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26 ASK THE ECONOMIST HEAR DIRECTLY FROM TODAY'S LEADING MARKET EXPERTS. Andres Carbacho-Burgos analyzes the U.S. housing market, U.S. residential construction, the Canada housing market, and U.S. regional economies. Before joining Moody's Analytics, he taught economics at Texas State University, where he also researched open- economy macroeconomics and income inequality. Originally born in Chile, he obtained his Ph.D. and Masters in economics from the University of Massachusetts at Amherst and his B.A. in economics from Carleton College. In your webinar titled "U.S. Housing Outlook—Not the Canary in the Mine This Time, Housing Just Before 2020," you indicated that the current signs of a slowdown in the housing market are different from what was observed just before the housing bust? How so? Some, but not all, of the signs of a slowdown are the same. We currently have a slowdown in house price growth and a decline in home sales and construction: similar symptoms as in 2006-2007 before the outbreak of a full-blown financial crisis. However, there were three key elements in the prelude to the 2008 crisis that are missing today. First, there is much less overvaluation of the housing market on a national level, even though individual markets such as Denver and the large Texas metro areas are overvalued. Currently, the level of U.S. house price indexes above their long-term trend (the trend being determined by consumer price inflation, real disposable income growth, and construction costs) is much lower than it was at its peak in 2006-2007. Second, there is no deterioration in mortgage debt performance. On the contrary, mortgage debt service is doing fine: According to our data from Equifax, the overall rate of delinquency is almost at a record low. is good performance is not so much because the economy is going at full speed but because the combination of last decade's foreclosures and more cautious lending over the past decade has reduced the number of risky borrowers, albeit at the cost of pushing down the share of home ownership. ird, the ratio of home values to returns is much less unbalanced now than it was back in 2006-2007. If we use median rent as the indicator of returns, the ratio of median existing single-family home prices to median rent is now not only much lower than in 2006-2007 but also lower than its overall historical average. Although it is questionable whether home ownership is a good financial investment in an absolute sense, it is a much better investment now than at the peak of the last decade's housing bubble. Because of these three missing elements— severe overvaluation, deteriorating mortgage service, and unbalanced price vs. return ratios— we do not believe that a house price correction is in the cards, and indeed our baseline forecast for the U.S. does not have any quarters of house price index decline. You suggested that U.S. house prices are edging toward overvaluation. What does this mean for first-time homebuyers? Increasing overvaluation correlates with reduced affordability for first-time homebuyers. e National Association of Realtors' First- Time Homebuyer Affordability Index has recently fallen below 100 for the first time since 2007. at is, the median income of first-time homebuyer families is now less than 100 percent of the qualifying income for a median price starter home. While affordability is still better than at the peak of the housing bubble, it has been getting worse since 2012. According to your forecast, the Fed will raise rates four times through 2019. How will this impact mortgage-debt performance? e outlook for monetary policy has changed significantly since the December "Because of these three missing elements— severe overvaluation, deteriorating mortgage service, and unbalanced price vs. return ratios— we do not believe that a house price correction is in the cards." Andres Carbacho- Burgos Head Housing Economist, Moody's Analytics

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