HOUSING MARKET OVERVIEW AND FORECAST

REAL ESTATE ECONOMICS HOUSING MARKET OVERVIEW AND FORECAST

APPRAISAL INSTITUTE FALL CONFERENCE

NOVEMBER 2012

OVERVIEW WHERE WE’VE BEEN SEVERE HOUSING MARKET DISRUPTION FOLLOWED BY QE INFINITY AND VERY LOW INTEREST RATES UNEVEN RECOVERY

WHERE ARE WE NOW? INVESTORS ARE EVERYWHERE! LISTINGS HAVE PLUMMETED FOREIGN DEMAND SKYROCKETS

WHERE ARE WE GOING? INTEREST RATE OUTLOOK SUBMARKET VALUATION AND FORECASTS

WHERE WE’VE BEEN

BAY AREA OVERVIEW - 11-COUNTY REGION: (ALAMEDA, CONTRA COSTA, MARIN, NAPA, SAN BENITO, SAN

FRANCISCO, SAN MATEO, SANTA CLARA, SANTA CRUZ, SOLANO & SONOMA COUNTIES)

Category 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12

No. of Active Developments 242 352 410 406 311 220 195 190

Average of Base Prices $800,547 $782,611 $737,160 $689,530 $647,487 $638,102 $594,821 $620,461

Average of Unit Sizes (S.F.) 2,413 sf 2,223 sf 2,178 sf 2,083 sf 2,104 sf 2,096 sf 2,172 sf 2,206 sf

Average Price Per Square Foot $332 $352 $338 $331 $308 $304 $274 $281

Average of Minimum Lot Sizes 4,644 sf 4,076 sf 3,762 sf 3,326 sf 3,377 sf 3,159 sf 3,657 sf 3,874 sf

QUARTERLY MARKET STATISTICS

SURVEY-TO-SURVEY NEW HOME MARKET CHANGES

BAY AREA OVERVIEW - 11-COUNTY REGION:

Category 3Q05 3Q06 3Q07 3Q08 3Q09 3Q10 3Q11 3Q12

Total Market Area Monthly Sales Rate 688/mo 745/mo 660/mo 620/mo 453/mo 454/mo 418/mo 587/mo

Average Monthly Sales Rate 2.8/mo 2.1/mo 1.6/mo 1.5/mo 1.5/mo 2.1/mo 2.1/mo 3.1/mo

Total Unsold Released Inventory 697 du 4,451 du 5,141 du 4,794 du 3,311 du 1,977 du 1,728 du 1,318 du

Total Inventory 10,775 du 18,156 du 20,878 du 18,640 du 12,101 du 6,953 du 6,945 du 5,996 du

Months of Unsold Released Inventory 1.0 mos. 6.0 mos. 7.8 mos. 7.7 mos. 7.3 mos. 4.3 mos. 4.1 mos. 2.2 mos.

Months of Total Inventory 15.7 mos. 24.3 mos. 31.6 mos. 30.1 mos. 26.7 mos. 15.3 mos. 16.6 mos. 10.2 mos.

QUARTERLY MARKET STATISTICS

SURVEY-TO-SURVEY NEW HOME MARKET CHANGES

BAY AREA OVERVIEW – YEAR-OVER-YEAR EMPLOYMENT CHANGE

11-COUNTY BAY AREATotal Non-Farm 12-Month Change

-10,

592

-47,

967

3,85

8

6,94

2

71,7

50

111,

342

130,

650

103,

000

91,7

42

154,

667

-34,

017

-186

,442

-100

,925

-16,

058

30,3

92

60,4

08

45,9

75

-14,

550

-201

,850

-42,

283

41,9

42

85,7

42

76,7

75

70,2

25

74,6

00

69,2

00

62,5

33

-250,000

-200,000

-150,000

-100,000

-50,000

0

50,000

100,000

150,000

200,000

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

est

2013

prj

2014

prj

2015

prj

2016

prj

2017

prj

5-Year Forecast

BAY AREA OVERVIEW – ANNUALIZED UNEMPLOYMENT RATES

11-COUNTY BAY AREA Civilian Unemployment

4.0%

5.6%

6.8%

6.9%

6.3%

5.7%

4.8%

4.1%

3.7%

3.2%

3.5%

4.6%

6.7%

6.8%

5.8%

5.0%

4.3%

4.6%

5.9%

10.0

%10

.7%

9.8%

8.4%

8.2%

7.6%

7.0%

6.3%

5.7%

0%

2%

4%

6%

8%

10%

12%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

est

2013

prj

2014

prj

2015

prj

2016

prj

2017

prj

5-Year Forecast

BAY AREA OVERVIEW

11-COUNTY BAY AREA

* Over/Under supply measures based on current jobs-to-housing relationship relative to long-term relationship between jobs and housing. Source: Bureau of Labor Statistics; Census Bureau; National Assoc. of Realtors; Real Estate Economicswww.realestateeconomics.com

HOUSING DEMAND AND SUPPLY PATTERNS

2,300,000

2,400,000

2,500,000

2,600,000

2,700,000

2,800,000

2,900,000

3,000,000

3,100,000

3,200,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

Jan-14 prj

Jan-15 prj

Jan-16 prj

Jan-17 prj

Jan-18 prjU

nits

Dem

and/

Supp

lied

Supply of Housing Demand for Housing*

5-Year Forecast

COMPARED TO OTHER FINANCIAL ASSETS

WHERE WE ARE NOW

INVESTORS ARE EVERYWHERE!

•Lowest price ranges being cleaned out by rental investors. •Volume surges in high demand neighborhoods (buyers priced out for years want in!) •Surge in resale volume reflects lender preference for short sales. •Total distressed plummets as short sales and loan mods deal with underwater owners.

Count % Count % Count %

By Sales PriceUnder $300,000 9,071 38.4% 9,547 42.5% 8,786 37.5%Over $1.0 million 998 4.2% 775 3.5% 898 3.8%

By Sales TypeResale 17,775 68.6% 15,271 56.0% 16,087 56.4%New Sale 1,068 4.1% 854 3.1% 1,312 4.6%

Foreclosure 2,257 8.7% 4,804 17.6% 5,123 18.0%Foreclosure Sale 4,805 18.5% 6,333 23.2% 6,002 21.0%TOTAL DISTRESSED 7,062 27.3% 11,137 40.9% 11,125 39.0%

CLOSINGS DISTRIBUTION REPORTALL OF ALAMEDA AND CONTRA COSTA COUNTY

Mar '12 to Aug '12

Category Current Period One Year Ago Two Years AgoTotal Number Of Home Sales

TRENDS IN ACTIVE LISTINGS

% DROP IN LISTINGS INVENTORY IN PAST 12 MONTHS

-58.35%

-45.03%-43.13%-42.24%-41.75%-41.36%-41.10%-40.15%-35.45%-34.83%-31.95%-31.92%-31.74%

(70%)

(60%)(50%)

(40%)(30%)

(20%)

(10%)0%

10%

Oak

land

Sto

ckto

n-Lo

di

Fre

sno

Sac

ram

ento

Inla

ndE

mpi

re

Bak

ersf

ield

San

Jos

e

San

Fra

ncis

co

San

taB

arba

ra

San

Die

go

Ora

nge

Cou

nty

Ven

tura

Los

Ang

eles

TRENDS IN FOREIGN DEMAND

• 2011 – Sales to foreigners totaled $82.5 billion or 8.9% of total U.S. transaction volume.

• 2010 - $66.4 billion or 7.7% of total U.S. transaction volume. • 2011 volume equals 371,957 homes at the then-median home

price of $221,800. • 2011 new home sales totaled 303,211. • Foreign buyer market was 23% larger, by volume, than the new

home market in 2011!

• What does this mean for new home product and sales?

WHERE ARE FOREIGN BUYERS COMING FROM?

Source: Dataquick, Inman News

WHERE ARE WE GOING?

INTEREST RATE TRENDS AND FORECAST

30-YEAR FIXED RATE MORTGAGESNATIONAL AVERAGES

OCTOBER 2012

10.1

%9.

2%8.

4%7.

3%8.

4%8.

0%7.

8%7.

6%6.

9%7.

4%8.

1%7.

0%6.

6%5.

8%5.

8%5.

9%6.

4%6.

3%6.

0%5.

0%4.

7%4.

4%3.

8%3.

9%4.

4%5.

2%6.

0%6.

5%

0%

2%

4%

6%

8%

10%

12%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012est

2013prj

2014prj

2015prj

2016prj

2017prj

5-Year ForecastYears 2008 to 2009 - Financial crisis and interest

rate intervention by the Federal Reserve

INTEREST RATE VOLATILITY

October 1993 = 6.83% January 1995 = 9.15%

SUBMARKET VALUATION: What does “supportable home price” mean?

•Interest rates at any point in time are known.

•Household incomes are known.

•The percent of household income that will be dedicated

to mortgage payments can be calculated and customized

to the characteristics of a given market area.

•Therefore, we know what buyers are capable of paying

and what they have been willing to pay over many years.

BAY AREA OVERVIEW

11-COUNTY BAY AREA

* Over/Under valuation based on value of housing (inclusive of mortgage rates) relative to long-term relationship between housing value & household incomes.

Source: Bureau of Labor Statistics; Census Bureau; National Assoc. of Realtors; Real Estate Economicswww.realestateeconomics.com

HOUSING VALUATION PATTERNS

$75,000

$175,000

$275,000

$375,000

$475,000

$575,000

$675,000

$775,000

$875,000

$975,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

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Historical/Forecast Median Home Price Supportable Median Home Price*

5-Year Forecast

SUBMARKET VALUATION: SANTA CLARA COUNTY

SAN JOSE-SUNNYVALE-SANTA CLARA, CA MSA




$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

$900,000

$1,000,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

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5-Year Forecast

SUBMARKET VALUATION: S.F. & SAN MATEO

SAN FRANCISCO-SAN MATEO-REDWOOD CITY, CA PMSA




$75,000

$175,000

$275,000

$375,000

$475,000

$575,000

$675,000

$775,000

$875,000

$975,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

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5-Year Forecast

SUBMARKET VALUATION: ALAMEDA & CONTRA COSTA

OAKLAND-FREMONT-HAYWARD, CA MSA




$75,000

$175,000

$275,000

$375,000

$475,000

$575,000

$675,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

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5-Year Forecast

SUBMARKET VALUATION: SACRAMENTO

SACRAMENTO-ARDEN-ARCADE-ROSEVILLE, CA MSA




$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

Jan-14 prj

Jan-15 prj

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5-Year Forecast

SUBMARKET VALUATION: CENTRAL VALLEY

CENTRAL VALLEY (MADERA, FRESNO, KINGS, TULARE COS.)




$70,000

$90,000

$110,000

$130,000

$150,000

$170,000

$190,000

$210,000

$230,000

$250,000

$270,000

Jan-90

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13 prj

Jan-14 prj

Jan-15 prj

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5-Year Forecast

CONCLUSIONS AND EXPECTATIONS

Interest rates have been a friend to housing prices for 30 years, expect a change. Disposable incomes will be pressured by higher taxes and higher utility costs (food, healthcare, transportation and education too?). Ten years from now the current housing recovery will not be considered to have been as robust as the last real estate cycles. But….. We’re coming off a VERY depressed base, there are numerous sources of pent up demand. Rental investors are clearing out the lower price ranges as fast as supply enters the system. Conventional owner-occupants are locked out of the distressed home market (to the benefit of the new home market). Many huge losses can be (and could have been) avoided with objective and inexpensive research.

John Mulville, S.V. P. , Residential Consulting, 949-502-5151, [email protected],

Documents

HOUSING MARKET OVERVIEW AND FORECAST