A Historical Perspective on Housing Downturns Eric S. Rosengren President & CEO Federal Reserve Bank of Boston CBIA Economic Summit January 8, 2008 EMBARGOED until Jan. 8, 2008, 10:50 AM Eastern Time or upon delivery

1 Trends in Residential Investment Residential investment has declined continuously since 2006:Q1 Most economic forecasts predict that trend will continue at least through the first half of 2008

2 Exhibit 1 Continuous Declines of Three Quarters or more in Real Residential Investment :Q3 Source: BEA / Haver Analytics

3 Exhibit 2 Real Residential Investment and Real Interest Rates Source: BEA, BLS, Federal Reserve Board / Haver Analytics

4 Today's Residential Trends are Distinctive Previous significant declines in residential investment have often followed rising inflation and tighter monetary policy Housing price declines have tended to be regionally concentrated

5 Exhibit 3 Growth Rate of Real House Prices by Census Region* Source: OFHEO, BLS / Haver Analytics

6 Exhibit 4 National Home Price Indexes Source: OFHEO, S&P/Case-Shiller / Haver Analytics

7 Exhibit 5 S&P/Case-Shiller Home Price Index: Ten Metro Areas and Composite Source: S&P/Case-Shiller / Haver Analytics

8 Summary of Recent Trends Regional changes in house prices have been correlated Prices have fallen faster in regions that experienced some of the most rapid appreciation Weakness has occurred with relatively low inflation and real interest rates

9 Housing Downturns in Focus Strength of the economy going forward Reaction of lenders to current problems –Transparency of response –Speed of loss recognition –Adjustments benefit from orderly, well-functioning environment

10 Exhibit 6 New England House Price Index Source: OFHEO / Haver Analytics

11 New England Experience New England appreciated quickly during the first half of the 1980s Late 1980s and early 1990s home and commercial real estate prices declined –Recognition of losses enforced by bank examiners –Problem loans quickly sold

12 Japanese Experience Rapid rise in land prices in 1980s followed by a decline throughout the 1990s –Financial institutions not transparent –Problem assets held not sold by financial institutions and government –Misallocation of credit

13 Exhibit 7 Japanese Land Price Indexes: All Urban Land and Six Major Cities Source: Japan Real Estate Institute

14 Potential for Credit Crunch Remains Banks remain a major source of liquidity –Bank assets have grown – asset-backed commercial paper, leveraged buy-out loans –Many credit spreads are elevated but have improved relative to year end –Need to insure credit is available for promising projects

15 Exhibit 8 Balance-Sheet Growth at Commercial Banks in the U.S. in 2007 Source: Federal Reserve Board / Haver Analytics

16 Recent Actions by the Federal Reserve Monetary Policy Term Auction Facility –Innovative tool to provide liquidity without the stigma some have attached to the Discount Window –Proved useful at the end of 2007

17 New England Initiative Mortgage Relief Fund –Consortium of banks have made funds available for subprime borrowers with as little as 3% equity in their house –Subprime borrowers should see if they can be helped at:

18 Exhibit 9

19 Conclusion We have, and need to continue, to closely monitor problems generated from a weak housing sector Greater transparency and loss recognition may speed up the adjustment process Adjustments will be easier with a well-functioning economy and financial markets