When Will It End? Presented by: Mark M. Zandi, Chief Economist Presented by: Mark M. Zandi, Chief Economist September 23, 2008

2 How Did We Get Into This Mess?

3 The Bursting Housing Bubble… Fiserv Case Shiller National House Price Index, 2000Q1= %

4 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 At risk mortgages15,000,000 Foreclosure rate40% Foreclosed mortgages6,000,000 Loss rate50% Mortgage loss$600 bil Residential mortgages Consumer loans Commercial mortgages Corporate …Undermining the Financial System…

6 Difference between 3 month Libor and Treasury bill yields …And Pushing It to the Precipice of Collapse S&L crisis Subprime financial shock Peso crisis LTCM Tech bust Orange County Thai baht Y2K

7 Is the Policy Response Appropriate?

8 An Unprecedented Policy Response…

9 …That Will Be Costly, But Not $1 Trillion Public Financial Writedowns as of Early September 2008

10 What Is the Economic Fallout?

11 Real GDP growth, annualized % change The Negative Economic Fallout Is Significant…

12 …Very Significant…

13 Bond issuance, $ bil, annualized, Source: Thompson …As Credit Markets Remain Frozen…

14 Difference with 10-yr Treasury rate, basis points …Credit Spreads Have Ballooned… Junk corporate Emerging market

15 Net % tightening standards …And Banks Will Continue to Tighten Source: Federal Reserve Board

16 Consumers (L) Small business (R) Confidence Is Rock Bottom… Sources: Conference Board, NFIB

17 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

18 When Will It End?

19 Another 10% to Go... % change from peak, Sources: Fiserv Lending Solutions, Census, Moody's Economy.com Early 1990s House price Home salesHousing starts Current downturn to date Early 1980s Current downturn forecast

20...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%

21 Housing Is Becoming More Affordable… Sources: BEA, Census, PPR, Realtors Price-income ratio (R) Price-rent ratio (L)

22 Number of vacant homes for sale, ths, Source: Census …Inventories Are Peaking… Housing supply1,000,000 Single625,000 Multi300,000 Manufactured75,000 Housing demand1,500,000 Households975,000 Obsolescence400,000 Second homes125,000

23 Source: Bankrate.com 30-year fixed mortgage rate …And Nationalization Is A Plus

24 A Timeline to Recovery 08q108q2 08q308q409q109q2 09q309q4 10q110q2 10q310q4 Stock Market Bottoms Oil Prices Peak Home Sales Bottom Housing Starts Bottom Employment Bottoms House Prices Bottoms Foreclosures Peak Jobless Rate Peaks House Prices Resume Rising Financial Failures Abate Self-Sustaining Economic Expansion Begins Fed Tightens Extraordinary Writedowns End $ Rises

25 Serious Threats Remain.

26 The Financial System Remains Very Fragile… Financial stock index, Source: NYSE Financial shock strikes Bear Stearns fails Panic

27 Number of underwater homeowners, ths Sources: Equifax, Moody's Economy.com …and House Price Declines Threaten to Overshoot

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