2018 Housing Market Outlook Tuolumne County AOR & Business Council November 15, 2017 Oscar Wei Senior Economist

Overview Economic Update California Housing Market Outlook 2018 Forecast

Economic Update

Economic Growth Stayed Solid in Q3 As Investment Spending Remained Strong 3.0% GDP 2017-Q3 2.4% Consumption 2017-Q3 4.1% Unemployment Oct 2017 1.4% Job Growth Oct 2017 Gross Private Domestic Investment: Q317 – 6.0%, Q217 – 3.9%

Growth remained solid in Q3, despite hurricanes’ effect GDP - 2016: 1.5%; 2017 Q3: 3.0% ANNUALLY QUARTERLY Notes: E – expected, F – forecast, P- preliminary 1929 though first quarter 2009 annual GDP figures were revised in July 2009 using 2005 benchmark. 2009 Largest Annual Drop since 1946 (-2.8%) SERIES: GDP SOURCE: US Dept. of Commerce, Bureau of Economic Analysis 5

Unemployment Rates Inched Up in August but Still Near Recent Lows US 4.1% (Oct 2017) & CA 5.1% (Sep 2017) SERIES: Unemployment Rate SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

U.S. job growth bounced back after slow growth in September CA 1.7% (09/17) US 1.4% (10/17) SERIES: Total Nonfarm Employment SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

Unemployment rate by California Metro Area September 2017: California 5.1% Source: http://www.labormarketinfo.edd.ca.gov/LMID/Employment_by_Industry_Data.html SERIES: Civilian Unemployment Rate SOURCE: CA Employment Development Division

Inflation Trending Up since July Sept 2017: All Items 2.2% YTY; Core +1.7% YTY “Core Inflation” is All Items Less Food and Energy The CPI data is seasonally adjusted. SOURCE: Go to http://www.economy.com/freelunch/fl_dictionary.asp?m=34174038-A1EF-4C70-9374-59144B50A3F5&h=H0022000400040002&f=0&c=undefined First choose "All Items." "Monthly" and "Yr/Yr%" series. Then find "All items less food and energy" towards the bottom of the CPI list. Do the same as above. SERIES: Consumer Price Index SOURCE: US Bureau of Labor Statistics

Tax Reform Proposal Provisions that affect the housing market: Reduce the mortgage interest deduction (MID) cap from $1M to $500k Cap property tax deductions at $10,000 Require five years instead of two for the exclusion of capital gain tax on primary home sales. Taxpayer use of the exclusion would be limited to one sale every five years, rather than one every two. Eliminate the MID on second homes Homeowners no longer able to deduct interest on home equity loans

Impact on the Housing Market Incentives of using MID as a tax saving tool as a homeowner would be nullified, as the standard deduction nearly doubles Lowering MID cap and limiting property tax cap increases the cost of owning a home for many homeowners in high cost state Further constraint housing supply shortage with the new capital gain tax requirement Home values decline as tax saving benefits vanish

What Members Can Do REALTORS® Should Call Congress Now!   Call 1-800-278-3615. Enter NRDS ID to get connected followed by the # sign to be connected to their Member of Congress’s office. Call from 6:00 AM to 2:00 PM Pacific Time Weekdays Please ask your Representative to OPPOSE this and ANY tax reform proposal that WEAKENS THE INCENTIVE TO OWN HOMES.

California Housing Market Outlook

Sales Continue to Grow but at a Slower Pace California, Sept. 2017 Sales: 436,920 Units, +2.6% YTD, +1.7% YTY Sep-16: 429,760 Sep-17: 436,920 Peak:624,957 units in 2005 Valley:189,345 units in 1982 2012 annual sales up 4.3% from 2011 2011 annual sales up 1.4% from 2010 2010 annual sales down 12.3% from 2009 2009 annual sales up 24.5% from 2008 2008 annual sales up 30.4% from 2007 2007 annual sales down 33.4% from 2006 2006 annual sales down 23.8% from 2005 2005 annual sales up 0.8% from 2004 2004 annual sales up 3.8% from 2003 2003 annual sales up 7.6% from 2002 2002 annual sales up 14.1% from 2001 2001 annual sales down 4.7% from 2000 YTD 2000 annual sales up 1.4 from 1999 1999 sales up 7.3% over 1998 10/93: 41.0 Consumer Confidence 01/00: 148.6 03/03: 63.0 5/07: 128.4 2/09: 23.9 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® *Sales are seasonally adjusted and annualized

Decline in Pending Sales Suggests Softening in Closed Sales in Upcoming Months California: September 2017 Sep-16: 127.7 Sep-17: 120.0 SERIES: Pending Home Sales Index, Seasonally Adjusted SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Mortgage Rates: Highest since July January 2010 – November 9, 2017 MONTHLY WEEKLY Monthly from 2009 to present, weekly for the past 8 weeks SERIES: 30Yr FRM, 5Yr ARM SOURCE: Freddie Mac

Household Growth Continues to Support Housing Demand SERIES: Annual Household Growth SOURCE: CA Department of Finance

Sales Improve in Mid and High Priced Markets But Decline in Lower Priced Segments Sept 2017 (Year-to-Year) SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Supply Remains an Issue Sept 2016: 3.5 Months; Sept 2017: 3.2 Months Range since 1988: Low: 1.3 months in April 2004 High: 18.8 months in Apr 1991 Long-run average: 6.9 months Note: “Unsold Inventory Index” represents the number of months it would take to sell the remaining inventory for the month in question. The remaining inventory for the month is defined as the number of properties that were “Active”, “Pending”, and “Contingent” (when available) and divide the sum by the number of “Sold” properties for the month in question. SERIES: Unsold Inventory Index of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Supply Saw Declines, Especially in Bay Area September 2017 SERIES: Sales and Listings of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Supply Constraint across Most Prices, but Most Obvious in the Lower End Sept 2017 SERIES: Active Listings of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Fewer Units Turning Over Since the Great Recession Housing Turnover Rate (Single-Family Homes only) Long-Time Homeowners are not moving as in the past because: Demographic shift Low rate on current mortgage Low property taxes Capital gains hit Where can I afford to go? CA turnover rate trend SERIES: Percent of existing single-family homes being sold SOURCE: Census Bureau, American Community Survey, Moody’s Analytics, C.A.R.

Sellers Are Not Moving as Often as Before … SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

… Especially for Baby Boomers 71% of Californian’s aged 55+ haven’t moved since 1999 SERIES: Distribution of Home Ownership by Year Moved In SOURCE: U.S. Census Bureau, 2013 American Housing Survey

C.A.R. Tax Portability Initiative How will the initiative work C.A.R.’s Portability Initiative would allow homeowners 55 years of age or older to transfer some of their Proposition 13 property tax base to a home of any price, located anywhere in the state, any number of times. Why is this needed? Under Proposition 13, homeowners are protected from rapidly increasing property taxes. However, seniors fear they will not be able to afford a big property tax increase if they sell their existing home and buy another one, discouraging them from ever moving. The initiative will allow them to sell their home while keeping some property tax protections, and therefore create homeownership opportunities for young families.

“Missing” 72,000 New Units Annually 2016: 98,881 (47,889 sf, 50,992 mf) 2017p: 107,756 (53,708 sf, 54,048 mf ) 2018f: 115,292 (58,542 sf, 56,750 mf) CA HCD Projected Housing Needs: 180,000/yr. SERIES: California New Housing Permits SOURCE: Construction Industry Research Board

Housing Supply Gap Will Be Over 2 Million at Current Construction Pace With housing needs increasing at a rate of 180,000 every year, California will need more than 3.3 million units by 2030 to fill the housing demand and bring it back to 2005 level. At the current construction pace, however, California will have a backlog of over 2 million by 2030 SERIES: Housing Supply Gap SOURCE: Calculation by CALIFORNIA ASSOCIATION OF REALTORS®

California Not Building Enough Because… SOURCE: CA Legislative Analyst Office

Market Competitiveness Up in 2017 6 out of 10 had Multiple Offers SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

And the Market is More Competitive for First-Time Buyers …   First-time Buyers Repeat Buyers All Buyers % with Multiple Offer 68.8% 55.5% 60.4% % of Sales Above Asking Price 41% 28.8% 32.9% Days on Market 10 14 13 SERIES: 2016 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

…Partly Because Many of Them Live in the Supply Constraint Bay Area SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Despite the Tough Market Conditions, Share of 1st Time Buyers reached highest level since 2012 SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Financial Characteristics: First-Time vs. Repeat (2017)   First-time Buyers Repeat Buyers All Buyers Median Household Income $85,000 $150,000 $120,000 Median Monthly Mortgage Payment $1,750 $2,200 $1,924 Median Downpayment (in $$) $35,000 $108,300 $72,000 Median Downpayment (in % to Price) 7.4% 20% 17.6% SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Financial Characteristics II: First-Time vs. Repeat (2017)   First-time Buyers Repeat Buyers All Buyers % of buyers with zero down payment 10.2% 3.2% 6.0% % of cash buyers 6.7% 29.0% 21.5% % of home buyers with a second mortgage 5.9% 2.8% 3.9% % with FHA Loan 22.6% 9.1% 14.8% SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Characteristics of Homes: First-Time vs. Repeat (2017)   First-time Buyers Repeat Buyers All Buyers Median Sales Price $440,000 $550,000 $525,000 Median Square Footage 1,477 1,800 1,650 % of Detached Single-Family 75.8% 79.6% 78.0% % of Condo/Townhome 18.4% 12.8% 14.6% SERIES: 2017 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Statewide Median Price Growing Faster California, September 2017: $553,490, -2.1% MTM, +7.2% YTY Sep-17: $553,490 Sep-16: $516,450 SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Housing Affordability Peaked Q1 2012 California, 1984-2017 Annual Quarterly C.A.R.’s traditional Housing Affordability Index (HAI) was replaced with the First-Time Buyer Housing Affordability Index (FTB-HAI) in 2006. Note this slide takes the average of the 3 months in each of the quarters. C.A.R. began producing its Housing Affordability Index (HAI) in 1984. At that time, fixed-rate mortgages were the prevailing form of financing a home purchase, while the calculations used to produce the HAI reflected a 20 percent down payment. The methodology also assumed a monthly payment for principal, interest, taxes and insurance that was no more than 30 percent of a household’s income. In the more than two decades since the CALIFORNIA ASSOCIATION OF REALTORS® first conceived the HAI, the mortgage finance landscape has changed dramatically. The range of mortgage products available to buyers as well as underwriting criteria has changed. C.A.R. developed the new index measuring affordability for first-time home buyers to better reflect the realities of today’s real estate market. SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Housing Affordability In CA: By County 2017-Q3: % able to purchase median-priced home SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Minimum Annual Income Required During Affordability Peak vs. Current SERIES: Housing Affordability Index of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Lackluster Income Growth Also Contributed to the Affordability Issue Income growth could not keep up with price growth until recently SERIES: Household income growth vs. Home price growth SOURCE: U.S. Census Bureau, Current Population Survey/Annual Social and Economic Supplement, CALIFORNIA ASSOCIATION OF REALTORS®

What Will Happen When Mortgage Rates Increase? Q2-2017 Median Price $553,260 20% Downpayment MONTHLY MORTGAGE Minimum Qualifying Income INTEREST RATE INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Affordability Is also an Issue for Renters California Average Asking Rent SERIES: California asking rent and household income SOURCE: California Department of Housing and Community Development, Census Bureau Decennial Census, American Community Survey

Homeownership Dropped, Big Gap in CA SERIES: Homeownership Rate (%) SOURCE: U.S. Census Bureau, Housing Vacancy Survey (HVS)

Homeownership Will Deteriorate if the Trend Continues Scenario “Fast”: Homeownership rate follows the average decline rate of the last 10 years (2007-2016), decreasing on a year-over-year basis by slightly over 1% of the prior year’s rate. Scenario “Slow”: Homeownership rate follows the average decline rate of the last 5 years (2012-2016), decreasing on a year-over-year basis by 0.5% of the prior year’s rate. Scenario “”Average”: Average of the “Fast” and “Slow” scenarios. SERIES: Homeownership Rate SOURCE: U.S. Census Bureau, American Community Survey, C.A.R. projection

The Forecast

U.S. Economic Outlook SERIES: U.S. Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Economic Outlook SERIES: CA Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Housing Market Outlook SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Concluding Remarks Economy was sluggish in Q1, but bounced back in Q2 and Q3. It should experience steady growth in the next couple quarters Housing market doing ok now, but sales growth will slow Interest rates still low but should rise in 2018 Supply and affordability will remain issues in the near term Outmigration to more affordable areas will continue

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Thank You This presentation can be found on www.car.org/marketdata Speeches & Presentations oscarw@car.org