1. Jon Haveman Principal, Haveman Economic Consulting April, 2013 Today’s Real Estate: Drivers and the Road Ahead

2. Outline: Drivers General Economy General Economy Government Policy Government Policy – Fiscal Policy – Monetary Policy Bank Lending Standards Bank Lending Standards Venture Capital Venture Capital

3. BACKGROUND STATISTICS

4. Median Home Prices Through Q3-2012 Price Declines – Peak to Current Price Declines – Peak to Current – Bay Area: -31% – Solano: -50% – Contra Costa:-38% – Napa:-36% – Alameda:-28% – Sonoma:-26% – Santa Clara: -19% – Marin:-18% – San Francisco:-15% – San Mateo:-14% Source: DataQuick

5. Foreclosures Through Q3-2012 Current Rates Current Rates – Bay Area: 1.4 – Solano: 4.0 – Contra Costa:2.3 – Napa:2.0 – Sonoma1.8 – Alameda: 1.3 – San Mateo:0.6 – Marin:0.5 – Santa Clara:0.6 – San Francisco:0.5 Source: DataQuick

6. High Housing Prices (Median Home Values Over Time) Bay Area LA & SD United States

7. Apartment Rents Bay Area: rapidly rising Bay Area: rapidly rising Silicon Valley: most expensive place to rent Silicon Valley: most expensive place to rent Santa Clara County: 29% increase over 4 years Santa Clara County: 29% increase over 4 years Source: Realfacts/bizjournals.com

8. GENERAL ECONOMY

9. US GDP Growth Remains Sluggish Source: UCLA Anderson Forecast

10. Unemployment Remains Too High Source: UCLA Anderson Forecast

11. Inflation Stays off the Radar Price Deflator for Personal Consumption Expenditures Source: UCLA Anderson Forecast

12. Housing Set to Rebound Housing Starts, Annual Data Source: UCLA Anderson Forecast

13. Investment in Business Structures Uneven Source: UCLA Anderson Forecast

14. Threats to U.S. Recovery and Long Run Prosperity Abroad: Abroad: – Europe – Asia At home: At home: – Austerity push – Income inequality – Infrastructure

15. Bay Strengths Relative to CA & US (12 month % growth to Dec.) IndustryBay AreaCaliforniaU.S. Total Non-Farm Employment 2.91.61.7 Construction8.44.41.8 Manufacturing0.9-0.91.3 Prof, Sci, and Technical 6.13.03.1 Information5.84.7-0.2

16. Bay Area Share of Selected U.S. Tech Jobs in 2010

17. Forecast Growth in Total Jobs Source: Center for Continuing Study of the California Economy

18. Bay Area Population Growth (thousands) Source: Center for Continuing Study of the California Economy

19. GOVERNMENT POLICY

20. The Fiscal Austerity Issue Austerity: Austerity: – US – cutting spending – EU – Greek prescription driving renewed recession Continue stimulus until strong growth prevails Continue stimulus until strong growth prevails Plenty of time later for austerity Plenty of time later for austerity Remember 1937 Remember 1937

21. Interest Rates: Zero Rate Policy to Continue Through Late 2014 Source: UCLA Anderson Forecast

22. Income Inequality

23. Facts on Income Inequality Top 1%: Top 1%: – Collect 24% of all income – Own 40% of all wealth – Hold 50% of all stocks, bonds, and mutual funds – Received 63% of all income gains in recent years Problem for residential real estate: Problem for residential real estate: – Hollowing out of the middle creates a bifurcated residential market. Softening at the bottom and tightening at the top.

24. BANK LENDING STANDARDS

25. Lending Standards: Prime Mtgs. (Through Q4-2012) Source: Federal Reserve Loosening | Tightening

26. Source: Federal Reserve Lending Standards: C&I (Through Q4-2012) Loosening | Tightening

27. Cash Purchases Residential Residential – 32.4% of all California home sales in 2012 – Double the average of 15.6% since 1991 – Cash-only purchases > $500k up 35% compared to 2011 – Why? Can’t get a mortgage Want to prevail in hot markets

28. VENTURE CAPITAL

29. Venture Capital Source: PriceWaterhouseCoopers MoneyTree Q3-2012 Value of All Deals (Millions) % of Total US VC Bay Area2,61940 California3,31451 United States6,482

30. Summary Economy may be slow – current activity may be short lived Economy may be slow – current activity may be short lived Government policy: push-me pull-you Government policy: push-me pull-you – Austerity vs. Easy money vs. Uncertainty – Income inequality will influence markets Lending standards are an impediment Lending standards are an impediment – How long will cash drive markets? Bay area Bay area – Demographics will play a major role going forward – VC will likely continue, but is facing problems – Tech likely to be a driver for some time, but no guarantees

31.  Regional Analysis  Business & Market Analysis  Ports & Infrastructure Analysis  Economic Impact Analysis  Public Policy Analysis Jon@HavemanEcon.com 415-336-5705 Haveman Economic Consulting