2018 Mid-Year Market Update June 1, 2018 Leslie Appleton-Young Chief Economist & SVP

Overview Economic Update California Housing Market Outlook U.S. and California economy Jobs? Inflation? Interest Rates? California Housing Market Outlook Summary of recent home sales Regional focus: who is leading the pack? Identifying new trends or shifts in the market Understanding the drivers of that shift The Forecast Steady as she goes…

Economic Update

Economic “Sweet Spot” 2.2% 1.0% 2.1% 3.8% 1.6% Consumption 2018-Q1 GDP 2018-Q1 Consumption 2018-Q1 Core CPI Apr 2018 1.0% 2.1% 3.8% Unemployment May 2018 1.6% Job Growth May 2018 Gross Private Domestic Investment: Q317 – 7.3%, Q217 – 3.9%

Growth Momentum Eased Slightly GDP - 2017: 2.3%; 2018 Q1: 2.2% ANNUALLY QUARTERLY - First quarter 2018 GDP came in at 2.2 percent, an expected slowdown but less than feared given persistent seasonality issues. Consumer spending and business investment were slower and inflation continues to rise - Real consumer spending increased at a 1.0percent annual pace in Q1, below the recent trend. The slowdown reflected a decline in durables spending, including motor vehicles which, in turn, may reflect the impact of hurricane recovery spending in the fourth quarter. Continued gains in consumer spending are expected given improvement in the labor market, compensation, consumer confidence and household wealth. Residential investment is facing some headwinds as interest rates and land prices increase. Despite the not-so-stellar growth in housing starts, demand for apartments remains strong. Trade reflected an improvement in export growth compared to a year ago and was a net addition to GDP in the quarter. Services inflation has outpaced goods inflation throughout the 2015-2017 period. Rising inflation and continued moderate economic growth provide the basis for a FOMC decision to raise the funds rate in June. Our outlook is also for rising 2-and 5-year Treasury rates in response. Our model is for a flatter yield curve for this year. 2009 Largest Annual Drop since 1946 (-2.8%) SERIES: GDP SOURCE: US Dept. of Commerce, Bureau of Economic Analysis 5

May ‘18 Unemployment Lowest in 19 Years US 3.8% (May 2018) & CA 4.2% (Apr 2018) Source: http://www.labormarketinfo.edd.ca.gov/LMID/Employment_by_Industry_Data.html SERIES: Civilian Unemployment Rate SOURCE: CA Employment Development Division

Yield Surged Passed 3.0% for the 1st Time since 2014 but Dipped Recently due to European politics U.S. 10 Year Treasury Yield The European Union is massive in terms of the size of its economy and its impacts on the global financial system.  Threats to the stability of the EU cause shockwaves in financial markets.  Those shockwaves have an impact on everything from stock prices to mortgage rates. The latest threat is Italy's would-be government: a coalition between 2 parties that are both less than enthusiastic about Italy remaining in the EU.  They drafted a lawmaking game plan 2 weeks ago, and while it didn't include any specific goals regarding the country's EU membership, one of their nominees is a vocal proponent of a Brexit-style departure for Italy. SERIES: U.S. 10-Yr Treasury SOURCE: CNBC

Mortgage Rates Eased This Week Moving Up in 2nd Half of 2018 January 2010 – May 31, 2018 MONTHLY WEEKLY SERIES: 30Yr FRM, 5Yr ARM SOURCE: Freddie Mac

Perspective is everything!!

How About the Market?

CA Sales up slightly over last year Narrow band since 2010 April 2018 Sales: 416,790 Units, +1.5% YTD, +2.2% YTY Apr-17: 407,960 Apr-18: 416,790 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

Lower end sales declined – tightest inventroy April 2018 (Year-to-Year) SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Market has shifted towards higher end SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Bay Area Sales Up Last # Months SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® *Sales are not seasonally adjusted and annualized 14

SoCal Sales Up After 5 Months of Declines YoY % chg. SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® *Sales are not seasonally adjusted and annualized 15

Central Valley Sales Climbed Further YoY % chg. SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® *Sales are not seasonally adjusted and annualized 16

What’s new on prices?

Fast clip for price gains California, April 2018: $584,460, +3.5% MTM, +8.6% YTY Apr-18: $584,460 Apr-17: $537,950 SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Year-over-Year Price Growth by Percentile SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Price Gains Strong for Homes and Condos SERIES: Median Price of Existing Condo/Townhomes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Bay Area: Peak v. Current Price SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Southern California: Peak vs. Current Price SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Central Coast: Peak vs. Current Price SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Central Valley: Peak v. Current Price SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Other Counties in California: Peak v. Current Price SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Condo/Townhome Prices Trending Up Apr-18: $476,010 Apr-17: $436,390 SERIES: Median Prices of Existing Condos/Townhomes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Price Per Square Foot – Same April 2018: $281, Up 1.8% MTM, Up 7.7% YTY Apr-18: $281 Apr-17: $261 SERIES: Median Price Per Square Feet of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Inventory easing a bit Tipping point? Wait and see.

Active Listings by Month

Active listings increased for 1st time in 34 mon. 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: Active Listing of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Inventory Index Down Slightly April 2017: 3.3 Months; April 2018: 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®

Inventory Index Highest at High – end SERIES: Unsold Inventory Index of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Supply improved in many price segments SERIES: Active Listings of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Listings higher Central & South April 2018 SERIES: Sales and Listings of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Overall inventory remains tight 3.5 2.9 2.1 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®

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

Sellers were in their home a median of 7 years before selling Median: 7 years Q: How many years did you own the home before selling? (n=272) Source: 2018 C.A.R. Housing Consumer Survey

And California Is Not Building Enough 2017: 112,886 (55,779 sf, 57,107 mf ) 2018f: 127,780 (64,900 sf, 62,880 mf) CA HCD Projected Housing Needs: 180,000/yr. SERIES: California New Housing Permits SOURCE: Construction Industry Research Board

Tight Means Competitive

Median Time on the Market California, April 2018: 16.0 Days Range since 1988: Low - 21.9 days in May 2004 High – 93 days in Feb 1993 SERIES: Median Time of Market of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

30 % of Listings Have Price Reductions SERIES: Listing Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

2018 (revised) Forecast

California Housing Market Outlook 2012 2013 2014 2015 2016 2017 2018f (revised) SFH Resales (000s) 439.8 414.9 382.7 409.4 417.7 421.9 423.2 428.3 % Change 4.1% -5.9% -7.8% 7.0% 2.0% 1.5% 0.3% 1.0% Median Price ($000s) $319.3 $407.2 $446.9 $476.3 $502.3 $538.0 $555.6 $582.0 11.6% 27.5% 9.8% 6.6% 5.4% 7.2% 3.2% 8.2% Housing Affordability Index 51% 36% 30% 31% 29% 26% 27% 30-Yr FRM 3.7% 4.0% 4.2% 3.9% 3.6% 4.6% 4.7% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

C.A.R. Economic/Data Resources

Where is the Market Data?

Interactive market stats http://www.car.org/marketdata/interactive/

Interactive market stats http://www.car.org/marketdata/interactive/

Thank You