Housing Market Update May 24, 2011 Wayne Yamano, Vice President 1

Independent research and consulting firm focused on the housing We help Investors, Builders/Developers, Lenders, and Building Product Manufacturers make smart decisions We analyze 80 Metros each month, in 10 major regions. Our research clients receive: Monthly reports Survey Results Insight from the Experts Webinars White Papers Introductions And much more… 2 Who is John Burns Real Estate Consulting?

3 1.Current State of Housing 2.Excess Housing Vacancy 3.Shadow Inventory 4.For-Sale Vs. Apartments Todays Agenda

4 Builders dropped prices in 7 of 9 regions in 1Q11 CA showed the most severe declines Prices have been under more pressure in 2Q11 Prices heading down

5 All builders hurting

6 Spring selling season disappointing

7 1.Current State of Housing 2.Excess Housing Vacancy 3.Shadow Inventory 4.For-Sale Vs. Apartments Todays Agenda

8 From 2000 to 2010: Total housing stock grew by 15.8 million Households only grew by 11.2 million Vacancy increased from 9.0% to 11.4% Excess Vacancy = 3.1 million units (2.4%)

9 CA not so bad CA Excess Vacancy = 2.2% Oak: 3.3% Sac: 2.7% SD: 2.3% OC: 1.8% LA: 1.7% SF: 1.5% Riv-SB: 0.7%

10 Construction averaging 1.03MM/yr through 2015 Household growth averaging 1.46MM/yr through 2015 U.S. back to equilibrium in 2015 OC: 2012 LA: 2014 SF: 2014 SD: 2014 Riv-SB: 2015 Oak: 2015 Sac: 2016

11 HH growth slowed to 1.0%/yr in 2000s, after 2 decades of 1.4%/yr growth HH growth should have averaged 1.3%/yr in 2000s, based on demographics and normal headship rates Pent-up household growth = 3.4MM Expected Theoretical Household Growth Rate

million more young adults living with their parents today than in 2000 More young adults living with parents

13 1.Current State of Housing 2.Excess Housing Vacancy 3.Shadow Inventory 4.For-Sale Vs. Apartments Todays Agenda

14 Based on our forecasts: 50% of the Foreclosure Notices have been filed Only 30% of the distressed homes have been sold Is the worst behind us?

15 Central CA markets have most shadow Coastal Bay area has least shadow U.S. Shadow Inventory = 10 months

16 Distressed sales: 27% of sales in 2010 Forecasted to be 36%-37% of sales in Typically 6%-7% of sales Distressed sales to take larger share

17 1.Current State of Housing 2.Excess Housing Vacancy 3.Shadow Inventory 4.For-Sale Vs. Apartments Todays Agenda

18 Scale tipping towards rental demand For-SaleRental JobsDemographicsCredit IssuesIncomeJobs Preference (Size, community, etc.) Affordability

19 Apartment fundamentals surging

20 Rents rising as prices falling Apartments rents have been rising since beginning of 2010 For-sale housing has never been this cheap compared to apartment rents

21 Rents rising as prices falling San Francisco Oakland San Jose Los Angeles Sacramento Orange County

22 …so why is the for-sale market so weak? Prospective buyer pool is lousy! FICO scores too low No $ for down payment

23 Construction will return as: 1) we add jobs, 2) vacancy is filled, and 3) builders can find ways to make $$$. MF: +173% SF: +72% 2010 to 2015

24 High Demand: Census Bureau says population will grow by 3.2 million per year and they will need to live somewhere. Job Growth Housing Vacancies Filled Demand Exceeds Supply Rents and Home prices Rise Construction Returns to Normal Recovery Timeline Recovery is Underway: Rents and home prices have stabilized in many of the best middle class neighborhoods today. Full Construction Recovery Will Take 6+ Years: It will take years to reach 1.7 million+ construction starts due to land locations and feasibility

25 Make great decisions with great analysis Wayne Yamano (949)