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

2. 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.

3. Macroeconomic Growth

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

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

6. Nonresidential Fixed Investment Declines
Source: Bureau of Economic Analysis

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

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

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

10. 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

11. 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 $ $
22.1%
21.9%
United Kingdom $ $
5.5%
4.0%
Canada $ $
14.9%
12.0%
Mexico $ $
11.8%
China $ $
7.3%
18.1%
Japan $ $
4.8%
5.9%
South Korea $ $
2.9%
3.0%
Brazil $ $
2.6%
1.2%
India $ $
1.8%
2.5%
Saudia Arabia $ $
1.3%
0.8%
Other $ $
30.4%
22.7%
Total
$ ,261
$ ,762
100.0%
Source: Census Bureau

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

13. Labor Market Conditions

14. 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

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

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

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

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

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

20. Capital Markets and Federal Reserve Policy

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

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

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

24. Housing and Mortgage Markets

25. 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

26. Inventory-to-Sales Ratios
Source: RedBell

27. 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

28. 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

29. 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

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

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

32. 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

33. 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

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

35. Majority of Renters Age 18-44 Indicate They Plan to Buy in the Future
Lifetime Intentions to Own a Home Among Renters
Q 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®

36. Young Home Buyers are Increasingly Purchasing Single-Family Homes
Quartile cutoffs were calculated using the income distribution of recent-mover owner-occupants aged in 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

37. 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

38. 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

39. 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.

40. Contact Information
Mark Palim, Vice President Fannie Mae 3900 Wisconsin Ave., NW Mail Stop 1H-2N/01 Washington, DC (o) Economic & Strategic Research