OVERVIEW OF RECENT/EXPECTED ECONOMIC/ HOUSING MARKET CONDITIONS

OVERVIEW OF RECENT/EXPECTED ECONOMIC/ HOUSING MARKET CONDITIONS STRONG ECONOMIC FUNDAMENTALS *BUT* EXTRAORDINARY SHORT-TERM FACTORS RESULTING IN MAJOR SHIFTS IN TYPES OF HOUSING PRODUCTS AND GEOGRAPHICAL DEVELOPMENT PATTERNS PREPARED FOR: CASTOFF PREPARED BY: EMPIRE ECONOMICS, INC. JOSEPH T. JANCZYK Ph.D. FEBRUARY 26, 2016 1

OVERVIEW OF HOW ECONOMIC AND HOUSING MARKET CONDITIONS ARE IMPACTING NEW MONEY CFDs BACKGROUND PRIOR PRESENTATIONS: PREVIOUSLY DISCUSSED, THE HOUSING PRICE BUBBLE, ITS IMPLOSION AND LINGERING EFFECTS DISCUSSED LAST YEAR, NEW MONEY CFDs ARE DRIVEN BY PRIMARILY BY NEW SINGLE-FAMILY HOMES I. FAVORABLE CORE FACTORS: STRONG EMPLOYMENT GROWTH UNDERLYING THE HOUSING MARKET RECOVERY II. EXTRAORDINARY SHORT-TERM FACTORS: MAJOR SHIFT FROM SINGLE-FAMILY TO APARTMENTS III. RESIDENTIAL DEVELOPMENT PATTERNS GEOGRAPHICALLY TRANSFORMED URBANIZED/COASTAL VERSUS SUBURBAN-RURAL/INLAND 2

I. EMPLOYMENT IS THE PRIMARY FACTOR UNDERLYING THE DEMAND FOR HOUSING SOUTHERN CALIFORNIA EMPLOYMENT RECENTLY SURPASSED ITS PRIOR PEAK LEVEL THE AGGREGATE LEVEL OF EMPLOYMENT IS NOW +217,000 OR +2.5% HIGHER THAN THE PRIOR PEAK LEVEL AGGREGATE LEVEL OF EMPLOYMENT 12,000,000 11,000,000 10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 SOUTHERN CALIFORNIA: AGGREGATE EMPLOYMENT GREEN = NEW PEAK LEVEL RED = LOSSES YELLOW = RECOUPING LOSSES From, the level of employment increased to new highs In, the Great Recession drove employment to its lowest level since Employment recovered and then set a new peak in 2,000,000 1,000,000 0 2020 2019 2018 2017 2016 1990 1989 1988 3

MEDIAN HOUSEHOLD INCOME INFLUENCES THE PRICES FOR HOMES CALIFORNIA S REAL MEDIAN HOUSEHOLD INCOME IN WAS SLIGHTLY BELOW THAT OF 1989 CALIFORNIA: MEDIAN HOUSEHOLD INCOME $70,000 $64,358 $64,956 $60,487 $60,872 $60,000 $56,177 $54,991 $50,000 $40,000 $30,000 $20,000 CALIFORNIA MEDIAN HOUSEHOLD INCOME ($ DOLLARS) $10,000 $0 1990 1989 1988 4

SECONDARY FACTORS OUTSIDE EMPLOYMENT CONTRIBUTING TO HOUSING AFFORDABILITY MORTGAGE RATES REMAIN AT FAVORABLE LEVELS AND MORTGAGE QUALIFICATION CRITERIA BECOMING MORE FAVORABLE 12% UNITED STATES: MORTGAGE RATES MORTGAGE RATES AT RECENT LOW LEVELS 11% 10.5% 10% 9% 8% 8.2% Since, mortgage rates have been below the 1988 average of 6.9% MORTGAGE RATES 7% 6% 5% 4% 3.7% 3.9% 3% 2% 1% 0% 1990 1989 1988 5

HOUSING AFFORDABILITY - NOTICES OF DEFAULT WHILE NODs HAVE DECLINED, FORECLOSED HOMES ARE STILL RENTED, KEEPING RENTAL SUPPLY HIGH 300,000 SOUTHERN CALIFORNIA: NOTICES OF DEFAULT (NODs) 270,000 240,000 NODs peaked in following the housing bubble 258,584 NOTICES OF DEFAULT (NODS) 210,000 180,000 150,000 120,000 90,000 163,929 NODs averaged 105,000 per year from to 60,000 30,000 30,963 33,433 0 6

HOUSING AFFORDABILITY COMMUTING COSTS RECENT DECLINES IN GAS PRICES FROM THEIR PEAK HAVE DECREASED COMMUTING COSTS CALIFORNIA: AVERAGE GAS PRICES $5.00 $3.88 $3.56 $2.51 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 AVERAGE REGULAR GAS PRICES (IN $ DOLLARS) $0.00 Jan. 2016 1990 1989 1988 7

109,000 52,867 1990 120,000 100,000 80,000 60,000 40,000 20,000 0? SOUTHERN CALIFORNIA: SINGLE-FAMILY, MULTIPLE-FAMILY AND APARTMENTS LONG TERM AVERAGE IS ~56,000 8 LEVEL OF PERMITS - ANNUALLY

EMPLOYMENT GROWTH IS STRONG, *TYPICALLY* SPILLOVER TO INLAND AREAS TYPICAL RECOVERY SINGLE FAMILY SPILLOVER 9

II. EXTRAORDINARY SHORT-TERM FACTORS CONSTRAINING THE DEMAND FOR HOUSING MILLENNIALS' PREFER HIGHER-DENSITY HOUSING AND HAVE SIGNIFICANT STUDENT DEBT PERSONAL PREFERENCE FOR APARTMENTS URBANIZED SETTING: CLOSE TO OFFICE REDUCED COMMUTING PROXIMITY TO CULTURE/NIGHTLIFE RESORT LIKE AMENITY PACKAGES: CONCIERGE SERVICE, GYMS AND SWIMMING POOL FLEXIBILITY/MOBILITY: RENTING VS. HOME OWNERSHIP (18-34 YEAR OLDS ONLY 13% OWN HOMES) CONVENIENCE: NO YARD WORK OR MAINTENANCE OR REPAIRS FINANCIAL FACTORS INCREASES IN STUDENT DEBT: ADVERSELY IMPACT DOWN PAYMENT AND MORTGAGE QUALIFICATION AVERAGE CALIFORNIA GRADUATE STUDENT LOAN DEBT $24,000 $20,000 $16,000 $12,000 $8,000 $4,000 $0 -$4,000 -$8,000 -$12,000 -$16,000 -$20,000 -$24,000 CALIFORNIA: STUDENT LOAN DEBT AND SHARE OF STUDENTS WITH LOANS $17,340 $17,532 $17,228 44% 46% 48% 48% $18,094 $18,563 51% 52% $19,333 $19,006 $19,691 55% 55% 160% 150% 140% 130% 120% 110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% SHARE OF CALIFORNIA GRADUATES WITH LOANS Average Debt of California Graduates % of California Graduates with Student Loans 10

HOMEOWNERSHIP HAS DECLINED FROM A PEAK LEVEL OF ABOUT 60% IN TO A RECENT LEVEL OF 54%; THEREBY REDUCING THE DEMAND FOR NEW SINGLE-FAMILY HOMES CA HOMEOWNERSHIP RATES FOR ALL HOME TYPES CALIFORNIA HOMEOWNERSHIP RATES 80% 70% 60% 50% 40% 30% 20% 53.6% Declines in homeownership rates reflect stagnant median income, rising student debt, and stringent lending standards. As California home ownership rates rose from 54% to 60% from 1989 to, driven by employment growth and falling mortgage rates 56.0% 59.7% Homeownership dropped significantly from to its lowest level since 1990 54.2% 10% 0% 1990 1989 1988 11

CONSTRAINING DEMAND - RENTER-OCCUPIED SINGLE-FAMILY HOMES INCREASES IN SINGLE FAMILY RENTALS REFLECT A TRANSFORMATION OF THE EXCESS HOUSING MARKET BUBBLE SINGLE-FAMILY HOMES TO RENTALS SOUTHERN CALIFORNIA COUNTIES: CHANGE IN MARKET SHARE OF SINGLE- FAMILY RENTER-OCCUPIED HOUSING FROM - 12% Single family renter occupied housing increased in all Southern California counties from to CHANGE IN MARKET SHARE OF SINGLE-FAMILY RENTER OCCUPIED HOMES FROM - 10% 8% 6% 4% 2% +11,000 1.5% +42,000 +5,400 2.1% 2.4% 4.4% The largest increase was in Riverside County +31,000 +27,000 4.8% +58,000 8.5% 0% Riverside County San Bernardino County Orange County Ventura County Los Angeles County San Diego County 12

CONSTRAINING DEMAND PRICE APPRECIATION EXPECTATIONS ONLY MODERATE FUTURE EXPECTATION OF PRICE APPRECIATION HAS RESTRAINED BUYER CONFIDENCE 40% RECENT/EXPECTED SOUTHERN CALIFORNIA HOUSING PRICE CHANGES HISTORICAL: CASE-SHILLER PRICE INDEX EXPECTED: ZILLOW CONSENSUS FORECAST 100+ PROFESSIONALS 30% HOUSING PRICE CHANGES - ANNUALLY 20% 10% 0% -10% -20% -30% -40% 1988 1989 1990 2016 2020 2019 13

ALTHOUGH EMPLOYMENT GROWTH IS STRONG, EXTRAORDINARY SPECIAL FACTORS ARE CAUSING MAJOR MARKET SHIFTS LESS SINGLE FAMILY SPILLOVER SHIFT TO APARTMENTS 14

III. COMBINED IMPACT OF FAVORABLE AND CONSTRAINING FACTORS - HIGHER SHARE OF APARTMENTS MILLENNIALS, WHO APPEAR TO HAVE A GREATER PREFERENCE FOR HIGHER DENSITY UNITS, ARE RAISING THE SHARE OF APARTMENTS TO VERY HIGH LEVELS 100% SOUTHERN CALIFORNIA: APARTMENT SHARE OF NEW PERMITS 90% APARTMENT SHARE OF TOTAL PERMITS 80% 70% 60% 50% 40% 30% 43% The long term average is 38% 23% 62% 20% 10% 0% 1990 15

100% SOUTHERN CALIFORNIA: COMPOSITION OF NEW HOMES SINGLE-FAMILY VS. APARTMENT SHARES 90% 80% 70% 60% 50% 40% 61% 59% 57% 74% 77% 77% 78% 77% 74% 70% 71% 68% 67% 67%67% 67% 65% Long term average new home share: Single family: 62% Multiple family: 38% 61% 52% 51% 51% 52% 46% 42% 40% 39% 38% 39% 47% 55% 61% 30% 20% 10% 0% new home share: Single family: 38% Multiple family: 62% 1990 2016 2017 2018 2019 2020 SINGLE FAMILY NEW HOME PERMIT SHARE RECOVERY RETURN TOWARDS LONG TERM AVERAGE SHIFT DUE TO EXTRAORDINARY SHORT TERM FACTORS NEW APARTMENT UNITS PERMIT SHARE 16

100% SOUTHERN CALIFORNIA: COMPOSITION OF NEW HOMES SINGLE-FAMILY VS. APARTMENT SHARES 90% 80% 70% 60% 50% 40% 61% 59% 57% 74% 77% 77% 78% 77% 74% 70% 71% 68% 67% 67%67% 67% 65% Long term average new home share: Single family: 62% Multiple family: 38% 61% 52% 51% 51% 52% 46% 42% 40% 39% 38% 39% 47% 55% 61% 30% 20% 10% 0% new home share: Single family: 38% Multiple family: 62% 1990 2016 2017 2018 2019 2020 SINGLE FAMILY NEW HOME PERMIT SHARE RECOVERY RETURN TOWARDS LONG TERM AVERAGE SHIFT DUE TO EXTRAORDINARY SHORT TERM FACTORS NEW APARTMENT UNITS PERMIT SHARE 17

100% SOUTHERN CALIFORNIA: COMPOSITION OF NEW HOMES SINGLE-FAMILY VS. APARTMENT SHARES 90% 80% 70% 60% 50% 40% 61% 59% 57% 74% 77% 77% 78% 77% 74% 70% 71% 68% 67% 67%67% 67% 65% Long term average new home share: Single family: 62% Multiple family: 38% 61% 52% 51% 51% 52% 46% 42% 40% 39% 38% 39% 47% 55% 61% 30% 20% 10% 0% new home share: Single family: 38% Multiple family: 62% 1990 2016 2017 2018 2019 2020 SINGLE FAMILY NEW HOME PERMIT SHARE RECOVERY RETURN TOWARDS LONG TERM AVERAGE SHIFT DUE TO EXTRAORDINARY SHORT TERM FACTORS NEW APARTMENT UNITS PERMIT SHARE 18

100% SOUTHERN CALIFORNIA: COMPOSITION OF NEW HOMES SINGLE-FAMILY VS. APARTMENT SHARES 90% 80% 70% 60% 50% 40% 61% 59% 57% 74% 77% 77% 78% 77% 74% 70% 71% 68% 67% 67%67% 67% 65% Long term average new home share: Single family: 62% Multiple family: 38% 61% 52% 51% 51% 52% 46% 42% 40% 39% 38% 39% 47% 55% 61% 30% 20% 10% 0% new home share: Single family: 38% Multiple family: 62% 1990 2016 2017 2018 2019 2020 SINGLE FAMILY NEW HOME PERMIT SHARE RECOVERY RETURN TOWARDS LONG TERM AVERAGE SHIFT DUE TO EXTRAORDINARY SHORT TERM FACTORS NEW APARTMENT UNITS PERMIT SHARE 19

100% SOUTHERN CALIFORNIA: COMPOSITION OF NEW HOMES SINGLE-FAMILY VS. APARTMENT SHARES 90% 80% 70% 60% 50% 40% 61% 59% 57% 74% 77% 77% 78% 77% 74% 70% 71% 68% 67% 67%67% 67% 65% Long term average new home share: Single family: 62% Multiple family: 38% 61% 52% 51% 51% 52% 46% 42% 40% 39% 38% 39% YELLOW ARROW RETURN TO NORMAL 47% 55% 61% 30% 20% 10% new home share: Single family: 38% Multiple family: 62% RED ARROW STRUCTURAL SHIFT 0% 1990 2016 2017 2018 2019 2020 SINGLE FAMILY NEW HOME PERMIT SHARE RECOVERY RETURN TOWARDS LONG TERM AVERAGE SHIFT DUE TO EXTRAORDINARY SHORT TERM FACTORS NEW APARTMENT UNITS PERMIT SHARE 20

SOUTHERN CALIFORNIA LEVEL OF NEW SINGLE-FAMILY HOMES BY GEOGRAPHIC AREA THE LEVEL OF NEW SINGLE FAMILY HOMES IS RECOVERING AT A MODERATE PACE IN THE COASTAL AREAS, BUT ONLY AT A SLOW PACE IN THE INLAND AREAS 50,000 45,000 New single family homes in the Inland Areas had a much higher peak level during the Housing Bubble SOUTHERN CALIFORNIA: NEW SINGLE FAMILY HOMES BY GEOGRAPHIC AREAS 40,000 35,000 30,000 25,000 20,000 New single family homes are recovering at a faster pace in the coastal vs. the inland areas 15,000 10,000 5,000 0 Coastal Inland 21

SOUTHERN CALIFORNIA: LEVEL OF NEW APARTMENT UNITS THE LEVEL OF NEW APARTMENTS IS RECOVERING AT A STRONG PACE IN THE COASTAL AREAS, BUT REMAINING AT MINIMAL LEVELS IN THE INLAND AREAS 35,000 30,000 SOUTHERN CALIFORNIA: NEW APARTMENTS BY GEOGRAPHIC AREAS New apartments in the Coastal Area have attained a new peak level 25,000 20,000 15,000 New apartments in the Inland Area peaked in 10,000 5,000 0 Coastal Inland 22

PERFORMANCE OF CALIFORNIA CITIES EARLY INDICATORS OF MARKET SHIFTS RECENT SINGLE-FAMILY HOMES VS. LONG TERM AVERAGES AREAS RECENTLY EXCEEDING THEIR LONG-TERM AVERAGE SINGLE FAMILY PERMIT GROWTH COUNTIES 1 OF 58: ONLY ORANGE COUNTY CITIES: ONLY 14 OF 472 GROWTH IN THE 14 CITIES BELOW REPRESENTS ~30% OF ALL CALIFORNIA SINGLE-FAMILY PERMIT GROWTH 2,000 1,800 1,600 1,400 1,200 1,000 800 1,782 1,721 CALIFORNIA CITIES WITH RECENT SINGLE FAMILY PERMITS ABOVE THEIR RESPECTIVE HISTORICAL AVERAGES Southern California Northern California 600 400 200 433 397 343 308 285 251 205 461 308 304 285 245 0 23

IV. RECENT EMPLOYMENT-HOUSING TRENDS FOR VARIOUS CALIFORNIA REGIONS 24

IV. RECENT EMPLOYMENT-HOUSING TRENDS FOR VARIOUS CALIFORNIA REGIONS EMPLOYMENT FOR ALL OF THE REGIONS ACHIEVED NEW PEAK LEVELS IN EMPLOYMENT TRENDS BY CALIFORNIA REGIONS 16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 663K 648K 3.0M 2.9M The Bay Area experienced employment declines after the tech bubble 3.5M 3.3M 885K 925K 3.4M 816K 832K 3.1M Employment has reached new peaks in each geography 910K 926K 3.7M 6,000,000 4,000,000 7.3M 6.8M 8.8M 8.0M 8.9M 2,000,000 0 1990 Southern California Bay Area Sacramento Central Valley 25

CALIFORNIA COMPARISON BY REGION HOUSING PRICES PRICE CHANGES FOR CALIFORNIA AND ITS MAJOR CITIES LARGELY MOVED TOGETHER FROM 1988- HOWEVER, DURING -, SAN FRANCISCO EXPERIENCED SOME DIFFERENCES 40% ANNUAL CHANGES IN HOUSING PRICES: CALIFORNIA AND CALIFORNIA REGIONS 30% 20% 10% 0% 10% 20% 30% 40% 1988.1 1988.4 1989.3 1990.2.1.4.3.2.1.4.3.2.1.4.3.2.1.4.3.2.1.4.3.2.1.4.3.2.1.4.3.2.1.4.3.2.1.4 California Los Angeles San Diego San Francisco 26

CALIFORNIA COMPARISON BY REGION SINGLE-FAMILY PERMITS SINGLE-FAMILY PERMITS HAVE STRUGGLED TO RECOVER DUE TO EXTRAORDINARY SHORT-TERM FACTORS, ESPECIALLY IN SOUTHERN CALIFORNIA AND THE BAY AREA IN THE BAY AREA, SINGLE HOME PERMITS PEAKED IN, WELL BEFORE OTHER REGIONS 140,000 SINGLE-FAMILY HOME PERMITS BY CALIFORNIA REGION 120,000 22.4K NEW SINGLE FAMILY HOME PERMITS 100,000 80,000 60,000 40,000 20,000 0 13.4K 13.7K 16.1K 46.9K 18.7K 71.8K Across all California regions, single family building permits fell significantly from through. They have only slightly improved since then. 3.7K 11.7K 2.0K 1.8K 4.5K 4.9K 6.7K 18.1K Southern California Bay Area Sacramento Central Valley 27

CALIFORNIA COMPARISON BY REGION APARTMENT UNIT PERMITS APARTMENT UNIT PERMITS HAVE BENEFITED FROM EXTRAORDINARY SHORT-TERM FACTORS, CLIMBING TO AND MAINTAINING NEAR-PEAK LEVELS IN SOUTHERN CALIFORNIA AND THE BAY AREA 140,000 APARTMENT UNIT PERMITS BY CALIFORNIA REGIONS 120,000 NEW APARTMENT UNIT PERMITS 100,000 80,000 60,000 40,000 757 3.2K 4.6K 12.6K 13.2K 2.8K While apartment unit permits also declined significantly from, unlike single family permits, they have since rebounded in 362 1.1K 11.1K 20,000 0 24.5K 38.0K 0.3K 0.4K 2.0K 7.5K 33.5K Southern California Bay Area Sacramento Central Valley 28

SINGLE-FAMILY PERMITS SHARES: CALIFORNIA AND MAJOR REGIONS THE RECENT SHARES OF NEW SINGLE-FAMILY PERMITS ARE AT LOW LEVELS 100% SHARE OF SINGLE-FAMILY HOMES FOR CALIFORNIA AND REGIONS 90% SHARE OF NEW SINGLE FAMILY HOME PERMITS 80% 70% 60% 50% 40% 30% 20% 10% CALIFORNIA LONG TERM AVERAGE 64% 0% Southern California Bay Area California 29

EMPLOYMENT GROWTH IS STRONG, BUT THE SHORT-TERM SPECIAL FACTORS ARE DILUTING THE DEMAND FOR HOUSING IN INLAND AREAS SINGLE FAMILY SPILLOVER SHIFT TO APARTMENTS 30