California s Housing Market: How Much Froth Is Out There?

California s Housing Market: How Much Froth Is Out There?

Conference Underwriter

Polling Question: What Will Most Likely Occur to California s Housing Prices in the Next 2 Years? 1. Bubble Bursts 15% or Greater Decline 2. Prices Decline by 1 to 14% 3. Prices Remain Constant 4. Price Increases Moderate to Single-Digits 5. Price Increases Continue in the Double-Digits

Polling Question: Which Factor Will Have the Most Influential Impact on the State s Housing Market? 1. Direction of Interest Rates 2. Job Growth 3. Price of Oil 4. Supply Constraints

Polling Question: Which California Region is Most Vulnerable to a Slowdown in Housing Prices? 1. Central Valley 2. Bay Area 3. Los Angeles / Inland Empire 4. Orange County 5. San Diego

Median Sales Price of Existing Single-Family Homes United States US$ Thousands 220 Median Sales Price (L) Median Sales Price - % Change (R) 200 180 160 140 120 Percent Change, Year Ago 16 14 12 10 8 6 4 100 96 97 98 99 00 01 02 03 04 05 2

Median Sales Price of Existing Single-Family Homes California US$ Thousands 500 Median Sales Price (L) Median Sales Price - % Change (R) 450 400 350 300 250 200 Percent Change, Year Ago 30 20 10 0 150 96 97 98 99 00 01 02 03 04 05-10

Median Sales Price of Existing Single-Family Homes San Francisco San Mateo Redwood City US$ Thousands 800 Median Sales Price (L) Median Sales Price - % Change (R) 700 600 500 400 300 Percent Change, Year Ago 30 25 20 15 10 5 0 200 96 97 98 99 00 01 02 03 04 05-5

Median Sales Price of Existing Single-Family Homes Oakland Fremont Hayward US$ Thousands 700 Median Sales Price (L) Median Sales Price - % Change (R) 600 500 400 300 200 Percent Change, Year Ago 40 30 20 10 0 100 96 97 98 99 00 01 02 03 04 05-10

Median Sales Price of Existing Single-Family Homes San Jose Sunnyvale Santa Clara US$ Thousands 800 Median Sales Price (L) Median Sales Price - % Change (R) 700 600 500 400 300 Percent Change, Year Ago 40 20 0-20 200 96 97 98 99 00 01 02 03 04 05-40

Median Sales Price of Existing Single-Family Homes Fresno US$ Thousands 350 Median Sales Price (L) Median Sales Price - % Change (R) 300 250 200 150 100 Percent Change, Year Ago 30 20 10 0 50 96 97 98 99 00 01 02 03 04 05-10

Median Sales Price of Existing Single-Family Homes Los Angeles Long Beach Glendale US$ Thousands 450 Median Sales Price (L) Median Sales Price - % Change (R) 400 350 300 250 200 150 Percent Change, Year Ago 30 20 10 0 100 96 97 98 99 00 01 02 03 04 05-10

Median Sales Price of Existing Single-Family Homes Santa Ana Anaheim Irvine US$ Thousands 700 Median Sales Price (L) Median Sales Price - % Change (R) 600 500 400 300 200 Percent Change, Year Ago 40 30 20 10 0 100 96 97 98 99 00 01 02 03 04 05-10

Median Sales Price of Existing Single-Family Homes Riverside San Bernardino Ontario US$ Thousands 400 Median Sales Price (L) Median Sales Price - % Change (R) 350 300 250 200 150 100 Percent Change, Year Ago 40 30 20 10 0 50 96 97 98 99 00 01 02 03 04 05-10

Median Sales Price of Existing Single-Family Homes San Diego Carlsbad San Marcos US$ Thousands 600 Median Sales Price (L) Median Sales Price - % Change (R) 500 Percent Change, Year Ago 40 30 400 20 300 10 200 0 100 96 97 98 99 00 01 02 03 04 05-10

Most Expensive Markets Coldwell Banker Home Price Comparison, 2005 Price Market (In US$, Millions) La Jolla, CA 1.875 Santa Monica, CA 1.767 Beverly Hills, CA 1.657 Santa Barbara, CA 1.604 Palo Alto, CA 1.550 Newport Beach, CA 1.499 San Mateo, CA 1.334 San Francisco, CA 1.300 San Jose, CA 1.273 Greenwich, CT 1.268

Least Expensive Markets Coldwell Banker Home Price Comparison, 2005 Price Market (In US$, Ths.) Killeen, TX 131.3 Minot, ND 133.3 Beckley, WV 137.9 Arlington, TX 139.5 Billings, MT 142.5 Tulsa, OK 142.6 Parkersburg, WV 146.0 Forth Worth, TX 148.6 Yankton, SD 149.5 Grayling/Roscommon, MI 149.6

Home Prices in California Top 10 CA Metros, Ranked by 5-Yr Percent Change Percent Change 2004-2005 Percent Change 2000-2005 Rank Metro Area 1Yuba City 26% 122% 2 Santa Barbara-Santa Maria-Goleta 27% 122% 3Merced 27% 118% 4 San Diego-Carlsbad-San Marcos 25% 118% 5Modesto 26% 118% 6 Salinas 31% 117% 7 Riverside-San Bernardino-Ontario 29% 116% 8 Sacramento-Arden-Arcade-Roseville 26% 113% 9Fresno 27% 111% 10 Stockton 28% 111%

Strongest Housing States Average Annual Percent Change in the Last 5 Years <5% 5-10% >10%

Home Price Appreciation Ranked by Percent Change Over the Last Five Years State 5 Year % Change 1 Year % Change California 103.0 25.4 Rhode Island 97.6 17.1 Nevada 84.7 31.2 Hawaii 82.9 24.4 Florida 80.5 21.4 Maryland 77.9 21.0 New Jersey 76.5 15.8 New Hampshire 72.3 12.1 Massachusetts 71.8 11.6 U.S. 50.5 12.5

Price-to-Rent Ratios Major Metro Areas, 2005 Average Condo Price US$ Average Annual Rent US$ Price-to-Rent Ratio Metro San Francisco 697,301 18,384 38 New York City 654,570 17,940 36 San Diego 431,064 14,184 30 Phoenix 234,400 8,196 29 Seattle 268,786 9,792 27 Baltimore 309,090 11,292 27 Los Angeles 433,135 15,852 27 Washington, D.C. 356,715 13,500 26 Miami 276,904 10,800 26 Tampa 227,096 9,060 25

Absorption Rates of Apartments United States Percent 85 80 75 70 65 60 55 50 90 92 94 96 98 00 02 04

Percent of Apartment Sales to Condo Converters As of 2005 1 st Quarter Market Percent Miami, FL 81 Broward, FL 69 Palm Beach, FL 58 San Diego, CA 58 Las Vegas, NV 48 Boston, MA 46 DC/VA suburbs 42 Jacksonville, FL 40 Orlando, FL 40 Sacramento, CA 38

Housing Affordability Rates 1995 August 2005 Percent 150 140 130 120 110 95 96 97 98 99 00 01 02 03 04 05

Homeownership Rates CA vs. U.S. Percent 70 68 66 California United States 64 62 60 58 56 54 94 95 96 97 98 99 00 01 02 03 04

Homeowner Vacancy Rates CA vs. U.S. Percent 2.2 2.0 1.8 1.6 1.4 1.2 1.0 California United States 0.8 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

New Home Median Price CA vs. U.S. US$ Thousands 350 California United States 300 250 200 150 100 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05

New Single-Family Homes Sales Quarterly, United States Thousands 1300 1200 1100 1000 900 800 99 00 01 02 03 04 05

Housing Starts California Thousands 250 200 150 Level (L) Growth Rate (R) Percent Change, Year Ago 40 20 0-20 100-40 -60 50 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05-80

Building Permits California Share of U.S. Percent 11 10 9 8 7 6 5 95 96 97 98 99 00 01 02 03 04 05

Residential Construction California, As Share of Total Construction Percent 58 56 54 52 50 48 46 44 02 03 04 05

Mortgage Rates Fixed vs. Adjustable Percent 10 8 6 4 2 30-Yr Fixed 1-Month LIBOR 1-Yr Adjustable 0 92 93 94 95 96 97 98 99 00 01 02 03 04 05

Household Mortgage Type United States, Percent with a Mortgage ARM, 23.2% Fixed-Rate Mortgage, 76.8%

Mortgage Originations United States US$ Billions 3000 2500 Refinance Originations Purchase Originations 2000 1500 1000 500 0 2000 2001 2002 2003 2004

Refinance Share of Mortgage Applications United States Percent 80 70 60 50 40 30 20 10 1998 1999 2000 2001 2002 2003 2004 2005

Median Appreciation of Refinanced Property United States Percent 30 25 20 15 10 5 0 1998 1999 2000 2001 2002 2003 2004 2005

ARM Share of Mortgage Applications United States Percent 40 35 30 25 20 15 10 5 98 99 00 01 02 03 04 05

ARM Lending is Much Greater in the Jumbo Market United States ARM Share of Conventional, Percent 80 60 Conforming Jumbo 40 20 0 90 91 92 93 94 95 96 97 98 99 00 01 02

Interest-Only Mortgages on the Rise CA vs. U.S., As Percent of Total Mortgages Percent 70 60 California United States 50 40 30 20 10 0 2002 2003 2004 Feb. 2005

Top 10 Metro Areas for Interest-Only Loans As Percent of Total Mortgages, 2004 Percent 48 46 44 42 40 38 36 34 Atlanta Denver San Jose Seattle Ventura San Diego San Francisco Oakland Phoenix Orange County

Subprime Loans Percent with ARMs and Interest-Only Payments Percent 25 20 15 10 5 0 2001 2002 2003 2004

Subprime Loans Percent with Full Data on Borrower s Income and Assets Percent 70 65 60 55 50 2001 2002 2003 2004

Gains in Home Equity Buyers of Existing Single-Family Homes US$ Thousands 500 Equity Sales Price Loan Amount 400 300 200 100 0 00 01 02 03 04 Mar-05

Loan-to-Value Ratio Buyers of Existing Single-Family Homes Percent 80 78 76 74 72 70 68 66 64 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

Loan-to-Value Distribution for First Mortgages By Dollar Volume, Second Half of 2004 Percent 50 40 30 20 10 0 > 100 91 to 100 81 to 90 71 to 80 61 to 70 51 to 60

Median House Price vs. Median Household Income California Index 1990=100 240 220 Median House Price Median Household Income 200 180 160 140 120 100 80 90 92 94 96 98 00 02 04

Ratio of Median House Price to Median Household Income California Rank Metro Area 2000Q1 2005Q1 1 San Diego-Carlsbad-San Marcos, CA 1.0 1.9 2 Sacramento--Arden-Arcade--Roseville, CA 0.8 1.8 3 Riverside-San Bernardino-Ontario, CA 0.8 1.8 4 Providence-New Bedford-Fall River, RI-MA 1.2 1.8 5 Fort Lauderdale-Pompano Beach-Deerfield Beach, FL 1.0 1.8 6Worcester, MA 1.3 1.8 7 New York-White Plains-Wayne, NY-NJ 1.1 1.8 8 Baltimore-Towson, MD 1.2 1.7 9 Miami-Miami Beach-Kendall, FL 0.9 1.7 10 Boston-Quincy, MA 1.2 1.7 11 Sarasota-Bradenton-Venice, FL 0.9 1.6 12 West Palm Beach-Boca Raton-Boynton Beach, FL 0.6 1.6 13 Los Angeles-Long Beach-Glendale, CA 0.8 1.5 14 San Francisco-San Mateo-Redwood City, CA 1.0 1.5 15 Santa Ana-Anaheim-Irvine, CA 0.8 1.5

Housing Cost Burdens Top 10 States, As Percent of All Homeowners Rank State Spending >30% of Income on Housing Spending >50% of Income on Housing 1 California 39.6 15.4 2 Hawaii 36.4 11.2 3 Washington 33.5 10.6 4Florida 33.2 13.2 5Nevada 33.0 11.6 6New York 32.9 13.7 7 Massachusetts 32.6 12.5 8New Jersey 32.5 12.1 9Oregon 32.4 11.6 10 Colorado 31.8 10.9 United States 29.1 10.6

Homebuyer Income Gap Index 2005 2 nd Quarter Median Home Price Median Household Income Qualifying Income Area Income Gap San Francisco Bay Area $726,920 $68,140 $170,370 $102,230 Southern CA $510,000 $52,310 $119,530 $67,220 Central Valley $344,330 $41,250 $80,700 $39,450 California $530,430 $53,840 $124,320 $70,480

C.A.R. Housing Affordability Index % of Households Able to Afford Median-Priced Home Area Aug. 04 (%) Aug. 05 (%) Change (%) Central Valley 26 17-9 Los Angeles 17 12-5 San Francisco Bay Area 14 12-2 San Diego 10 9-1 Orange County 11 11 0 California 18 14-4 United States 54 48-6

Biggest Housing Bubble Markets According to PMI Insurance Group* Rank Metro 1 Boston, MA 2 Nassau-Suffolk, NY 3 San Diego, CA 4 San Jose, CA 5 Santa Ana-Anaheim-Irvine, CA 6 Oakland, CA 7 Cambridge, MA 8 San Francisco, CA 9 Providence, RI 10 Riverside-San Bernardino, CA *Uses labor market data, median incomes and mortgage costs

Biggest Housing Bubble Markets According to Rank National City* Rank Metro 1 Santa Barbara, CA 2 Salinas, CA 3 Naples, FL 4 Riverside-San Bernardino, CA 5 Merced, CA 6 Stockton, CA 7 Port St. Lucie, FL 8 Madera, CA 9 Napa, CA 10 Medford, OR *Uses incomes, mortgage data and space constraints

Biggest Housing Bubble Markets According Credit Suisse First Boston* Rank Metro 1 Fresno, CA 2 Las Vegas, NV 3 Los Angeles, CA 4 Riverside-San Bernardino, CA 5 Phoenix, AZ 6 Bakersfield, CA 7 Sarasota, FL 8 Sacramento, CA 9 Jacksonville, FL 10 Naples, FL *Uses interest-only loan data, price trend, investor activity, job growth and supply constraints

Growth in Median Sales Price of Existing Single-Family Home 5-Year Gain Major Market Percent San Diego 137 Los Angeles 118 Miami 105 Las Vegas 103 Wash., D.C. 97 New York 94 San Francisco Bay 78 Boston 44

California Housing is Through the Roof Real House Price Growth, 4-Quarter MA Percent Change, Year Ago 25 20 Realtor OFHEO 15 10 5 0-5 -10 81 83 85 87 89 91 93 95 97 99 01 03 05

Exotic Mortgage Lending is Surging... Share of Non-Conforming Mortgage Originations 25 20 Option ARM IO ARM 15 10 5 0 98 99 00 '01 '02 '03 '04 '05H1

...Especially in These Markets Interest-Only ARM Share of Originations, 2005H1 San Diego Bay Area Denver Sacramento Los Angeles Modesto Riverside Atlanta Las Vegas 0 10 20 30 40 50

Housing is Overvalued in These Metro Areas NAR Median Existing House Price Index, 2005Q2 Seattle Tacoma Portland Salem Vallejo Sacramento Reno Santa Rosa San Francisco Stockton Oakland Modesto San Jose Fresno Denver Salinas Visalia Las Vegas Bakersfield Santa Barbara Riverside Oxnard- Los Angeles Phoenix Ventura Santa Ana San Diego Tucson Honolulu Madison Minneapolis Milwaukee Lake County Chicago Grand Rapids Lansing Detroit Asheville Tampa Sarasota Cape Coral Allentown Warren New York Charleston Deltona Orlando Boston, Cambridge, Essex Worcester Providence Nassau Newark Edison Baltimore Bethesda Washington DC West Palm Beach Ft. Lauderdale Miami Highly overpriced > 2 SD from historic average Overpriced > 1 SD from historic average

The Home has Become a Cash Machine... 1000 Gross Equity Extraction, $Billions 800 Home Equity Borrowing Cash-Out Refi Capital Gains 600 400 200 0 '00 '01 '02 '03 '04 '05H1

...Particularly in California Mortgage Equity Withdrawal as Share of Disposable Income, '05, U.S. = 7% Vallejo 21% Santa Rosa 15% San Francisco 14% Stockton 22% San Jose 15% Sacramento 19% Salinas 20% Riverside 19% Santa Barbara 17% Oxnard- Ventura Los Angeles 10% 19% Santa Ana San Diego 18% 17% Greater than U.S. Close to U.S. Less than U.S.

Housing is Key to the Job Market... Housing Employment Share of Total Employment Percent 12 11 10 9 8 7 6 71 73 75 77 79 81 83 85 87 89 91 93 95 97 United States California Florida Virginia 99 01 03 05

...in the Most Active Housing Markets Share of Job Growth Due to Growth in Housing Related Jobs,'05q2-'03q2, U.S. = 40% Greater than U.S. Less than U.S.

Housing Affordability is Affecting Migration Patterns... Net Migration from Los Angeles 0-25000 -50000-75000 -100000 Bakersfield Phoenix Las Vegas Riverside '00 '01 '02 '03 '04

...in High-Priced Areas Net Migration from San Francisco 0-5000 -10000-15000 Reno Phoenix Las Vegas Stockton '00 '01 '02 '03 '04

A Reason for Some Optimism Difference Between Housing Supply and Demand, '05q2 Overbuilt Overbuilding Not Overbuilt

Home Sales Will Weaken First... Existing Home Sales, Thousands 600 575 550 525 500 475 '00 '01 '02 '03 '04 '05 '06 '07

...Followed by House Price Growth... Median Existing House Price Growth 25 23.3 20 15 12.9 12.7 14.6 16.4 10 5 6.6 4.5-0.5 0-5 '00 '01 '02 '03 '04 '05 '06 '07

...and Finally, Housing Starts Housing Starts, Thousands 200 150 138 Multifamily Single Family 138 154 184 192 198 190 160 100 50 0 '00 '01 '02 '03 '04 '05 '06 '07

Median Sale Price of Houses in Los Angeles and Orange County 2000-2005 $650,000 $600,000 $617,000 $550,000 Median Sale Price $500,000 $450,000 $400,000 $350,000 $494,000 $300,000 $250,000 $200,000 $259,000 $248,900 2000 2001 2002 2003 2004 2005 Year Orange County Los Angeles County

CAR Affordability Index 2000

CAR Affordability Index 2004

Effects of Different Financing on Average Mortgage Payment Orange County $4,000 $3,500 Monthly House Payment (Fixed Rate Mortgage) Monthly Rent or Payment $3,000 $2,500 $2,000 $1,500 Variable Rate Mortgage Interest Only Mortgage $1,000 $500 Average Monthly Rent (Total Orange County) $0 2000 2001 2002 2003 2004 2005 Year

10 Year Growth in Households for CA Counties (1990-2000)

Expected 5 Year Growth in HH s for CA Counties (2005-2009)

Expected 5 Year Growth in HH s for CA Counties (2005-2009)

Residential Supply and Demand for Key Southern California Counties 1985-2004 Los Angeles County 80,000 70,000 60,000 Residential Permits Annual Household Growth 50,000 Number of Households 40,000 30,000 20,000 10,000 0-10,000-20,000 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year

Residential Supply and Demand for Key Southern California Counties 1985-2004 Orange County 40,000 35,000 Residential Permits Annual Household Growth 30,000 Number of Households 25,000 20,000 15,000 10,000 5,000 0-5,000-10,000 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year

Residential Supply and Demand for Key Southern California Counties 1985-2004 Riverside and San Bernardino Counties 80,000 70,000 60,000 Residential Permits Annual Household Growth Number of Households 50,000 40,000 30,000 20,000 10,000 0-10,000-20,000 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 Year www.usc.edu/casden

National Delinquency Rate Percent of Loans Past Due 90 Days Percent 0.90 0.80 0.70 0.60 0.50 91 93 95 97 99 01 03 05

$500K Interest-Only ARM Loan 30-Years with Initial 5-Year Fixed Rate I.O. Period Period Monthly Payment Monthly Increase Percent Increase First 5 Years at 5% $2,083 --- --- After 5 Years at 5% $2,923 $840 40% After 5 Years at 7% $3,533 $1,450 70%

Existing Home Sales vs. Median Sales Price Single-Family, United States US$ Thousands 220 Median Sales Price of Existing Single-Fam. (L) Existing Home Sales (R) 200 180 160 140 Millions 7.5 7.0 6.5 6.0 5.5 5.0 120 2000 2001 2002 2003 2004 2005 4.5

New Single-Family Home Sales Monthly, United States Thousands 1400 1300 1200 1100 1000 900 800 700 00 01 02 03 04 05