The Administration’s Housing Strategy and Economic Update

[Pages:32]The Administration's Housing Strategy and Economic Update

Neel Kashkari

Phillip Swagel

Senior Advisor to the Secretary Assistant Secretary for Economic Policy

Department of the Treasury May 2, 2008

Agenda

Macro overview Housing market run-up The foreclosure problem The Administration's plan to deal with it Measuring results Looking forward Discussion

2

Slowdown and Recovery

Blue Chip Scenario for GDP Growth

Percent change at an annual rate

5

4.9

4

3.8

Blue Chip Optimists

3 2 1 0.6 0

2.9

2.1 1.9

2.3

0.6 0.6 0.1

Blue Chip Pessimists

-1

Blue Chip Consensus

(Bars)

-2

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

H1 H2

2007

2008

2009

3 Source: Blue Chip Economic Indicators

Home Inventories Are Elevated

Months' Supply of New Single-Family Houses

12

High

10

8

Median Forecast

6

4

Low

2 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

4 Source: Census Bureau

Labor Market Slowdown

Unemployment Rate and Nonfarm Payrolls

Thousands

400

Percent

6.5

300

200

Unemployment rate (right axis)

Blue Chip 6.0 forecast

5.5

100

5.0

0

4.5

-100 -200

4.0

Payroll job change

(left axis)

3.5

-300

3.0

2002 2003 2004 2005 2006 2007 2008

5 Sources: Bureau of Labor Statistics

Home Price Declines

HOUSING PRICE/RENT RATIO

(Case-Shiller 10-City Price/Price Index for Rent)

2.0

Futures Market Predictions

1.5

1.0

0.5

Historical

Range

0.0

87 89 91 93 95 97 99 01 03 05 07 09 11

6 Sources: Bureau of Labor Statistics, S&P and MacroMarkets LLC

Financial Market Stresses

3-Month LIBOR Rate less 3-Month Treasury Bill Rate

Percent 2.5

3-Month LIBOR-OIS Spread

Percent 1.2

2.0

1.0

0.8 1.5

0.6 1.0

0.4

0.5 0.2

0.0

J FMAM J J A SOND J FMAM J J A SOND J FMAM

2006

2007

2008

Spread Between Jumbo and 30-Year Mortgage

Rates

2.0

1.5

1.0

0.0

J FMAM J J A SOND J FMAM J J A SOND J FMAM

2006

2007

2008

Dow Jones CDX Investment Grade Index

Sd

180

New

series

150

120

0.5

0.0

-0.5 J FMAM J J A SOND J FMAM J J A SOND J FMAM

2006

2007

2008

90

60

30

Old

series

0

J FMAM J J A SOND J FMAM J J A SOND J FMAM

2006

2007

2008

7 Sources: Reuters, British Bankers Association, Federal Reserve, CMAN-CMA New York, BanxQuote

What Caused the Excesses?

Upside: more Americans became homeowners

Poor origination practices

Low-doc / no-doc No money down

New mortgage products

Subprime hybrid ARMs Pay option ARMs

Originate-to-distribute model

Structured product complexity

Cheap credit

Chart Source: The Census Bureau

Homeownership Rate

70% 69% 68% 67% 66% 65% 64% 63% 62% 61% 60%

1980

1986

1992

1998

2005

8

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