2017 Housing Market Outlook

2017 Housing Market Outlook
Home Buyer/Seller Fair July 15, 2017 Oscar Wei Senior Economist

Overview California Housing Market Outlook
Regional Housing Market Outlook 2017 Forecast

California Housing Market Outlook

Home Sales Strong so Far, but Is the Trend Sustainable?
California, May 2017 Sales: 430,060 Units, +3.4% YTD, +2.6% YTY May-16: 419,000 May-17: 430,060 Peak:624,957 units in 2005 Valley:189,345 units in 1982 2012 annual sales up 4.3% from 2011 2011 annual sales up 1.4% from 2010 2010 annual sales down 12.3% from 2009 2009 annual sales up 24.5% from 2008 2008 annual sales up 30.4% from 2007 2007 annual sales down 33.4% from 2006 2006 annual sales down 23.8% from 2005 2005 annual sales up 0.8% from 2004 2004 annual sales up 3.8% from 2003 2003 annual sales up 7.6% from 2002 2002 annual sales up 14.1% from 2001 2001 annual sales down 4.7% from 2000 YTD 2000 annual sales up 1.4 from 1999 1999 sales up 7.3% over 1998 10/93: 41.0 Consumer Confidence 01/00: 03/03: 63.0 5/07: 128.4 2/09: 23.9 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® *Sales are seasonally adjusted and annualized

California Home Sales Increased in June
SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 5

Household Growth Continues to Support Housing Demand
SERIES: Annual Household Growth SOURCE: CA Department of Finance

Weak Start for Economic Growth but Job Market Remained Solid
1.4% GDP 2017-Q1 1.1% Consumption Q1 4.4% Unemployment Jun 2017 1.6% Job Growth Jun 2017

Unemployment rate by California Metro Area
May 2017: California 4.7% Source: Unemployment rate is seasonally adjusted at the state level, but not at the county level SERIES: Unemployment Rate SOURCE: CA Employment Development Division

Consumers Bounced back after 2 months of Decline
Consumer Confidence: (Jun 2017) Consumers’ appraisal of current conditions held steady in May. Those saying business conditions are “good” edged down from 30.8 percent to 29.4 percent, but those saying business conditions are “bad” was unchanged at 13.7 percent. Consumers’ assessment of the labor market also remained positive. Those stating jobs are “plentiful” declined marginally from 30.3 percent to 29.9 percent, however, those claiming jobs are “hard to get” decreased from 19.4 percent to 18.2 percent. Consumers were less optimistic about the short-term outlook in May. The percentage of consumers expecting business conditions to improve over the next six months decreased from 25.1 percent to 21.3 percent, however, those expecting business conditions to worsen declined marginally from 10.4 percent to 10.1 percent. Consumers’ outlook for the labor market was mixed. The proportion expecting more jobs in the months ahead declined from 21.9 percent to 18.6 percent, but those anticipating fewer jobs decreased from 13.8 percent to 12.0 percent. The percentage of consumers expecting their incomes to increase edged up from 18.7 percent to 19.2 percent, but the proportion expecting a decrease also rose, from 7.6 percent to 8.7 percent. Buying plans for automobiles, homes and major appliances all declined. While these data are notoriously volatile, all three series hit their lowest levels this year. This bears watching but runs counter to recent reports citing improving consumer finances. SERIES: Consumer Confidence SOURCE: The Conference Board

Mortgage Rates: Near Lowest Level since the Election
January 2010 – July 7, 2017 MONTHLY WEEKLY Monthly from 2009 to present, weekly for the past 8 weeks SERIES: 30Yr FRM, 5Yr ARM SOURCE: Freddie Mac

The FED’s Rate Hike Federal Reserve announced plan to shrink its portfolio of bond Fed has accumulated $4.5 trillion in assets, and has continued to reinvest the proceeds to maintain the portfolio’s size Fed will reduce holding by allowing up to $6 billion in treasury securities and $4 billion in mortgage bonds to roll off without reinvestment The limit will rise to a maximum of $30 billion a month for Treasury securities and $20 billion a month for MBS Federal Reserve raised rates By a quarter percentage point to a range between 1% to 1.25% One more increase later this year Mortgage rates actually fell to the lowest level afterward, partly because of lower than expected inflation The Fed acknowledged that the recent decline in inflation was held down by temporary factors SOURCE: The Federal Reserve

What Will Happen When Mortgage Rates Increase?
Q Median Price $496,620 20% Downpayment MONTHLY MORTGAGE Minimum Qualifying Income INTEREST RATE INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Imbalance between Supply and Demand Led to Upward Pressure on Prices
California, May 2017: $550,200, +2.3% MTM, +5.8% YTY May-16: $519,930 May-17: $550,200 SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Lackluster Income Growth Also Contributed to the Affordability Issue
Income growth could not keep up with price growth until recently SERIES: Household income growth vs. Home price growth SOURCE: U.S. Census Bureau, Current Population Survey/Annual Social and Economic Supplement, CALIFORNIA ASSOCIATION OF REALTORS®

Supply Remains an Issue
May 2016: 3.4 Months; May 2017: 2.9 Months Range since 1988: Low: 1.3 months in April 2004 High: 18.8 months in Apr 1991 Long-run average: 6.9 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®

Sales Improved in Mid and High Priced Markets But Continued to Decline in Lower-Priced Segments
Jun 2017 (Year-to-Year) SERIES: Sales of Existing Detached Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Fewer Units Turning Over Since the Great Recession
Housing Turnover Rate (Single-Family Homes only) Long-Time Homeowners are not moving as in the past because: Demographic shift Low rate on current mortgage Low property taxes Capital gains hit Where can I afford to go? CA turnover rate trend SERIES: Percent of existing single-family homes being sold SOURCE: Census Bureau, American Community Survey, Moody’s Analytics, C.A.R.

“Missing” 80,000 New Units Annually
2016: 98,881 (47,889 sf, 50,992 mf) 2017f: 100,246 (51,720 sf, 48,526 mf ) CA HCD Projected Housing Needs: 180,000/yr. SERIES: California New Housing Permits SOURCE: Construction Industry Research Board

Housing Supply Gap Will Be Over 2 Million at Current Construction Pace
With housing needs increasing at a rate of 180,000 every year, California will need more than 3.3 million units by 2030 to fill the housing demand and bring it back to 2005 level. At the current construction pace, however, California will have a backlog of over 2 million by 2030 SERIES: Housing Supply Gap SOURCE: Calculation by CALIFORNIA ASSOCIATION OF REALTORS®

Tight Supply Pushed up Home Prices, as one-third of Homes Were Sold above the Asking Price
Long Run Average = 20% SERIES: 2016 Housing Market Survey SOURCE: Calculation by CALIFORNIA ASSOCIATION OF REALTORS®

Market remained Competitive, as inventory level continued to be low
SERIES: 2016 Housing Market Survey SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Housing Affordability Peaked Q1 2012 Prices v
Housing Affordability Peaked Q Prices v. Low Rates and Income Growth California vs. U.S. – Annual Quarterly C.A.R.’s traditional Housing Affordability Index (HAI) was replaced with the First-Time Buyer Housing Affordability Index (FTB-HAI) in 2006. Note this slide takes the average of the 3 months in each of the quarters. C.A.R. began producing its Housing Affordability Index (HAI) in At that time, fixed-rate mortgages were the prevailing form of financing a home purchase, while the calculations used to produce the HAI reflected a 20 percent down payment. The methodology also assumed a monthly payment for principal, interest, taxes and insurance that was no more than 30 percent of a household’s income. In the more than two decades since the CALIFORNIA ASSOCIATION OF REALTORS® first conceived the HAI, the mortgage finance landscape has changed dramatically. The range of mortgage products available to buyers as well as underwriting criteria has changed. C.A.R. developed the new index measuring affordability for first-time home buyers to better reflect the realities of today’s real estate market. SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

But Affordability Is Not Just a Monthly Mortgage Payment Issue, It’s Also a Down Payment Issue
Highest Down Pmt. in $ Since 2005, but lowest down pmt. in % in last 7 yrs. SERIES: 2016 Annual Housing Market Survey SOURCE: California Association of REALTORS®

Regional Housing Market Outlook

Los Angeles County

L.A. Economy Expected to Grow Faster in 2017
Unemployment Rate In 2016, real GDP in Los Angeles County grew at 2.2 percent, a slowdown from the prior year when the economy grew by 3.6 percent. However, this year’s growth was faster than the national rate of growth. Real GDP growth is expected to be 2.7 percent for the next two years, also outpacing the nation. SERIES: Real GDP Los Angeles County SOURCE: BEA, LAEDC

Household Formation rebounding
Long Run Average: 11,748 SERIES: Household Formation, Los Angeles County SOURCE: California Department of Finance, E5 Housing Estimates

Sales of Existing Detached Homes
LA County, May-17 Sales: 4,226 Units, +7.3% YTY, +3.3% YTD, Peak: 60,922 units in 2005 Valley: 28,044 units in 1993 2012 annual sales 6.6% from 2011 2011 annual sales down 4.7% from 2010 2010 annual sales down 10.2% from 2009 2009 annual sales up 24.9% from 2008 2008 annual sales up 29.2% from 2007 2007 annual sales down 35.6% from 2006 2006 annual sales down 20.4% from 2005 2005 annual sales up 5.2% from 2004 2004 annual sales down 2.9% from 2003 2003 annual sales up 2.2% from 2002 2002 annual sales up 7.1% from 2001 2001 annual sales up 3.2% from 2000 2000 annual sales up 3.9% from 1999 10/93: 41.0 01/00: 03/03: 63.0 5/07: 128.4 2/09: 24.3 SERIES: Sales of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Median Price of Existing Detached Homes
Los Angeles County, May. 2017: $492,240, Up 5.3% YTY Los Angeles County, 2016: $507,060, Up 5.6% Valley:$171,103 in 1996 High: $625,812 in Sept 2007 2012 annual median price 6.4% from 2011 2011 annual median price down 4.8% from 2010 2010 annual median price up 7.9% from 2009 2009 annual median price down 21.8% from 2008 2008 annual median price down 35.0% from 2007 2007 annual median price up 2.1% from 2006 2006 annual median price up 11.4% from 2005 2005 annual median price up 18.5% from 2004 2004 annual median price up 25.1% over 2003 2003 annual median price up 21.3% over 2002 2002 annual median price up 18.5% over 2001 2001 annual median price up 12.2% over 2000 2000 annual median price up 8.3% over 1999 Early 1990s Peak: May 1991, $229,260, surpassed in May 2001, $232,712 SERIES: Median Price of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Supply Continued to Drop from Last Year
Los Angeles County, May 2017: 3.0 Months Supply of homes has remained below the long-run average in recent months. Average: 8.0 Months Low: 1.2 Months, December 2003 High: 27.9 Months, February 1991 Note: The Unsold Inventory Index represents the number of months it would take to deplete the remaining inventory at the end of a particular month with the sales rate of the month in consideration. Inventory includes listings with “Active”, “Pending”, and “Contingent” (when available) statuses. SERIES: Unsold Inventory Index of Existing Single Family Homes SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

New Housing Permits Los Angeles County, 2016: 19,936 Units, -13.1% YTY
2012 permits: units, up 2.9% from 2011 2011 permits: units, up 39.3% from 2010 2010 permits: 7,468 units, up 32.1% from 2009 2009 permits: 5,649 units, down 58.8% from 2008 2008 permits: 13,704 units, down 32.7% from 2007 2007 permits: 20,363 units, down 22.7% from 2006 2006 permits: 26,348 units, up 2.7% from 2005 2005 permits: 25,647 units, down 4.8% from 2004. 2004 permits were up significantly, but remained below levels of late 1980s and early 1990s. 2004 permits: 26,935 units, up 26.4% over 2003. 2003 annual permits: 21,313 units, up 10.1% over 2002 2002 annual permits up 6.1% over 2001 2001 annual permits up 6.9% over 2000 2000 annual permits up 18.7% from 1999 Giant housing shortage looming SERIES: New Housing Permits SOURCE: Construction Industry Research Board

Housing Affordability In CA: by county
2017-Q1: % able to purchase median-priced home SERIES: Housing Affordability Index of Traditional Buyers SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

What Will Happen When Mortgage Rates Increase? - LA
Q Median Price $485,820 20% Downpayment MONTHLY MORTGAGE Minimum Qualifying Income INTEREST RATE INTEREST RATE SERIES: Housing Affordability Index SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Rosemead

Sales of Single Family Homes
Rosemead, May 2017: 18 Units -10.5% 2016, +8.3% 2017 YTD, +38.5% YTY SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 35

Median Price of Single Family Homes
Rosemead, May 2017: $544,000 Down 15.3% MTM, Down 13.0% YTY SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 36

For Sale Properties Rosemead, May 2017: 22 Units -22.4% 2016, -18.6% 2017 YTD, -29.0% 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: CALIFORNIA ASSOCIATION OF REALTORS® 37

San Gabriel

San Gabriel, May 2017: 23 Units -13.2% 2016, +16.0% 2017 YTD, +35.3% YTY SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 39

San Gabriel, May 2017: $780,000 Up 4.0% MTM, Up 13.0% YTY SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 40

For Sale Properties San Gabriel, May 2017: 44 Units -10.7% 2016, -26.7% 2017 YTD, -22.8% 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: CALIFORNIA ASSOCIATION OF REALTORS® 41

Alhambra

Alhambra, May 2017: 10 Units -8.0% 2016, -18.6% 2017 YTD, -52.4% YTY SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 43

Alhambra, May 2017: $690,750 Up 9.8% MTM, Up 24.5% YTY SOURCE: CALIFORNIA ASSOCIATION OF REALTORS® 44

For Sale Properties Alhambra, May 2017: 21 Units +2.6% 2016, -31.4% 2017 YTD, -46.2% 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: CALIFORNIA ASSOCIATION OF REALTORS® 45

The Forecast

U.S. Economic Outlook 2011 2012 2013 2014 2015 2016p 2017f US GDP 1.6%
2.2% 1.7% 2.4% 2.6% 2.1% Nonfarm Job Growth 1.2% 1.9% 1.8% 1.3% Unemployment 8.9% 8.1% 7.4% 6.2% 5.3% 4.9% 4.7% CPI 3.1% 1.5% 0.1% 1.4% Real Disposable Income, % Change 2.5% 3.2% -1.4% 2.7% 3.4% 3.0% 30-Yr FRM 4.5% 3.7% 4.0% 4.2% 3.9% 3.6% 4.4% SERIES: U.S. Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Economic Outlook
2011 2012 2013 2014 2015 2016p 2017f Nonfarm Job Growth 1.1% 2.4% 3.0% 2.2% 2.7% 2.3% 1.9% Unemployment Rate 11.8% 10.4% 8.9% 7.5% 6.2% 5.5% 5.4% Population Growth 0.7% 0.9% 1.0% Real Disposable Income, % Change 3.5% 4.7% -1.1% 3.2% 3.6% 4.5% SERIES: CA Economic Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Housing Market Outlook
2011 2012 2013 2014 2015 2016 2017f SFH Resales (000s) 422.6 439.8 414.9 382.7 409.4 416.3 419.6 % Change 1.4% 4.1% -5.9% -7.8% 7.0% 1.7% 0.8% Median Price ($000s) $286.0 $319.3 $407.2 $446.9 $476.3 $502.3 $525.4 -6.2% 11.6% 27.5% 9.8% 6.6% 5.4% 4.6% Housing Affordability Index 53% 51% 36% 30% 31% 28% 30-Yr FRM 4.5% 3.7% 4.0% 4.2% 3.9% 3.6% 4.4% SERIES: CA Housing Market Outlook SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Post-Election Uncertainty
Economic stimulus package/tax reform $550 billion over 10 years Tax reductions/increase in standard deduction/eliminate property tax deduction Higher budget deficits will lead to rising interest rates Dismantling Dodd-Frank Banks will loosen up lending standards Buyers could have more mortgage options Heighten risks of having another financial bubble Reform of GSE’s Privatization or not? An increase in interest rates is expected if GSE’s were privatized The tax cut would also result in the decline in Federal revenue by $6.2 trillion over the first decade. Including interest costs, it would amount to $7.2 trillion over the first decade and $20.9 trillion by 2036. The loss in federal revenue would lead to significantly higher budget deficits, which could exert more upward pressure on inflation. Rising interest rates likely

Post-Election Uncertainty
Trade Policy Boarder adjustment tax/Tariff Consumer pay higher prices on imported goods Higher inflation will lead to higher interest rates Other wildcards Healthcare reform Immigration Policy/H1B Visa program

Concluding Remarks Economy was sluggish in Q1, but should bounce back.
Housing market doing ok now, but sales growth will slow Interest rates are expected to rise Supply and affordability will remain issues in the near term

Housing Matters Podcast
The all-new Housing Matters Podcast is your housing hub for market analysis, economic trends, and housing news from the CALIFORNIA ASSOCIATION OF REALTORS® (C.A.R.) and its institute the Center for California Real Estate. Be sure to subscribe on iTunes to hear the latest episode every other Friday to learn what you need to know about the market from C.A.R. experts who will give you their take on the week’s top real estate stories.

Thank You This presentation can be found on www.car.org/marketdata
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