Housing Market Outlook 2016 By Norm Miller, PhD Ernest 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

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

• 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

Long-term Rates Expected to Rise (Source: CoreLogic) 7%

Interest Rate on 30-Year Fixed-Rate Mortgages and 10-Year Constant Maturity Treasury (percent) QE1

QE2

Operation Twist

Forecast

QE3

6%

Dec. 2016:

5% 30-Year FRM

4.5%

4% 3%

2.7%

2% 10-Year Treasury

1% 2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Source: Freddie Mac Primary Mortgage Market Survey®, Board of Governors of the Federal Reserve System (H.15), IHS Global Insight September 2015 projection.

3

Household Formation Accelerated in 2015 Annual Household Growth (Net Change, in Millions) 2.1 2.0 1.7 1.5

1.5

1.0

0.8 0.7 0.6

0.7

2013

2014

0.6 0.4

0.4

0.5

0.7

0.0 2005

2006

2007

2008

2009

2010

2011

2012

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.

Large Demographic Tailwind Has Arrived Number of People in 2014 (Millions) Largest Age Cohort 4.6 Average Age First-Time Homebuyer

4.4

4.2 Average Age Repeat Homebuyer

4.0

3.8

3.6

3.4 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Age Cohort Source: U.S. Census Bureau, Population as of July 1, 2014 5

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

280

Forecast

260 240

10%

220 200

45%

180 160 140 120 100 80 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2013 2014 2015 2016 2017 7

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

For-Sale Home Inventory Has Been Low Since 2012 (Source: CoreLogic) Homes-For-Sale Inventory as a Percent of Households 4.0%

3.0%

2.0%

1.0% 1983

1987

1991

1995

1999

2003

2007

2011

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.

2015

San Diego (Source: Collateral Analytics)

Negative Equity Share in U.S.: 8.7 Percent of Mortgagors, or About 4.4 Million Homeowners Note: Blue is bad, red is good

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.

San Diego Foreclosures Short Sales Sharply Lower 12 Months Completed Foreclosures and Short Sales (Thousands) 20.5

21.0

20

17.9 15.5

15 11.1 10

4.2

5

3.0

0 2009

2010

2011

2012

2013

2014

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

Short Sales

Completed 2015 Foreclosures

San Diego (Source: Collateral Analytics)

San Diego (Source: Collateral Analytics)

San Diego (Source: Collateral Analytics)

San Diego (Source: Collateral Analytics)

San Diego (Source: Collateral Analytics)

Underwriting Remains Cautious Purchase Originations 2000-2001 (Blue) April 2015 (Red)

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

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? 450

Effective Tax Rate

400 350 300 250 200 150 100 50

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

2.00

1.90

1.80

1.70

1.60

1.50

1.40

1.30

1.20

1.10

1.00

0.90

0.80

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0

Effective Prop Tax Rates Versus Median Tenure in Neighborhood With Trend Line R2 = -.497

1.2 1.1 1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2

-

10

Years in Home

20

30

Turnover Rate %

105

Turnover Rate Since 2005 Versus Eff Property Tax Rate for San Diego Neighborhoods

85

65

45

25

5 0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

Eff Property Tax Rate

1.3

1.4

1.5

1.6

1.7

1.8

1.9

0% 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 2047 2050 2053 2056 2059 2062 2065

Present Value of Property Tax Savings as Percentage of Home Value

35%

30%

25%

20%

15%

10%

5%

Multifamily Trends from CoreLogic and CBRE

NO

Components of the U.S. Rental Stock 2015 Rental Stock

One-family 35%

Multi-family 42%

Manufactured Housing 5% 2- to 4-family 18% Source: U.S. Census Bureau, 2014 American Community Survey, Table 30 S2504

Change in Number of Single-Family Detached Rental Stock 2006 - 2013

Single-Family Detached Rental Stock Grew by Three Million in U.S., 2006–2013

Percent Change in Single-Family Detached Rental Stock 2006 - 2013 Source: U.S. Census Bureau, 50 largest metropolitan rental markets; size 31 of bubble represents the size of the single-family rental detached stock.

10

US Vacancy Rates Are Lowest on Single-Family Homes Rental Vacancy Rate (2015 Second Quarter) 8% 7% 6% 5% 4% 3% 2% 1% 0% One-family Detached One-family Attached 3-Bedroom 2-Bedroom

5- to 9-Unit

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

10-or-more Apartments

Single-Family Rent Growth Strong, Especially in West Rent Growth for 3-Bedroom Detached Houses, July 2014 to July 2015 12%

8%

4%

0%

-4% Rent

Atlanta

1082

Chicago

1659

Dallas

1386

Detroit

1038

Houston

Los Angeles

1328

2467

Miami

1812

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

New York

NA

Philadelphia

1215

Phoenix

1346

San Diego

2368

Seattle

2062

Washington DC

1792

11

San Diego Multifamily Market Snapshot (Source: CoreLogic) 3rd Quarter 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 GROWTH

4.8% (Annual)

Occupancy Rates (Source: CBRE)

97.00%

96.00% 95.60% 95.00%

95.30%

94.00% 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F

Rental Rates (Source: CBRE) 3.7% Average Forecasted Rent Growth 2017 – 2019

$2,200 $2,100 2010 – 2015 Growth

$2,000

Rent Index ($/Unit)

$1,900 $1,800

$1,848

$1,700 $1,600 $1,500 $1,400 $1,300 $1,200 2010

2011

2012

2013

2014

2015

2016F

2017F

2018F

2019F

2020F

7.5% 7.0% 6.5%

Selected Markets: Median Cap Rates on Detached 3 BR Homes 2015 (Source: CoreLogic)

6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0%

Dallas

Miami

Phoenix Chicago

LA

San Diego

S D Sales trends (>100 Unit Properties) (Source: CBRE)

2015 YTD 24 Sales $1,079,925,000 Sales Volume

33% Increase in Sales 36.4% Increase in Volume Over 2014

A

21% $349,616/Unit $329/SF

C

B 42% $210,844/Unit $232/SF

37% $164,817/Unit

*Percentage by number of sales

8,000

S D Multifamily Deliveries (2004-2018F) 7,384 6,928

7,000 6,000 5,311

5,000 4,000 3,364

3,000

Average Deliveries = 2,376 1,826

2,000

1,947

1,805

1,835

1,565 1,028

1,000

970 755

376

172

368

0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015F

2016F

2017F

2018F

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.