the housing dilemma: sustaining the california housing market

THE HOUSING DILEMMA: SUSTAINING THE CALIFORNIA HOUSING MARKETMid-Year LuncheonMay 1, 2014Joel 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

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

-

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 HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Median Price Gains ModeratingCalifornia, March 2014: $435,470, Up 14.9% YTY

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

$-

$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% frompeak

SERIES: Median Price of Existing Single Family HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

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.

02468

1012141618

SERIES: Unsold Inventory Index of Existing Single Family HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

2009 2010 2011 201212300000

1240000012500000

1260000012700000

1280000012900000

1300000013100000

1320000013300000

12,997,41712,898,639 12,912,894

12,633,403

12,991,93213,063,744

13,135,95213,208,559

Actual # of HH that would have formed

Household Formation Gap is Significant

SOURCE: California Dept. of Finance; compiled by C.A.R.

2009 2010 2011 2012 2009 - 2012-200,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

-5,485 165,105 223,058

575,156

957,834

Households not formed

# of Households Lost Since the Great Recession

SOURCE: California Dept. of Finance; compiled by C.A.R.

Today’s 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 wasn’t always like this…

• Oh, maybe it was…

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

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 HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

California Sales of Existing Homes and Median Price: 1970-2013

California Median Prices 1980 - 2013

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

2012$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 HomesSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

Avg. Annual Price Gain:

+4.9%(1980 – 2001)

Avg. Annual

Price Gain: +16.4%(2002 – 2006)

Mortgage Rates Heading Higher

19721974

19761978

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20120%

2%

4%

6%

8%

10%

12%

14%

16%

18% FRM ARM

SERIES: 30Yr FRM, 1Yr ARMSOURCE: 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 IndexSOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

19841986

19881990

19921994

19961998

20002002

20042006

20082010

2012Q2 2012

Q4 2012Q2 2013

Q4 20140%

10%

20%

30%

40%

50%

60%

70%

80% CA US Annual Quarterly

Median CA House PaymentWell Below Peak

Jan-80Feb-80Mar-80Apr-80May-80Jun-80Jul-80Aug-80Sep-80Oct-80Nov-80Dec-80Jan-81Feb-81Mar-81Apr-81May-81Jun-81Jul-81Aug-81Sep-81Oct-81Nov-81Dec-81Jan-82Feb-82Mar-82Apr-82May-82Jun-82Jul-82Aug-82Sep-82Oct-82Nov-82Dec-82Jan-83Feb-83Mar-83Apr-83May-83Jun-83Jul-83Aug-83Sep-83Oct-83Nov-83Dec-83Jan-84Feb-84Mar-84Apr-84May-84Jun-84Jul-84Aug-84Sep-84Oct-84Nov-84Dec-84Jan-85Feb-85Mar-85Apr-85May-85Jun-85Jul-85Aug-85Sep-85Oct-85Nov-85Dec-85Jan-86Feb-86Mar-86Apr-86May-86Jun-86Jul-86Aug-86Sep-86Oct-86Nov-86Dec-86Jan-87Feb-87Mar-87Apr-87May-87Jun-87Jul-87Aug-87Sep-87Oct-87Nov-87Dec-87Jan-88Feb-88Mar-88Apr-88May-88Jun-88Jul-88Aug-88Sep-88Oct-88Nov-88Dec-88Jan-89Feb-89Mar-89Apr-89May-89Jun-89Jul-89Aug-89Sep-89Oct-89Nov-89Dec-89Jan-90Feb-90Mar-90Apr-90May-90Jun-90Jul-90Aug-90Sep-90Oct-90Nov-90Dec-90Jan-91Feb-91Mar-91Apr-91May-91Jun-91Jul-91Aug-91Sep-91Oct-91Nov-91Dec-91Jan-92Feb-92Mar-92Apr-92May-92Jun-92Jul-92Aug-92Sep-92Oct-92Nov-92Dec-92Jan-93Feb-93Mar-93Apr-93May-93Jun-93Jul-93Aug-93Sep-93Oct-93Nov-93Dec-93Jan-94Feb-94Mar-94Apr-94May-94Jun-94Jul-94Aug-94Sep-94Oct-94Nov-94Dec-94Jan-95Feb-95Mar-95Apr-95May-95Jun-95Jul-95Aug-95Sep-95Oct-95Nov-95Dec-95Jan-96Feb-96Mar-96Apr-96May-96Jun-96Jul-96Aug-96Sep-96Oct-96Nov-96Dec-96Jan-97Feb-97Mar-97Apr-97May-97Jun-97Jul-97Aug-97Sep-97Oct-97Nov-97Dec-97Jan-98Feb-98Mar-98Apr-98May-98Jun-98Jul-98Aug-98Sep-98Oct-98Nov-98Dec-98Jan-99Feb-99Mar-99Apr-99May-99Jun-99Jul-99Aug-99Sep-99Oct-99Nov-99Dec-99Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-01Feb-01Mar-01Apr-01May-01Jun-01Jul-01Aug-01Sep-01Oct-01Nov-01Dec-01Jan-02Feb-02Mar-02Apr-02May-02Jun-02Jul-02Aug-02Sep-02Oct-02Nov-02Dec-02Jan-03Feb-03Mar-03Apr-03May-03Jun-03Jul-03Aug-03Sep-03Oct-03Nov-03Dec-03Jan-04Feb-04Mar-04Apr-04May-04Jun-04Jul-04Aug-04Sep-04Oct-04Nov-04Dec-04Jan-05Feb-05Mar-05Apr-05May-05Jun-05Jul-05Aug-05Sep-05Oct-05Nov-05Dec-052006 Q12006 Q22006 Q32006 Q42007 Q12007 Q22007 Q32007 Q42008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q4 $-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

SOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

PITI/Month

Peak: $3,668/mo (2007 Q2)

Latest: $2,233/mo (2013 Q4)

… Minimum Qualifying Income Below Peak

Jan-80Feb-80Mar-80Apr-80May-80Jun-80Jul-80Aug-80Sep-80Oct-80Nov-80Dec-80Jan-81Feb-81Mar-81Apr-81May-81Jun-81Jul-81Aug-81Sep-81Oct-81Nov-81Dec-81Jan-82Feb-82Mar-82Apr-82May-82Jun-82Jul-82Aug-82Sep-82Oct-82Nov-82Dec-82Jan-83Feb-83Mar-83Apr-83May-83Jun-83Jul-83Aug-83Sep-83Oct-83Nov-83Dec-83Jan-84Feb-84Mar-84Apr-84May-84Jun-84Jul-84Aug-84Sep-84Oct-84Nov-84Dec-84Jan-85Feb-85Mar-85Apr-85May-85Jun-85Jul-85Aug-85Sep-85Oct-85Nov-85Dec-85Jan-86Feb-86Mar-86Apr-86May-86Jun-86Jul-86Aug-86Sep-86Oct-86Nov-86Dec-86Jan-87Feb-87Mar-87Apr-87May-87Jun-87Jul-87Aug-87Sep-87Oct-87Nov-87Dec-87Jan-88Feb-88Mar-88Apr-88May-88Jun-88Jul-88Aug-88Sep-88Oct-88Nov-88Dec-88Jan-89Feb-89Mar-89Apr-89May-89Jun-89Jul-89Aug-89Sep-89Oct-89Nov-89Dec-89Jan-90Feb-90Mar-90Apr-90May-90Jun-90Jul-90Aug-90Sep-90Oct-90Nov-90Dec-90Jan-91Feb-91Mar-91Apr-91May-91Jun-91Jul-91Aug-91Sep-91Oct-91Nov-91Dec-91Jan-92Feb-92Mar-92Apr-92May-92Jun-92Jul-92Aug-92Sep-92Oct-92Nov-92Dec-92Jan-93Feb-93Mar-93Apr-93May-93Jun-93Jul-93Aug-93Sep-93Oct-93Nov-93Dec-93Jan-94Feb-94Mar-94Apr-94May-94Jun-94Jul-94Aug-94Sep-94Oct-94Nov-94Dec-94Jan-95Feb-95Mar-95Apr-95May-95Jun-95Jul-95Aug-95Sep-95Oct-95Nov-95Dec-95Jan-96Feb-96Mar-96Apr-96May-96Jun-96Jul-96Aug-96Sep-96Oct-96Nov-96Dec-96Jan-97Feb-97Mar-97Apr-97May-97Jun-97Jul-97Aug-97Sep-97Oct-97Nov-97Dec-97Jan-98Feb-98Mar-98Apr-98May-98Jun-98Jul-98Aug-98Sep-98Oct-98Nov-98Dec-98Jan-99Feb-99Mar-99Apr-99May-99Jun-99Jul-99Aug-99Sep-99Oct-99Nov-99Dec-99Jan-00Feb-00Mar-00Apr-00May-00Jun-00Jul-00Aug-00Sep-00Oct-00Nov-00Dec-00Jan-01Feb-01Mar-01Apr-01May-01Jun-01Jul-01Aug-01Sep-01Oct-01Nov-01Dec-01Jan-02Feb-02Mar-02Apr-02May-02Jun-02Jul-02Aug-02Sep-02Oct-02Nov-02Dec-02Jan-03Feb-03Mar-03Apr-03May-03Jun-03Jul-03Aug-03Sep-03Oct-03Nov-03Dec-03Jan-04Feb-04Mar-04Apr-04May-04Jun-04Jul-04Aug-04Sep-04Oct-04Nov-04Dec-04Jan-05Feb-05Mar-05Apr-05May-05Jun-05Jul-05Aug-05Sep-05Oct-05Nov-05Dec-052006 Q12006 Q22006 Q32006 Q42007 Q12007 Q22007 Q32007 Q42008 Q12008 Q22008 Q32008 Q42009 Q12009 Q22009 Q32009 Q42010 Q12010 Q22010 Q32010 Q42011 Q12011 Q22011 Q32011 Q42012 Q12012 Q22012 Q32012 Q42013 Q12013 Q22013 Q32013 Q4 $-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000


Min. IncomePeak: $146,701/yr (2007 Q2)

Latest: $89,320/yr (2013 Q4)

House Payment (Inflation Adjusted) Is at Late 1970’s Level

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

2011

2012

2013

$- $100 $200 $300 $400 $500 $600 $700 $800 $900

$1,000

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

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

2011

2012

2013

$- $5,000

$10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000

Min. Income(Adjusted for Inflation) Peak: $37,122

(2006)

Latest: $18,337 (2013)


Share of First-Time Buyers is the Lowest Since 2006

81 83 85 87 89 91 93 95 97 990%

10%

20%

30%

40%

50%

60%

28.1%

% First-Time Home Buyers Long Run Average

Long Run Average = 38%

SERIES: 2013 Housing Market SurveySOURCE: CALIFORNIA ASSOCIATION OF REALTORS®

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

2005 2006 2007 2008 2009 2010 2011 2012 20130%

10%

20%

30%

40%

17%

6%

FHA VA


Homeownership Rates DroppingCalifornia Vs. U.S.

0%

10%

20%

30%

40%

50%

60%

70%

80%

54.5%

65.4%

CA US

SERIES: Homeownership RatesSOURCE: U.S. Census Bureau

Median Monthly Mortgage Payment - CAWhat Will Happen When Mortgage Rates Increase?

3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%$0

$400

$800

$1,200

$1,600

$2,000

$2,400

$1,455$1,550

$1,648 $1,749$1,853

$1,960$2,070 $2,182Q4-2013 Median Price

$431,51020% Downpayment

INTEREST RATE

MONTHLY MORTGAGE


Minimum Qualifying Income - CAWhat Will Happen When Mortgage Rates Increase?

3.00% 3.50% 4.00% 4.50% 5.00% 5.50% 6.00% 6.50%$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$78,066 $81,855 $85,772 $89,814$93,976 $98,252$102,637$107,127

Q4-2013 Median Price $431,51020% Downpayment

INTEREST RATE

MONTHLY MORTGAGE


California’s 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 SFH’s, is still exhibiting inadequate supply

WHAT ABOUT FUTURE HOUSING DEMAND?

Population and Households Will Continue to Grow

California 1970-2020

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

2018

-

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

SOURCE: Moody’s Analytics

Immigrant Share of Growth in Home Owners2010-2020

Dowell Myers, USC Price

Californ

ia

Nevada

Washington

Oregon

Arizona

Colorado

Rest of W

est

Illinois

Ohio

Rest of M

idwest

Minnesota

Michiga

n

DC Region

Florid

aTe

xas

Georgia

North Caro

lina

Rest of S

outh

New Jerse

y

New York

Massach

usetts

Connecticu

t

Pennsyl

vania

Rest of N

orthea

st

TOTAL U

.S.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

1980-90 1990-00 2000-10 2010-200

2

4

6

8

10

12

Immigrants

Native-Born

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 state’s 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 quintileSource: 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.?

2008 2009 2010 2011 2012 20130%

1%

2%

3%

4%

5%

6%

7%

8%

9%

8%


Investment Homes : 19% Market Share

19%


0%2%4%6%8%

10%12%14%16%18%20%

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

19801982

19841986

19881990

19921994

19961998

20002002

20042006

20082010

20120

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 PermitsSOURCE: Moody’s Analytics

Mortgage Finance• Permanent Source of Sufficient Affordable Funding

• GSE’s• 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

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the housing dilemma: sustaining the california housing market

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