Chairman Donald E. Powell
Federal Deposit Insurance Corporation
Housing Trends and the Economy: Implications for Financial Institutions
America's Community Bankers
November 5, 2002
San Francisco, California
FOR IMMEDIATE RELEASE Media Contact:
PR-117-2002 (11-5-02) Rosemary George (202) 898-6530
Good morning.
I am glad to be here in San Francisco with you. As far as I am concerned, this city has
only one drawback: it's hard to leave. It's a place where, as John Updike said, "the view
is visible from anywhere." It's a lovely city.
I want to talk this morning about backbone. Specifically, about how the housing market
has been the backbone of the economy during this downturn and how community banks
played a vital role in providing consumer financing to keep that market strong. Also, I
would like to highlight a few supervisory issues that we at the FDIC are watching.
But first I want to talk a little about the industry as a whole, and where it is today.
It's a fact that the banking industry in 2002 looks a lot different than it did 20 years ago.
Changes taking place throughout our entire economy are reflected in the financial
services industry - including the powerful combination of long-term trends like
deregulation, rapid advances in technology, consolidation, and a strong focus on the
consumer.
We have seen an unprecedented consolidation in the industry, resulting in the
concentration of assets in a few very large and complex banking firms. In fact, today the
combined assets of the three largest institutions in the country exceed the combined
assets of all community banks with less than $1 billion.
Despite this powerful trend, there is another story that all of you know very well.
Community banks continue to play an important role in their local economies all across
America. Certainly investors think so. New charters are up, and community banks
overall show better capitalization. Our examiners see less drain on revenue from loan-
loss provisions and increased noninterest income - all signs of good health.
Part of the important role community banks play is in financing home mortgages - or, as
we so often hear, financing the American dream. And that is what I want to spend some
time on today.
Federal Deposit Insurance Corporation
Housing Trends and the Economy: Implications for Financial Institutions
America's Community Bankers
November 5, 2002
San Francisco, California
FOR IMMEDIATE RELEASE Media Contact:
PR-117-2002 (11-5-02) Rosemary George (202) 898-6530
Good morning.
I am glad to be here in San Francisco with you. As far as I am concerned, this city has
only one drawback: it's hard to leave. It's a place where, as John Updike said, "the view
is visible from anywhere." It's a lovely city.
I want to talk this morning about backbone. Specifically, about how the housing market
has been the backbone of the economy during this downturn and how community banks
played a vital role in providing consumer financing to keep that market strong. Also, I
would like to highlight a few supervisory issues that we at the FDIC are watching.
But first I want to talk a little about the industry as a whole, and where it is today.
It's a fact that the banking industry in 2002 looks a lot different than it did 20 years ago.
Changes taking place throughout our entire economy are reflected in the financial
services industry - including the powerful combination of long-term trends like
deregulation, rapid advances in technology, consolidation, and a strong focus on the
consumer.
We have seen an unprecedented consolidation in the industry, resulting in the
concentration of assets in a few very large and complex banking firms. In fact, today the
combined assets of the three largest institutions in the country exceed the combined
assets of all community banks with less than $1 billion.
Despite this powerful trend, there is another story that all of you know very well.
Community banks continue to play an important role in their local economies all across
America. Certainly investors think so. New charters are up, and community banks
overall show better capitalization. Our examiners see less drain on revenue from loan-
loss provisions and increased noninterest income - all signs of good health.
Part of the important role community banks play is in financing home mortgages - or, as
we so often hear, financing the American dream. And that is what I want to spend some
time on today.
Rarely in our history has the housing market been so crucial to the economy. Housing is
usually very closely tied to employment and personal income cycles. As a result, it has
historically been one of the hardest-hit sectors in a recession.
Yet the experience of the last couple of years has been very different. Productivity gains
helped keep personal income relatively strong, and the absence of significant inflation
allowed the Federal Reserve to lower interest rates to unprecedented levels - making
credit readily available to the vast majority of Americans.
As a result, consumers maintained the ability and incentive to purchase homes. Both
new and existing home sales reached record highs. New home sales for September
were at an all-time high of over one million units, while existing home sales reached a
peak of over six million annualized units earlier this year.
The economy was also fueled by refinancings. Mortgage interest rates have been at or
near all-time lows, with the average 30-year fixed rate falling as low as 5.84 percent in
the last week of September. The average rate for the first week of October was down
more than 60 basis points from the prior year, and was more than 180 basis points
lower than rates two years ago.
This low-cost financing made it ever more profitable for homeowners to refinance and
secure new terms on their mortgage loans. Last year, seven million homeowners
refinanced $1.2 trillion in mortgage debt. That was an all-time high. This year's pace is
expected to match or even surpass that record.
Combined with low interest rates, rapid appreciation is adding to the refinancing boom
and enabling consumers to extract equity from the homes they refinance. Home prices
in 2001 were up about 9 percent on a year-over-year basis and are continuing to climb.
This helps explain why cash-out refinancings comprised the majority of all refinancings
last year.
It is hard to overestimate how important this was to the overall economy. As the
corporate sector has struggled to work off debt overhang, repair balance sheets and
restructure business models, the American consumer kept GDP growing over much of
the last year. The consumer was supported in this endeavor by strong growth in real
disposable incomes - almost half of which was a direct result of the drop in inflation.
The home equity extraction provided consumers with an estimated $90 billion in extra
cash last year, and $50 billion in the first half of 2002. Cash-outs have been an
important source of funding for today's economy, with the monies going to finance new
consumer spending and repay higher cost debt.
It's important to remember that this recent housing performance deviates significantly
from historical patterns, and this has led some folks to map out a series of doom-and-
gloom scenarios. We've read some analysts' predictions that point to an overheated real
estate market whose bubble is waiting to burst. Others caution that consumers are
overburdened, and any negative economic shock could stress the sector so much that it
triggers a contraction in spending and depresses the housing market. Still others predict
usually very closely tied to employment and personal income cycles. As a result, it has
historically been one of the hardest-hit sectors in a recession.
Yet the experience of the last couple of years has been very different. Productivity gains
helped keep personal income relatively strong, and the absence of significant inflation
allowed the Federal Reserve to lower interest rates to unprecedented levels - making
credit readily available to the vast majority of Americans.
As a result, consumers maintained the ability and incentive to purchase homes. Both
new and existing home sales reached record highs. New home sales for September
were at an all-time high of over one million units, while existing home sales reached a
peak of over six million annualized units earlier this year.
The economy was also fueled by refinancings. Mortgage interest rates have been at or
near all-time lows, with the average 30-year fixed rate falling as low as 5.84 percent in
the last week of September. The average rate for the first week of October was down
more than 60 basis points from the prior year, and was more than 180 basis points
lower than rates two years ago.
This low-cost financing made it ever more profitable for homeowners to refinance and
secure new terms on their mortgage loans. Last year, seven million homeowners
refinanced $1.2 trillion in mortgage debt. That was an all-time high. This year's pace is
expected to match or even surpass that record.
Combined with low interest rates, rapid appreciation is adding to the refinancing boom
and enabling consumers to extract equity from the homes they refinance. Home prices
in 2001 were up about 9 percent on a year-over-year basis and are continuing to climb.
This helps explain why cash-out refinancings comprised the majority of all refinancings
last year.
It is hard to overestimate how important this was to the overall economy. As the
corporate sector has struggled to work off debt overhang, repair balance sheets and
restructure business models, the American consumer kept GDP growing over much of
the last year. The consumer was supported in this endeavor by strong growth in real
disposable incomes - almost half of which was a direct result of the drop in inflation.
The home equity extraction provided consumers with an estimated $90 billion in extra
cash last year, and $50 billion in the first half of 2002. Cash-outs have been an
important source of funding for today's economy, with the monies going to finance new
consumer spending and repay higher cost debt.
It's important to remember that this recent housing performance deviates significantly
from historical patterns, and this has led some folks to map out a series of doom-and-
gloom scenarios. We've read some analysts' predictions that point to an overheated real
estate market whose bubble is waiting to burst. Others caution that consumers are
overburdened, and any negative economic shock could stress the sector so much that it
triggers a contraction in spending and depresses the housing market. Still others predict