2006 Real Estate Market Forecast

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
Gross Domestic Product

• 2004 4.2 2005 3.4 2006 3.6

ANNUAL PERCENT CHANGE, CHAIN-TYPE (2000)
5
Hurricane Katrina

• 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

6
Consumer Price Index

• Inflation August 2005 3.6 Y-T-Y 2.2 Core

PERCENT CHANGE FROM A YEAR AGO
7
Crude Oil Prices

Dollars per Barrel of West Texas Intermediate,
Adjusted by CPI (1982-84100, SA)
8
Employment Growth, California vs. U.S.

YEAR TO YEAR CHANGE
9
Nonfarm Employment By Region

SOURCE CA Employment Development Division
10
Consumer Confidence Index

• August 2005 103.2

INDEX, 1001985
11
Personal Consumption

• 2005 Q2 3.0

QUARTERLY PERCENT CHANGE
12
US Sales and Median Price

ANNUAL RATE
13
Mortgage Origination

• Refinance vs. Purchase

ORIGINATION (BIL )
30-YR FIXED RATE MORTGAGE
SOURCE Mortgage Bankers Association
Source Mortgage Bankers Association of America
14
Mortgage Origination

• Refinance Share vs. Purchase Share

30- YR FIXED RATE MORTGAGE
REFINANCE/PURCHASE SHARE
SOURCE Mortgage Bankers Association
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 Its 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 MortgagesWhy isnt this
lower?
Source Federal Housing Finance Board
Source Federal Housing Finance Board
20
New Loan Products and Risk

• Types of instruments
• Zero down-payment
• Interest-only
• Stated income
• Option-ARMs
• Concerns
• Ability to absorb rate adjustments
• Slower equity growth ahead

21
National Economy

• 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

22
California Real Estate Market
23
Californias Housing Cycles and
Membership1970-2006
THOUSANDS
24
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

INDEX
UNITS
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
Californias Million-Dollar Home Sales

YEAR
NUMBER OF HOMES
Source DataQuick Information Systems
27
Unsold Inventory Index

• California - July 2005 3.2 months of supply

MONTHS
SOURCE California Association of REALTORS
28
Sales Index vs. Listings Index

1989 100
LR Average Listings 1.5 times sales
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
Is There a Housing Bubble?
Yes Virginia, there is a bubble a bubble in
the number of articles about the housing bubble.
31
BUBBLE? NO! SOFT LANDING? YES
32
What is a Bubble?NASDAQ 1987-2005
MONTHLY AVERAGE
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
Q. What type of residence was purchased?
Note Figures do not total 100 due to other
types of homes sold.
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 HomebuyersCalifornia
Q. Was the buyer a first-time buyer?
41
Median DownpaymentFirst-Time Homebuyers Vs.
Repeat Homebuyer
Q. What was the amount of downpayment?
42
Median DownpaymentSingle-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
Californias Housing Crisis
46
Housing Affordability Index

• California Vs. U.S.

OF HOUSEHOLDS THAT CAN BUY
SOURCE California Association of REALTORS
47
California vs. U.S. Median Prices

• 1970-2004

SOURCE California Association of REALTORS
48
California vs. U.S. Household Income

• 1980 - 2004

CURRENT DOLLARS
SOURCE U.S. Census Bureau, CA Dept of Finance
49
Homeownership Rates California (59.7) vs. U.S.
(69.0)
50
Sources of Population Growth

• California 1981-2004

THOUSANDS
SOURCE CA Dept. of Finance
51
New Housing Permits CA
SOURCES CAR Construction Industry Research
Board CSHP
52
Californias 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
Sales of Existing Detached Homes

• Southern California July 2005 Sales 13,214
  Units, Down 2.0 Y-T-D, -3.6 Y-T-Y

UNITS
SOURCE California Association of REALTORS The
Conference Board
60
Annual Percent Change in SalesSouthern
California Existing Homes
PERCENT CHANGE IN SALES
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

• Southern California

SOURCE California Association of REALTORS
65
Housing Affordability

• July 2005

SOURCE California Association of REALTORS
66
New Housing Permits Southern CaliforniaNeed110,
000 units
SOURCES CAR Construction Industry Research
Board CCSCE
67
Nonresidential Permits, Valuations7 Southern
California Counties (1989-2004)
MILLIONS
SOURCEU.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

• Santa Clara County, July 2005 Up 0.1 Y-T-Y

Y-T-Y PERCENT CHANGE
SOURCE CA Employment Development Division
71
Nonfarm Employment

• Santa Clara vs.California

SANTA CLARA
CA
SOURCE CA Employment Development Division
72
Sales of Existing Detached Homes

• Bay Area, July 2005 4,549 Units, Down 10.6
  Y-T-D, Down 16.3 Y-T-Y

UNITS
SOURCE California Association of REALTORS The
Conference Board
73
Annual Percent Change in SalesBay Area
Existing Homes
PERCENT CHANGE IN SALES
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
79
Housing Affordability

• July 2005

SOURCE California Association of REALTORS
80
New Housing Permits SF Bay AreaNeed 34,600 units
SOURCES CAR Construction Industry Research
Board CCSCE
81
Non-Residential Permits Valuations9 Bay-Area
Counties (1989-2004)
SOURCEU.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
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

UNITS
SOURCE California Association of REALTORS The
Conference Board
85
Annual Percent Change in SalesCentral Valley
Existing Homes
PERCENT CHANGE IN SALES
86
Median Home Price Central Valley, 1990-2005
ANNUAL MEDIAN SALES PRICE
87
Annual Percent Change in Home Price Central
Valley, 1990-2005
PERCENT CHANGE IN PRICE
SOURCE California Association of REALTORS
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 ValuationsSacramento
County (1989-2004)
SOURCEU.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 PRICE
SALES ACTIVITIES
SOURCE California Association of REALTORS
97
Forecast Summary

• 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

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
2006 Market Opportunities

• 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.

100
Thank You