U.S. Real Estate Market Conditions: The Good, the Bad, and the Ugly Mid-Year Meetings The Counselors of Real Estate Seattle May 2010 Stan Humphries, PhD Chief Economist

2 Current Market Performance

3 Case-Shiller only includes homes that have sold at least twice (and excludes all new construction) Case-Shiller includes foreclosure re-sales even though these are substantially different than non-distressed sales. ZHVI looks at all home values, regardless of what has sold or not. ZHVI does not include foreclosure re-sales. The Zillow Home Value Index: Comparison with Case-Shiller Peak-to-Current Change ZHVI: -23% Case-Shiller: -28%

4 Home values in the United States Source: Zillow.com

5 Foreclosures in the United States Source: Zillow.com

6 Comparing the top metros Source: Zillow.com

7 Markets which have stopped falling – will it last? Source: Zillow.com

8 Markets which touched a bottom and then weakened Source: Zillow.com

9 Hard-hit markets where improvement has stalled Source: Zillow.com

10 Markets which were improving (or getting less bad) but have weakened Source: Zillow.com

11 A look at the magnitude of the housing recession Source: Zillow.com The magnitude and breadth of current housing recession is unprecedented in the post-Depression era

12 Phoenix foreclosures Source: Zillow.com

13 Las Vegas foreclosures Source: Zillow.com

14 Stockton foreclosures Source: Zillow.com

15 Continuing Challenges for Housing Market

16 America is flush with empty homes

17 Current inventory level of for-sale homes is very high We made some good progress reducing inventory levels last fall with tax credits Did not work as well this year April: Nearly twice as many homes added to market as were sold in month Inventory levels back to July 2009 levels Pent-up supply? 7% of homeowners (5.3 million) want to sell if they see signs of improvement

18 Lots of “shadow inventory” in the wings 7.3 million mortgages either in foreclosure or delinquent as of March Accounting for shadow inventory, there was 45% more supply than indicated in official NAR inventory numbers as of Sept This discrepancy is growing over time meaning that, while official inventory has been falling, real inventory is essentially unchanged. Source: Mortgage Bankers Association; First American/Corelogic

19 Negative equity among the largest metro markets Source: Zillow.com

20 Negative equity + unemployment = more foreclosures Negative equity can only be worked down by sales/foreclosures, price appreciation or paying down mortgage balances We don’t expect much price appreciation near- term Unemployment forecasted to remain above 8% through end of 2012 Result: 3+ years of high unemployment visited on homeowners who can’t easily sell or refinance their mortgages

21 Mortgage rates are currently helping the market We’d been expecting mortgage rates to be in the upper 5% range by end of year. Greece, Portugal, North Korea and complete lack of inflation pressure have helped keep interest rates low. When will mortgage rates rise? Source: Zillow.com; see real-time rates and historical charts at

22 Mortgages continue to reset and recast Source: Deutsche Bank Global Markets Research Alt-A resets and Option ARM recasts have been a concern Alt-A: Less worrisome now with low mortgage rate environment Option ARM: Default rates have already been high in this product so fewer that will have to recast

23 Home values will continue to fall until Q A likely total peak-to-trough decline of 26-28%. Further declines driven by foreclosures (themselves driven by negative equity and unemployment), an already high supply of for-sale homes, high overall vacancy rates, pent- up supply, and weaker demand after the homebuyer tax credits lapse due to demand-shifting. Very anemic appreciation after bottom is reached; may not appreciate at all in real terms for next 3-5 years. Conclusions