Jon Haveman Principal, Haveman Economic Consulting April, 2013 Today’s Real Estate: Drivers and the Road Ahead.

Jon HavemanPrincipal, Haveman Economic Consulting

April, 2013

Today’s Real Estate: Drivers and the Road Ahead

Outline: Drivers

• General Economy• Government Policy

– Fiscal Policy– Monetary Policy

• Bank Lending Standards• Venture Capital

BACKGROUND STATISTICS

Median Home PricesThrough Q3-2012

• Price Declines – Peak to Current– Bay Area: -31%– Solano: -50%– Contra Costa: -38%– Napa: -36%– Alameda: -

28%– Sonoma: -

26%– Santa Clara: -19%– Marin: -18%– San Francisco: -15%– San Mateo: -14%Source: DataQuick

1990Q2

1992Q4

1995Q2

1997Q4

2000Q2

2002Q4

2005Q2

2007Q4

2010Q2$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

ALAMEDACONTRA COSTASANTA CLARASAN FRANCISCOBAY AREA

Thou

sand

s of D

olla

rs

ForeclosuresThrough Q3-2012

• Current Rates– Bay Area: 1.4– Solano: 4.0– Contra Costa: 2.3– Napa: 2.0– Sonoma 1.8– Alameda: 1.3– San Mateo: 0.6– Marin: 0.5– Santa Clara: 0.6– San Francisco: 0.5

Source: DataQuick

1995Q3

1997Q2

1999Q1

2000Q4

2002Q3

2004Q2

2006Q1

2007Q4

2009Q3

2011Q20

2

4

6

8

10

12

14

16

ALAMEDACONTRA COSTASOLANOBAY AREA

Fore

clos

ures

/ 1

,000

Hom

es

High Housing Prices(Median Home Values Over Time)

Bay Area

LA & SD

United States

Apartment Rents

• Bay Area: rapidly rising• Silicon Valley: most expensive place to rent• Santa Clara County: 29% increase over 4 years

Source: Realfacts/bizjournals.com

GENERAL ECONOMY

US GDP Growth Remains Sluggish

20142012201020082006

6

4

20

-2

-4-6

-8

-10

(Percent Change, SAAR)

Source: UCLA Anderson Forecast

Unemployment Remains Too High

20142012201020082006

10%

9%

8%

7%

6%

5%

4%

(Rate)

Source: UCLA Anderson Forecast

Inflation Stays off the Radar

20142012201020082006

5%

4%

3%

2%

1%

0%

-1%

-2%

(Percent Change Year-Ago)

Price Deflator for Personal Consumption Expenditures

Source: UCLA Anderson Forecast

Housing Set to Rebound

20142012201020082006

2500

2000

1500

1000

500

0

(Thousands of Units)

Housing Starts, Annual Data

Source: UCLA Anderson Forecast

Investment in Business Structures Uneven

20142012201020082006

15%

10%

5%0%

-5%

-10%-15%

-20%

-25%

(Percent Change)

Source: UCLA Anderson Forecast

Threats to U.S. Recovery and Long Run Prosperity

• Abroad:– Europe – Asia

• At home:– Austerity push– Income inequality – Infrastructure

Bay Strengths Relative to CA & US(12 month % growth to Dec.)

Industry Bay Area California U.S.

Total Non-Farm Employment

2.9 1.6 1.7

Construction 8.4 4.4 1.8

Manufacturing 0.9 -0.9 1.3

Prof, Sci, and Technical

6.1 3.0 3.1

Information 5.8 4.7 -0.2

Bay Area Share of Selected U.S. Tech Jobs in 2010

Comp. & Electr. Manuf.

Pharmaceuticals

Medical Equipment

Software

Internet-Related

Architectural & Engr. Services

Computer Services

Management.& Technical Serv.

Scientific R&D Services

Total Jobs

0% 2% 4% 6% 8% 10% 12% 14%

Forecast Growth in Total Jobs

2007-2020 2010-2020 2020-20400.0%

5.0%

10.0%

15.0%

20.0%

25.0%

11.4%

20.2%

13.5%

9.2%

19.2%

13.0%

8.8%

15.1%

12.3%

Bay Area California United States

Source: Center for Continuing Study of the California Economy

Bay Area Population Growth (thousands)

0-24 25-34 35-54 55-64 65-74 75+-200,000

-100,000

0

100,000

200,000

300,000

400,000

2000-2010 2010-2020

Source: Center for Continuing Study of the California Economy

GOVERNMENT POLICY

The Fiscal Austerity Issue

• Austerity:– US – cutting spending– EU – Greek prescription

driving renewed recession

• Continue stimulus until strong growth prevails

• Plenty of time later for austerity

• Remember 1937

Interest Rates: Zero Rate Policy to Continue Through Late 2014

20142012201020082006

6%

5%

4%

3%

2%

1%

0%

-1%

(Rates)

Fed Funds 10-Yr. T-bonds

Source: UCLA Anderson Forecast

Income Inequality

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

0.47

0.48

0.49

0.5

0.51

0.52

0.53

The U.S.

The Bay Area

California

Gini

Coe

ffici

ent

Facts on Income Inequality

• Top 1%:– Collect 24% of all income– Own 40% of all wealth– Hold 50% of all stocks, bonds, and mutual funds– Received 63% of all income gains in recent years

• Problem for residential real estate:– Hollowing out of the middle creates a bifurcated

residential market. Softening at the bottom and tightening at the top.

BANK LENDING STANDARDS

Lending Standards: Prime Mtgs.(Through Q4-2012)

Source: Federal Reserve

Loos

enin

g

|

T

ight

enin

g

Q1-07

Q2-07

Q3-07

Q4-07

Q1-08

Q2-08

Q3-08

Q4-08

Q1-09

Q2-09

Q3-09

Q4-09

Q1-10

Q2-10

Q3-10

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-12

-80

-60

-40

-20

0

20

40

60

80

100

Lending Standards Loan Demand

Source: Federal Reserve

Lending Standards: C&I(Through Q4-2012)

Loos

enin

g

|

Tig

hten

ing

Q1-

05

Q3-

05

Q1-

06

Q3-

06

Q1-

07

Q3-

07

Q1-

08

Q3-

08

Q1-

09

Q3-

09

Q1-

10

Q3-

10

Q1-

11

Q3-

11

Q1-

12

Q3-

12

-40

-20

0

20

40

60

80

100

Large/Medium Firms Small Firms

%

Cash Purchases

• Residential– 32.4% of all California home sales in 2012– Double the average of 15.6% since 1991– Cash-only purchases > $500k up 35% compared to

2011– Why?

• Can’t get a mortgage• Want to prevail in hot markets

VENTURE CAPITAL

Venture Capital

Source: PriceWaterhouseCoopers MoneyTree

Q3-2012Value of All Deals

(Millions)% of Total

US VC

Bay Area 2,619 40

California 3,314 51

United States 6,482

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

CA and Bay Shares of U.S. Venture Capital to Q3-2012

Bay California

(%)

Summary• Economy may be slow – current activity may be short

lived• Government policy: push-me pull-you

– Austerity vs. Easy money vs. Uncertainty– Income inequality will influence markets

• Lending standards are an impediment– How long will cash drive markets?

• Bay area– Demographics will play a major role going forward– VC will likely continue, but is facing problems– Tech likely to be a driver for some time, but no guarantees

Regional Analysis Business & Market Analysis Ports & Infrastructure Analysis Economic Impact Analysis Public Policy Analysis

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Haveman Economic Consulting