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11/9/2017 MBA Economic and Mortgage Finance Outlook Prepared for AFM Conference CREF Session November 2017 Presented by Mike Fratantoni Mortgage Bankers Association Summary of the MBA Outlook 2016 2017 2018 2019 2020 GDP Growth

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11/9/2017 1

MBA Economic and Mortgage Finance Outlook

Prepared for AFM Conference – CREF Session

November 2017

Presented by

Mike Fratantoni

Mortgage Bankers Association

Summary of the MBA Outlook

Source: MBA Forecast – October 2017

2016 2017 2018 2019 2020 GDP Growth 1.8% 2.3% 2.0% 1.9% 1.8% Inflation 1.3% 2.0% 2.0% 2.1% 2.2% Unemployment 4.9% 4.4% 4.1% 4.0% 4.1% Fed Funds 0.625% 1.375% 2.125% 2.625% 2.875% 10-year Treasury 1.8% 2.3% 2.7% 3.1% 3.4% 30-year Mortgage 3.6% 4.0% 4.6% 5.0% 5.3% New home sales (000s) 561 584 623 662 696 Existing home sales (000s) 5,440 5,486 5,626 5,810 5,991 Home prices (YOY % chg) 5.7% 6.2% 5.4% 4.1% 2.9% Purchase originations ($B) 1,052 1,088 1,167 1,245 1,317 Refi originations ($ B) 999 600 430 395 395 Total originations ($B) 2,051 1,688 1,597 1,640 1,712 GSE 974 810 751 776 839 FHA 256 246 264 292 318 Other 821 631 583 572 555 ARM Share (based on $) 13.1% 15.5% 15.9% 15.6% 14.9% Mortgage debt outstanding ($B) 9,710 10,010 10,370 10,760 11,130

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Job Growth Still Strong in 2017

Source: BLS

235 284 254 265 163 (144) (42) 10 170 210 174 96 (297) (422) 88 174 179 192 250 226 187 216 232 50 207 145 210 138 208 18 261 (500) (400) (300) (200) (100)

200 300 400 Thousands of jobs

Average Monthly Payroll Growth

Companies Increasingly Having Difficulties Filling Open Positions

Source: NFIB

4 (5.0) ‐ 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 Jan‐86 Dec‐86 Nov‐87 Oct‐88 Sep‐89 Aug‐90 Jul‐91 Jun‐92 May‐93 Apr‐94 Mar‐95 Feb‐96 Jan‐97 Dec‐97 Nov‐98 Oct‐99 Sep‐00 Aug‐01 Jul‐02 Jun‐03 May‐04 Apr‐05 Mar‐06 Feb‐07 Jan‐08 Dec‐08 Nov‐09 Oct‐10 Sep‐11 Aug‐12 Jul‐13 Jun‐14 May‐15 Apr‐16 Mar‐17

Firms Reporting Hard to Fill Openings and Plans to Raise Compensation

Percent of firms with hard to fill job openings, (%, SA) Net percent of firms planning to raise compensation, (%, SA)

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Wages Growing Slowly

Source: Federal Reserve Bank of Atlanta

5 0.0 1.0 2.0 3.0 4.0 5.0 6.0

Atlanta Fed Wage Growth Tracker

Overall Prime-age

Percent

Inflation Flirting with 2 Percent

Source: BLS

6 (40.0) (30.0) (20.0) (10.0) ‐ 10.0 20.0 30.0 40.0 (4.0) (3.0) (2.0) (1.0) ‐ 1.0 2.0 3.0 4.0 Jan‐14 Feb‐14 Mar‐14 Apr‐14 May‐14 Jun‐14 Jul‐14 Aug‐14 Sep‐14 Oct‐14 Nov‐14 Dec‐14 Jan‐15 Feb‐15 Mar‐15 Apr‐15 May‐15 Jun‐15 Jul‐15 Aug‐15 Sep‐15 Oct‐15 Nov‐15 Dec‐15 Jan‐16 Feb‐16 Mar‐16 Apr‐16 May‐16 Jun‐16 Jul‐16 Aug‐16 Sep‐16 Oct‐16 Nov‐16 Dec‐16 Jan‐17 Feb‐17 Mar‐17 Apr‐17 May‐17 Jun‐17 Jul‐17 Aug‐17 Sep‐17

CPI and Selected Components

Year over year percent change

Motor Fuel (right axis) All Items (left axis) All Items exc Food & Energy (left axis) Shelter (left axis)

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New Leadership at the Fed: Increased Uncertainty

Yellen -> Powell
Fischer -> ??
3 other governor spots open
Dudley -> ??
Richmond Fed??

Changes to Fed’s Balance Sheet Are Coming…

Source: FRED, FOMC Statement

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 2002‐Q4 2003‐Q2 2003‐Q4 2004‐Q2 2004‐Q4 2005‐Q2 2005‐Q4 2006‐Q2 2006‐Q4 2007‐Q2 2007‐Q4 2008‐Q2 2008‐Q4 2009‐Q2 2009‐Q4 2010‐Q2 2010‐Q4 2011‐Q2 2011‐Q4 2012‐Q2 2012‐Q4 2013‐Q2 2013‐Q4 2014‐Q2 2014‐Q4 2015‐Q2 2015‐Q4 2016‐Q2 2016‐Q4 2017‐Q2 2017‐Q4 2018‐Q2 2018‐Q4 2019‐Q2 2019‐Q4 $ Trllions

Chart of the Week ‐ June 16, 2017

US Treasuries and Agency MBS on Fed's Balance Sheet

MBS US Treasuries Hypothetical path

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11 FRBNY Bonis, Brian, Jane Ihrig, and Min Wei (2017). "Projected Evolution of the SOMA Portfolio and the 10-year Treasury Term Premium Effect," FEDS Notes. Washington: Board of Governors of the Federal Reserve System, September 22, 2017, https://doi.org/10.17016/2380- 7172.2081. Data: https://www.federalreserve.gov/econres/notes/feds-notes/projected-evolution-of-the-soma-portfolio-and-the-10-year-treasury-term- premium-effect-accessible-20170922.htm#fig1

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Growing Federal Debt Looming

Source: CBO

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Rates Expected to Increase

Source: Federal Reserve, Freddie Mac, MBA

Impact of Rate Hikes

Source: S&P

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Tax Reform

Corporate
Business
Individual
Rates
Distributional impacts
Housing provisions
Geographic impacts

Demand Strong but Household Formation Facing Headwinds

Source: Census, USPS, EIA

18 970 950 650 540 1,350 1,100 750 538 971 1,344 1,177 871 1,036 1,156 1,295 200 400 600 800 1,000 1,200 1,400 1,600 2014 2015 2016 2017 Thousands

Alternate Data Sources Provide Different Views of Household Formation

ACS Adjusted CPS

Res. USPS
Res. Elect. Srvc

Housing Completions

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A Decade of Unusual (for the US) Housing Growth Is Binding Markets

Source: Adjusted CPS, MBA

0.8 1.8 1.0 1.2 5.7 3.0 8.1 0.9 11.2 1.6 ‐0.8 1.4 ‐2 2 4 6 8 10 12 14 Single Family Multifamily Single Family Multifamily Single Family Multifamily 1987‐1997 1997‐2007 2007‐2017 Millions

Net Change in Households, by Structure Type and Tenure (millions)

Rented Owner‐Occupied

Declining Inventories for Sale Constraining Existing Home Sales

Source: NAR, MBA

20 1000 2000 3000 4000 5000 6000 7000 8000 2 4 6 8 10 12 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 Thousands Months

Existing Home Sales, Inventory and Months Supply

Months supply of existing homes on market (Months, SA, left axis) Existing Home Sales (Ths., SAAR, right axis) Number of homes available for sale (Ths., SA, right axis) EHS Forecast (right axis)

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Decelerating Growth in New Home Market, Despite Demand

Source: MBA Builder Applications Survey

50 100 150 200 250 ‐10% ‐5% 0% 5% 10% 15% 20% 25% 30%

Chart of the Week ‐ October 13, 2017

Year over Year Change in Builder Applications Survey Index (%)

2014 2015 2016 2017 BAS Index (right axis)

Single Family Starts Still Gathering Steam; MF Steady

Source: Census, MBA

22 200 400 600 800 1000 1200 1400 1600 1800 2000 2200 Thousands

Single and Multifamily Housing Starts

(Seasonally adjusted annualized rate)

Single Family Starts (SAAR) MF Starts (SAAR) Total Completions (SAAR)

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Lack of Labor Holding Back Single Family Housing Starts

Source: BLS, NAHB

23 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 Jan‐02 Sep‐02 May‐03 Jan‐04 Sep‐04 May‐05 Jan‐06 Sep‐06 May‐07 Jan‐08 Sep‐08 May‐09 Jan‐10 Sep‐10 May‐11 Jan‐12 Sep‐12 May‐13 Jan‐14 Sep‐14 May‐15 Jan‐16 Sep‐16 May‐17

Construction Labor

Layoffs and Discharges Rate (12 mo. moving avg., %) Hires Rate (12 mo. moving avg., %) Job Openings Rate (12 mo. moving avg., %)

House Price Growth Outpacing Income Growth; Price Gains to Slow

Source: FHFA, BLS

24 2.3% 6.4% 2.4% ‐10.0% ‐5.0% 0.0% 5.0% 10.0% 15.0% Q1‐83 Q1‐85 Q1‐87 Q1‐89 Q1‐91 Q1‐93 Q1‐95 Q1‐97 Q1‐99 Q1‐01 Q1‐03 Q1‐05 Q1‐07 Q1‐09 Q1‐11 Q1‐13 Q1‐15 Q1‐17 Q1‐19

Year over Year Growth of Wages and House Prices

ECI: Wages & Salaries: Civilian Workers (SA, Dec‐05=100) FHFA House Price Index, United States (NSA, Q1‐80=100)

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