence, Tyser Teaching Fellow
August 4, 2011
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Takeaways
Continued disequilibrium and uncertainty in Maryland housing markets:
2011 will still be a year of house price decline
2010 should see slight improvement in a positive direction
Key Drivers to Watch:
Bank underwriting trends
Buyer composition
Consumer sentiment/General economic conditions
Re-entry of private capital in secondary market
Public policy – Credit risk retention/QRM, GSE Reform
Credit performance – Shadow foreclosure inventory
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Current State of Housing Scorecard
Housing market will continue to weaken as supply and demand drivers
further destabilize markets
Overall 2011 Outlook – Negative and Deteriorating
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Credit Availability
Lenders appear to be backing off of extremely tight credit policies since the
crisis
Balance sheet capacity and relative margins are issues affecting mortgage
credit supply
Source: Federal Reserve Board of Governors Senior Loan Officer Opinion Survey on Bank Lending Practices, April 2011.
.
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National House Price Trends
Double dip in home prices coming off heels of FTHB tax credit expiration
Foreclosure inventories bloat supply, house prices fall further
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Maryland House Price Trends
Maryland generally not as hard hit as other areas
of the country but recovery also more moderate
Bethesda/Frederick/Rockville Baltimore/Towson Cumberland Salisbury Hagerstown Bakersfield,CA
Forecast House
Price Changes
Q410-Q411
Q411-Q412
Median Home Price
Median Family Income
Change in Home Price Q309-Q310
Worst 1 Year House Price Change 1980-2010
-12.40%
1.20%
$389,000
$111,600
0%
-14.70%
0.20%
2.50%
$265,000
$80,900
-5%
-10.90%
-2.60%
-9.90%
2.50%
3.80%
$88,000 $150,000
$55,300 $62,400
-0.60%
-1.40%
-8.90% -13.90%
-3.90%
1.10%
$136,000
$63,000
-2.30%
-12.40%
-7.50%
5.10%
$129,000
$47,900
-5.30%
-33.70%
Source: Fiserve, 2011
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Effects of Oversupply
Until foreclosure problem ebbs, expect home prices
to be negatively impacted
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Shadow Inventory Trends
Shadow inventories continue to build
Added to 8.6 months of existing homes for sale reported by NAR and
supply is THE major driver of slumping home prices
Remember that 6 months supply is about normal
Source: Core Logic Shadow Inventory Report, 2011.
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Housing Wildcards
Public Policy
No coherent national housing policy creates market
uncertainty and hampers effective policy actions
Mortgage servicing industry settlements
Strength of economic recovery
Bank balance sheet capacity and mortgage risk
appetite
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Macroeconomic Wildcards
Debt crisis aftermath and potential effect on borrowing costs
US rating (and associated muni) downgrade
This would raise mortgage rates - just one more negative to
housing recovery
A 1% increase in nominal interest rates would have about a .5 to
.75% decline in residential real estate investment
Other Macro Factors
Unemployment
GDP
Inflation/Oil prices
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Foreclosure Wildcards
State and Federal mortgage servicing settlements
What to Watch For:
Actions that accelerate or slow down foreclosure
State AG requirements on servicers
Federal interagency servicing standards
Principal writedowns
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Repurchases/Rescissions
Repurchase demands remain high, posing uncertainty for servicers,
investors
GSE repurchase demands
MI rescission rates (recent years +20% vs 7% historically)
Class action investor lawsuits
What to Watch For:
Broad settlements – a la Bank of America and Fannie Mae
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Risk Retention & QRM
Final rule on credit risk retention and Qualified Residential Mortgage
(QRM) provisions
What to Look For:
Relaxation of MI and LTV QRM-eligibility criteria
Will this be enough to entice private capital?
Alternative approach for QRM allowing riskier assets but less
flexibility over form of risk retention
Vertical
Horizontal
L-shaped
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GSE Reform
Short-term – 2011
Expiration of loan limits will reduce GSE and FHA
support
GSEs and FHA increase of mortgage insurance fees
Long-term – 2-3 years
Expect long-term solution to be more like Option 3 of
Treasury GSE Reform proposal
Privately capitalized MBS issuers
No government guarantee on issuer debt
Explicit catastrophic guarantee on MBS
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Takeaways
No silver bullets on the horizon to fix underlying breakdown in housing
fundamentals
Instead fragmented and weak public policy solutions – expect then a prolonged
multi-year recovery from this point forward
Expect supply drivers to dominate market outcomes
Shadow foreclosure inventory will build
Without artificial stimulus, hangover in supply will keep home prices
depressed for several years
Significant slack in housing demand will remain through 2011, certainly
insufficient to sop up excess supply
Higher than normal unemployment and weak economic growth limit demand
First-time homebuyers sidelined until sustained stable economic recovery
emerges
Investors and 2nd homebuyers will remain opportunistic
2011 generally remains weak
Home prices continue to fall around Maryland housing markets thru 2011
Interest rates edge higher (about 50bps)
Foreclosure inventories rise by year-end
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But 2012 looks a little brighter
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Stakeholder Outlook
Favorable
Less Favorable
Distressed Asset Buyers
Homebuilders
Loan Workout Firms
Realtors
Large Mortgage Servicers
Small Banks
Due Diligence Firms
Appraisal Companies
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