The Housing Dilemma: Sustaining The California Housing Market

THE HOUSING DILEMMA:
SUSTAINING THE CALIFORNIA

HOUSING MARKET
Mid-Year Luncheon
May 1, 2014
Joel Singer, Chief Executive Officer

Overview
Where Are We

The Long View

Components of Housing Demand

What Has to Happen

Sales Retreating Since Mid-2013
California, Mar 2014 Sales: 367,000 Units, -13.2% YTD, -12.3% YTY

-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
*Sales are seasonally adjusted and annualized SERIES: Sales of Existing Single Family Homes
SOURCE: CALIFORNIA ASSOCIATION OF REALTORS
Median Price Gains Moderating
California, March 2014: $435,470, Up 14.9% YTY
$-
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000 P: May-07
$594,530
T: Feb-09
$245,230
-59% from
peak
SERIES: Median Price of Existing Single Family Homes
Inventory Has Improved but Remains Tight
California, March 2014: 4.0 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.
0
2
4
6
8
10
12
14
16
18
SERIES: Unsold Inventory Index of Existing Single Family Homes
12,997,417
12,898,639 12,912,894
12,633,403
12,991,932
13,063,744
13,135,952
13,208,559
12300000
12400000
12500000
12600000
12700000
12800000
12900000
13000000
13100000
13200000
13300000
2009 2010 2011 2012
Actual # of HH that would have formed
Household Formation Gap is Significant
SOURCE: California Dept. of Finance; compiled by C.A.R.
-5,485
165,105
223,058
575,156
957,834
-200,000
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
2009 2010 2011 2012 2009 - 2012
Households not formed
# of Households Lost Since the Great
Recession
SOURCE: California Dept. of Finance; compiled by C.A.R.
Todays Market

Clearly well on the road to recovering

Volume A bit down, still reliant on investment sales

Prices up sharply, but increases slowing in most markets

Inventory remains tight

Pent-up/unrealized demand not yet translating into sales

Affordability challenges emerging once again
The Long View

It wasnt always like this

Oh, maybe it was
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
Sales of Existing Detached Homes Median Price

California Sales & Median Price: 1970-2013

-61% -34%
-49%
UNITS/MEDIAN PRICE $
SERIES: Sales of Existing Detached Homes
California Sales of Existing Homes and Median
Price: 1970-2013
California Median Prices 1980 - 2013

$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
Median Price
Avg. Annual
Price Gain:
-19.4%
(2007 2009)
SERIES: Median Price of Existing Detached Homes
Avg. Annual
Price Gain:
+4.9%
(1980 2001)
Avg. Annual
Price Gain:
+16.4%
(2002 2006)
Mortgage Rates Heading Higher

0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
FRM ARM
SERIES: 30Yr FRM, 1Yr ARM
SOURCE: Federal Home Loan Mortgage Corporation
Housing Affordability Hit by Mortgage Rate Hikes
and Price Gains
California vs. U.S. 1984-2013
% OF HOUSEHOLDS THAT CAN BUY, ANNUAL RATE
SERIES: Housing Affordability Index
0%
10%
20%
30%
40%
50%
60%
70%
80%
CA US
Annual Quarterly
Median CA House Payment
Well Below Peak

$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
2006
Q1
2012
Q1
PITI/Month
Peak: $3,668/mo (2007 Q2)
Latest: $2,233/mo (2013 Q4)
Minimum Qualifying Income
Below Peak
$-
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
$160,000
Jan-
80
Jan-
82
Jan-
84
Jan-
86
Jan-
88
Jan-
90
Jan-
92
Jan-
94
Jan-
96
Jan-
98
Jan-
00
Jan-
02
Jan-
04
2006
Q1
2012
Q1
Min. Income
Peak: $146,701/yr (2007 Q2)
Latest: $89,320/yr (2013 Q4)
House Payment (Inflation Adjusted)
Is at Late 1970s Level
$-
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
PITI/Month
(Adjusted for Inflation)
Peak: $928/mo (2006)
Latest: $458/mo (2013)
And Minimum Qualifying Income (Inflation Adjusted) Is
the Same as 35 Years ago
$-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011
Min. Income
(Adjusted for Inflation) Peak: $37,122 (2006)
Latest: $18,337 (2013)
Share of First-Time Buyers is the Lowest Since 2006
28.1%
0%
10%
20%
30%
40%
50%
60%
8
1
8
2
8
3
8
4
8
5
8
6
8
7
8
8
8
9
9
0
9
1
9
2
9
3
9
4
9
5
9
6
9
7
9
8
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
% First-Time Home Buyers Long Run Average
Long Run Average = 38%
SERIES: 2013 Housing Market Survey
Student Debt: Drags On Home Sales
Q. Please indicate the type of mortgage.
Share of FHA was the lowest in 6 Years;
24% of first-time buyers used FHA loans
17%
6%
0%
10%
20%
30%
40%
2005 2006 2007 2008 2009 2010 2011 2012 2013
FHA VA
Homeownership Rates Dropping
California Vs. U.S.
54.5%
65.4%
0%
10%
20%
30%
40%
50%
60%
70%
80%
CA US
SERIES: Homeownership Rates
SOURCE: U.S. Census Bureau
Median Monthly Mortgage Payment - CA
What Will Happen When Mortgage Rates Increase?

$0
$400
$800
$1,200
$1,600
$2,000
$2,400
3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
$1,455
$1,550
$1,648
$1,749
$1,853
$1,960
$2,070
$2,182
Q4-2013 Median Price $431,510
20% Downpayment
INTEREST RATE
MONTHLY MORTGAGE
Minimum Qualifying Income - CA
What Will Happen When Mortgage Rates Increase?

$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5%
$78,066
$81,855
$85,772
$89,814
$93,976
$98,252
$102,637
$107,127
Q4-2013 Median Price $431,510
20% Downpayment
INTEREST RATE
MONTHLY MORTGAGE
Californias Housing Dilemma

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 SFHs, is still exhibiting inadequate supply
WHAT ABOUT FUTURE
HOUSING DEMAND?
Population and Households Will Continue to Grow
California 1970-2020
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
1
9
7
0
1
9
7
2
1
9
7
4
1
9
7
6
1
9
7
8
1
9
8
0
1
9
8
2
1
9
8
4
1
9
8
6
1
9
8
8
1
9
9
0
1
9
9
2
1
9
9
4
1
9
9
6
1
9
9
8
2
0
0
0
2
0
0
2
2
0
0
4
2
0
0
6
2
0
0
8
2
0
1
0
2
0
1
2
2
0
1
4
2
0
1
6
2
0
1
8
2
0
2
0
SOURCE: Moodys Analytics
Immigrant Share of Growth in Home Owners
2010-2020
Dowell Myers, USC Price
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
West Midwest South Northeast
Source: Dowell Myers and John Pitkin, Immigrant Contributions to
the Housing Market RIHA, Mortgage Bankers Association, 2013
Immigrants
Native-Born
0
2
4
6
8
10
12
1980-90 1990-00 2000-10 2010-20
forecast
Source: Dowell Myers and John Pitkin, Immigrant Contributions to the Housing Market RIHA, Mortgage Bankers Association,
2013
Growth in Number of Immigrant or Native Born
Owner (Millions)
Future Demand

The demographic demand for housing is not going to lessen

Where Will Our Children Live ? remains a relevant question

Enduring negative impacts on the states economy

Housing is the Achilles heel of the California Economy
ATTITUDES ON
HOMEOWNERSHIP REMAIN
HIGHLY POSITIVE
Good Time to Buy Took Small Dip in the Recent
Market Downturn
SOURCE: Thomson Reuters & University of Michigan, Survey of Consumers
Share of Consumers Planning to Buy a Home Up
Sharply in Recent Years
% Answering Yes, Jan 2000-Jan 2014, 3 Month Average, SA
SERIES: Share of Consumers who Plan to Buy in 6 mos.
SOURCE: The Conference Board
Majority of All Age Groups Think Owning Makes More
Financial Sense than Renting
SOURCE: Fannie Mae, National Housing Survey Q1 2012, Joint Center for Housing Studies of Harvard University
Homeownership Has Mattered Profoundly to Wealth
Accumulation Even after Controlling for Income
Note: All values are in 2010 dollars, for the middle income quintile
Source: Joint Center tabulations of Board of Governors of the Federal Reserve System, Survey of Consumer Finances

Make no mistake about it, the way that working-
class 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,

Real Estate is Considered the Best
Long Term Investment
SOURCE: Gallup
Financial Constraints Weigh Heavily on Perceptions,
Keeping Some Out of Market
SOURCE: Hanley Wood Housing 360 Survey (2011), Joint Center for Housing Studies of Harvard University
Reasons for Leaving California
International Buyers are Getting a Bigger Slice of
the Market than Before
Q. Was the buyer an international buyer a person who was a citizen of another country who wished to
purchase residential real estate in the U.S.?
8%
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
2008 2009 2010 2011 2012 2013
Investment Homes : 19% Market Share
19%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
Investment/Rental Property
Investment/Rental Property
Long Run Average: 11 %
HOW TO MAKE IT MORE
AFFORDABLE FOR HOME
BUYERS?
One Word: Supply
CA Housing Needs = Minimally 165,000 Units Annually

Regulatory Problem
Impact Fees
Public Attitudes
0
50000
100000
150000
200000
250000
300000
350000
Single Family Multi-Family
A Healthy Price Appreciation Requires the Right
Balance between Supply and Demand
2013: 80,319 Units, Up 37.2% from 2012

Household Growth: 220,000-250,000/yr
SERIES: Residential Permits
SOURCE: Moodys Analytics
Mortgage Finance
Permanent Source of Sufficient Affordable Funding

GSEs
FHA
Rental Housing
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
Maybe a new mortgage
process is part of creating
the sustainable housing
market

We shape our dwellings, and afterwards our dwellings shape
us.

~Winston Churchill 1944

Almost any man worthy of his salt would fight to defend his
home, but no one ever heard of man going to war for his
boarding house.

~ Mark Twain
THANK YOU!
www.car.org/marketdata
joels@car.org

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THE HOUSING DILEMMA:

SUSTAINING THE CALIFORNIA

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