CALIFORNIA ECONOMIC & MARKET OUTLOOK. October 29,2014 Contra Costa Association of REALTORS Leslie Appleton Young, Chief Economist

2014 2015 CALIFORNIA ECONOMIC & MARKET OUTLOOK October 29,2014 Contra Costa Association of REALTORS Leslie Appleton Young, Chief Economist

OVERVIEW Economic Outlook California Housing Market Outlook Housing Affordability Regional Market 2015 Forecast

ECONOMIC OUTLOOK

ECONOMY: GAINING MOMENTUM 2013: 1.9%; 2014: 2.2%; 2015: 3.0%; 2014 Q2: ANNUAL PERCENT 4.6% CHANGE, CHAIN TYPE (2005) $ ANNUALLY QUARTERLY 2009 Largest Annual Drop since 1938 ( 3.4%) SERIES: GDP SOURCE: US Dept. of Commerce, Bureau of Economic Analysis

US UNEMPLOYMENT RATE BELOW 6% CA 7.3% (Sep. 2014) vs. US 5.9% (Sep. 2014) SERIES: Unemployment Rate SOURCE: US Bureau of Labor Statistics, CA Employment Development Division

EMPLOYMENT GROWTH, CA VS. U.S. ANNUAL PERCENT CHANGE SERIES: Total Nonfarm Employment SOURCE: US Bureau of Labor Statistics, CA Employment Development Division

PERCENT JOB LOSSES PRIOR RECESSIONS RECENT CYCLE WORST BY FAR

EMPLOYMENT GROWTH, BY INDUSTRY September 2014: CA +2.3%, +390,600 ANNUAL PERCENT CHANGE SERIES: Total Nonfarm Employment By Industry SOURCE: CA Employment Development Division

CALIFORNIA JOB CHANGES BY INDUSTRY September 2014: CA +2.3%, +390,600 ANNUAL PERCENT CHANGE SERIES: Total Nonfarm Employment By Industry SOURCE: US Bureau of Labor Statistics, CA Employment Development Division

JOB TRENDS BY CALIFORNIA METRO AREA September 2014: CA +2.3%, +390,600 ANNUAL PERCENT CHANGE SERIES: Total Nonfarm Employment SOURCE: CA Employment Development Division

CONSUMER PRICE INDEX September 2014: All Items +1.7% YTY; Core +1.7% ANNUAL PERCENT YTY CHANGE SERIES: Consumer Price Index SOURCE: US Bureau of Labor Statistics

INDEX, 100=1985 CONSUMER CONFIDENCE: UNCERTAINTY October 2014: 94.5 SERIES: Consumer Confidence SOURCE: The Conference Board

MORTGAGE RATES: WHAT HAPPENED? January 2009 October 2014 MONTHLY WEEKLY SERIES: 30Yr FRM, 1Yr ARM SOURCE: Federal Home Loan Mortgage Corporation

FORECASTERS HAVE BEEN EXPECTING RATES TO RISE Percent 6 6 Percent 5 5 4 4 3 3 2 1 Actual 10-year Treasury yield (solid black line) Predictions out to five quarters ahead of professional forecasters (hatched lines) 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0 SERIES: Loan Officer Survey SOURCE: Philadelphia Federal Reserve Survey of Professional Forecasters, Bloomberg

MORTGAGE RATES + 1% SPRING 2013 ACTUAL TAPERING? NO IMPACT? SERIES: 30Yr FRM, 1Yr ARM, Federal Funds SOURCE: Federal Home Loan Mortgage Corporation

$ BILLIONS U.S. DEPOSITORY INSTITUTIONS: HIGH LEVEL OF EXCESS RESERVES SINCE 9/08 SERIES: Excess Reserves of Depository Institutions SOURCE: Federal Reserve Bank of Saint Louis

U.S. ECONOMIC FORECAST 2011 2012 2013 2014 P 2015 F Gross Domestic Product 1.8% 2.8% 1.9% 2.2% 3.0% Nonfarm Job Growth 1.2% 1.7% 1.7% 1.8% 2.2% Unemployment Rate 8.9% 8.1% 7.4% 6.2% 5.8% Consumer Price Index 3.1% 2.1% 1.5% 2.0% 2.2% Real Disposable Income, % Change 1.3% 1.5% 0.7% 2.6% 2.6% SERIES: U.S. Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CALIFORNIA ECONOMIC FORECAST 2011 2012 2013 2014 P 2015 F Nonfarm Job Growth 1.1% 2.4% 3.0% 2.2% 2.4% Unemployment Rate 11.8% 10.4% 8.9% 7.5% 6.7% Population Growth 0.7% 0.7% 0.9% 0.9% 0.9% Real Disposable Income, % Change 1.9% 1.1% 0.9% 3.0% 3.8% SERIES: CA Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CALIFORNIA HOUSING MARKET OUTLOOK

TODAY S MARKET Clearly well on the road to recovering Bay Area strongest regional market Volume A bit down, still reliant on investment sales Prices up sharply, but increases slowing in most markets Inventory remains tight but up from last year Pent up/unrealized demand not yet translating into sales Affordability challenges emerging once again

CA SALES FLAT SINCE SPRING 2014 California, Sep. 2014 Sales: 396,440 Units, 9.5% YTD, 4.2% YTY Sep 13: 413,850 Sep 14: 396,440 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS *Sales are seasonally adjusted and annualized

MULTIPLE OFFERS DECLINE WITH LESS INTENSE MARKET COMPETITION IN 2014 AFTER PEAKING IN 2013 SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

49 % SOLD BELOW ASKING IN 2014 Median Reduction: 4.5% of List Price SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

FEWER HOMES SOLD ABOVE THE ASKING PRICE AS MARKET COMPETITION COOLED IN 2014 Long Run Average = 19% QUESTION: 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? SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

INVESTMENT HOMES : 15% MARKET SHARE Long Run Average: 12 % SERIES: 2013 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

WE VE COME A LONG WAY SINCE 2009: EQUITY SALES: 9 OUT OF 10 TRANSACTIONS SERIES: Distressed Sales, Not Seasonally Adjusted SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

DISTRESSED SALES: BAY AREA Percent of Total Sales SERIES: Distressed Sales, Not Seasonally Adjusted SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CONTRA COSTA COUNTY Preforeclosure: 672 Auction: 455 Bank Owned: 161 SOURCE: PropertyRadar.com as of 10/14/14

CONCORD Preforeclosure: 60 Auction: 39 Bank Owned: 18 SOURCE: PropertyRadar.com as of 10/14/14

WALNUT CREEK Preforeclosure: 27 Auction: 11 Bank Owned: 2 SOURCE: PropertyRadar.com as of 10/14/14

DANVILLE Preforeclosure: 36 Auction: 15 Bank Owned: 3 SOURCE: PropertyRadar.com as of 10/14/14

RICHMOND Preforeclosure: 87 Auction: 48 Bank Owned: 30 SOURCE: PropertyRadar.com as of 10/14/14

SALES GROWING IN HIGHER PRICE RANGES SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CHANGE IN SALES BY PRICE RANGE (Year to Year) SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

PRICE PLATEAU AHEAD; ANNUAL GAINS SLOWING California, Sep. 2014: $460,940, Up 7.6% YTY Sep 13: $428,290 Sep 14: $460,940 SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

TROUGH VS. CURRENT PRICE By Counties, August 2014 Region Trough Month Trough Price Aug 14 Median %Chg Fr Trough Ventura Feb 09 $359,630 $602,060 67.4% Tulare Apr 11 $111,600 $184,440 65.3% Mendocino Jun 11 $181,430 $291,670 60.8% San Francisco Jan 12 $561,270 $900,910 60.5% Kings Jul 11 $114,290 $183,330 60.4% Orange Jan 09 $442,170 $699,430 58.2% Contra Costa Jan 12 $476,470 $750,000 57.4% San Diego Mar 09 $326,830 $510,860 56.3% Fresno Jan 12 $131,070 $203,760 55.5% SERIES: Median Price of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CALIFORNIA VS. U.S. MEDIAN PRICES 1970 2014 SERIES: Median Price of Existing Single Family Homes SOURCE: SOURCE: CALIFORNIA CALIFORNIA ASSOCIATION ASSOCIATION OF OF REALTORS

INVENTORY IMPROVING FROM LAST YEAR Sept 2013: 3.6 Months; Sept 2014: 4.2 Months 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

INVENTORY HIGHER AT UPPER PRICE RANGES Price Range (Thousand) Sep 14 Aug 14 Sep 13 $1,000K+ 5.5 5.0 5.9 $750 999K 4.3 3.9 3.7 $500 749K 3.9 3.8 3.5 $400 499K 3.9 3.8 3.3 $300 399K 4.1 4.0 3.3 $200 299K 4.0 4.0 3.2 $0 199K 3.9 3.8 3.2 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

WHY WAS/IS INVENTORY SO LOW? Demand Side Housing affordability was at historic highs Low rates hurt investment alternatives International buyers Supply Side Little new construction for last 5 years Underwater homeowners are stuck Mortgage Lock In Effect No inventory to move up Foreclosure pipeline drying up Investors are renting instead of flipping Off market (aka pocket ) listings

BUYING TO RENT V. FLIP; CHANGE IN PREFERRED INVESTMENT STRATEGY 2013: 18% 2014: 30% Investment to Flip 2013: 82% 2014: 70% Rental Property SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

HOUSING AFFORDABILITY

REAL ENEMY OF THE FUTURE OF CALIFORNIA? Housing Affordability The Achilles Heel of the California Economy What happens when housing costs are too high? Impact on jobs and economic growth Impact on neighborhoods and family stability

HOUSING AFFORDABILITY DOWN SHARPLY SINCE Q1 2012 % OF HOUSEHOLDS THAT CAN BUY A MEDIAN PRICED HOME California vs. U.S. 1984 2014 Annual Quarterly SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

PITI/Month SOME GOOD NEWS:MEDIAN CA HOUSE PAYMENT WELL BELOW PEAK PEAK Peak: $3,668/mo (2007 Q2) Latest: $2,340/mo (2014 Q2) SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

MINIMUM QUALIFYING INCOME ALSO WELL BELOW PEAK Min. Income Peak: $146,701/yr (2007 Q2) Latest: $93,593/yr (2014 Q2) SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

HOUSE PAYMENT (INFLATION ADJUSTED) IS AT LATE 1970 S LEVEL PITI/Month (ADJUSTED FOR INFLATION) Peak: $928/mo (2006) Latest: $458/mo (2013) SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

MINIMUM QUALIFYING INCOME IS THE SAME AS 35 YEARS AGO Min. Income (Adjusted for Inflation) Peak: $37,122 (2006) Latest: $18,337 (2013) SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

HOUSING AFFORDABILITY INDEX What Will Happen When MORTGAGE RATES Increase? % OF HOUSEHOLDS THAT CAN BUY, ALL ELSE CONSTANT Q2 2014 Median Price $457,140 20% Down payment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

MEDIAN MONTHLY MORTGAGE PAYMENT MONTHLY MORTGAGE What Will Happen When Mortgage Rates Increase? Q2 2014 Median Price $457,140 20% Down payment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

MINIMUM QUALIFYING INCOME MONTHLY MORTGAGE What Will Happen When Mortgage Rates Increase? Q2 2014 Median Price $457,140 20% Down payment INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

INCOME REQUIRED TO BUY A MEDIAN PRICED HOME IN CA: (PEAK VS. CURRENT) Change in minimum required income: $37,269 Increase in income attributed to interest rate increase: $836 (2.2% of total change) Increase in income attributed to price increase : $36,433 (97.8% of total change) SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

SHARE OF FIRST TIME BUYERS UP BUT STILL BELOW LONG RUN AVERAGE Long Run Average = 38% QUESTION: Was the buyer a first time buyer? SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

WHY DO WE CARE ABOUT LOW LEVEL OF FIRST TIME BUYER? It signals a constrained flow of new households in the housing market Trade up market cannot be replenished in the long run First time buyers represent the main impulse that drives the state s homeownership rate

FINANCIAL CHARACTERISTICS: FIRST TIME VS. REPEAT First time Buyers Repeat Buyers All Buyers Median Household Income $80,000 $120,000 $100,000 Median Monthly Mortgage Payment $1,477 $1,868 $1,800 Median Downpayment (in $$) $32,500 $100,000 $70,000 Median Downpayment (in % to Price) 10% 20% 19.7% SERIES: 2014 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

REASONS FOR RENTING INSTEAD OF BUYING SERIES: 2013 Renter Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

STUDENT LOAN DEBT AN ISSUE FOR 25% OF RENTERS SERIES: 2013 Renter Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

STUDENT DEBT: DRAGS ON HOME SALES

HOMEOWNERSHIP RATE LOWER IN CA California Vs. U.S. SERIES: Homeownership Rates SOURCE: U.S. Census Bureau

HOMEOWNERSHIP RATE BY AGE OF HOUSEHOLDER SOURCE: Census Bureau

MILLENNIAL HOMEOWNERSHIP FALLING SOURCE: Census Bureau

CALIFORNIA S HOUSING DELEMMA Even with everything (or at least most things) going right, our homeownership market is in trouble The rental market, even with the conversion of 500,000 SFH s, is still exhibiting inadequate supply

HOW TO MAKE IT MORE AFFORDABLE? ONE WORD: SUPPLY CA Housing Needs = Minimally 165,000 Units Annually Regulatory Problem Impact Fees Public Attitudes

CA PERMITS UP BUT MORE UNITS NEEDED 2013: 57,496 Units, Up 43.0% from 2012 Household Growth: 220,000 250,000/yr SERIES: New Housing Permits SOURCE: Construction Industry Research Board

REGIONAL HOUSING MARKETS

CONTRA COSTA COUNTY

SALES OF RESIDENTIAL HOMES Contra Costa County, September 2014: 1,061 Units Down 12.6% MTM, Down 4.9% YTY SOURCE: Clarus Market Metrics

MEDIAN PRICE OF RESIDENTIAL HOMES Contra Costa County, September 2014: $450,000 Down 7.6% MTM, Up 6.8% YTY SOURCE: Clarus Market Metrics

FOR SALE PROPERTIES Contra Costa County, September 2014: 3,627 Units Down 4.7% MTM, Down 3.2% YTY Note: For Sale Properties represents the overall supply that exist throughout the entire month, including any listings that appear as Active any point in time during the month. SOURCE: Clarus Market Metrics

MONTH S SUPPLY OF INVENTORY Contra Costa County, September 2014: 1.7 Months Note: Month s Supply of Inventory 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 For Sale on the last day of the month in question. The inventory figure is then divided by the number of properties that went Under Contract during the month. SOURCE: Clarus Market Metrics

CONCORD

SALES OF RESIDENTIAL HOMES Concord, September 2014: 104 Units Down 11.9% MTM, Down 17.5% YTY SOURCE: Clarus Market Metrics

MEDIAN PRICE OF RESIDENTIAL HOMES Concord, September 2014: $432,500 Down 2.6% MTM, Up 8.8% YTY SOURCE: Clarus Market Metrics

FOR SALE PROPERTIES Concord, September 2014: 394 Units Down 3.9% MTM, Up 4.8% YTY Note: For Sale Properties represents the overall supply that exist throughout the entire month, including any listings that appear as Active any point in time during the month. SOURCE: Clarus Market Metrics

MONTH S SUPPLY OF INVENTORY Concord, September 2014: 1.8 Months Note: Month s Supply of Inventory 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 For Sale on the last day of the month in question. The inventory figure is then divided by the number of properties that went Under Contract during the month. SOURCE: Clarus Market Metrics

WALNUT CREEK

SALES OF RESIDENTIAL HOMES Walnut Creek, September 2014: 126 Units Down 0.8% MTM, Down 3.8% YTY SOURCE: Clarus Market Metrics

MEDIAN PRICE OF RESIDENTIAL HOMES Walnut Creek, September 2014: $550,000 Down 9.8% MTM, Down 0.9% YTY SOURCE: Clarus Market Metrics

FOR SALE PROPERTIES Walnut Creek, September 2014: 358 Units Down 3.0% MTM, Up 14.0% YTY Note: For Sale Properties represents the overall supply that exist throughout the entire month, including any listings that appear as Active any point in time during the month. SOURCE: Clarus Market Metrics

MONTH S SUPPLY OF INVENTORY Walnut Creek, September 2014: 1.5 Months Note: Month s Supply of Inventory 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 For Sale on the last day of the month in question. The inventory figure is then divided by the number of properties that went Under Contract during the month. SOURCE: Clarus Market Metrics

DANVILLE

SALES OF RESIDENTIAL HOMES Danville, September 2014: 70 Units Down 23.9% MTM, Up 9.4% YTY SOURCE: Clarus Market Metrics

MEDIAN PRICE OF RESIDENTIAL HOMES Danville, September 2014: $1,011,500 Down 3.7% MTM, Up 8.2% YTY SOURCE: Clarus Market Metrics

FOR SALE PROPERTIES Danville, September 2014: 196 Units Down 6.7% MTM, Down 8.8% YTY Note: For Sale Properties represents the overall supply that exist throughout the entire month, including any listings that appear as Active any point in time during the month. SOURCE: Clarus Market Metrics

MONTH S SUPPLY OF INVENTORY Danville, September 2014: 1.6 Months Note: Month s Supply of Inventory 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 For Sale on the last day of the month in question. The inventory figure is then divided by the number of properties that went Under Contract during the month. SOURCE: Clarus Market Metrics

RICHMOND

SALES OF RESIDENTIAL HOMES Richmond, September 2014: 61 Units Down 32.2% MTM, Down 12.9% YTY SOURCE: Clarus Market Metrics

MEDIAN PRICE OF RESIDENTIAL HOMES Richmond, September 2014: $360,000 Up 12.5% MTM, Up 30.4% YTY SOURCE: Clarus Market Metrics

FOR SALE PROPERTIES Richmond, September 2014: 266 Units Down 4.7% MTM, Down 11.9% YTY Note: For Sale Properties represents the overall supply that exist throughout the entire month, including any listings that appear as Active any point in time during the month. SOURCE: Clarus Market Metrics

MONTH S SUPPLY OF INVENTORY Richmond, September 2014: 1.7 Months Note: Month s Supply of Inventory 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 For Sale on the last day of the month in question. The inventory figure is then divided by the number of properties that went Under Contract during the month. SOURCE: Clarus Market Metrics

2015 FORECAST

CALIFORNIA HOUSING MARKET FORECAST 2011 2012 2013 2014 P 2015 F SFH Resales (000s) 422.6 439.8 413.3 380.5 402.5 % Change 1.4% 4.1% 5.8% 8.2% 5.8% Median Price ($000s) $286.0 $319.3 $407.2 $455.0 $478.7 % Change 6.2% 11.6% 27.5% 11.8% 5.2% Housing Affordability Index 53% 51% 36% 30% 27% 30 Yr FRM 4.5% 3.7% 4.0% 4.3% 4.5% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CALIFORNIA HOUSING MARKET OUTLOOK Sales Down for 2014 but will Improve in 2015; Price Gains Slowing Units (Thousand) Price (Thousand) SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

CA: DOLLAR VOLUME UP FOR 4 TH YEAR Up 2.7% in 2014, Up 11.3% in 2015 $ in Billion % Change 60% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS

REAL ESTATE IS CONSIDERED THE BEST LONG TERM INVESTMENT SOURCE: Gallup

Make no mistake about it, the way that workingclass people build wealth is through homeownership, not the stock market, not their 401(k) and not a pension. John Taylor, President of the National Community Reinvestment Coalition,

ATTITUDE TOWARD THE HOME BUYING PROCESS MIXED RESULTS SOURCE: How would you describe your attitude towards the home buying process? C.A.R. 2014 Millennial Survey

MOST MILLENNIALS UNCERTAIN/DOUBTFUL THAT THEY COULD OBTAIN A MORTGAGE NOW?AMILLENNIAL ETHNICITY SOURCE: C.A.R. 2014 Millennial Survey Q: Could you obtain a mortgage if you applied now?

PEOPLE WOULD PREFER THE FOLLOWING OVER GOING THROUGH THE HOME MORTGAGE PROCESS AGAIN: SOURCE: Guaranteed Rate Mortgage Survey of 1,000 adults 25 and older USA Today April 2014

C.A.R. Strategic Planning Books