THE HOUSING DILEMMA: SUSTAINING THE CALIFORNIA HOUSING MARKET Mid-Year Luncheon May 1, 2014 Joel Singer, Chief Executive Officer

Overview Where Are We The Long View Components of Housing Demand What Has to Happen

Sales Retreating Since Mid-2013 California, Mar 2014 Sales: 367,000 Units, -13.2% YTD, -12.3% YTY *Sales are seasonally adjusted and annualizedSERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Median Price Gains Moderating California, March 2014: $435,470, Up 14.9% YTY SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Inventory Has Improved but Remains Tight California, March 2014: 4.0 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®

Household Formation Gap is Significant SOURCE: California Dept. of Finance; compiled by C.A.R.

# of Households Lost Since the Great Recession SOURCE: California Dept. of Finance; compiled by C.A.R.

Todays Market Clearly well on the road to recovering Volume – A bit down, still reliant on investment sales Prices up sharply, but increases slowing in most markets Inventory remains tight Pent-up/unrealized demand not yet translating into sales Affordability challenges emerging once again…

The Long View It wasnt always like this… Oh, maybe it was…

California Sales & Median Price: % -34% -49% UNITS/MEDIAN PRICE $ SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® California Sales of Existing Homes and Median Price:

California Median Prices SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® Avg. Annual Price Gain: +4.9% (1980 – 2001) Avg. Annual Price Gain: +16.4% (2002 – 2006)

Mortgage Rates Heading Higher SERIES: 30Yr FRM, 1Yr ARM SOURCE: Federal Home Loan Mortgage Corporation

Housing Affordability Hit by Mortgage Rate Hikes and Price Gains California vs. U.S. – % OF HOUSEHOLDS THAT CAN BUY, ANNUAL RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® AnnualQuarterly

Median CA House Payment Well Below Peak SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® PITI/Month Peak: $3,668/mo (2007 Q2) Latest: $2,233/mo (2013 Q4)

… Minimum Qualifying Income Below Peak SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® Min. Income Peak: $146,701/yr (2007 Q2) Latest: $89,320/yr (2013 Q4)

House Payment (Inflation Adjusted) Is at Late 1970s Level PITI/Month (Adjusted for Inflation) Peak: $928/mo (2006) Latest: $458/mo (2013) SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

… And Minimum Qualifying Income (Inflation Adjusted) Is the Same as 35 Years ago Min. Income (Adjusted for Inflation) Peak: $37,122 (2006) Latest: $18,337 (2013) SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Share of First-Time Buyers is the Lowest Since 2006 Long Run Average = 38% SERIES: 2013 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Student Debt: Drags On Home Sales

Q. Please indicate the type of mortgage. Share of FHA was the lowest in 6 Years; 24% of first-time buyers used FHA loans SERIES: 2013 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Homeownership Rates Dropping California Vs. U.S. SERIES: Homeownership Rates SOURCE: U.S. Census Bureau

Median Monthly Mortgage Payment - CA What Will Happen When Mortgage Rates Increase? Q Median Price $431,510 20% Downpayment INTEREST RATE MONTHLY MORTGAGE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Minimum Qualifying Income - CA What Will Happen When Mortgage Rates Increase? Q Median Price $431,510 20% Downpayment INTEREST RATE MONTHLY MORTGAGE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Californias Housing Dilemma Even with everything (or at least most things) going right, our homeownership market is in trouble… The rental market, even with the conversion of 500,000 SFHs, is still exhibiting inadequate supply

WHAT ABOUT FUTURE HOUSING DEMAND?

Population and Households Will Continue to Grow California SOURCE: Moodys Analytics

Immigrant Share of Growth in Home Owners Dowell Myers, USC Price Source: Dowell Myers and John Pitkin, Immigrant Contributions to the Housing Market… RIHA, Mortgage Bankers Association, 2013

Growth in Number of Immigrant or Native Born Owner (Millions)

Future Demand The demographic demand for housing is not going to lessen… Where Will Our Children Live ? remains a relevant question Enduring negative impacts on the states economy Housing is the Achilles heel of the California Economy

ATTITUDES ON HOMEOWNERSHIP REMAIN HIGHLY POSITIVE

Good Time to Buy Took Small Dip in the Recent Market Downturn SOURCE: Thomson Reuters & University of Michigan, Survey of Consumers

Share of Consumers Planning to Buy a Home Up Sharply in Recent Years % Answering Yes, Jan 2000-Jan 2014, 3 Month Average, SA SERIES: Share of Consumers who Plan to Buy in 6 mos. SOURCE: The Conference Board

Majority of All Age Groups Think Owning Makes More Financial Sense than Renting SOURCE: Fannie Mae, National Housing Survey Q1 2012, Joint Center for Housing Studies of Harvard University

Homeownership Has Mattered Profoundly to Wealth Accumulation Even after Controlling for Income Note: All values are in 2010 dollars, for the middle income quintile Source: Joint Center tabulations of Board of Governors of the Federal Reserve System, Survey of Consumer Finances

Make no mistake about it, the way that working- class people build wealth is through homeownership, not the stock market, not their 401(k) and not a pension. John Taylor, President of the National Community Reinvestment Coalition,

Real Estate is Considered the Best Long Term Investment SOURCE: Gallup

More Sellers Are Planning to Repurchase; Repeat Buyers are Back Q. Is the seller planning on purchasing another home? SERIES: 2013 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Financial Constraints Weigh Heavily on Perceptions, Keeping Some Out of Market SOURCE: Hanley Wood Housing 360 Survey (2011), Joint Center for Housing Studies of Harvard University

Reasons for Leaving California

International Buyers are Getting a Bigger Slice of the Market than Before Q. Was the buyer an international buyer – a person who was a citizen of another country who wished to purchase residential real estate in the U.S.? SERIES: 2013 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Investment Homes : 19% Market Share 19% SERIES: 2013 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® Long Run Average: 11 %

HOW TO MAKE IT MORE AFFORDABLE FOR HOME BUYERS?

One Word: Supply CA Housing Needs = Minimally 165,000 Units Annually Regulatory Problem Impact Fees Public Attitudes

A Healthy Price Appreciation Requires the Right Balance between Supply and Demand 2013: 80,319 Units, Up 37.2% from 2012 Household Growth: 220, ,000/yr SERIES: Residential Permits SOURCE: Moodys Analytics

Mortgage Finance Permanent Source of Sufficient Affordable Funding GSEs FHA Rental Housing

People would prefer the following over going through the home mortgage process again: SOURCE: Guaranteed Rate Mortgage Survey of 1,000 adults 25 and older; USA Today Maybe a new mortgage process is part of creating the sustainable housing market …

We shape our dwellings, and afterwards our dwellings shape us. ~Winston Churchill 1944

Almost any man worthy of his salt would fight to defend his home, but no one ever heard of man going to war for his boarding house. ~ Mark Twain

THANK YOU!