1. HOUSING AFFORDABILITY C.A.R. Research & Economics www.car.org/marketdata

2. HOUSING AFFORDABILITY AND HOMEOWNERSHIP

3. 2015 - WHERE ARE WE TODAY? Housing market is under-preforming given fundamentals – Low mortgage rates – Job & Income growth are back And yet… – Sales off 7.6% in 2014 compared to 2013 – Share of first-time buyers LOW – Affordability key concern for renters

4. INADEQUATE HOUSING SUPPLY ISSUE Housing supply constrained in long-run – New construction recovery is very slow – Missing 165,000+ new units per year – Production has fallen short of housing needs Inhibited by – Fiscal interests of local government – Residents who disdain further development, especially multi-family – Unfavorable legal/business environment for development in general & multi-family in particular

5. CALIFORNIA’S 3 HOUSING GAPS Housing Gaps: – Housing affordability gap – Homeownership gap – Housing production gap Chronic problems spanning decades

6. AFFORDABILITY GAP

7. HOUSING AFFORDABILITY DOWN SHARPLY SINCE Q1 2012 California vs. U.S. – 1984-2014 % OF HOUSEHOLDS THAT CAN BUY A MEDIAN-PRICED HOME SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® AnnualQuarterly

8. HOUSING AFFORDABILITY IN CA: BY COUNTY SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® HAI % able to purchase median priced home 2014 Q4

9. INCOME REQUIRED TO BUY A MEDIAN-PRICED HOME IN CA: (PEAK VS. CURRENT) Change in minimum required income: $35,228 Increase in income attributed to interest rate increase: $338 (1.0% of total change) Increase in income attributed to price increase : $34,890 (99.0% of total change) SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

10. VERY SLOW REAL INCOME GROWTH In 2013 Dollars SERIES: Median Household Income SOURCE: US Census Bureau, Current Population Survey 2013 gap = $5,600

11. HOW WAGES MEASURED AGAINST INCOME REQUIRED TO BUY A HOME SOURCE: Bureau of Labor Statistics, C.A.R. Annual Mean Wage California

12. HOUSING AFFORDABILITY GAP Affordability crisis goes beyond low income households – Lack of affordable housing for low income service workers is apparent – Less obvious problem: moderate income households who cannot afford homes in/near communities where they work – In general, there are programs to assist the first group, but not the second group

13. HOUSING AFFORDABILITY INDEX - CA What Will Happen When Mortgage Rates Increase? Q4-2014 Median Price $452,140 20% Downpayment INTEREST RATE % OF HOUSEHOLDS THAT CAN BUY, ALL ELSE CONSTANT SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

14. MEDIAN MONTHLY MORTGAGE PAYMENT - CA What Will Happen When Mortgage Rates Increase? Q4-2014 Median Price $452,140 20% Downpayment INTEREST RATE MONTHLY MORTGAGE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

15. MINIMUM QUALIFYING INCOME - CA What Will Happen When Mortgage Rates Increase? Q4-2014 Median Price $452,140 20% Downpayment INTEREST RATE Minimum Qualifying Income SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

16. HOMEOWNERSHIP GAP

17. HOMEOWNERSHIP RATES California Vs. U.S. – 9.9% gap in 2014 SERIES: Homeownership Rates SOURCE: U.S. Census Bureau

18. HOMEOWNERSHIP RATE BY AGE OF HOUSEHOLDER SOURCE: Census Bureau

19. OVER 1/3 LIVE WITH THEIR PARENTS What is your current living situation? SERIES: 2014 Millennials Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

20. MILLENNIALS’ BIGGEST CONCERNS What are your biggest concerns about home ownership? SERIES: 2014 Millennials Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

21. SHARE OF FIRST-TIME BUYERS UP IN ’14 BUT STILL BELOW LONG-RUN AVERAGE Long Run Average = 38% QUESTION: Was the buyer a first-time buyer? SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

22. WHY DO WE CARE ABOUT LOW LEVEL OF FIRST-TIME BUYERS? It signals a constrained flow of new households in the housing market Trade-up market cannot be replenished in the long run First-time buyers represent the main impulse that drives the state’s homeownership rate

23. REASONS FOR RENTING INSTEAD OF BUYING SERIES: 2013 Renter Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

24. STUDENT LOAN DEBT:25% OF RENTERS SERIES: 2013 Renter Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

25. STUDENT DEBT: DRAGS ON HOME SALES

26. CALIFORNIA’S HOUSING DELIMMA 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 SFH’s, is still exhibiting inadequate supply CA Housing Needs = Minimally 165,000 Units Annually – Regulatory Problem – Impact Fees – Public Attitudes

27. HOUSING PRODUCTION GAP

28. CA PERMITS UP BUT MORE UNITS NEEDED 2014: 85,065 Units, Up 3.4% from 2013 SERIES: New Housing Permits SOURCE: Construction Industry Research Board Household Growth: 220,000-250,000/yr

29. # OF HOUSEHOLDS LOST IN THE GREAT RECESSION SOURCE: California Dept. of Finance; compiled by C.A.R.

30. POPULATION AND HOUSEHOLDS WILL CONTINUE TO GROW California 1970-2020 SOURCE: Moody’s Analytics

31. HOW DID WE GET HERE? Why the Production Shortfall? Shortage of Land: – Production shortfall greatest in cities where need is most critical High Costs of Development – Fees in most California communities are higher than elsewhere in US – Infill development costs higher than suburban development costs – Environmental policies, etc increase costs – Lengthy permitting process increases cost per unit produced and favors deep pockets

32. HOW DID WE GET HERE? General Desire for Low Density Land Use – Preference for detached single family homes – Disdain for multifamily developments Cost of service to cities higher than other land uses NIMBYism: – Desire to preserve existing character of community – Dislike for multifamily, higher density development by residents and officials – Quality of life concerns – Fear of crime and other negative aspects associated with density

33. WHAT IS OUR FUTURE? “… If current trends continue, California will build less than 60 percent of the new housing needed over the next 20 years.” Little Hoover Commission Report on Housing in California

34. SOLVING CALIFORNIA’S HOUSING PROBLEM

35. SOLUTIONS Production Gap is Primary Source of CA’s Housing Problems Solutions must include: – Increase in Production Infill and brownfield opportunities in urban areas where shortage is critical – Revitalization of Neighborhoods – Change Incentive Structure Facing Cities Fiscal Housing & Zoning Requirements Enforce housing elements of general plans, create incentives to comply – Improve Business & Legal Climate for Developers

36. SOLUTIONS Attitude Shift is Essential to Moving Toward Solutions… – By Households as Residents – By Households as Taxpayers – By Local Elected Officials – By State Officials … and an Attitude Shift Requires Education and Heightened Awareness of Problems, Implications, and Solutions! Solutions will take time

37. SOLUTIONS - LOCAL Permanent city affordable housing subsidy source Dedication of a share of county tax increment financing to affordable housing Revise zoning code and/or density bonus ordinance to increase Ease parking and set-aside requirements to enable more backyard homes; granny flats Convert unlawful but affordable units Collaborate with business community

38. SOLUTIONS - STATE CEQA Reform Inclusionary Zoning Experiment with social impact bonds & health funds as a source

39. 2015 FORECAST

40. CALIFORNIA HOUSING MARKET OUTLOOK SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

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