FDIC Quarterly 29 2010, Volume 4, No. 1

Housing: Signs of Recovery

After more than three years of decline, the beleaguered 

U.S. housing market has shown some apparent signs of 

stabilizing in recent months. Inventories are down, 

existing home sales are up, and residential construction 

activity has stopped falling, at least for the time being. 

In relative terms, these trends represent a welcome 

departure from the continuous deterioration of market 

conditions that began in 2006.

Sales, Construction, and Inventories

•	 The inventory of unsold new homes in December 

was 13 percent lower than one year ago (see 

Chart 1).

•	 The months’ supply of existing homes on the market 

has fallen to the lowest levels since late 2006, while 

the supply of new homes on the market has also 

dropped from an all-time high of 12.4 months in 

January 2009.

U.S. housing and mortgage markets have experienced 

historic distress over the past three years. Housing starts 

dropped from more than 2 million units in 2005 to only 

553,000 in 2009, while foreclosures soared from 780,000 

to about 3 million during the same period. However, 

the signs of eventual recovery are beginning to emerge. 

Home price declines have boosted affordability, which 

in turn helped to push existing home sales in the fourth 

quarter of 2009 to their highest level in almost three 

years. Meanwhile, a number of government initiatives, 

from mortgage modification programs to outright 

purchases of mortgage-backed securities (MBS), have 

been put in place to help stabilize these highly 

distressed markets.

After more than three years of mostly unremitting bad 

news from the housing and mortgage sectors, analysts 

are now trying to evaluate the tentative signs of stabilization that emerged in late 2009. For example, home 

prices, by some measures, rose slightly on average for six 

consecutive months through November. Does this 

signal the “all clear” for homeowners and mortgage 

lenders? The answer is certainly “no.” At the same 

time, the combination of more affordable home prices, 

reduced inventory, and a leveling-off of home prices 

does suggest that a new equilibrium in the housing 

sector might not be that far off.

What worries analysts is that the mortgage delinquencies, foreclosures, and distressed sales that have driven 

home prices sharply lower since 2006 will outlast the 

policy support that has been slowing foreclosures, lowering mortgage rates, and encouraging first-time homebuyers to enter the market. This chartbook examines 

U.S. housing and mortgage markets for tentative signs 

of recovery and evaluates those hopeful signs against 

the challenges that remain.

Feature Article:

Measuring Progress in 

U.S. Housing and Mortgage Markets

Chart 1

-20%

-10%

0%

10%

20%

30%

40%

2005 2006 2007 2008 2009

0

2

4

6

8

10

12

14

Sources: National Association of Realtors; U.S. Census (Haver Analytics).

Existing and New Homes For Sale

(Percent change, one year ago)

Existing and New Homes For Sale

(Months' supply)

Housing Inventories Are Now Declining

from Peak Levels 
FDIC Quarterly 30 2010, Volume 4, No. 1

•	 Home sales increased during 2009 in markets across 

the South, West, Northeast, and Midwest (see 

Chart 2).

•	 Existing home sales nationwide are near their 

highest level in more than two years.

•	 Although permit issuance and new residential 

construction generally remain weak across the 

nation, the rate of decline is slowing, possibly indicating a bottom in the market (see Chart 3).

•	 Housing construction made its second consecutive 

positive contribution to gross domestic product 

growth in fourth quarter 2009, after more than three 

years of decline.

•	 Residential real estate investment rose again in 

fourth quarter 2009, increasing at nearly an 

8 percent annual rate, albeit from an already 

depressed level.

Continued Progress Hinges on Prices

Just as falling home prices came to represent the fundamental source of uncertainty in mortgage markets after 

2006, so too will a sustainable recovery in housing 

markets depend on the stabilization and slow recovery 

of home prices. This is why indications of a leveling-off 

in home prices at more affordable levels during the 

second half of 2009 represent a hopeful sign that housing activity and mortgage credit distress may soon stabilize or even improve.

•	 The S&P/Case-Shiller 10-city home price index 

registered a sixth consecutive monthly increase in 

November, with a 0.24 percent gain, following more 

than two years of declining prices (see Chart 4).

•	 The year-over-year change in the home price index, 

while still negative, has progressively moved closer 

to zero for the ninth month in a row, reaching 

−4.5 percent in November.

Chart 2

Existing Home Sales Have Improved in 

Regions across the Nation

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

South

Midwest

West

Northeast

Existing Home Sales

(Thousands)

Source: National Association of Realtors (data through fourth quarter 2009).

Note: Data are seasonally adjusted at annual rates.

Chart 3

Construction Activity, Starts, and Permits

(Thousands of units) 

Residential Construction Spending

(Billions of dollars)

Residential Construction Has Reached a Bottom

and Is Starting to Resume 

0

500

1000

1500

2000

2500

2005 2006 2007 2008 2009

0

100

200

300

400

500

600

700

Source: U.S. Census (Haver Analytics).

Chart 4

10-City Home Price Index

(Percent change, year-over-year)

10-City Home Price Index

(Percent change, month-to-month)

The Decline in House Prices May Have 

Reached a Turning Point 

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

Source: S&P/Case Shiller (Haver Analytics).
FDIC Quarterly 31 2010, Volume 4, No. 1

Housing and Mortgage Markets

•	 Year-over-year declines in home prices have eased in 

several of the hardest hit housing markets, such as 

Las Vegas, Phoenix, Miami, and Detroit (see 

Chart 5).

•	 Recent price trends may be either a sign of sustained 

recovery ahead or a temporary lull that will give way 

to further price declines once government stabilization programs begin to expire in early to mid-2010.

•	 Home price declines and low interest rates have 

contributed to dramatically improved housing 

affordability during the past two years.

•	 The National Association of Realtors’ Housing 

Affordability Index stood at 163.8 in December 

2009 (see Chart 6). This means that a family earning the median income had about 164 percent of the 

income needed to qualify to purchase the medianpriced home using a standard mortgage.

•	 The December reading is well above the long-term 

average for the index and indicates that housing 

remains near its most affordable level in decades.

•	 The improvement in housing affordability since late 

2007 extends to all 50 states (see Chart 7).

•	 Affordability has particularly improved in some of 

the higher-priced coastal markets. In California, a 

family earning the median income can now qualify 

to purchase a home worth 115 percent of the 

median price, up from a level of just 60 percent in 

2007.

Chart 5

Year-Over-Year Change in Home Price Index

(Percent)

House Price Declines Are Starting to Ease 

in the Nation’s Worst Housing Markets

Source: S&P/Case-Shiller.

-40

-30

-20

-10

0

10

20

30

40

50

60

00 03 06 09 00 03 06 09 00 03 06 09 00 03 06 09

Las Vegas Phoenix Miami Detroit

Chart 6

Housing Affordability Remains Near

Its Highest Level in Years 

Housing Affordability Index

(Median income=qualifying income=100)

60

80

100

120

140

160

180

1971 1976 1982 1987 1993 1998 2004 2009

Source: National Association of Realtors (Haver Analytics).

Long-term average = 117

Chart 7

Housing Affordability Has Improved in All States

Source: Moody’s Economy.com estimates.

Note: A value of 100 on the Housing Affordability Index means that the family earning the

median income can afford 100 percent of the traditional mortgage payment of the medianpriced home. The calculation assumes a mortgage loan with a 30-year maturity and a 

down payment of 20 percent. It also assumes that the monthly principal and interest

payments do not exceed 25 percent of the median family income.

Third Quarter 2007

Third Quarter 2009

0 - 70

70 - 100

100 - 130

130 - 200

200 - 275

Housing Affordability Index
FDIC Quarterly 32 2010, Volume 4, No. 1

Foreclosures Cloud an Uncertain Future

Among the biggest challenges to a recovery in the 

housing market is the near-record high level of foreclosures and the excess inventory and distressed home 

sales those foreclosures could impose on the market. 

The more than tripling of the annual number of U.S. 

foreclosures since 2006 has destabilized the housing 

market and placed additional downward pressure on 

home prices in what became a self-reinforcing cycle. 

If both foreclosures and unemployment continue to 

increase, the housing market could retrench in coming 

months and the tentative recovery in housing fundamentals could falter.

Foreclosures

•	 Delinquencies and foreclosures have now spread into 

prime space. In fourth quarter 2009, the past-due 

rate for prime loans was near a record high 6.7 

percent. Prime fixed-rate loans accounted for 35 

percent of the foreclosure starts during the quarter 

(see Chart 8).1

•	 The poor performance of prime fixed-rate loans will 

likely get worse because those loans represented an 

increasing share of loans 90 days or more past-due 

but not yet in foreclosure.

•	 About 32 percent of home sales nationwide in 

December were distressed or foreclosure related.2

•	 An estimated 2.82 million homes entered foreclosure 

during 2009, a marked increase from the estimated 

2.28 million foreclosures in 2008 (see Chart 9).3

•	 The abundance of foreclosure resales has contributed 

to continued home price depreciation.

•	 In California, nearly 5.6 percent of all mortgages 

were in foreclosure in fourth quarter 2009.4

•	 Although foreclosure resales in California are declining, they remain an important consideration for 

both home buyers and sellers, accounting for 40 

percent of existing home sales in fourth quarter 2009 

(see Chart 10).

1

 Mortgage Bankers Association, National Delinquency Survey, Fourth 

Quarter 2009.

2

 National Association of Realtors, news release, January 25, 2010. 

3

 FDIC estimates based on data from the Mortgage Bankers Association’s National Delinquency Survey for fourth quarter 2009. 

4

 Mortgage Bankers Association. 

Chart 8

0

5

10

15

20

25

2000 2003 2006 2009

Subprime All

ARMs

Prime

ARMs

All

0

2

4

6

8

10

12

14

16

18

2000 2003 2006 2009

Subprime

All

ARMs

Prime

ARMs

All

Source: Mortgage Bankers Association (Haver Analytics). 

Mortgage Credit Distress Continued to Rise—and

Spread to Prime Loans—as the Recession Deepened

Conventional Loans Past Due 90+ Days

(Percent)

Conventional Loans in Foreclosure

(Percent)

Chart 9

Still-Rising Foreclosures Raise Concerns about

Distressed Sales and “Shadow Inventory”

Estimated Annual Foreclosures

(Thousands)

0

500

1000

1500

2000

2500

3000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: FDIC estimates based on Mortgage Bankers Association data.

Chart 10

In California, Foreclosure Resales Are Trending Down

but Remain High

Foreclosure Resales as a Share of Existing Home Sales

(Percent)

3.2 5.4

9.5

19.0

33.1

40.1

47.5

54.4

57.8

49.9

42.7 40.7

0

10

20

30

40

50

60

1Q 07 2Q 07 3Q 07 4Q 07 1Q 08 2Q 08 3Q 08 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09

Source: DQNews.com Real Estate News & Custom Data.
FDIC Quarterly 33 2010, Volume 4, No. 1

Housing and Mortgage Markets

Shift in the Composition of Mortgage Funding

The most significant result of deteriorating credit 

quality and tightened lending standards has been the 

collapse of the private MBS market and a shift toward 

conforming mortgage originations.

•	 Through third quarter 2009, 67 percent of new 

mortgage originations were conforming mortgages 

that could be readily sold in the agency MBS 

market, compared with 33 percent in 2006.6

•	 The pace of jumbo mortgage lending increased 

during the first nine months of 2009, although it 

remained far below the level reached at the peak of 

the market (see Chart 12).

6

 Inside Mortgage Finance, November 27, 2009. 

Shadow Inventory

•	 The risk posed by still-rising foreclosures is that they 

will increase the pending supply, or shadow inventory, 

of homes not yet on the market. Shadow inventory 

is generally made up of current foreclosures and 

homes owned by delinquent borrowers that are 

likely to transition into the foreclosure pipeline.

•	 Shadow inventory, which is estimated to be 1.7 

million units as of third quarter 2009, may increase 

the already high proportion of distressed or foreclosed home resales.5

Credit Availability: Continued Strains

While the national housing market is showing some 

signs of recovery, credit markets for residential mortgages continue to be stressed. Tightened credit standards, declining consumer net worth, rising delinquency 

and foreclosure rates, the lack of private MBS issuance, 

and the collapse of the subprime market have limited 

funding channels and lending opportunities. Government programs and agencies have filled the void largely 

through policy initiatives and implicit or explicit 

guarantees.

Tightened Credit Standards

Poor mortgage loan performance has prompted tighter 

underwriting standards.

•	 Residential credit quality has deteriorated. The 

noncurrent ratio for one-to-four single-family 

mortgages increased to a record high 9.9 percent in 

fourth quarter 2009, nearly double the level of one 

year ago.

•	 Banks have tightened credit standards on residential 

mortgage loans. The Federal Reserve’s January 

survey indicated that banks tightened lending standards, on net, for both prime and nontraditional 

mortgages (see Chart 11).

5

 First American CoreLogic, Media Alert, December 17, 2009. 

Chart 11

Banks Continue to Tighten Lending Standards

for Residential Mortgages

Net Percentage of Domestic Respondents Tightening Standards

-40

-20

0

20

40

60

80

100

91 93 95 97 99 01 03 05 07

-40

-20

0

20

40

60

80

100

2Q07 1Q08 4Q08 3Q09

Prime

Subprime

1Q10

All Residential Mortgages

Non- traditional

Source: Federal Reserve Senior Loan Officer Opinion Survey, January 2010.

Notes: All residential mortgage data from 1Q91 to 1Q07. The subprime series was 

discontinued after 1Q09. 

Chart 12

Jumbo Mortgage Originations Fell Sharply in 2008

and Remain at Low Levels 

$0

$100

$200

$300

$400

$500

$600

$700

2000 2002 2004 2006 2008 1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

0%

5%

10%

15%

20%

25%

30%

Jumbo Mortgage Originations

(Billions of dollars)

Jumbo Market Share

(Percent of total originations)

Source: Inside Mortgage Finance.
FDIC Quarterly 34 2010, Volume 4, No. 1

Government Adds Liquidity to the Market

Throughout 2009, the government added liquidity to 

the flagging mortgage credit markets as the Federal 

Reserve and the U.S. Treasury became primary purchasers of agency MBS.

•	 The Federal Reserve’s net purchases of agency 

securitizations during 2009 totaled $1.11 trillion, 

representing 65 percent of the total $1.71 trillion in 

agency MBS issued during 2009.9

•	 The government is likely to remain a major investor 

in the flagging mortgage market for now with its 

commitment to purchase a total of $1.25 trillion in 

agency MBS by the end of first quarter 2010.

•	 Together, the Federal Reserve and Treasury hold 

an estimated 12 percent of total agency MBS 

outstanding.10

•	 The GSEs have spurred issuance of MBS by adding 

liquidity to a constrained mortgage market. The 

$1.71 trillion dollars of agency MBS issued during 

2009 represents nearly a 47 percent increase from 

2008 (see Chart 14).11

•	 Ginnie Mae MBS issuance during 2009 was 66 

percent higher than in 2008.12

9

 Federal Reserve Bank of New York; Inside MBS & ABS, 

January 22, 2010. 10 Inside MBS & ABS, September 25, 2009. 

11 Inside MBS & ABS, January 22, 2010. 

12 Ibid. 

•	 The volume of jumbo mortgage originations for 

2009 now appears on track to match 2008 levels.

•	 The change in mortgage production has created a 

fundamental shift in the composition of mortgage 

funding.

•	 The government-sponsored enterprises (GSEs) 

Fannie Mae and Freddie Mac and the government 

mortgage insurance program Ginnie Mae together 

account for more than 95 percent of total MBS 

issuance since 2008.7

•	 Federal Housing Administration (FHA) and 

Department of Veterans Affairs (VA) guaranteed 

mortgage loan originations accounted for almost 

one-quarter (24 percent) of mortgage originations 

through third quarter 2009, up from a low of 2.7 

percent in 2006 (see Chart 13).8

•	 FHA-insured mortgages will remain a strong force in 

the mortgage market, but the rate of increase may 

slow as the result of the recently announced tightening of standards.

•	 The GSEs’ higher conforming loan limits and the 

FHA’s higher mortgage limit are helping to support 

housing markets by increasing the availability of 

mortgages for homes in higher-priced areas.

7

 Inside MBS & ABS, December 18, 2009. 

8

 Inside Mortgage Finance, November 27, 2009. 

Chart 13

The Popularity of FHA and VA Loans Has Jumped 

in the Face of Tight Credit

FHA / VA Mortgage Originations

(Billions of dollars)

FHA / VA Market Share

(Percent of total originations)

$0

$50

$100

$150

$200

$250

$300

$350

2000 2002 2004 2006 2008 1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

0%

5%

10%

15%

20%

25%

30%

35%

40%

Source: Inside Mortgage Finance.

Chart 14

Government-Sponsored Enterprises Have Boosted

MBS Issuance to Add Liquidity to the

Flagging Mortgage Market 

MBS Issuance

(Billions of dollars)

0

50

100

150

200

250

300

Mar

08

May

08

Jul

08

Sep

08

Nov

08

Jan

09

Mar

09

May

09

Jul

09

Sep

09

Nov

09

Non-Agency

Freddie Mac

Fannie Mae

Ginnie Mae

Source: Inside MBS and ABS.
FDIC Quarterly 35 2010, Volume 4, No. 1

Housing and Mortgage Markets

Conclusion

The U.S. housing market showed tangible signs of 

improvement in 2009 as home price indices stabilized, 

inventories declined, and housing affordability reached 

historic high levels. Improvements in these fundamentals are still tentative, however, and are at risk of faltering after the withdrawal of the exceptional government 

support that helped to stabilize the housing and mortgage markets in 2009. Even if the signs of recovery 

continue, residential construction, home prices, and 

lending activity may remain subdued for years. But after 

more than three years of historic turmoil, a return to 

stable and self-sustaining housing and mortgage markets 

would bring welcome relief to lenders, homeowners, 

and the U.S. economy as a whole.

Authors: Cynthia Angell, Financial Economist

Robert M. Miller, Economic Analyst

•	 In contrast, non-agency issuance during 2009 was 

almost flat, at only 3.5 percent above the 2008 level. 

Non-agency market share in 2009 was just 3.4 

percent of total MBS issuance.13

Mortgage Originations Increased in 2009

Mortgage originations were strong throughout the 

middle of the decade before declining substantially with 

the onset of the subprime mortgage crisis.

•	 Mortgage market turmoil since 2007 has necessitated tighter credit standards and a realignment of 

funding sources, resulting in a greater government 

role in providing liquidity to the market.

•	 Mortgage originations peaked in 2003 at almost 

$4 trillion. By 2008, mortgage originations had 

fallen to $1.5 trillion for the year, the lowest level 

since 2000 (see Chart 15).14

•	 The Federal Reserve’s purchases of agency MBS in 

2009 helped to reduce mortgage rates to historically 

low levels and generate a refinancing boom (see 

Chart 16).

•	 Refinance originations surged to 76 percent of originations in the first half of 2009. Refinancing activity 

slowed around mid-year as mortgage rates increased, 

but it picked up again in the second half of 2009 as 

rates fell.15

•	 The Mortgage Bankers Association expects that 

total mortgage production in 2009 rose by about 

40 percent to $2.1 trillion, largely on the strength of 

refinancing originations.16

•	 Total originations are expected to decline by 40 

percent in 2010 to $1.3 trillion, as the drop in refinancing originations in 2010 will far outweigh the 

expected 5 percent increase in purchase originations.

•	 A key question going forward is the extent to which 

mortgage rates may rise in 2010 as some government 

support programs expire.

13 Ibid. 

14 Inside Mortgage Finance, November 27, 2009. 

15 Ibid. 

16 Mortgage Bankers Association, Mortgage Finance Forecast, 

January 12, 2010. 

Chart 15

Mortgage Originations Declined Steadily from 

2005 to 2008 but Likely Increased in 2009

Total Mortgage Originations

(Billions of dollars)

S&P/Case-Shiller Home Price Index

(Q1 2000 = 100)

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2000 2002 2004 2006 2008 1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

0

20

40

60

80

100

120

140

160

180

200

Sources: Inside Mortgage Finance; S&P, Case-Shiller/Fiserv. 

Chart 16

Mortgage Interest Rates Declined to

Near-Historic Lows in 2009

Interest Rate

(Percent)

0

1

2

3

4

5

6

7

8

9

Aug05Dec05Apr06Aug06Dec06Apr07Aug07Dec07Apr08Aug08Dec08Apr09Aug09Dec09

30-year jumbo mortgage

Sources: Wall Street Journal; Federal Reserve Board (Haver Analytics).

30-year conventional mortgage

10-year constant Treasury maturity