Download - When Will It End?
When Will It End?
Presented by:
Mark M. Zandi,Chief Economist
Presented by:
Mark M. Zandi,Chief Economist
September 23, 2008
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100
120
140
160
180
200
00 01 02 03 04 05 06 07 08
The Bursting Housing Bubble…
Fiserv Case Shiller National House Price Index, 2000Q1=100
-20.2%
4
500
1,000
1,500
2,000
2,500
3,000
00 01 02 03 04 05 06 07 08
Sources: Equifax, Moody's Economy.com
First mortgage loan defaults, ths, SAAR
…Ignites a Mortgage Crisis…
5
Projected losses on assets originated 2005Q1-2007Q4, $ bil
0
100
200
300
400
500
600
Banks Other financial Government
At risk mortgages15,000,000Foreclosure rate 40%
Foreclosed mortgages 6,000,000Loss rate 50%
Mortgage loss $600 bil
Residential mortgages
Consumer loans
Commercial mortgages
Corporate
…Undermining the Financial System…
6
0.00
0.50
1.00
1.50
2.00
2.50
3.00
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Difference between 3 month Libor and Treasury bill yields
…And Pushing It to the Precipice of Collapse
S&L crisis
Subprimefinancialshock
Peso crisis
LTCM
TechbustOrange
County
Thai baht
Y2K
8
An Unprecedented Policy Response…
Potential CostTreasury Actions: Billions $
1) Troubled Asset Relief Program 700
2) Fannie/Freddie Takeover 200
3) AIG Takeover 85
4) Bear Stearns Resolution 29
5) Money Market Guarantee Fund 50
6) Puchase Fannie/Freddie MBS na
Total Cost 1,064
Federal Reserve Actions:
7) Non-Recourse Loans to Buy CP
8) Liberalize Liquidity Facilities
9) Supplementary Financing Program
10) Increase Swap Lines
11) Bank Charter for Goldman/Morgan
SEC Actions:
12) Restrictions on Short-Selling
9
…That Will Be Costly, But Not $1 Trillion
Firm Writedowns Capital Raised Firm Writedowns Capital Raised
Citigroup 55.1 49.1 E*Trade 3.6 2.4Merrill Lynch 51.8 29.9 Nomura Holdings 3.3 1.1UBS 44.2 28.3 Natixis 3.3 6.7HSBC 27.4 3.9 Bear Stearns 3.2 0.0Wachovia 22.5 11.0 HSH Nordbank 2.8 1.9Bank of America 21.2 20.7 Landesbank Sachsen 2.6 0.0IKB Deutshce 15.3 12.6 UniCredit 2.6 0.0Royal Bank of Scotland 14.9 24.3 Commerzbank 2.4 0.0Washington Mutual 14.8 12.1 ABN Amro 2.3 0.0Morgan Stanley 14.4 5.6 DZ Bank 2.0 0.0JPMorganChase 14.3 7.9 Bank of China 2.0 0.0Deutsche Bank 10.8 3.2 Fifth Third 1.9 2.6Credit Suisse 10.5 2.7 Rabobank 1.7 0.0Wells Fargo 10.0 4.1 Bank Hapoalim 1.7 2.4Barclays 9.1 18.6 Mitsubishi UFJ 1.6 1.5Lehman Brothers 8.2 13.9 Royal Bank of Canada 1.5 0.0Credit Agricole 8.0 8.9 Marchsall & Ilsley 1.4 0.0Foris 7.4 7.2 Alliane & Leicester 1.4 0.0HBOS 7.1 7.6 U.S. Bancorp 1.3 0.0Societe General 6.8 9.8 Dexia 1.2 0.0Bayerische Landesbank 6.4 0.0 Caisse d'Epargne 1.2 0.0Canadian Imperial 6.3 2.8 Keycorp 1.2 1.7Mizuho Financial Group 5.9 0.0 Soverign Bancorp 1.0 1.9ING Group 5.8 4.8 Hypo Real Etstae 1.0 0.0National City 5.4 8.9 Gulf International 1.0 1.0Lloyds TSB 5.0 4.9 Sumitomo Mitsui 0.9 4.9IndyMac 4.9 0.0 Sumitomo Trust 0.7 1.0WestLB 4.7 7.5 DBS Group 0.2 1.1Dresdner 4.1 0.0 Other European Banks 7.2 2.3BNP Paribas 4.0 0.0 Other Asian Banks 4.6 7.8LB Baden-Wuerttemberg 3.8 0.0 Other U.S. Banks 2.9 1.9Goldman Sachs 3.8 0.6 Other Canadian Banks 1.8 0.0
Total 501.4 351.2
Public Financial Writedowns as of Early September 2008
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(1)
0
1
2
3
4
5
08 09 10
Pre-panicPost-panic
Real GDP growth, annualized % change
The Negative Economic Fallout Is Significant…
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…Very Significant…
Pre-Financial Post-FinancialPanic Panic
2008q4 Real GDP Growth 1.30% -0.23%
2009 Real GDP Growth 1.75% 1.33%
Peak Unemployment Rate 6.5% (2009q3) 7% (2010q1)
Peak-to-Trough Decline in 800000 (2009q1) 1250000 (2009q3)Payroll Employment
Peak-to-Trough % Decline in 26% (2009q2) 30% (2009q3)House Prices
Federal Funds Rate Trough 2.0% 1.5%
Cumulative Budget Deficit 2.24 2.81 FY 2009 - FY 2013Billions $
Source: Moody's Economy.com
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Bond issuance, $ bil, annualized, Source: Thompson
0
200
400
600
800
1,000
01 02 03 04 05 06 07H1 07H2 08 ytd
JumboAlt-ASubprime
…As Credit Markets Remain Frozen…
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100
200
300
400
500
600
700
800
900
1,000
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08
Difference with 10-yr Treasury rate, basis points
…Credit Spreads Have Ballooned…
Junk corporate
Emerging market
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Net % tightening standards
-30
-20
-10
0
10
20
30
40
50
60
70
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90 92 94 96 98 00 02 04 06 08
C&ICommercial mortgageCredit card
…And Banks Will Continue to Tighten
Source: Federal Reserve Board
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44
54
64
74
84
94
104
114
124
134
144
98 99 00 01 02 03 04 05 06 07 0894
98
102
106
110
114
118
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Consumers (L)
Small business (R)
Confidence Is Rock Bottom…
Sources: Conference Board, NFIB
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-10
-5
0
5
10
15
20
05 06 07 081
2
3
4
5
6
7
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House-price growth 6 mo. lead (L)
Core retail sales growth 3 mo. MA (R)
…And the Wealth Effect Is Kicking In
Sources: Census, Realtors
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Another 10% to Go...
% change from peak, Sources: Fiserv Lending Solutions, Census, Moody's Economy.com
-60
-50
-40
-30
-20
-10
0
Early 1990s
House price Home sales Housing starts
Current downturn to date
Early 1980s
Current downturn forecast
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...With Big Differences Across the Country
Projected peak-to-trough house price decline
Sources: Fiserv Lending Solutions, Moody's Economy.com, OFHEO
-10 to -20%
0 to -10%No decline
-20 to -30%
< -30%
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12
14
16
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20
22
24
26
86 88 90 92 94 96 98 00 02 04 06 081.8
2.0
2.2
2.4
Housing Is Becoming More Affordable…
Sources: BEA, Census, PPR, Realtors
Price-income ratio (R)
Price-rentratio (L)
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Number of vacant homes for sale, ths, Source: Census
1,000
1,250
1,500
1,750
2,000
2,250
00 01 02 03 04 05 06 07 08
…Inventories Are Peaking…
Housing supply 1,000,000Single 625,000Multi 300,000Manufactured 75,000
Housing demand 1,500,000Households 975,000Obsolescence 400,000Second homes 125,000
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5.6
5.8
6.0
6.2
6.4
6.6
July August September
Source: Bankrate.com
30-year fixed mortgage rate
…And Nationalization Is A Plus
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A Timeline to Recovery
’08q1 ’08q2 ’08q3 ’08q4 ’09q1 ’09q2 ’09q3 ’09q4 ’10q1 ’10q2 ’10q3 ’10q4
Stock MarketBottoms
Oil PricesPeak
Home SalesBottom
Housing StartsBottom
EmploymentBottoms
House PricesBottoms
ForeclosuresPeak
Jobless RatePeaks
House PricesResume Rising
Financial FailuresAbate
Self-SustainingEconomic ExpansionBegins
Fed TightensExtraordinary WritedownsEnd
$ Rises
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5,000
6,000
7,000
8,000
9,000
10,000
07 08
The Financial System Remains Very Fragile…
Financial stock index, Source: NYSE
Financial shock strikes
Bear Stearns fails
Panic
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Number of underwater homeowners, ths
0
2,000
4,000
6,000
8,000
10,000
06 07 08
Sources: Equifax, Moody's Economy.com
…and House Price Declines Threaten to Overshoot