2019 Housing Market Forecast. Palos Verdes Peninsula AOR January 8, 2019 Jordan G. Levine Senior Economist

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1 2019 Housing Market Forecast Palos Verdes Peninsula AOR January 8, 2019 Jordan G. Levine Senior Economist

2 Overview Good News: Economic fundamentals solid Homeownership still the dream Rates might not go up as fast More supply: good news for buyers Bad News: Affordability has eroded a LOT Supply problems became demand Competition has dipped considerably Other economic & market risks Prices to moderate in 2019, sales falling

3 Economic Update

4 Economic Fundamentals Remain Strong 3.4% 3.5% 2.2% GDP 2018-Q3 3.9% Consumption 2018-Q3 1.7% Core CPI November 2018 Unemployment December 2018 Job Growth December 2018

5 Unemployment Lowest in 40+ Years Unemployment Rate 14 California U.S Jan-76 Mar-78 May-80 Jul-82 Sep-84 Nov-86 Jan-89 Mar-91 May-93 Jul-95 Sep-97 Nov-99 Jan-02 Mar-04 May-06 Jul-08 Sep-10 Nov-12 Jan-15 Mar % Kings Merced Yuba City Modesto Monterey 4.6% Shasta Santa Cruz Ventura Sacramento San Diego Orange County Napa South Bay San Francisco 2.1% 0% 2% 4% 6% 8% 10%

6 Why Housing Has Appreciated So Much 18,000 17,000 16,000 California Nonfarm Employment Jul-07, 15,510 May-14, 15,526 Nov-18, 17,268 15,000 14,000 13,000 12,000 Feb-10, 14,190 11,000 10,000 Jan-90 Oct-90 Jul-91 Apr-92 Jan-93 Oct-93 Jul-94 Apr-95 Jan-96 Oct-96 Jul-97 Apr-98 Jan-99 Oct-99 Jul-00 Apr-01 Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16 Jan-17 Oct-17 Jul-18

7 Consumer Confidence Shows Some Cracks December 2018: INDEX, 100= SERIES: Consumer Confidence SOURCE: The Conference Board

8 Stock Market Volatility (Jan 2018 Jan 2019) (9/1/18 1/3/19) 26, ,686 SERIES: Dow 30 SOURCE: Yahoo Finance

9 Housing Market Not As Strong

10 Home Sales: Largest Decline Since 2014 California, November 2018 Sales: 381,400 Units, -4.6% YTD, -13.4% YTY 700, , , , , , ,000 - Nov-17: 440,340 Nov-18: 381,400 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS *Sales are seasonally adjusted and annualized

11 Sales Declined in All Price Segments November 2018 (Year-to-Year) 0% -5% -10% -15% -13.1% -6.5% -9.1% -6.4% -10.5% -8.0% -11.7% -20% -25% -21.9% SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

12 Sales Down for 2/3 of Our Housing Stock Growth in Existing Home Sales by Price 2017 Home Sales by Price Under $500K 1.5% 8.8% $3M + 5% 6% -6.6% -2.5% $2-$3M 11% $500-$750K 17% -22.6% -21.7% -19.0% -15.5% $1.5-$2M 19% $750K-$1M 16% -34.6% $1.25-$1.5M 14% $1-$1.25M 12%

13 Sales Trending Downward Prior to Drop 20% 15% 10% Avg. year-over-year % chg. = -7.9% 5% 0% -5% -10% Last 4+ consecutive mo. with decline: Avg. year-over-year % chg. = -1.9% -15% Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Aug-17 Dec-17 Apr-18 Aug-18 *Sales are seasonally adjusted and annualized SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

14 Feeling the Pinch Locally As Well 160 Palos Verdes Peninsula Home Sales 60% Palos Verdes Peninsula Home Sales Growth Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -22.2% Existing SFR Sales Condo Sales

15 2018 Existing Home Sales by City Torrance 12% San Pedro 9% Redondo Beach 8% Rolling Hills Estates 6% Rolling Hills 3% Long Beach 2% Lomita 2% Other 7% Harbor City 1% Carson 1% Los Angeles 1% Lakewood 1% Hawthorne 1% Lawndale 1% Gardena 1% Manhattan Beach 1% Downey 1% Palos Verdes Peninsula 0% Palos Verdes Estates 16% Rancho Palos Verdes 28% Cypress 0%

16 Declines Are Broad-Based Across Region 2017 Existing SFR Growth by City 300% 250% 250.0% 200% 150% 100% 50% 0% -50% -100% -12.5% -0.9% -20.6% -36.6% -11.9% 18.8% 53.8% -42.9% -54.5% 12.5% -42.9% -46.7% -53.3% -28.6%

17 Evidence of Demand Problems

18 Is It a Good Time to Buy or Sell? Do you think it s a good time to buy a home in California? Do you think it s a good time to sell a home in California? 57% 56% 51% 46% 48% 22% 21% 27% 25% 22% Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Do you think it s a good time to buy a home in California? (n=300) Do you think it s a good time to sell a home in California? (n=300) SERIES: 2018 Google Consumer Poll SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

19 Housing Affordability Peaked at Q % OF HOUSEHOLDS THAT CAN BUY A MEDIAN-PRICED HOME 80% 70% 60% 50% 40% 30% 20% 10% 0% California, Annual Quarterly 53% 27% SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

20 Minimum Annual Income Required During Affordability Peak vs. Current Region 2012 Q Q3 % CHG CA SFH $56,320 $125, % CA Condo/Townhomes $44,440 $102, % Los Angeles Metropolitan Area $53,780 $112, % Inland Empire $35,170 $77, % S.F. Bay Area $90,370 $202, % US $32,000 $56, % SERIES: Housing Affordability Index of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

21 Rates Rising, but Keep Perspective! Year Fixed Rate Mortgage SERIES: 30Yr FRM, 5Yr ARM SOURCE: Freddie Mac

22 Higher Rates Hurt Affordability Q Median Price $588,530 20% Downpayment $3,200 $2,800 $2,400 $2,000 $1,985 MONTHLY MORTGAGE $2,673 $2,527 $2,248 $2,386 $2,114 $2,823 $2,976 $160,000 $140,000 $120,000 $100,000 Minimum Qualifying Income $116,984 $122,496$128,172 $106,473 $111,641 $139,985 $146,109 $134,004 $1,600 $80,000 $1,200 $60,000 $800 $40,000 $400 $20,000 $0 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% $0 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% INTEREST RATE INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

23 Homes Taking Longer to Sell Median Time on Market (Days) Median Time on Market /1/ /1/2005 7/1/2006 4/1/2007 1/1/ /1/2008 7/1/2009 4/1/2010 1/1/ /1/2011 7/1/2012 4/1/2013 1/1/ /1/2014 7/1/2015 4/1/2016 1/1/ /1/2017 7/1/2018 Nov-17 Percentile Nov-18

24 More Sellers Facing Price Pressure Sales-to-List Ratio Sales-to-List Price Ratio 101% 100.5% 100% 99% 99.4% 100.0% 99.5% 99.0% 99.8% 99.9% 99.4% 99.2% 99.0% 99.0% 99.1% 99.3% 98% 98.5% 97% 98.0% 97.9% 96% 97.5% 97.0% 95% 96.5% 94% 1/1/ /1/2005 7/1/2006 4/1/2007 1/1/ /1/2008 7/1/2009 4/1/2010 1/1/ /1/2011 7/1/2012 4/1/2013 1/1/ /1/2014 7/1/2015 4/1/2016 1/1/ /1/2017 7/1/2018 Nov-17 Percentile Nov-18

25 More Actives Coming Down From List Reduced-Price Listings 50% 42.5% 45% 40% 35% 30% 25% 20% 15% 4.4% 10% 5% 0% 1/1/2010 4/1/2010 7/1/ /1/2010 1/1/2011 4/1/2011 7/1/ /1/2011 1/1/2012 4/1/2012 7/1/ /1/2012 1/1/2013 4/1/2013 7/1/ /1/2013 1/1/2014 4/1/2014 7/1/ /1/2014 1/1/2015 4/1/2015 7/1/ /1/2015 1/1/2016 4/1/2016 7/1/ /1/2016 1/1/2017 4/1/2017 7/1/ /1/2017 1/1/2018 4/1/2018 7/1/ /1/ % 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Share Reduced Median Reduction

26 Rural Counties Seeing More Reductions Share of Active Listings Reduced by County 60% 55.7% 50% 46.3% 46.1% 46.0% 45.3% 41.8% 40.8% 38.9% 40% 30% 20% 19.8% 10% 0%

27 Market Less Competitive Here Too Median Time on Market 100% 99% 98% Median Sales/List Price Ratio 99.1% % 96% 95% Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul % 93% Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17

28 Beginning to Translate Through to Prices

29 YTY Home Price Gains Moderating California, November 2018: $554,760, -3.0% MTM, +1.5% YTY $700,000 $600,000 P:May-07 $594,530 Nov-17: $546,820 Nov-18: $554,760 $500,000 $400,000 $300,000 T: Feb-09 $245,230-59% from peak $200,000 $100,000 $- SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

30 Evidence of Softening Prices at Upper End 2.5% 2.0% 1.5% 1.0% 2.2% California Year-Over-Year Price Growth by Quintile (November 2018) 1.4% 0.8% 0.5% 0.0% 0.0% 0.0% -0.5% -1.0% -1.5% -2.0% -0.5% -0.5% -0.7% -2.5% -2.3% Quintile SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

31 Price Growth Has Been Phenomenal 1,400,000 1,200,000 1,000, , , , , , ,000 Palos Verdes Peninsula Prices 1,176,000 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Median SFR Price Median Condo Price

32 Holds Up Better Locally, But Cracks Show 35% Palos Verdes Peninsula Home Price Growth (Smoothed) 30% 25% 20% 15% 10% 5% 0% -5% -10% Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov %

33 60% List Price Suggests a Bounce Back in Sales Price Growth in the Near Term California Median Sales vs. List Price Growth Sales Price Growth Lags List Price Growth by 4-6 months YTY% Chg. in Price 40% 20% 0% -20% -40% 4.7% 0.2% -60% Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Listing Price Sales Price SERIES: Sales Price Growth and List Price Growth of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

34 Supply Also Driving Price Trends

35 Inventory Index on the Rise Nov 2017: 2.9 Months; Nov 2018: 3.7 Months Jan-05 Sep-05 May-06 Jan-07 Sep-07 May-08 Jan-09 Sep-09 May-10 Jan-11 Sep-11 May-12 Jan-13 Sep-13 May-14 Jan-15 Sep-15 May-16 Jan-17 Sep-17 May-18 40% 30% 20% 10% 0% -10% -20% Year-over-Year % Chg (Active Listings) 31.0% Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Note: Unsold Inventory Index represents the number of months it would take to sell the remaining inventory for the month in question. The remaining inventory for the month is defined as the number of properties that were Active, Pending, and Contingent (when available) and divide the sum by the number of Sold properties for the month in question. SERIES: Unsold Inventory Index of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

36 Locally, Surge in Listings Has Been Slower Palos Verdes Peninsula Active Listings 23.8% % 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% Growth Listings

37 Listings Peaked Much Later Last Year 70,000 Active Listings by Month 60,000 50,000 40,000 30,000 20,000 10,

38 Biggest Jumps in Lower-Priced Segments 60% 50% 52.6% Active Listings Growth 40% 36.3% 40.4% 35.1% 30% 28.2% 20% 17.7% 10% 11.3% 9.7% 0% Under $300K $300-$500K $ K $ K $1-1.5M $1.5-2M $2-$3M $3M +

39 Similar Themes Locally at the Bottom Growth in Active Listings by Price 350.0% 100.0% 28.6% 25.0% 10.3% 12.1% 23.8% -5.6% -50.0% Under $500K $500-$750K $750K-$1M $1-$1.25M $1.25-$1.5M $1.5-$2M $2-$3M $3M + Total

40 Which Underscores Demand Issues Sales vs. Active Listings Growth 60% 50% 40% 30% 36.3% 52.6% 40.4% 35.1% 28.2% 20% 10% 11.3% 17.7% 9.7% 0% -10% -20% -30% -8.1% -6.5% -6.0% -4.4% -10.5% -13.3% -16.8% -16.2% Under $300K $300-$500K $ K $ K $1-1.5M $1.5-2M $2-$3M $3M + Listings Sales

41 Now For the Good News

42 Fed Has Raised Rates 8x since Dec January 2012 January 2018 MONTHLY WEEKLY FRM ARM Fed Raise Rate the 1 st time since mid Fed Funds Rate 0 SERIES: 30Yr FRM, 5Yr ARM, Fed Funds Rate (Target Rate) SOURCE: Freddie Mac, St. Louis Fed

43 Recently, Rates Have Reversed Course Jan 2: 4.55% SERIES: Average 30 Yr. Fixed Mortgage Rates SOURCE: Mortgage News Daily

44 Homeownership: Still The Dream

45 Homeownership Still Aspirational How important is homeownership to you? n: 1663 Percent 30% 29% 27% 23% 20% 13% 10% 8% 0% CALIFORNIA ASSOCIATION OF REALTORS

46 But Vastly Over Estimate Downpayment How much downpayment is required to purchase a home? n: 1681 Percent 40% 33% 40% 30% 20% 19% 10% 4% 4% 0% CALIFORNIA ASSOCIATION OF REALTORS

47 Most Renters Would Buy With Little Down If you could qualify for a mortgage with a much lower down-payment would you buy? n: 1716 Percent 60% 69% 40% 31% 20% 0% CALIFORNIA ASSOCIATION OF REALTORS

48 And Only 30% Know of Low-Down Loans Are you aware of (FHA) backed loans that require only a 3.5% downpayment n: 1716 Percent 60% 72% 40% 28% 20% 0% CALIFORNIA ASSOCIATION OF REALTORS

49 Despite the Tough Market Conditions, Share of First Time Buyers Reached Highest Level since 2012 % First-Time Home Buyers Long Run Average 50% 40% Long Run Average = 37.4% 30% 34.8% 20% 10% 0% SERIES: 2018 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

50 Higher Rates May Get Buyers Off Fence

51 Higher Rates Hurt Affordability Q Median Price $588,530 20% Downpayment $3,200 $2,800 $2,400 $2,000 $1,985 MONTHLY MORTGAGE $2,673 $2,527 $2,248 $2,386 $2,114 $2,823 $2,976 $160,000 $140,000 $120,000 $100,000 Minimum Qualifying Income $116,984 $122,496$128,172 $106,473 $111,641 $139,985 $146,109 $134,004 $1,600 $80,000 $1,200 $60,000 $800 $40,000 $400 $20,000 $0 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% $0 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% INTEREST RATE INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

52 Still Reasons For Buyers & Sellers to Be Active

53 Remember: Economy is Still Doing Well California Nonfarm Employment 18,000 17,000 16,000 Jul-07, 15,510 May-14, 15,526 Sep-18, 17,203 15,000 14,000 13,000 12,000 Feb-10, 14,190 11,000 10,000 Jan-90 Oct-90 Jul-91 Apr-92 Jan-93 Oct-93 Jul-94 Apr-95 Jan-96 Oct-96 Jul-97 Apr-98 Jan-99 Oct-99 Jul-00 Apr-01 Jan-02 Oct-02 Jul-03 Apr-04 Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14 Jul-15 Apr-16 Jan-17 Oct-17 Jul-18

54 Market Still Competitive in Absolute Terms Median Time on Market (Days) 100% 98% 96% 94% 92% Sales to List Price Ratio (%) 10 0 Jan-90 Aug-91 Mar-93 Oct-94 May-96 Dec-97 Jul-99 Feb-01 Sep-02 Apr-04 Nov-05 Jun-07 Jan-09 Aug-10 Mar-12 Oct-13 May-15 Dec-16 Jul-18 90% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18

55 The Forecast

56 U.S. Economic Outlook p 2019f US GDP 1.7% 2.4% 2.6% 1.6% 2.3% 3.0% 2.4% Nonfarm Job Growth 1.7% 1.9% 2.1% 1.8% 1.4% 1.6% 1.3% Unemployment 7.4% 6.2% 5.3% 4.9% 4.4% 3.9% 3.7% CPI 1.5% 1.6% 0.1% 1.4% 2.0% 2.5% 2.4% Real Disposable Income, % Change -1.4% 2.7% 3.4% 2.7% 2.1% 2.8% 2.6% 30-Yr FRM 4.0% 4.2% 3.9% 3.6% 4.0% 4.7% 5.2% SERIES: U.S. Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

57 CA Housing Market Outlook Best Case p 2019 Likely 2019 Best 2019 Worst SFH Resales (000s) % Change -5.9% -7.8% 7.0% 2.0% 1.5% -3.2% -6.9% -3.3% -10.4% Median Price ($000s) $407.2 $446.9 $476.3 $502.3 $538.0 $575.8 $574.5 $593.4 $534.4 % Change 27.5% 9.8% 6.6% 5.4% 7.2% 7.0% -0.2% 3.1% -6.5% Housing Affordability Index 36% 30% 31% 31% 29% 28% 26% 25% 30% 30-Yr FRM 4.0% 4.2% 3.9% 3.6% 4.0% 4.7% 5.2% 5.2% 5.2% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

58 Conclusion

59 Putting it all Together Economy still going strong People still want to own homes Still demand for housing More listings for REALTORS RE moving relatively quick Rising rates get folks off fence Rates won t go up as fast Market not as competitive Buyers can start to negotiate Supply issues have become a demand problem Migration Volatility Here to Stay Signs of a shift Sales weak at bottom Inventory not snapped up Sellers starting to reduce prices Rising rates DO hurt Market to soften in 19 Focus on Selling Ownership

60

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