Automation Angst - Essent Guaranty · 11/10/2016 · ©2016 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF @mflemingecon #FirstAmEcon

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Automation

AngstThe Information

Revolution, Millennials, and

the Housing Market

November, 2016

#FirstAmEcon

@mflemingecon

©2016 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF

Handloom Weavers and Saddle

Makers

The Relative Importance of

Factors of Production


@mflemingecon #FirstAmEcon

95

96

97

98

99

100

1 2 3 4 5 6 7 8

Underperforming Potential- GDP Depth and DurationReal Quarterly GDP (SA, %, Recession Peak = 100)

1953 1957 1973 1981 1990 2007

Source: BEA, FRED, Q3 2009

Year from Peak


@mflemingecon #FirstAmEcon4

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

10

1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

Source: U.S. BEA, BLS, FRED, Q3 2016

People Power Drives Economic GrowthPercent Change from a Year Ago (SA)

Recessions Labor Force Real GDP Poly. (Labor Force) Poly. (Real GDP)



-4

-2

0

2

4

6

8

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Source: BLS, FRED, Q3 2016

Making More With Less? Productivity Gains Almost GoneNon-Farm Real Output Per Hour of All Persons (Percent Change YOY, SA)

Recessions Real Output Per Hour Trend (Polynomial)



Source: BLS, BEA, FRED, Q3 2016

80

100

120

140

160

180

Jan-79 Jan-82 Jan-85 Jan-88 Jan-91 Jan-94 Jan-97 Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15

Capital Versus Labor- Who Gains the Growth Benefits?Real GDP Per Capita and Full Time Employed Median Earnings (SA, Q1 1979 = 100)

Recessions Earnings Real GDP



80

90

100

110

120

130

Jul-00 Jul-02 Jul-04 Jul-06 Jul-08 Jul-10 Jul-12 Jul-14

Job Polarization- Job Creation is Skill SkewedEmployment Count of Full Time Workers (Q3 2000 = 100)

Recessions Total Low Earning Total High Earning

Source: BLS, Q3 2016



90

95

100

105

110

Jul-00 Jan-02 Jul-03 Jan-05 Jul-06 Jan-08 Jul-09 Jan-11 Jul-12 Jan-14 Jul-15

Robot Maker or Wage TakerMedian Usual Weekly Earnings (Inflation Adjust Q1 2016, Q3 2000 = 100)

Recessions < $40k > $40kSource: BLS, Q3 2016



10

11

12

13

14

15

16

17

18

19

20

40

50

60

70

80

90

100

110

Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

Source: BLS, Fed Board of Governors, September 2016

The Plight of LaborInd. Manuf. Prod. (Index 2012=100, Monthly, SA) and Employment (MM of Persons)

Recessions Production(LHS) Employment(RHS)



-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

Source: BLS, FRED, September 2016

Wage Growth Trending in the Right DirectionReal Growth in Production and Nonsupervisory Average Weekly Earnings

Recessions Real Wage Growth Trend (Polynomial)



20

25

30

35

40

45

50

55

60


Th

ou

sa

nd

s

Source: BLS, Census, FRED, 2015

Household Income Stagnating for DecadesMedian Household Income ($ Thousands, Annual)

Recessions 2014 Current Dollars Nominal



58

60

62

64

66

68

0

2

4

6

8

10

12

14

16

18

Source: BLS,CBO, FRED, Q3 2016

Underworked or Aging? Finding the New NormalUnemployment Rates and Labor Force Participation (%,SA)

Recessions Unemployed (LHS)



-5

-4

-3

-2

-1

0

1

2

3

4

5

6

Source: U.S. BEA,CBO, FRED, Q3 2016

Return To Our Fading PotentialReal & Potential GDP Year-Over-Year (SAAR, Chained 2009 $)

Recessions Real GDP Real Potential GDP



-3

-2

-1

0

1

2

3

4

5

6

7

8

9

Source: BLS, CBO, BEA, Fed Board of Governors, FRED, Q3 2016

Weak Potential Requires Loose Monetary Policy"Real" Unemployment & Inflation (Adjusted for Fed Targets)

Recessions "Real" Unemployment "Real" PCE Effective Fed Funds


“It ain’t what you don’t know

that gets you into trouble. It’s

what you know for sure that

just ain’t so.”

- Mark Twain



62

63

64

65

66

67

68

69

70

Jan-65 Jan-70 Jan-75 Jan-80 Jan-85 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15

Source: US Census Bureau, Q3 2016

Is Something Restricting the American Dream?Homeownership Rate (%)



0

4

8

12

16

20

24

28

Under 5 5 to 13 14 to 17 18 to 24 25 to 44 45 to 64 65 and over

The Aging of AmericaPercent Share of Total U.S. Population

2015 2060Source: Census Bureau, 2014



-4

-3

-2

-1

0

1

2

3

4

5

6


Source: Census Bureau, FRED Q3 2016

Demographics Drives Rental DemandHousehold Formation by Occupancy Type (Year-Over-Year Inventory Growth, %)

Recession Rented Owned Rented Three Year Moving Average



34

36

38

40

42

44

1982 1987 1992 1997 2002 2007 2012

Source: Census Bureau CPS/HVS, 2015

Renting MillennialsHomeownership Rate for Households Under 35



0.8

1

1.2

1.4

1.6

Homeownership

Income

Employment

Education

Children

Marriage

Baby Boomers

Generation X

Millennials

Over or Under Achieving GenY

Source: Census Bureau, 2013-2014

20



0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

6

7

8

9

10

11

12

13

14

15

1992 1995 1998 2001 2004 2007 2010 2013

Borrow More and Pay More?Average Loan Term (Years) and Payment-to-Income Ratio

average repayment term Mean P/I (Right Axis) Median P/I (Right Axis)

Source: Federal Reserve Board of Governors SCF, 2013

21



0

5

10

15

20

25

30

35

40

45

20 26 32 38 44 50 56 62 68

Education Attainment Percent Share of Population with Bachelors Degree or Higher

Baby Boomers Gen X Millennials

Source: ACS IPUMS, 2015



0

10

20

30

40

50

60

70

80

90

100

25 35 45 55 65

With Age Comes Wisdom and HomeownershipPercent of Homeowners

Asian Black Hispanic White

Source: IPUMS CPS,


Mind The Gap

Measuring the Differences in

Homeownership in a

Diversifying Economy



0%

20%

40%

60%

80%

100%

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Source: Census Bureau, 2014

The Collective Minority Becomes The MajorityPercent Share of Total U.S. Population

Other Hispanic Asian Black White



0

50

100

150

200BA Degree or Above

Median Income

Marital Rate

Avg. Number of Kids

White Non-Hispanic

Asian

Hispanic

Black

What Matters Most To Achieving the American DreamAttributes of Tenure Choice by Ethnicity (Non-Hispanic White, 2015=100)

Source: IPUMS CPS, 2015



50

55

60

65

70

75

80

White Asian Black Hispanic

Ceteris Paribus Homeownership RatesAttribute Constant Ethnicity Homeownership Rates, %, 2015

IPUMS CPS, 2015

11.3 %

9.3%

0.9 %



96

97

98

99

100

101

102

103

1985 1990 1995 2000 2005 2010 2015

The Economics of HomeownershipCeteris Paribus Homeownership Index (2000= 100)

Source: IPUMS CPS, 2015



0

5

10

15

20

25

2015 2020 2025 2030 2035 2040 2045 2050 2055 2060

Source: Census Bureau, FirstAm Calculations, December 2015

The Future of Millennial Housing Demand Cumulative Net New Owner-Occupied Households (17-35 Yrs. Old in 2015, Millions)

Non-Hispanic White Other




Forecasting Housing’s Future

Sunny with a few cloudy

periods today and Thursday,

which will be followed by

Friday…

-The Province (Vancouver, B.C.) 6/21/78



3000

3500

4000

4500

5000

5500

6000

6500

7000

7500

Source: NAR, FRB St. Louis, First American Calculations, September 2016

Market Activity Under-Performing PotentialExisting and Potential Home Sales ('000s, SAAR)

Recessions Existing Sales Potential Sales



0

200

400

600

800

1000

1200

1400

1600

1800

2000

Source: US Census Bureau, FRED, Sept. 2016

Demographics Drives Building Potential Single and Multifamily Housing Starts ('000s,Units)

Recessions 5+Units 1-4 Units



0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Housing's Quarter-Century Tailwind30-Year Fixed Rate, Effective Federal Funds Rate, % NSA

Recessions Mortgage Rate (%) Federal Funds Rate (%)

Source: Freddie Mac , FRED, Sept. 2016



60

80

100

120

140

160

180

200

Source: Standard & Poors, First American, August 2016

Real Prices Remain Well Below Historic LevelsHouse Prices (SA, Jan. 2000 = 100)

Recessions Real Unadjusted



Real Prices Remain Low In Most Markets

Source: FHFA, Freddie Mac, Census, FirstAmEcon, August 2016



-16%

-12%

-8%

-4%

0%

4%

8%

12%

16%

Source: NAR, FRB St. Louis, First American Calculations, June 2016

Price Growth Expected to Remain StrongHPI Growth (SA, Year-Over-Year)

HPI Recessions



48%

49%

50%

51%

52%

53%

54%

90

100

110

120

130

140

150

160

170

180

Overall (right) Loan Volume (left)

Source: AEI International Center on Housing Risk , July

First-Time Buyers ReboundingFirst-Time Homebuyer Market Share and Transaction Volume Index (% , Volume- April 2013 = 100)



0

100

200

HPRI*

NHPI

RHPI

EHS

NHS

PHS

REO Sales

Foreclosures

Housing HealthJune 2006 = 100

Peak '06

Trough '12

Current '16

Source: First American, May 2016*Annual 2015 Data

Homeownership Progress

Index (HPRI)

Nominal House Price Index

(NHPI)

Real House Price Index (RHPI)

Existing Home Sales (EHS)

New Home Sales (NHS)

Potential Home Sales (PHS)

REO Sales

Foreclosures



Source: First American Calculations, Q3 2016

Residential Purchase Transactions Expected To Grow



Year Ahead Price Expectation For All Property

Types

Source: First American Calculations, Q3 2016


First American’s

Office of Economic

Research

FirstAm.com/Economics

@mflemingecon

#FirstAmEcon

Documents

Automation Angst - Essent Guaranty · 11/10/2016 · ©2016 First American Financial Corporation and/or its affiliates. All rights reserved. q NYSE: FAF @mflemingecon #FirstAmEcon