Economic and Housing Outlook Mark Palim Vice President, Economic & Strategic Research Fannie Mae June, 2016

Disclaimer Opinions, analyses, estimates, forecasts, and other views of Fannie Mae's Economic & Strategic Research (ESR) group included in these materials should not be construed as indicating Fannie Mae's business prospects or expected results, are based on a number of assumptions, and are subject to change without notice. How this information affects Fannie Mae will depend on many factors. Although the ESR group bases its opinions, analyses, estimates, forecasts, and other views on information it considers reliable, it does not guarantee that the information provided in these materials is accurate, current, or suitable for any particular purpose. Changes in the assumptions or the information underlying these views could produce materially different results. The analyses, opinions, estimates, forecasts, and other views published by the ESR group represent the views of that group as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.

Macroeconomic Growth

Labor Productivity Growth Slows and Dampens Income Growth Source: Bureau of Economic Analysis, Bureau of Labor Statistics

Inventory-to-Sales Ratios Rise on Slower Sales Source: Bureau of Economic Analysis, Census Bureau

Nonresidential Fixed Investment Declines Source: Bureau of Economic Analysis

Industrial Production Declining – Led By Energy Sector Downturn Source: Federal Reserve

Private Nonresidential Investment Follows Corporate Profits Source: Bureau of Economic Analysis

Consumer Confidence Remains Near Cyclical High, but Change in Level is More Indicative of Consumer Spending Source: Conference Board, Bureau of Economic Analysis

The Strong Dollar Contributes to the Reduction in Trade The Dollar Remains Elevated U.S. Trade Continues to Fall Source: Federal Reserve Board, Census Bureau

2015 US Exports and Imports – Goods and Services UK Accounts for Small Share of US Exports, but Heavier Trade with Broader EU 2015 US Exports and Imports – Goods and Services Billions of Dollars Percent of Total Exports Imports European Union $ 501 $ 604   22.1% 21.9% United Kingdom $ 123 $ 111 5.5% 4.0% Canada $ 338 $ 332 14.9% 12.0% Mexico $ 267 $ 325 11.8% China $ 165 $ 499 7.3% 18.1% Japan $ 108 $ 164 4.8% 5.9% South Korea $ 65 $ 84 2.9% 3.0% Brazil $ 60 $ 34 2.6% 1.2% India $ 40 $ 70 1.8% 2.5% Saudia Arabia $ 30 $ 23 1.3% 0.8% Other $ 688 $ 627 30.4% 22.7% Total $ 2,261 $ 2,762 100.0% Source: Census Bureau

GDP Forecast to Continue Modest Growth Source: Bureau of Economic Analysis, *Fannie Mae Economic & Strategic Research June 2016 Forecast

Labor Market Conditions

Employment Continues to Improve, but Wage Growth Remains Modest Labor Force Participation Rate Leveling Off Along with Low Unemployment Rate Wage Growth Remains Subdued Source: Bureau of Labor Statistics

Pace of Labor Market Improvement has Recently Decelerated Source: Bureau of Labor Statistics, Federal Reserve

Unemployment Rates and Labor Force Participation Rates in the Region Source: Bureau of Labor Statistics

Real Median Income Trends in the Region Source: Bureau of Economic Analysis, Moody’s

Job Growth Less Geographically Uniform in 2015 December 2014 Y/Y % Change December 2015 Y/Y % Change Source: Bureau of Labor Statistics

Core Inflation Ticks Up, but Expectations Remain Anchored Source: Bureau of Labor Statistics, Federal Reserve Bank of Cleveland

Capital Markets and Federal Reserve Policy

Corporate Debt Cycles Sending Signals Source: Federal Reserve, Bureau of Economic Analysis, Bank of America Merrill Lynch

Intermediate Rates Have Fallen Since the Announcement of a Rate Hike Source: U.S. Treasury

Real Interest Rates Have Trended Lower for Over Three Decades Inflation Adjusted 1-Year U.S. Treasury Yield Source: Federal Reserve Bank of Cleveland

Housing and Mortgage Markets

Housing Demand is Moving Ahead of Supply Existing Home Sales are Volatile; New Home Sales Growth Recovering Slowly Tight Supply May Further Support Home Price Growth Source: Census Bureau, National Association of REALTORS®, CoreLogic

Inventory-to-Sales Ratios Source: RedBell

Change in Home Prices in This Region Month Year Change in Home Prices in This Region US HI CA WA OR Peak Q1 2007 Q2 2007 Q3 2006 Q4 2007 Trough Q2 2012 Q1 2012 As of Q1 2016 Source: FHFA Source: FHFA Presentation Title Goes Here

Difference in Growth Between Price Tiers Moderately Priced Homes Continue to See Faster Home Price Appreciations MSA Name Low Tier Mid Tier High Tier   Difference in Growth Between Price Tiers Year-over-Year % Change Low Tier - Mid Tier Low Tier - High Tier Atlanta 8.52% 7.25% 5.52% 1.28% 3.00% Boston 6.32% 3.66% 3.64% 2.66% 2.68% Chicago 6.94% 4.35% 0.13% 2.59% 6.81% Denver 15.83% 10.83% 6.75% 5.00% 9.08% Las Vegas 9.80% 7.70% 3.52% 2.11% 6.28% Los Angeles 10.06% 7.07% 5.27% 2.99% 4.79% Miami 14.92% 7.86% 3.39% 11.53% Minneapolis 8.38% 4.60% 1.02% 3.77% 7.36% New York 3.87% 5.44% 1.34% -1.57% 2.53% Portland 11.27% 4.33% 7.62% Phoenix 15.42% 13.13% 9.92% 2.29% 5.50% San Diego 10.34% 6.04% 4.95% 4.30% 5.39% San Francisco 12.93% 7.19% 3.85% 5.74% Seattle 11.16% 11.95% 10.14% -0.79% Tampa 18.72% 9.96% 5.32% 8.76% 13.40% Washington DC 3.59% 2.20% 0.42% 1.39% 3.17% Note: Percentage change in S&P/Case-Shiller Home Price Index (SA) from March 2015 to March 2016. Source: Standard & Poor's

Single-Family Housing Supply is Still Behind the Curve Tight Supply of Single-Family Construction Compared to Population Multifamily Construction Picks Up the Pace Source: Census Bureau

Recovery in New Home Construction Is Slower than What We’ve Seen in the Past and Skewed Toward Less Affordable Homes Source: Census Bureau

Labor Cost and Availability Are the Major Factors Holding Home Builders Back Source: National Association of Home Builders

Housing Affordability Moves to the Forefront Affordability Still Above Normal, but Declining High Rental Demand Boosts Rent Growth Peak 1/2013 214.5 ↑112% Post-recession low 7/2015 154.5 ↓28% Low 7/2006 101.1 (High Home Prices) 9/1981 63.9 ↓20% Note: Index=100 when median family income qualifies for an 80% mortgage on a median priced existing single-family home. A rising index indicates more buyers can afford to enter market. Note: Price-to-Rent: The ratio is calculated by dividing the FHFA purchase-only home price index by the Owner's Equivalent Rent component of the CPI. Source: National Association of Realtors®, Bureau of Labor Statistics, Census Bureau

Millennials Housing Demand Subdued Compared with Previous Generations Millennials are Less Likely to Form Households Than Their Predecessors When They Do Form Households, They are More Likely to Rent, Particularly Single-Family Homes The headship rate, a commonly used metric of household formation, is the proportion of the population in a given age group that is a householder, i.e., the person, or one of the persons, in whose name a housing unit is owned, being bought, or rented. “Single-family” is 1 to 4 units in structure, “multifamily” is 5+ units in structure, and “Other” is predominantly manufactured/mobile homes. Source: Census, Decennial Census and American Community Survey

A Notable Increase in the Age of Repeat Buyers Repeat buyer Distribution by Age First-Time Homebuyers Distribution by Age 2003 Median Age= 46 2014 Median Age = 53 Source: National Association of REALTORS® - 2003 and 2014 Profile of Home Buyers and Sellers

Majority of Renters Age 18-44 Indicate They Plan to Buy in the Future Lifetime Intentions to Own a Home Among Renters Q3 2014 to Q2 2015 Q31 – If you were going to move, would you be more likely to: Rent / Buy Q50 – (IF Q31=RENT) In the future, are you more likely to: Always rent / Buy at some point in the future Likely to buy at some point: Q31= Buy or Q50 = Buy at some point in the future Likely to always rent: Q50 = Always Rent Source: Fannie Mae National Housing Survey®

Young Home Buyers are Increasingly Purchasing Single-Family Homes Quartile cutoffs were calculated using the income distribution of recent-mover owner-occupants aged 25-34 in 2006. Quartile membership in other years was determined by indexing the 2006 quartile cutoffs for inflation using the CPI-U-RS. Source: U.S. Census Bureau, 2006 and 2013 American Community Survey 1-Year Estimates and 2000 Census

2016 Housing and Mortgage Market Outlook – Up from 2015, but Slower Growth June 2016 forecast 2015* 2016 2017 Housing Starts 1.111 million 1.214 million 1.355 million New Single-Family Home Sales (Percent Change Year-Over-Year) 501 thousand 14.6% 562 thousand 12.1% 614 thousand 9.4% Total Existing Home Sales (Percent Change Year-Over-Year) 5.250 million 6.3% 5.401 million 2.9% 5.530 million 2.4% FHFA Purchase-Only Index (Annual Percent Change Q4/Q4) 5.9% 5.2% 3.9% Purchase Mortgage Originations $916 billion $1,004 billion $1,010 billion Refinance Mortgage Originations $795 billion $659 billion $440 billion 30-Year Fixed Rate Mortgage (Year-end) 3.7% 3.8% *Actual values Source: Fannie Mae Economic & Strategic Research June 2016 Forecast

Mortgage Production Expected to Shift Further Toward Purchase Market Mortgage Originations (1-4 Unit, Trillions of $) Source: Fannie Mae Economic & Strategic Research Forecast June 2016 Forecast

Speaker Biography Mark Palim – Vice President of Applied Economic & Housing Research Dr. Mark Palim is Vice President of Applied Economic and Housing Research at Fannie Mae. He is responsible for overseeing the Economic and Strategic Research Group’s forecasting functions and manages multi- disciplinary partnerships across the company to address specific business issues facing Fannie Mae. Dr. Palim is a key spokesperson on economic trends and a frequent speaker at national mortgage finance and housing industry events. Prior to working at Fannie Mae, Dr. Palim was an economic consultant at PricewaterhouseCoopers and LECG. His practice focused on applying economic and financial theory to a variety of business disputes and policy questions. He worked as a consulting and testifying expert in antitrust cases and disputes in the financial services industry. In addition, Dr. Palim led a team of 75 adjudicators charged with valuing claims for the Department of Justice and the Special Master administering the Federal September 11th Victim Compensation Fund. Dr. Palim was first involved with economic forecasting and mortgage securities in 1988 when he was a portfolio manager and reported to the Chief Economist at Mercantile Safe Deposit and Trust Company. Subsequently, he continued his work on macroeconomic and policy issues as a staff economist for the National Association of Federal Credit Unions (NAFCU). Dr. Palim has a Ph.D. in economics from George Mason University and a B.A. in international studies from the Johns Hopkins University. In addition to his academic training, Dr. Palim is a Chartered Financial Analyst charter holder (CFA). Dr. Palim is married to an attorney and has four children. He lives in Bethesda, Maryland and grew up in Brussels, Belgium. Dr. Palim is fluent in French.

Contact Information Mark Palim, Vice President Fannie Mae 3900 Wisconsin Ave., NW Mail Stop 1H-2N/01 Washington, DC 20016 (o) 202-752-7987 mark_palim@fanniemae.com Economic & Strategic Research http://fanniemae.com/portal/research-and-analysis/