The Global Outlook & a New Administration

The Global Outlook & a New Administration
West San Gabriel Association of REALTORS® June 7, 2017 Jordan G. Levine Senior Economist

Overview Post-Election Outlook Economic Update
Started 2017 with a bang! STILL Lots of uncertainty—hard time to forecast What to worry about, what to be hopeful for Economic Update Global, U.S., and California economy Full employment? Up-/Downside Risks? California Housing Market Outlook Story remains the same, plus some wild cards Regional Housing Market Outlook Lots of challenges locally—especially in the core Expect people to continue to be priced out of 2017 Forecast Don’t shoot the messenger!

Post-Election Outlook

The federal policy whipsaw
Deregulation: industry & banks General regulatory environment CFPB & Dodd-Frank Tax cuts on business & people 3 brackets, lower rates More than half corporate rate Tax reform: repatriating profits Infrastructure investment? Better trade terms? Economy relatively healthy GSEs and the FHA/HUD Will they stay or will they go? MIP reduction already gone Mortgage interest deduction? Pro-growth = higher rates Especially if more hawks at Fed Supply is already an issue here CA very exposed to trade war What does retaliation look like? Capital flows to/from China? Healthcare & Immigration Demand, but also Fed $$ CA exposed there too Uncertainty & Market volatility

The good, bad, and the ugly
Economy relatively healthy Deregulation: industry & banks General regulatory environment CFPB & Dodd-Frank Infrastructure investment? Tax cuts on business & people 3 brackets, lower rates More than half corporate rate Tax reform: repatriating profits Better trade terms? Mortgage interest deduction? GSEs and the FHA/HUD Will they stay or will they go? MIP reduction already gone Healthcare & Immigration Demand, but also Fed $$ CA exposed there too Uncertainty & Market volatility Pro-growth = higher rates Especially if more hawks at Fed Supply is already an issue here CA very exposed to trade war What does retaliation look like? Capital flows to/from China?

Fannie & Freddie Dodd- Frank

Changes to Dodd-Frank should help housing
“Financial Choice Act” Banks will loosen lending standards Lower credit score requirement (still need about 726) FICO Less onerous regulatory requirements Capital requirements on banks Liquidity requirements on banks Provide buyers more mortgage options Could open up private mortgage financing GSEs have been dominating this cycle There’s always a but! Increase in housing demand could push up home prices Affordability already a significant challenge Heighten risks of having another housing and credit bubble Pendulum probably swung too but, don’t wild west either

What will happen to the GSEs?
Market reactions suggest optimism in the future of the GSEs Mnuchin came out early saying “Privatize” Backed off privatization during confirmation hearings FHFA said taxpayers won’t be saddled with GSE losses in 2018 MBA, others don’t think it makes the short list Many others say “now is the time” Could significantly increase the cost of borrowing Cheaper to gamble with a guarantee than not, all else equal Moody’s estimated anything from basis points

Economic Stimulus Package

Big plans already seeing big changes
$550 billion $1 trillion in infrastructure investments over 10 years $100 billion per year in infrastructure investments “Rebuild our highways, bridges, tunnels, airports, schools, hospitals.” Goal: boost economic growth Result: GDP higher… at least short-term More jobs = more housing demand Upward pressure on home prices Affordability already an issue Don’t expect much in terms of new supply

Tax Reform

Putting more money in pockets is good. But what about homeownership?!
Overhaul of the current tax code Reduction in tax rates Drop from 7 tax brackets to 3 10%, 25%, 35% Increase standard deduction Remove virtually all other deductions Eliminate the federal estate and gift taxes Results/Consequences? Good for renter’s pocket books, not good for their wealth Historically, people just don’t save unless they have a home Bad for wealth accumulation, communities, and social engagement Bad for homeowners—will take a tax hit because of lost deductions Reduces the incentive to become a homeowner—very bad!

Macro effect of fiscal policies?
Tax Reform Boosts GDP Big Infrastructure Stimulus More Demand for Housing

Effects of all federal policies?
Potential Inflation Full Employment Higher Demand Effects of all federal policies?

Net effect of all federal policies?
Tax Cuts Bigger Deficits More Potential Inflation

So what? Here’s the punchline.
More Inflation Bigger Deficits Higher Rates

Second order effects on housing?
More Demand Supply Shortage Higher Prices Second order effects on housing? Higher Prices Higher Rates Deteriorating Affordability

So what’s the punchline?
Bad news for homeownership? Tax hit to existing homeowners Higher prices Higher rates No incentive to own for renters Less affordability

The Fed

Not a question of if, but how much/quickly
Rates rise with fiscal stimulus More inflation anticipated, core nearly at Fed target 10-year treasuries already up to ~2.5% December rate hike, same in March Expect more this year, but may not be as many Yield curve to flatten, so 30-Yr FRMs may not rise as much Janet is off the chopping block for now Other vacancies to fill too Raphael Bostic got one, that’s a good thing – pro-housing Still, we can probably expect rates to keep rising

Mortgage rates: keep the champagne corked
January 2010 – June 1, 2017 MONTHLY WEEKLY Monthly from 2009 to present, weekly for the past 8 weeks SERIES: 30Yr FRM, 5Yr ARM SOURCE: Freddie Mac

Rate increases -> same home costs more
What Will Happen When Mortgage Rates Increase? MONTHLY MORTGAGE Q Median Price $496,620 20% Downpayment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Tough conversations with employers?
What Will Happen When Mortgage Rates Increase? Minimum Qualifying Income Q Median Price $496,620 20% Downpayment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

? Trade Policy

Full steam ahead, but lots of uncertainty
Trade reform to bring jobs back to America. Withdrawn from the Trans-Pacific Partnership (TPP) Renegotiate NAFTA Declare China a currency manipulator Tax imports from Mexico Increase tariffs on Chinese imports Industry-specific or product-specific tariffs Could impact housing demand locally Lots of logistics & import/export jobs in the region Not yet Not yet Not yet Not yet Not yet

The Wildcards

Important question marks for CA
Healthcare future uncertain Potentially 4.6M covered under ACA That’s just CoveredCA and MediCal Still have kids on parents’ plans That’s health or pocketbook issue Could be a hidden negative for housing What does deportation of 12M look like? Politics aside, there’s practical aspects Reduces the number of bodies/demand Reductions to household income How do sanctuary cities fare: fed funding? Again, large negative for housing in CA Uncertainty & Market volatility The Twitter already jolting equities around

Economic Update

Global outlook not robust
SERIES: Real Economic (GDP) Growth SOURCE: World Bank

China and Japan having a tough time East Asian Tigers doing well
Asian Exchange % Chg. Dec-16 European Exchange Shenzhen -11.6% Ukrainian -22.1% Colombo -10.5% Athens (ATHEX) Shanghai -9.8% BME Spanishs -9.7% Bursa Malaysia -5.2% SIX Swiss -6.9% Port Moresby -4.4% Cyprus -5.8% Hanoi -0.5% Irish -5.5% Hong Kong 0.3% Bucharest -2.5% Philippine 0.4% Nasdaq Nordics -0.6% Singapore Exchange 1.5% Deutsche Boerse AG 1.0% BSE India Limited 3.0% Malta 1.6% National of India Limited 3.3% Warsaw 2.2% Japan Exchange Group Inc. 3.4% Stock of Mauritius 5.1% Taipei Exchange 3.7% Wiener Borse 5.3% Korea Exchange 4.1% Euronext 5.6% Chittagong 6.7% Zagreb 9.6% Dhaka 8.5% Oslo Bors 20.7% NZX Limited 9.8% Bourse de Casablanca 26.4% Australian 10.9% Budapest 29.3% Sydney 12.5% Luxembourg 30.5% Taiwan 15.7% Moscow 61.7% Indonesia 22.8% Belarusian 132.0% The of Thailand 25.4% Hochiminh SERIES: Domestic Market Capitalization Growth (%) SOURCE: World Federation of Exchanges

Americas hot while Africa struggles
Central/South American % Chg. Dec-16 Middle East Exchange Bolsa Mexicana de Valores -17.1% Borsa Istanbul -16.5% Bolsa de Valores de Panama 3.0% Ljubljana -12.0% Barbados 5.0% Tel-Aviv -11.8% Nasdaq - US 6.8% LSE Group -9.9% Jamaica 9.7% Amman -3.5% NYSE 10.0% BRVM -0.1% Bolsa de Comercio de Santiago 11.6% Bahrain Bourse 0.6% Bolsa de Comercio de Buenos Aires 13.8% Palestine 1.5% Bolsa de Valores de Colombia 20.3% Muscat Securities Market 4.9% Bolsa Nacional de Valores 24.0% Beirut 6.5% TMX Group 28.2% Saudi (Tadawul) 6.6% Bermuda 36.3% Abu Dhabi Securities 8.1% Bolsa de Valores de Lima 41.7% Qatar 8.7% BM&FBOVESPA S.A. 57.8% Dubai Financial Market 9.9% Kazakhstan 15.0% African Tehran 15.8% Nigerian -42.2% Seychelles 122.5% The Egyptian -41.8% Tunis -4.2% Namibian 23.2% Johannesburg 30.3% SERIES: Domestic Market Capitalization ($USD) Growth (%) SOURCE: World Federation of Exchanges

Fewer areas seeing prices fall last year
SERIES: International Home Price Index SOURCE: Federal Reserve Bank of Dallas

Who is speeding up and slowing down
SERIES: International Home Price Index SOURCE: Federal Reserve Bank of Dallas

How’s the economy closer to home?

Jumping off from a decent starting point
1.2% GDP 2017-Q1 0.6% Consumption Q1 4.4% Unemployment April 2016 1.6% Job Growth April 2016

Slowest GDP growth since Q1 2014
ANNUALLY QUARTERLY Weakness was primarily centered on a slower pace of consumer spending. Real consumer spending inched up just 0.3 percent in Q1, which was the weakest annualized pace growth since Q409. Milder-than-usual winter weather during the first two month of the year was the factor that kept economic growth below the norm. As such, consumers did not spend as much on utility services. On the other hand, business fixed investment posted a strong quarterly performance, up 9.4 percent. The outlook for capital spending outside of the energy sector has improved now that the nearly two-year slide in industrial activity appears to have ended. Small business owners are more upbeat, and a rising number of business owners plan to increase capital spending. The shift in business attitudes is a potential potent tailwind and raises some upside bias to the forecast. The Congressional Budget Office recently released its estimates for potential real GDP growth of just below 2 percent. Meanwhile, most private estimates project real growth above 2 percent in the near-term. So, is inflation on the upward slope over the next two years— and where inflation goes, will the fed funds rate follow? This will be a touchy issue for the next two years as a stronger dollar and higher interest rates may act as a partial offset to the fiscal stimulus plans of the current administration. Business/consumer sentiment continues to suggest the weakness in Q1 was not the start of a new trend. On early signs of strengthening consumer , resilient BFI and residential construction activity, conditions suggest US GDP will rebound in Q2. 2009 Largest Annual Drop since 1946 (-2.8%) SERIES: GDP SOURCE: U.S. Bureau of Economic Analysis 37

Unemployment rates lowest since 2007
US 4.4% (April 2017) & CA 4.8% (April 2017) SERIES: Unemployment Rate SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

CA jobs growing faster than Nation
US 1.6% (04/17) SERIES: Total Nonfarm Employment SOURCE: U.S. Bureau of Labor Statistics, CA Employment Development Dept.

Unemployment rate by California metro
March 2017: California 4.9% Source: SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division

Job Trends by California Metro Area
Source: SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Dept.

Most sectors still growing
SERIES: Total Nonfarm Employment by Industry SOURCE: CA Employment Development Dept.

Housing Market Trends

Recent Trends in Homeownership

Homeownership bearing the brunt
SERIES: Homeownership Rate (%) SOURCE: U.S. Census Bureau, Housing Vacancy Survey (HVS)

Similar Phenomenon Locally
SERIES: Homeownership Rate (%) SOURCE: U.S. Census Bureau, Housing Vacancy Survey (HVS)

Achieving Homeownership in California

Interest rates were the saving grace
SOURCE: Calculations by California Association of REALTORS®

Rates were the saving grace… WERE!

Homeownership challenges by race
SERIES: Surplus/Deficit of Home Sales Relative to Population Base SOURCE: U.S. Census Bureau, American Community Survey

Supply & Affordability: Connecting the Dots

Housing Affordability In CA: by county
SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

“Missing” 77,000 new units annually
2016: 98,881 (47,889 sf, 50,992 mf) 2017f: 102,712 (51,720 sf, 50,992 mf ) CA HCD Projected Housing Needs: 180,000/yr. SERIES: California New Housing Permits SOURCE: Construction Industry Research Board

Most underbuilt counties in California
SERIES: Nonfarm Job Growth & Residential Building Permits SOURCE: CA EDD, Construction Industry Research Board

More “underbuilding,” less affordability
SERIES: Nonfarm Job Growth, New Housing Permits, Existing Median Prices SOURCE: CA EDD, C.A.R., Construction Industry Research Board

Sales of Existing Detached Homes
LA County, April 2017 Sales: 3,384 Units, +2.0% YTD, -7.5% YTY Sales dropped from last year mainly because July 2016 had two fewer trading days than July 2015. Peak: 60,922 units in 2005 Valley: 28,044 units in 1993 2012 annual sales 6.6% from 2011 2011 annual sales down 4.7% from 2010 2010 annual sales down 10.2% from 2009 2009 annual sales up 24.9% from 2008 2008 annual sales up 29.2% from 2007 2007 annual sales down 35.6% from 2006 2006 annual sales down 20.4% from 2005 2005 annual sales up 5.2% from 2004 2004 annual sales down 2.9% from 2003 2003 annual sales up 2.2% from 2002 2002 annual sales up 7.1% from 2001 2001 annual sales up 3.2% from 2000 2000 annual sales up 3.9% from 1999 10/93: 41.0 01/00: 03/03: 63.0 5/07: 128.4 2/09: 24.3 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Median Price of Existing Detached Homes
Los Angeles County, April 2017: $480,230, Up 5.0% YTY Valley:$171,103 in 1996 High: $625,812 in Sept 2007 2012 annual median price 6.4% from 2011 2011 annual median price down 4.8% from 2010 2010 annual median price up 7.9% from 2009 2009 annual median price down 21.8% from 2008 2008 annual median price down 35.0% from 2007 2007 annual median price up 2.1% from 2006 2006 annual median price up 11.4% from 2005 2005 annual median price up 18.5% from 2004 2004 annual median price up 25.1% over 2003 2003 annual median price up 21.3% over 2002 2002 annual median price up 18.5% over 2001 2001 annual median price up 12.2% over 2000 2000 annual median price up 8.3% over 1999 Early 1990s Peak: May 1991, $229,260, surpassed in May 2001, $232,712 SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Lack of Turnover: Causes and Consequences

Unsold Inventory Index
Los Angeles County, April 2017: 3.4 Months Supply of homes has remained below the long-run average in recent months. Average: 8.0 Months Low: 1.2 Months, December 2003 High: 27.9 Months, February 1991 Note: The Unsold Inventory Index represents the number of months it would take to deplete the remaining inventory at the end of a particular month with the sales rate of the month in consideration. Inventory includes listings with “Active”, “Pending”, and “Contingent” (when available) statuses. SERIES: Unsold Inventory Index of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Where is the inventory? Long-Time Homeowners are not moving as in the past Low rate on current mortgage Low property taxes Capital gains hit Where can I afford to go? Could not qualify for a mortgage today Remodel and stay Are we headed for the “European Model” where children inherit the home of their parents? One more thing…Secular decline in marriage

Fewer units turning over since the Great Recession
Housing Turnover Rate (Single-Family Homes only) SERIES: Percent of existing single-family homes being sold SOURCE: Census Bureau, American Community Survey, Moody’s Analytics, C.A.R.

People are staying in their homes longer
SERIES: 2016 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Boomers not moving as often
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

Owners investing in staying put?
Another angle on low turnover—reinvesting in your current home for the long haul so you don’t have to move. The value of residential alterations/additions permits in California is at an all-time high through the first 7 months of 2016 compared with the first 7 months of any other year ever. Also accelerating this year—up 16% over last year and the strongest growth for the series this cycle. SOURCE: California Homebuilding Foundation (CHF)/Construction Industry Research Board (CIRB) Downloaded from Moody’s Analytics

More single family units now rentals
Potentially between 400,000 and 700,000 SF Rentals that Used to be Owner-Occupied SOURCE: U.S. Census Bureau, Annual Social and Economic Supplement (ASEC) to the Current Population Survey (CPS) Downloaded from the National Bureau of Economic Research (NBER)

The Forecast

U.S. economic outlook 2011 2012 2013 2014 2015 2016p 2017f US GDP 1.6%
2.2% 1.7% 2.4% 2.6% 2.1% Nonfarm Job Growth 1.2% 1.9% 1.8% 1.3% Unemployment 8.9% 8.1% 7.4% 6.2% 5.3% 4.9% 4.7% CPI 3.1% 1.5% 0.1% 1.4% Real Disposable Income, % Change 2.5% 3.2% -1.4% 2.7% 3.4% 3.0% 30-Yr FRM 4.5% 3.7% 4.0% 4.2% 3.9% 3.6% 4.4% SERIES: U.S. Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California economic outlook
2011 2012 2013 2014 2015 2016p 2017f Nonfarm Job Growth 1.1% 2.4% 3.0% 2.2% 2.7% 2.3% 1.9% Unemployment Rate 11.8% 10.4% 8.9% 7.5% 6.2% 5.5% 5.4% Population Growth 0.7% 0.9% 1.0% Real Disposable Income, % Change 3.5% 4.7% -1.1% 3.2% 3.6% 4.5% SERIES: CA Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California housing market outlook
2011 2012 2013 2014 2015 2016 2017f SFH Resales (000s) 422.6 439.8 414.9 382.7 409.4 416.3 419.6 % Change 1.4% 4.1% -5.9% -7.8% 7.0% 1.7% 0.8% Median Price ($000s) $286.0 $319.3 $407.2 $446.9 $476.3 $502.3 $525.4 -6.2% 11.6% 27.5% 9.8% 6.6% 5.4% 4.6% Housing Affordability Index 53% 51% 36% 30% 31% 28% 30-Yr FRM 4.5% 3.7% 4.0% 4.2% 3.9% 3.6% 4.4% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Conclusions

Fasten seatbelts for bumpy ride
Lots of political uncertainty Big stimulus, how does that affect our housing imbalances Threats to MID, Fannie/Freddie, FHA? MID is the one to worry about. Trade, healthcare, immigration, federal funding, interest rates All potential negatives Economy and housing market doing ok for now, but… Several threats to homeownership in California Lack of housing and its effects on affordability Low turnover rate further restricts supply High prices and downpayment requirements Rising interest rate environment is expected Future policy changes: GSEs, Mortgage Interest Deduction? Outmigration to more affordable areas Many of these fundamental issues aren’t abating any time soon That means fighting for market share in a relatively flat market

The all-new Housing Matters Podcast is your housing hub for market analysis, economic trends, and housing news from the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) and its institute the Center for California Real Estate. Be sure to subscribe on iTunes to hear the latest episode every other Friday to learn what you need to know about the market from C.A.R. experts who will give you their take on the week’s top real estate stories.

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