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8 NEW YORK FED PRESIDENT PRAISES PROGRESS OF HOUSING FUNDAMENTALS In an address about the economic outlook in the United States and monetary policy at the Economic Club of New York this week, New York Fed President and CEO Bill Dudley praised the progress housing fundamentals have made during the economic recovery but refused to offer his views on whether the Fed would raise the short-term interest rate in December. Dudley stated at the onset of his speech that he would not address the topic of whether the "normalization" process would commence at the Federal Open Market Committee's next meeting (its last of 2015) in mid-December. He said his view on whether or not the Fed will raise rates depends on how the incoming data influences his assessment of more improvement in the labor market and his confidence that inflation will return to the Fed's 2 percent target rate. e weak advance report on Q 3 GDP growth (1.5 percent, compared to 3.9 percent in Q2) and the weakness of the manufacturing sector have caused some concern among many that the U.S. economy is losing forward momentum, Dudley said. But there are many positives to offset those negative economic metrics, one of which is housing, according to Dudley. "In particular, domestic demand continues to grow at a solid pace as increases in consumer spending, housing and business fixed investment all contributed to the third quarter's 2.9 percent annualized gain in real domestic final sales," Dudley said. "A large decline in the pace of inventory accumulation was the main reason why real GDP growth faltered in the third quarter. Because the contribution to growth from inventory investment can be quite volatile on a quarter-to-quarter basis, the growth in real final sales probably provides a better sense of the state of economic activity than does the GDP figure." e fundamentals supporting domestic demand have been solid—consumer spending has increased supported by real income gains, and household net worth is rising—and housing fundamentals have been solid as well, according to Dudley. "Housing prices are rising and the constraint on growth in residential investment now appears to be more on the supply side, as building contractors struggle to mobilize the resources needed to construct more homes," Dudley said. "e National Association of Home Builders' index rose in October to the highest level since late 2005. While the housing indicators will likely continue to be volatile on a month-to-month basis, I expect the gradual improvement in the housing sector to continue." Dudley also noted the importance that the forward momentum the jobs market picked up in October persists. e well-below-expectations jobs reports in August and September caused many to speculate that the labor market was faltering—but 270,000 jobs were added in October, about 50 percent higher than expected. "ose concerns should be at least partially put to rest given the strength of the October employment report, recognizing that the employment news can be volatile on a month-to- month basis," Dudley said. "Most noteworthy to me are the strong payroll employment gains in October and the solid 0.3 percent rise in aggregate hours worked. Over the past three months, payroll gains have averaged 187,000 per month, not much below the average payroll growth of 213,000 per month during the first half of 2015." Earlier in the week in a public address in Rhode Island, however, Boston Fed President Eric Rosengren hinted that the Fed may not raise the rates at December's meeting. "Given persistently low wage and price pressures, and the relatively slow real GDP growth forecast in the SEP, a more gradual path of normalization may be necessary to ensure reaching the 2 percent inflation target," Rosengren said. "While the housing indicators will likely continue to be volatile on a month-to-month basis, I expect the gradual improvement in the housing sector to continue." –Bill Dudley, New York Fed President 'NEW' SEVERE DELINQUENCIES TUMBLE TO 2009 LEVEL e percentage of "new" severe delinquent residential mortgages reported for September 2015—that is, the number of severely delinquent loans that were current six months ago—was the lowest of any September since 2009, according to Black Knight Financial Services. e share of new severely delinquent borrowers in September was reported at 0.66 percent, a number that has been steadily declining since hitting its September peak of 2.81 percent six years ago, according to Black Knight. e data shows a seasonal effect to new severe delinquencies; the rate has peaked in every September or October for the last six years. e number of new severe delinquencies has dropped from an average of three in every 100, its peak reached back in 2009, down to seven for every 1,000 in September of 2015. According to Black Knight, there is a definite seasonal effect to new severe delinquencies; the rate has peaked in every September or October for the last six years. Mortgages that originated during the bubble years of 2005 to 2008 accounted for the highest percentage of new serious delinquencies; they make up 45 percent of new serious delinquent mortgages even though they account for only 17 percent of total loans in the mortgage universe. Meanwhile, mortgages that originated during the post-crisis years (2009 to 2015) make up 68 percent of all mortgages but account for just 34 percent of new severe delinquencies, Black Knight reported. "ese post-crisis vintages are seeing new seriously delinquent loans rates of half the national average," the report stated. e new severe delinquency rate on mortgages with a second lien was more than twice those without a second lien in September (1.04 percent compared to 0.48 percent), which has been the case for about the last two years, according to Black Knight. During this period, mortgages with a second lien have seen "increased seasonality in new severely delinquent loan rates."

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