A Historical Perspective on Housing Downturns

Eric S. RosengrenPresident & CEO

Federal Reserve Bank of Boston

CBIA Economic SummitJanuary 8, 2008

EMBARGOED until Jan. 8, 2008,10:50 AM Eastern Time or upon delivery

2

Trends in Residential Investment

• Residential investment has declined continuously since 2006:Q1

• Most economic forecasts predict that trend will continue at least through the first half of 2008

3

Exhibit 1Continuous Declines of Three Quarters or more in Real Residential Investment 1958-2007:Q3

Source: BEA / Haver Analytics

Dates

Number of Quarters

Cumulative Decline (%)

1973:Q2-1975:Q1

8

-39.6

1978:Q4-1980:Q2* 7 -31.7

1981:Q1-1982:Q3* 7 -28.5

2006:Q1-2007:Q3 7 -23.7

1966:Q2-1967:Q1 4 -22.7

1989:Q1-1989:Q4** 4 -6.7

1990:Q2-1991:Q1** 4 -19.4

1994:Q3-1995:Q2 4 -7.6

1960:Q2-1960:Q4 3 -11.1

1964:Q2-1964:Q4 3 -8.3

1969:Q2-1969:Q4 3 -9.1 *Declines interrupted by just two quarters of growth in residential investment. **Declines interrupted by just one quarter of growth in residential investment. Note: Prior to the sample period, there was an eleven-quarter decline of 20.3%, 1955:Q3-1958:Q1.

4

Exhibit 2Real Residential Investment and

Real Interest Rates

Source: BEA, BLS, Federal Reserve Board / Haver Analytics

-60

-40

-20

0

20

40

60

80

100

58

:Q1

59

:Q3

61

:Q1

62

:Q3

64

:Q1

65

:Q3

67

:Q1

68

:Q3

70

:Q1

71

:Q3

73

:Q1

74

:Q3

76

:Q1

77

:Q3

79

:Q1

80

:Q3

82

:Q1

83

:Q3

85

:Q1

86

:Q3

88

:Q1

89

:Q3

91

:Q1

92

:Q3

94

:Q1

95

:Q3

97

:Q1

98

:Q3

00

:Q1

01

:Q3

03

:Q1

04

:Q3

06

:Q1

07

:Q3

Quarterly Percent Change (SAAR) in Real Residential Investment

Percent

0

2

4

6

8

10

12

14

16

18

20

58

:Q1

59

:Q3

61

:Q1

62

:Q3

64

:Q1

65

:Q3

67

:Q1

68

:Q3

70

:Q1

71

:Q3

73

:Q1

74

:Q3

76

:Q1

77

:Q3

79

:Q1

80

:Q3

82

:Q1

83

:Q3

85

:Q1

86

:Q3

88

:Q1

89

:Q3

91

:Q1

92

:Q3

94

:Q1

95

:Q3

97

:Q1

98

:Q3

00

:Q1

01

:Q3

03

:Q1

04

:Q3

06

:Q1

07

:Q3

Federal Funds Effective Rate

Quarterly Percent Change (SAAR) in Core CPI

Percent

5

Today's Residential Trends are Distinctive

• Previous significant declines in residential investment have often followed rising inflation and tighter monetary policy

• Housing price declines have tended to be regionally concentrated

6

Exhibit 3Growth Rate of Real House Prices by

Census Region*

Source: OFHEO, BLS / Haver Analytics

-30

-20

-10

0

10

20

30

40

86:Q

1

87:Q

1

88:Q

1

89:Q

1

90:Q

1

91:Q

1

92:Q

1

93:Q

1

94:Q

1

95:Q

1

96:Q

1

97:Q

1

98:Q

1

99:Q

1

00:Q

1

01:Q

1

02:Q

1

03:Q

1

04:Q

1

05:Q

1

06:Q

1

07:Q

1

NE MA ENC WNC SA ESC WSC M P

Quarterly Percent Change at Annual Rate

*The 9 census regions are: New England (NE), Middle Atlantic (MA), East North Central (ENC), West North Central (WNC), South Atlantic (SA), East South Central (ESC), West South Central (WSC), Mountain (M) and Pacific (P).

7

Exhibit 4National Home Price Indexes

Source: OFHEO, S&P/Case-Shiller / Haver Analytics

-5

0

5

10

15

20

81

:Q1

82

:Q1

83

:Q1

84

:Q1

85

:Q1

86

:Q1

87

:Q1

88

:Q1

89

:Q1

90

:Q1

91

:Q1

92

:Q1

93

:Q1

94

:Q1

95

:Q1

96

:Q1

97

:Q1

98

:Q1

99

:Q1

00

:Q1

01

:Q1

02

:Q1

03

:Q1

04

:Q1

05

:Q1

06

:Q1

07

:Q1

OFHEOHouse Price Index

S&P/Case-ShillerHome Price Index

Percent Change from Year Earlier

8

Exhibit 5S&P/Case-Shiller Home Price Index:

Ten Metro Areas and Composite

Source: S&P/Case-Shiller / Haver Analytics

Composite 10 12.6 19.6 16.1 2.6 -6.7

Boston 6.9 10.4 4.7 -3.5 -3.6Chicago 8.2 8.9 9.2 5.1 -3.2Denver 1.1 4.0 4.2 0.7 -1.8Las Vegas 14.0 51.4 10.0 2.6 -10.7Los Angeles 19.6 28.1 20.6 5.2 -8.8Miami 15.1 21.7 32.3 8.5 -12.4New York 12.1 14.6 14.2 3.2 -4.1San Diego 17.7 30.0 7.5 -2.3 -11.1San Francisco 6.3 19.1 19.3 -0.1 -6.2Washington 13.5 23.4 22.2 -0.7 -7.0

Percent Change from Year Earlier

Oct-03 Oct-04 Oct-05 Oct-06 Oct-07

9

Summary of Recent Trends

• Regional changes in house prices have been correlated

• Prices have fallen faster in regions that experienced some of the most rapid appreciation

• Weakness has occurred with relatively low inflation and real interest rates

10

Housing Downturns in Focus

• Strength of the economy going forward• Reaction of lenders to current problems

– Transparency of response– Speed of loss recognition– Adjustments benefit from orderly, well-

functioning environment

11

Exhibit 6New England House Price Index

Source: OFHEO / Haver Analytics

0

100

200

300

400

500

600

700

75:Q

1

77:Q

3

80:Q

1

82:Q

3

85:Q

1

87:Q

3

90:Q

1

92:Q

3

95:Q

1

97:Q

3

00:Q

1

02:Q

3

05:Q

1

07:Q

3

Index, 1980:Q1=100

12

New England Experience

• New England appreciated quickly during the first half of the 1980s

• Late 1980s and early 1990s home and commercial real estate prices declined– Recognition of losses enforced by

bank examiners– Problem loans quickly sold

13

Japanese Experience

• Rapid rise in land prices in 1980s followed by a decline throughout the 1990s– Financial institutions not transparent– Problem assets held not sold by

financial institutions and government– Misallocation of credit

14

Exhibit 7Japanese Land Price Indexes:

All Urban Land and Six Major Cities

Source: Japan Real Estate Institute

0

50

100

150

200

250

300

Mar

-75

Mar

-77

Mar

-79

Mar

-81

Mar

-83

Mar

-85

Mar

-87

Mar

-89

Mar

-91

Mar

-93

Mar

-95

Mar

-97

Mar

-99

Mar

-01

Mar

-03

Mar

-05

Mar

-07

Six Major Cities

All Urban Land

Index, End of March 2000=100

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Potential for Credit Crunch Remains

• Banks remain a major source of liquidity– Bank assets have grown – asset-backed

commercial paper, leveraged buy-out loans

– Many credit spreads are elevated but have improved relative to year end

– Need to insure credit is available for promising projects

16

Exhibit 8Balance-Sheet Growth at

Commercial Banks in the U.S. in 2007

Source: Federal Reserve Board / Haver Analytics

90

100

110

120

130

140

3-Ja

n

17-J

an

31-J

an

14-F

eb

28-F

eb

14-M

ar

28-M

ar

11-A

pr

25-A

pr

9-M

ay

23-M

ay

6-Ju

n

20-J

un

4-Ju

l

18-J

ul

1-A

ug

15-A

ug

29-A

ug

12-S

ep

26-S

ep

10-O

ct

24-O

ct

7-N

ov

21-N

ov

5-D

ec

19-D

ec

Week

Index, January 3, 2007=100

Government Securities

C&I Loans

Other Securities

17

Recent Actions by the Federal Reserve

• Monetary Policy• Term Auction Facility

– Innovative tool to provide liquidity without the stigma some have attached to the Discount Window

– Proved useful at the end of 2007

18

New England Initiative

• Mortgage Relief Fund– Consortium of banks have made

funds available for subprime borrowers with as little as 3% equity in their house

– Subprime borrowers should see if they can be helped at:

www.MortgageReliefFund.com

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Exhibit 9www.MortgageReliefFund.com

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Conclusion

• We have, and need to continue, to closely monitor problems generated from a weak housing sector

• Greater transparency and loss recognition may speed up the adjustment process

• Adjustments will be easier with a well-functioning economy and financial markets