Housing Market Update May 24, 2011 Wayne Yamano, Vice President 1.

Housing Market UpdateMay 24, 2011

Wayne Yamano, Vice President

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Independent research and consulting firm focused on the housingWe help Investors, Builders/Developers, Lenders, and Building

Product Manufacturers make smart decisionsWe analyze 80 Metros each month, in 10 major regions.

Our research clients receive:Monthly reportsSurvey Results Insight from the ExpertsWebinarsWhite Papers IntroductionsAnd much more…

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Who is John Burns Real Estate Consulting?Who is John Burns Real Estate Consulting?

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1. Current State of Housing

2. Excess Housing Vacancy

3. Shadow Inventory

4. For-Sale Vs. Apartments

Today’s AgendaToday’s Agenda

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• Builders dropped prices in 7 of 9 regions in 1Q11• CA showed the most severe declines• Prices have been under more pressure in 2Q11

Prices heading downPrices heading down

-4.2%-3.6%

-2.1%-1.9%

-1.7%-1.4%

-1.2%-1.0%

0.2%0.6%

-5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0%

N. CaliforniaS. California

SouthwestNorthwest

MidwestNationFlorida

SoutheastTexas

Northeast

Average Change In Net PricesIn 1st Quarter 2011

Source: John Burns Real Estate Consulting independent survey. NSA April 2011

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All builders hurtingAll builders hurting

-1.9

%

-1.6

% -1.4

% -1.2

% -1.1

% -0.9

%

-0.9

%

-0.9

% -0.8

%

-0.7

%

-0.7

%

-0.6

%

-0.2

%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

SPF

MD

C

KBH

MH

O

LEN

DH

I

PHM

MTH

TOL

RYL

BZH

HO

V

NVR

% P

rice

Chan

ge

New Home Price Decline in Builders' Markets*(Last 3 Months)

* Average new home price declines weighted by builders' geographic exposure.

Builder Wtd. Avg. = -0.9%

Source: John Burns Real Estate Consulting, April 2011

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Spring selling season disappointingSpring selling season disappointing

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1. Current State of Housing

2. Excess Housing Vacancy

3. Shadow Inventory

4. For-Sale Vs. Apartments

Today’s AgendaToday’s Agenda

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• From 2000 to 2010:• Total housing stock grew by 15.8 million• Households only grew by 11.2 million• Vacancy increased from 9.0% to 11.4%

Excess Vacancy = 3.1 million units (2.4%)Excess Vacancy = 3.1 million units (2.4%)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Excess VacancyExcess Vacancy (Left Axis)

Excess Vacancy Rate (Right Axis)

Source: John Burns Real Estate Consulting, May 2011Source: John Burns Real Estate Consulting, May 2011

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CA not so badCA not so bad

CA Excess

Vacancy = 2.2%

Oak: 3.3%Oak: 3.3%Sac: 2.7%Sac: 2.7%SD: 2.3%SD: 2.3%OC: 1.8%OC: 1.8%LA: 1.7%LA: 1.7%SF: 1.5%SF: 1.5%

Riv-SB: 0.7%Riv-SB: 0.7%

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• Construction averaging 1.03MM/yr through 2015• Household growth averaging 1.46MM/yr through 2015

U.S. back to equilibrium in 2015U.S. back to equilibrium in 2015

-500,000

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

P

2012

P

2013

P

2014

P

2015

P

Excess Vacancy

Source: John Burns Real Estate Consulting, May 2011

OC: 2012OC: 2012LA: 2014LA: 2014SF: 2014SF: 2014SD: 2014SD: 2014Riv-SB: 2015Riv-SB: 2015Oak: 2015Oak: 2015Sac: 2016Sac: 2016

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• HH growth slowed to 1.0%/yr in 2000s, after 2 decades of 1.4%/yr growth

• HH growth should have averaged 1.3%/yr in 2000s, based on demographics and normal headship rates

Pent-up household growth = 3.4MMPent-up household growth = 3.4MM

1.8%

2.4%

1.4% 1.4%

1.0%1.3%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1970 1980 1990 2000 2010 2010(Th)

Annual HH Growth rate

Source: John Burns Real Estate Consulting, Census

Expected Theoretical Household

Growth Rate

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• 1.5 million more young adults living with their parents today than in 2000

More young adults living with parentsMore young adults living with parents

0%

2%

4%

6%

8%

10%

12%

14%

16%

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Mill

ions

25 to 34 Year Olds Living with their ParentsNumber (Left Axis)

Percentage (Right Axis)

Sources: US Census Bureau, JBREC

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1. Current State of Housing

2. Excess Housing Vacancy

3. Shadow Inventory

4. For-Sale Vs. Apartments

Today’s AgendaToday’s Agenda

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Based on our forecasts:• 50% of the Foreclosure Notices have been filed• Only 30% of the distressed homes have been sold

Is the worst behind us?Is the worst behind us?

2.3

2.92.6

2.5

2.0

1.31.1

0.9 0.90.9

1.51.3

1.8 1.9 2.01.7

1.31.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2008 2009 2010 2011P 2012P 2013P 2014P 2015P 2016P

Mill

ions Foreclosure Starts

Distressed Sales

Foreclosure Starts & Distressed Sales

Source: John Burns Real Estate Consulting, April 2011

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• Central CA markets have most shadow• Coastal Bay area has least shadow

U.S. Shadow Inventory = 10 monthsU.S. Shadow Inventory = 10 months

CA Metros: Shadow InventoryShadow Resale Shadow Estimated Current JBREC

Inventory Sales Months of Metro Median AffordabilityMetro (base case)3,6 (10-yr Avg) Supply Delinquency %2 Price Index™

Bakersfield, CA 16,932 12,020 17 19.9% $115,000 0.0Fresno, CA 14,968 10,588 17 16.9% $145,000 0.0Los Angeles, CA (MDiv) 114,741 98,127 14 12.4% $340,000 1.2Merced, CA 6,094 3,476 21 26.1% $113,000 0.7Modesto, CA 12,957 7,885 20 22.1% $137,000 0.2Monterey, CA 5,164 4,253 15 14.1% $223,500 0.7Oakland, CA (MDiv) 43,896 38,804 14 12.7% $321,000 0.9Orange County, CA (MDiv) 33,302 38,739 10 9.0% $470,000 4.4Riverside-San Bernardino, CA 95,058 73,585 16 20.7% $175,500 1.2Sacramento, CA 47,704 36,329 16 16.5% $195,000 0.4San Diego, CA 41,011 40,628 12 11.9% $362,000 2.9San Francisco, CA (MDiv) 13,307 18,542 9 6.5% $651,000 1.0San Jose, CA 17,503 24,188 9 7.9% $515,000 1.9Santa Barbara, CA 4,626 4,262 13 11.4% $331,500 0.3Santa Rosa, CA 6,782 7,467 11 10.7% $325,000 1.0Stockton, CA 16,213 10,341 19 21.4% $156,500 0.5Vallejo-Fairfield, CA 10,253 7,643 16 18.3% $195,000 0.2Ventura, CA 10,852 12,008 11 10.3% $410,000 4.0Visalia-Porterville, CA 6,660 4,389 18 16.0% $122,000 0.4

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• Distressed sales:• 27% of sales in 2010• Forecasted to be 36%-37% of sales in 2011-2013• Typically 6%-7% of sales

Distressed sales to take larger shareDistressed sales to take larger share

4.87 4.96 5.22 5.76 6.34 6.64 6.055.08

4.05 3.66 3.58 3.20 3.29 3.44 3.63 3.86 4.15

0.30 0.37 0.410.42

0.44 0.440.42

0.580.87 1.50 1.33 1.80 1.91 1.96 1.67 1.29 0.95

0

1

2

3

4

5

6

7

8

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P 2016P

Mill

ions

Distressed

Non-Distressed

"Normal" Non-Distressed Sales

Resale Sales Volume

Source: John Burns Real Estate Consulting, April 2011

Resale Sales Volume

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1. Current State of Housing

2. Excess Housing Vacancy

3. Shadow Inventory

4. For-Sale Vs. Apartments

Today’s AgendaToday’s Agenda

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Scale tipping towards rental demandScale tipping towards rental demand

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Apartment fundamentals surgingApartment fundamentals surging

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Rents rising as prices fallingRents rising as prices falling

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Curr

ent

2011

P

2012

P

2013

P

After-Tax Housing Costs vs Asking Rents (Annual Averages of All Markets Represented)

AVG After-Tax Cost of Homeownership

AVG Asking Rent

Source: JBREC Market Monitor; RealFacts, Reis (2010Q4) 81 markets (Current through 2010Q4)

• Apartments rents have been rising since beginning of 2010• For-sale housing has never been this cheap compared to

apartment rents

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Rents rising as prices fallingRents rising as prices fallingSan FranciscoSan Francisco OaklandOakland

San JoseSan Jose

Los AngelesLos Angeles

SacramentoSacramento

Orange CountyOrange County

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……so why is the for-sale market so weak?so why is the for-sale market so weak?• Prospective buyer pool is lousy!

• FICO scores too low• No $ for down payment

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0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Cu

rren

t20

11P

2012

P20

13P

2014

P20

15P

U.S. Residential Permits

Single Family Multifamily

Sources: John Burns R.E. Consulting, Census Bureau for history and JBREC for forecast (Pub: Apr/11),NSA, Current=SA,(Data: Feb/11)

YoY SA: -20.5%

2,218,900

1,769,400

2,155,300

1,279,000

1991: 948,800

1981: 985,5002011P: 626,500

Recession Years

Construction will return as: 1) we add jobs, 2) vacancy is filled, and 3) builders can find ways to make $$$.

MF: +173%MF: +173%SF: +72%SF: +72%

2010 to 20152010 to 2015

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• High Demand: Census Bureau says population will grow by 3.2 million per year and they will need to live somewhere.

JobGrowth

HousingVacanciesFilled

DemandExceedsSupply

Rents and Home pricesRise

ConstructionReturns to Normal

Recovery Timeline

• Recovery is Underway: Rents and home prices have stabilized in many of the best middle class neighborhoods today.

• Full Construction Recovery Will Take 6+ Years: It will take years to reach 1.7 million+ construction starts due to land locations and feasibility

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Make great decisions with great analysisMake great decisions with great analysis

Wayne [email protected]

(949) 870-1200