Housing Market Outlook 2016

By Norm Miller, PhDErnest W. Hahn Chair of Real Estate Finance

Burnham-Moores Center for Real Estate

School of Business, University of San Diego

www.normmiller.net

A special thanks to: Frank Nothaft, PhD, chief economist at CoreLogic

Rachel Parsons, senior associate and Mimi Hom, client services specialist s at CBRE

for contributing slides for this presentation

• Market in 2016 will have five features:

• Higher interest rates (short ↑ 1%, long ↑½%)• House prices up (4% to 5%)• Strong household formations (>1¼ million)• Rental robust: vacancy low, rents up• Mortgage underwriting quality remains high

o Some subprime creeping into the market

• Home sales: 2015 is the best year since 2007

U.S. Housing Market Forecast (Source: CoreLogic)

Long-term Rates Expected to Rise(Source: CoreLogic)

Source: Freddie Mac Primary Mortgage Market Survey®, Board of Governors of the Federal Reserve System (H.15), IHS Global Insight

September 2015 projection.

3

1%

2%

3%

4%

5%

6%

7%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

4.5%

2.7%

QE1 QE2Operation

TwistQE3 Forecast

Dec.

2016:

Interest Rate on 30-Year Fixed-Rate Mortgages and 10-Year Constant Maturity Treasury (percent)

30-Year FRM

10-Year Treasury

Household Formation Accelerated in 2015

2.1

1.5

0.6

0.4

0.7

0.40.6

0.80.7 0.7

1.7

0.0

0.5

1.0

1.5

2.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: U.S. Census Bureau, Housing Vacancy Survey, net change in number of households, January-to-June compared with same period

in prior year.

Annual Household Growth (Net Change, in Millions)

Large Demographic Tailwind Has Arrived

5

3.4

3.6

3.8

4.0

4.2

4.4

4.6

18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Number of People in

2014 (Millions)

Age Cohort

Average Age First-Time

Homebuyer

Average Age Repeat

Homebuyer

Largest Age Cohort

Source: U.S. Census Bureau, Population as of July 1, 2014

Long-Term Worries: Student Debt

Cleveland Fed states: “The recent decline in

mortgage applications is not solely a result of

student debt, but it is likely a contributing factor…

as 40% of young borrowers need to use 20% of their

income just to pay student debt.”

Note: Homeownership rate is under

64% and heading lower.

San Diego Home Prices Projected to

Rise Seven Percent Next Year

7

CoreLogic Home Price IndexTM (January 2000 = 100) Condos and SF units including distress

Note: this is an index, not prices, so in 2016 we will be 262% of prices in the year 2000.

80

100

120

140

160

180

200

220

240

260

280

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017

45%

10%

Forecast

Source: CoreLogic Home Price Index including distressed sales, January 2000 = 100 (October 6, 2015 release) and CoreLogic REAS HPI Forecasts

Projected to reach prior peak by early 2017 , but will be 18 percent lower in real price

For-Sale Home Inventory Has Been Low

Since 2012(Source: CoreLogic)

1.0%

2.0%

3.0%

4.0%

1983 1987 1991 1995 1999 2003 2007 2011 2015

Sources: National Association of Realtors, U.S. Census Bureau (New Residential Sales and Housing Vacancy Survey). Note: Existing home

inventory excludes Condo & Co-op Inventory before 1999.

Homes-For-Sale Inventory as a Percent of Households

(Source: Collateral Analytics)

San Diego

San Diego 6.8%

40,000 Owners

Source: CoreLogic Equity Report, Second Quarter 2015. Louisiana, Maine, Mississippi, South

Dakota, Vermont, West Virginia and Wyoming have insufficient equity data to report.

Note: Blue is bad, red is good

Negative Equity Share in U.S.: 8.7 Percent of Mortgagors, or About 4.4 Million Homeowners

San Diego Foreclosures

Short Sales Sharply Lower

0

5

10

15

20

2009 2010 2011 2012 2013 2014 2015

21.0

17.9

15.5

11.1

4.2

3.0

Source: CoreLogic National Foreclosure Report and MarketTrends, data for 12 months ending July of each year

12 Months Completed Foreclosures and Short Sales (Thousands)

Short Sales

Completed

Foreclosures

20.5

San Diego(Source: Collateral Analytics)

(Source: Collateral Analytics)

San Diego

San Diego(Source: Collateral Analytics)

(Source: Collateral Analytics)

San Diego

San Diego(Source: Collateral Analytics)

Underwriting Remains Cautious

Source: CoreLogic TrueStandings, April 2015 purchase money originations compared with 2000 and 2001

Purchase Originations

2000-2001 (Blue)

April 2015 (Red)

More San Diego Price Trends

Single Family and New Homes

San Diego All Single Family

San Diego New Homes

San Diego Listing Versus Sold Prices

San Diego Condos

San Diego

Prop 13 Long Term Impacts on Supply

What do San Diego Residents Really

Pay by Neighborhood?

0

50

100

150

200

250

300

350

400

450

0.1

0

0.2

0

0.3

0

0.4

0

0.5

0

0.6

0

0.7

0

0.8

0

0.9

0

1.0

0

1.1

0

1.2

0

1.3

0

1.4

0

1.5

0

1.6

0

1.7

0

1.8

0

1.9

0

2.0

0

Effective Tax Rate

Source: Norm Miller run for all neighborhoods in San Diego County

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

- 10 20 30

Effective Prop Tax Rates Versus Median Tenure in

Neighborhood With Trend Line R2 = -.497

Years in Home

5

25

45

65

85

105

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9

Turnover Rate %

Eff Property Tax Rate

Turnover Rate Since 2005 Versus Eff Property Tax

Rate for San Diego Neighborhoods

0%

5%

10%

15%

20%

25%

30%

35%

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

20

17

20

20

20

23

20

26

20

29

20

32

20

35

20

38

20

41

20

44

20

47

20

50

20

53

20

56

20

59

20

62

20

65

Present Value of Property Tax Savings

as Percentage of Home Value

Multifamily Trends

from CoreLogic and CBRE

NO

30Source: U.S. Census Bureau, 2014 American Community Survey, Table S2504

Components of the U.S.

Rental Stock 2015

Rental Stock

Multi-family 42%One-family 35%

2- to 4-family 18%

Manufactured

Housing 5%

31Source: U.S. Census Bureau, 50 largest metropolitan rental markets; size of bubble represents the size of the single-family rental detached stock.

Single-Family Detached Rental Stock

Grew by Three Million in U.S., 2006–2013

Percent Change in Single-Family Detached Rental Stock 2006 - 2013

Change in Numberof Single-Family Detached Rental Stock 2006 -2013

10

US Vacancy Rates Are Lowest on

Single-Family Homes

0%

1%

2%

3%

4%

5%

6%

7%

8%

One-family Detached

3-Bedroom

One-family Attached

2-Bedroom

5- to 9-Unit 10-or-more

Apartments

Rental Vacancy Rate (2015 Second Quarter)

Source: CoreLogic Rental Trends (average April-June 2015), U.S. Census Bureau, Housing Vacancy Survey (2015 Q2)

Single-Family Rent Growth Strong,

Especially in West

11

-4%

0%

4%

8%

12%

Source: CoreLogic Rental Trends, metropolitan area median rent July 2015

Atlanta Chicago Dallas Detroit Houston Los

Angeles

Miami New

York

Philadelphia Phoenix San

Diego

Seattle Washington

DC

1082 1659 1386 1038 1328 2467 1812 NA 1215 1346 2368 2062 1792Rent

Rent Growth for 3-Bedroom Detached Houses, July 2014 to July 2015

San Diego Multifamily Market Snapshot

3rdQuarter 2015

AVERAGE RENT $1,848

AVERAGE RENT PSF $2.05

TOTAL OCCUPANCY 95.6%

TOTAL UNITS 290,961 (5+ Units)

RENT GROWTH 7.8% (Annual)

PROJECTED RENT

GROWTH4.8% (Annual)

(Source: CoreLogic)

Occupancy Rates

95.60%

95.30%

94.00%

95.00%

96.00%

97.00%

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

(Source: CBRE)

Rental Rates

$1,848

$1,200

$1,300

$1,400

$1,500

$1,600

$1,700

$1,800

$1,900

$2,000

$2,100

$2,200

2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

Rent Index ($/Unit)

2010 – 2015 Growth

3.7% Average Forecasted Rent

Growth 2017 – 2019

(Source: CBRE)

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

Dallas Miami Phoenix Chicago LA San Diego

Selected Markets: Median

Cap Rates on Detached

3 BR Homes 2015 (Source: CoreLogic)

42%

37%

21%

$164,817/Unit

$210,844/Unit

$232/SF

$349,616/Unit

$329/SF

A

B

C

S D Sales trends (>100 Unit Properties)

2015 YTD

24 Sales

$1,079,925,000

Sales Volume

*Percentage by number of sales

33% Increase in Sales

36.4% Increase in

Volume Over 2014

(Source: CBRE)

S D Multifamily Deliveries

(2004-2018F)

172

3,364

376

1,028

1,565

1,826

970

368

1,805

755

1,947

5,311

1,835

6,928

7,384

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F

Average Deliveries = 2,376

Housing Shortages and Affordability

1) The London Group report suggests a shortage in housing units

of 50,000 to 118,000.

2) SANDAG estimated that San Diego will need to produce 161,980

more units of housing from 2010 -2020. After 36 percent of time

elapsed, San Diego produced:

• 31 percent of the high-income units needed,

• four percent of the moderate-income units needed and

• six percent of the low-income units needed

3) This is not surprising since the easiest housing to get approved

is low density and more expensive than the neighbors.