1. 2006 Real Estate Market Forecast Leslie Appleton-Young Vice President and Chief Economist

2. Overview Economic Conditions California Housing Market California Commercial Market Regional Real Estate Markets –Southern California –Bay Area –Central Valley 2006 Forecast

3. Economic Conditions

4. 2004: 4.2% 2005 3.4% 2006 3.6% ANNUAL PERCENT CHANGE, CHAIN-TYPE (2000) $ Gross Domestic Product

5. Will dampen growth in the short-term but does not pose a more persistent threat to the economy GDP will lose.5% in 2005 Q3,1% in 2005 Q4 Higher energy prices will cost consumers $50 Billion $25B in insurance payments and $??? B in Government Aid sent to region Budget deficit will increase $10 B this year; $10-15B next year; more in 2007+ Hurricane Katrina

6. PERCENT CHANGE FROM A YEAR AGO Consumer Price Index Inflation August 2005: 3.6% Y-T-Y; 2.2% Core

7. Dollars per Barrel of West Texas Intermediate, Adjusted by CPI (1982-84=100, SA) Crude Oil Prices

8. Employment Growth, California vs. U.S. YEAR TO YEAR % CHANGE

9. Nonfarm Employment By Region SOURCE: CA Employment Development Division

10. INDEX, 100=1985 Consumer Confidence Index August 2005: 103.2

11. QUARTERLY PERCENT CHANGE Personal Consumption 2005 Q2: +3.0%

12. ANNUAL RATE US Sales and Median Price

13. ORIGINATION (BIL $)30-YR FIXED RATE MORTGAGE SOURCE: Mortgage Bankers Association Mortgage Origination Source: Mortgage Bankers Association of America Refinance vs. Purchase

14. 30- YR FIXED RATE MORTGAGEREFINANCE/PURCHASE SHARE SOURCE: Mortgage Bankers Association Mortgage Origination Refinance Share vs. Purchase Share Source: Mortgage Bankers Association of America

15. Home Prices, Mortgage Rates and Consumer Spending Over $200 B per year in spending power has been added from the growth of borrowing against rising home prices. Home equity loans increase from $552 Billion in 2001 to $881 Billion in 2004 Home equity cash out refis grew from $92 Billion 1996-1999 to $400 Billion 2002-2004 This borrowing has fueled consumer spending and it will slow as housing price gains moderate.

16. Fed Funds and Mortgage Rates 2000-2005 SOURCE: Federal Home Loan Mortgage Corp.

17. Treasury Yield Curve

18. Why are Rates so Low? Greenspan: It’s a “Conundrum” Deflationary Structural Forces Global Competition: Wal-Mart Effect Increased consumer Awareness: Internet Effect Productivity gains/Greater efficiency Global Labor force – off-shoring Foreign Central Banks and Pension funds holding more $’s

19. ARMs as a Percent of All Mortgages Why isn’t this lower? Source: Federal Housing Finance Board

20. New Loan Products and Risk Types of instruments –Zero down-payment –Interest-only –Stated income –Option-ARM’s Concerns –Ability to absorb rate adjustments –Slower equity growth ahead

21. Economic growth in 2006 a moderate 3.6% The “Goldilocks Economy”? Accompanied by … –Modest job growth – solid but not outstanding –Inflation in check – Fed Priority –Continued strength in Business Investment –Consumer Spending flat –Growing Fiscal Stimulus: Katrina –Strong Housing Market slightly off 2005 peak National Economy

22. California Real Estate Market

23. THOUSANDS California’s Housing Cycles and Membership 1970-2006

24. INDEXUNITS Sales of Existing Detached Homes and Pacific West Consumer Confidence California, July 2005 Sales: 647,913 Units, Up 3.3% Y-T-D, Up 1.3% Y-T-Y SOURCE: California Association of REALTORS®; The Conference Board

25. Median Price of Existing Detached Homes California, July 2005: $540,900, Up 17.1% Y-T-Y SOURCE: California Association of REALTORS®

26. California’s Million-Dollar Home Sales Source: DataQuick Information Systems YEAR NUMBER OF HOMES

27. Unsold Inventory Index California - July 2005 : 3.2 months of supply SOURCE: California Association of REALTORS® MONTHS

28. 1989 = 100 LR Average Listings = 1.5 times sales Sales Index vs. Listings Index

29. Why are Home Prices Rising? Econ 101 Strong Demand –Low Mortgage Rates –Demographics: Baby Boomers –Flight from alternative investment choices –Speculation? Restricted Supply –Constraints on new construction –Low inventory of homes for sale

30. Yes Virginia, there is a bubble – a bubble in the number of articles about the housing bubble. Is There a Housing Bubble?

31. BUBBLE? NO! SOFT LANDING? YES

32. MONTHLY AVERAGE What is a Bubble? NASDAQ 1987-2005

33. Median Price, Annual Percentage Change California vs. U.S. ANNUAL PERCENTAGE CHANGE

34. California Median Price 1970-2005 Annual Percentage Change ANNUAL PERCENTAGE CHANGE

35. Annual Housing Market Survey 2005-2006: Market in Transition

36. Median Price Discount And Weeks On Market Q. What was the original list sales price of the property? What was the final sales price of the property? How many weeks did the property remain on the MLS?

37. Median Net Cash To Sellers Q. What was the net cash gain or net loss to the seller as a result of this sale?

38. Type of Residence Note: Figures do not total 100% due to “other” types of homes sold. Q. What type of residence was purchased?

39. Proportion of First-Time Homebuyers (Single-Family Detached vs. Condo/Townhome) Q. Was the buyer a first-time buyer?

40. Proportion of First-Time Homebuyers California Q. Was the buyer a first-time buyer?

41. Median Downpayment First-Time Homebuyers Vs. Repeat Homebuyer Q. What was the amount of downpayment?

42. Median Downpayment Single-Family Detached Vs. Condo/Townhomes Q. What was the amount of downpayment?

43. Types Of New First Mortgages

44. Proportion of Transactions With Second Mortgages Q. In addition to the first mortgage or assumption, was there a second mortgage?

45. California’s Housing Crisis

46. Housing Affordability Index California Vs. U.S. SOURCE: California Association of REALTORS® % OF HOUSEHOLDS THAT CAN BUY

47. California vs. U.S. Median Prices 1970-2004 SOURCE: California Association of REALTORS®

48. California vs. U.S. Household Income 1980 - 2004 SOURCE: U.S. Census Bureau, CA Dept of Finance CURRENT DOLLARS

49. Homeownership Rates California (59.7%) vs. U.S. (69.0%)

50. Sources of Population Growth California 1981-2004 SOURCE: CA Dept. of Finance THOUSANDS

51. New Housing Permits: CA SOURCES: CAR; Construction Industry Research Board; CSHP

52. California’s Commercial Market

53. Commercial Outlook Apartments –Favorable demographics in Southern Cal –Los Angeles & Inland Empire two of strongest US markets –Gradually increasing stability in Bay Area and Sacramento

54. Commercial Outlook Office –Improving vacancy rates with economic expansion and creation of jobs –Ventura, Orange, Inland Empire, & S.D. among strongest US markets –Gradual absorption of capacity in Bay Area

55. Commercial Outlook Industrial –Better in Southern California than Bay Area –Powerhouse in Inland Empire

56. Commercial Outlook Retail –Good fundamentals across markets of the state –San Francisco, San Diego, San Jose, Ventura, Oakland, and Sacramento in US Top 10 for lowest vacancy rates.

57. Regional Market: Southern California

58. Nonfarm Employment Southern California SOURCE: California Economic Development Dept.

59. UNITS Sales of Existing Detached Homes Southern California July 2005 Sales: 13,214 Units, Down 2.0% Y-T-D, -3.6% Y-T-Y SOURCE: California Association of REALTORS®; The Conference Board

60. PERCENT CHANGE IN SALES Annual Percent Change in Sales Southern California – Existing Homes

61. Median Home Price Southern California, 1990-2005 ANNUAL MEDIAN SALES PRICE

62. Annual Percent Change in Home Price Southern California, 1990-2005 PERCENT CHANGE IN PRICE

63. Median Home Price Southern California Regions SOURCE: California Association of REALTORS®

64. Supply Indicators SOURCE: California Association of REALTORS® Southern California 89.4% 3.0 Mos. 25.8 Days June 2005 91.0%89.3%Median Sales Price-to- Median List Price Ratio 3.4 Mos.3.6 Mos.Unsold Inventory Index 21.4 Days26.6 DaysMedian Time on the Market July 2004 July 2005

65. Housing Affordability July 2005 SOURCE: California Association of REALTORS®

66. New Housing Permits: Southern California Need:110,000 units SOURCES: CAR; Construction Industry Research Board; CCSCE

67. Nonresidential Permits, Valuations 7 Southern California Counties (1989-2004) $$ MILLIONS SOURCE:U.S. Real Estate Research Council of Northern California

68. Regional Market: Bay Area

69. Nonfarm Employment Bay Area Region SOURCE: California Economic Development Dept.

70. Nonfarm Employment SOURCE: CA Employment Development Division Y-T-Y PERCENT CHANGE Santa Clara County, July 2005: Up 0.1% Y-T-Y

71. Nonfarm Employment Santa Clara vs.California SOURCE: CA Employment Development Division SANTA CLARACA

72. SOURCE: California Association of REALTORS®; The Conference Board UNITS Sales of Existing Detached Homes Bay Area, July 2005: 4,549 Units, Down 10.6% Y-T-D, Down 16.3% Y-T-Y

73. PERCENT CHANGE IN SALES Annual Percent Change in Sales Bay Area – Existing Homes

74. Median Home Price in Bay Area Counties SOURCE: California Association of REALTORS®

75. Median Home Price Bay Area, 1990-2005 ANNUAL MEDIAN SALES PRICE

76. Median Price of Existing Detached Homes Bay Area, July 2005: $724,890, Up 11.3% Y-T-Y SOURCE: California Association of REALTORS®

77. Annual Percent Change in Home Price Bay Area, 1990-2005 PERCENT CHANGE IN PRICE SOURCE: California Association of REALTORS®

78. Supply Indicators Bay Area SOURCE: California Association of REALTORS® July 2005 June 2005 July 2004 Median Time on the Market 39.4 Days38.0 Days41.3 Days Unsold Inventory Index1.7 Mos.1.5 Mos.1.1 Mos. Median Sales Price-to- Median List Price Ratio 92.4%96.0%98.8%

79. Housing Affordability July 2005 SOURCE: California Association of REALTORS®

80. New Housing Permits: SF Bay Area Need 34,600 units SOURCES: CAR; Construction Industry Research Board; CCSCE

81. Non-Residential Permits Valuations 9 Bay-Area Counties (1989-2004) SOURCE:U.S. Real Estate Research Council of Northern California MILLIONS OF DOLLARS

82. Regional Market: Central Valley

83. Nonfarm Employment Central Valley Region SOURCE: California Economic Development Dept.

84. UNITS Sales of Existing Detached Homes Central Valley, July 2005 Sales: 4,765 Units, Down 2.9% Y-T-D, Down 0.3% Y-T-Y SOURCE: California Association of REALTORS®; The Conference Board

85. PERCENT CHANGE IN SALES Annual Percent Change in Sales Central Valley – Existing Homes

86. Median Home Price Central Valley, 1990-2005 ANNUAL MEDIAN SALES PRICE

87. SOURCE: California Association of REALTORS® Annual Percent Change in Home Price Central Valley, 1990-2005 PERCENT CHANGE IN PRICE

88. Median Home Price in Central Valley Regions SOURCE: California Association of REALTORS®

89. Housing Affordability July 2005 SOURCE: California Association of REALTORS®

90. Nonresidential Permits Valuations Sacramento County (1989-2004) SOURCE:U.S. Real Estate Research Council of Northern California MILLIONS OF DOLLARS

91. 2006 Forecast

92. 2006 U.S. Economic Forecast SOURCE: California Association of REALTORS®

93. 2006 U.S. Housing Market Forecast SOURCE: National Association of REALTORS®

94. 2006 California Economic Forecast SOURCE: California Association of REALTORS®

95. 2006 California Housing Market Forecast SOURCE: California Association of REALTORS®

96. Sales and Median Home Price California, 1990-2006 ANNUAL MEDIAN SALES PRICESALES ACTIVITIES

97. Market in Transition Bay Area and So Cal Coastal areas median price up 6-12% Central Valley and Inland Empire growing most rapidly; median price up 10-18% No Bubble – Soft landing Forecast Summary

98. 2006 Forecast Risks Interest Rate Risk: Higher rates from: –Unexpectedly high inflation –Budget deficit run up in rates –Sell off of U.S. debt by foreign investors and central banks Consumer Spending Risk: Weaker than expected, hindering expansion and job growth –Refi boom slows; less equity to tap

99. Baby boomers – retiring and diversifying Singles – larger share of homebuyers Condos/Infill in metro areas – affordability and quality of life issues Continued strength in entry- and mid-range Multi-cultural and immigrant buyers Internet marketing – reaching Gen X Life-long Learning – explore new productivity tools – Relay, Wireless, Tablet, Research etc. 2006 Market Opportunities

100. Thank You