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36 AEI ON HPI e latest American Enterprise Institute National Housing Market Indicators Report indicated a 6.6 percent of a steady rise in house prices appreciation in the low price tier, which is about 27 percent of the market. Among the high price tier that comprises about 9 percent of the market, prices appreciated at a rather gradual pace at 1.7 percent. e market by price tier and by metro areas revealed that it is becoming more bifurcated, pointing out to a possible likelihood of a continued housing boom. AEI indicated that buyers are moving away from larger cities, shifting the demand to smaller or medium-sized areas, wherein HPA has lagged behind. According to the report for Q 3 2018, the national house price boom continued in November 2018, even though at a slow pace at 25 quarters currently. According to its House Price Appreciation (HPA) index, 73 metro areas recorded an increase of 5 percent in November 2018 on an annual basis—a decline from 7.4 percent around the same period the previous year. ere was a slight pullback in the purchase transactions during the most recent quarter, on the demand side, per the report. Sales transactions of 6.37 million were reported for the four quarters ending in Q 3 2018. However, sales transactions declined by 0.6 percent in the third quarter—marking the 1st quarter of decreasing sales since 2014, the report pointed out. Despite this, the national seller's market continued and now stands at 75 consecutive months, it found. On the inventory side, the month's inventory in the 73 large metros stood at 3.6 months—data that is indicative of a strong seller's market. ere was a modest rise in the month's inventory for the low (up 0.4 months to 2.8 months) in terms of price tiers. Low-med reflected an upward trend at 2.6 months. e med-high is at 4.2 months while the high stood at 7.6 months, both reflecting a considerable increase despite the cyclical lows, the report said. e report pointed out a continued rise in mortgage risk in September 2018. e composite Purchase National Mortgage Risk Index (NMRI) was up 0.4 percentage point from September 2017, it indicated. e report also found a pull back on home prices in the high-cost segment outside of the reach of government agencies, which tend to be more affected by rising mortgage rates, and in high-cost metros, especially on the West Coast. THE BROAD IMPACTS OF FALLING HOME PRICES Home shoppers aren't the only ones who feel the impact of changing home prices. In fact, according to recent research, residential mortgage backed securities (RMBS) investors should be watching home prices just as expectantly. However, while home shoppers might delight in falling home prices, RMBS investors should not. Falling home prices are a "dominant influence" on mortgage default rates, according to research from Collateral Analytics, a provider of real estate analytics and tools. "e impact of price declines on default rates is very strong and consistent across a variety of different locations and corresponding home price levels," according to a research paper published this week by Collateral Analytics. Of course, price declines are not the only cause of default. Job loss, medical expenses, and business losses are also potential threats, according to Collateral Analytics. However, "a total loss of equity is a critical component of any default model," according to the research. When examining data from various metro areas from 2005 through 2018, the researchers found the strongest correlation between home price declines and mortgage defaults in Boston and the least correlation in Washington, D.C. Seattle and Los Angeles demonstrated somewhat typical correlations between home price declines and mortgage default rates. When home price declines accelerated by more than 10 percentage points, mortgage default rates increased an additional 7.2 percent in Seattle. In Los Angeles, defaults rose by an additional 5.0 percent under the same circumstances. Across all of the core based statistical areas observed, Collateral Analytics determined the relationship between default rates and peak to trough price declines of -0.74. However, when peak to trough prices declined by more than 20 percent, Collateral Analytics found default rates climbed "significantly." "It is not clear if homeowners are aware of small price declines, but they seem very aware of large price declines," the research stated. ose who purchase their home at the peak of a price cycle are more likely to default, regardless of other personal circumstances, such as employment. is was especially the case for loans with high loan-to-value (LTV) ratios. In fact, Collateral Analytics asserted that its research confirms "why conservative loans will be at 80 percent LTV or below." of nonhomeowners still view homeownership as part of the American Dream. Source: Morningstar Credit Ratings STAT INSIGHT 75%

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