california's existing housing prices have fallen nearly 30 ...€¦ · consumer sentiment...

Polling Question 1:

California's existing housing prices havefallen nearly 30 percent over the past 12months. What will happen to California’shome prices over the next 12 months?

1. They will increase

2. They will remain flat

3. Decrease another 5 percent

4. Decrease another 10 percent

5. Decrease by 15 percent or more

Polling Question 2:

Which factor will have the most significantimpact on California’s home prices?

1. Availability of mortgage credit

2. Job losses

3. Foreclosure inventory

4. The Troubled Asset Relief Program (TARP)

Consumer Sentiment Index University of Michigan

Sources: Federal Reserve Bank of St. Louis, University of Michigan, Reuters.

080604020098969492908886848280

120

100

80

60

40

Index (1966 Q1= 100)

Retail sales Excluding motor vehicle and parts dealers, United States

Sources: Moody’s Economy.com, U.S. Census Bureau.

0807060504030201009998

12

10

8

6

4

2

0

Percent change from preceding year

Industrial Production Index United States

Sources: Global Insight, Federal Reserve Board.

0807060504030201009998

15

10

5

0

-5

-10


Consumer Price Index United States

Sources: Global Insight, Bureau of Labor Statistics.

0807060504030201009998

6.0

5.0

4.0

3.0

2.0

1.0

0.0


All items

Less foodand energy

Oil prices West Texas Intermediate Crude

Sources: Global Insight, Wall Street Journal.

080706050403020100

160

140

120

100

80

60

40

20

0

US$/bbl

0807060504030201009998

30

20

10

0

-10

-20

-30


Gross private domestic investment Fixed investment, United States

Sources: Global Insight, Bureau of Economic Analysis.

Residential

Non-residential

Exports of goods and services United States

Sources: Global Insight, U.S. Census Bureau.

0807060504030201009998

30

20

10

0

-10

-20


Real personal consumption expenditures United States

Sources: Global Insight, Bureau of Economic Analysis.

0807060504030201009998

6

5

4

3

2

1

0


200820072006200520042003

400

300

200

100

0

Basis points

TED spread Difference between 3-month LIBOR and 3-month Treasury bill rate

Sources: Moody's Economy.com, British Bankers' Association, Federal Reserve Board.

*spread as of Oct. 24, 2008

Initial unemployment insurance claims United States

Sources: Global Insight, Bureau of Labor Statistics.

0807060504030201009998

550

500

450

400

350

300

250

200

Thousands of claims

Mortgage spread 30-year mortgage rate minus 10-year constant maturity securities

Sources: Moody's Economy.com, Federal Reserve Board, Freddie Mac.

0807060504030201009998

2.6

2.4

2.2

2.0

1.8

1.6

1.4

1.2

Percentage points

200820072006200520042003

30

20

10

0

-10

-20

-30

-40


Construction put-in-place United States

Sources: Moody's Economy.com, U.S. Census Bureau.

Non-residential

Residential

0807060504030201009998

4

3

2

1

0

-1

-2

-3


Non-farm employment California vs. United States

Sources: Bureau of Labor Statistics, Global Insight.

U.S.

California

0807060504030201009998

20

15

10

5

0

-5

-10

-15


Employment by industry California


Construction

Non-farm

Financialactivities

0807060504030201009998

15

10

5

0

-5

-10


Housing-related industries Employment, California


Buildingmaterials

Furniturestores

Real estateagents/brokers

Inventory and months supply of homes United States

Sources: Moody's Economy.com, National Association of Realtors.

Months supply of homes on market (R)

Number of homesavailable for sale (L)

0807060504030201009998

4.0

3.5

3.0

2.5

2.0

1.5

1.0

11

10

9

8

7

6

5

4

3

Millions of homes available Number of months

Months supply of homes California

Sources: Moody's Economy.com, California Association of Realtors.

0807060504030201009998

20

15

10

5

0

Number of months

0807060504030201009998

30

20

10

0

-10

-20

-30

-40


Median sales price, existing single-family home California vs. United States

Sources: Moody’s Economy.com, National Association of Realtors.

California

U.S.

0807060504030201009998

30

20

10

0

-10

-20


Median, new single-family home sales price California vs. United States

Sources: Moody's Economy.com, U.S. Census Bureau.

California

U.S.

0807060504030201009998

30

20

10

0

-10

-20

-30

-40


Existing single-family home sales California vs. United States

Sources: Moody’s Economy.com, National Association of Realtors, MDA Data Quick.

California

U.S.

Note: 3Q 2008 estimate for California is based onpreliminary information from DataQuick.

0807060504030201009998

30

20

10

0

-10

-20

-30

-40

-50


Housing starts Single-family, United States


Housing starts California


080604020098969492908886848280

350

300

250

200

150

100

50

150

100

50

0

-50

-100

Thousands of units Percent change from preceding year

Level (L)

% change (R)

0807060504030201009998

60

40

20

0

-20

-40

-60


Valuation of permits* California

Sources: Moody's Economy.com, Construction Industry Research Board.

Residential

Non-residential

* Three-month moving average applied

0807060504030201009998

16

14

12

10

8

6

4

2

0

Thousands of units

Residential permits* California


Multifamily

Single-family

* Three month moving average applied

S&P/Case-Shiller Home Price Index Aggregate index for single-family homes

Sources: Moody's Economy.com, Standard & Poor's, Fiserv, MacroMarkets.

20-city composite

U.S.

200820072006200520042003200220012000

220

200

180

160

140

120

100

80

Index (Jan. 2000 = 100)

Median price, existing single-family homes California


0807060504030201009998

500

450

400

350

300

250

200

150

30

20

10

0

-10

-20

-30

-40

US$ thousands Percent change from preceding year

Level (L)

% change (R)

Median price, existing single-family homes Metros with fastest declining prices, 2007 Q2–2008 Q2


2007 Q2 2008 Q2

Rank Metropolitan area

1 Salinas, CA 709 401 -43.4

2 Merced, CA 315 191 -39.2

3 Stockton, CA 390 247 -36.6

4 Sacramento-Arden-Arcade-Roseville, CA 352 226 -35.6

5 Modesto, CA 242 160 -33.7

6 Cape Coral-Fort Myers, FL 257 172 -33.1

7 Vallejo-Fairfield, CA 520 349 -32.9

8 Riverside-San Bernardino-Ontario, CA 392 264 -32.6

9 Santa Cruz-Watsonville, CA 818 556 -32.0

10 Port St. Lucie, FL 235 162 -31.3

US$ thousands

One-year

percent change

Median price, existing single-family homes Metros with fastest declining prices, 2003 Q2–2008 Q2


2003 Q2 2008 Q2

Rank Metropolitan area

1 Detroit-Warren-Livonia, MI 165 130 -21.3

2 Lansing-East Lansing, MI 134 106 -21.0

3 Davenport-Moline-Rock Island, IA-IL 104 84 -19.0

4 Saginaw-Saginaw Township North, MI 99 81 -19.0

5 Youngstown-Warren-Boardman, OH-PA 90 74 -18.1

6 Greeley, CO 159 132 -16.7

7 Cleveland-Elyria-Mentor, OH 134 112 -16.1

8 Grand Rapids-Wyoming, MI 129 111 -13.9

9 Burlington, NC 131 113 -13.8

10 Canton-Massillon, OH 114 99 -13.1

US$ thousands

Five-year

percent change

One year ago… Five years ago…

If you bought your house…

% change in price, June 07-08 % change in price, June 03-08

Sources: S&P/Case-Shiller, Milken Institute.

< 20%

>= 20% and < 35%

>= 35% and < 50%

>= 50% Sources: Zillow.com, Milken Institute.

United States = 44.8%

Percentage of homes purchased since 2006that now have negative equity

< 1%

>= 1% and < 25%

>= 25% and < 40%

>= 40%Sources: Zillow.com, Milken Institute.

Percentage of homes sold that were in foreclosure(Q2 2008)

United States = 18.6%

Delinquency rates All loans

Sources: Moody's Economy.com, Mortgage Bankers Association.

0807060504030201009998

80

60

40

20

0

-20

-40


California

U.S.

Delinquency rates of subprime loans Percent change, 2006 Q2-2008 Q2

Least delinquent (-12.9% - 32.8%)Second tier (32.9% - 48.3%)Third tier (48.4% - 77.5%)Most delinquent (77.6% - 192.2%)


Foreclosure rates* All loans


0807060504030201009998

2.0

1.5

1.0

0.5

0.0

Percent

* Started during quarterCalifornia

U.S.

0807060504030201009998

2.5

2.0

1.5

1.0

0.5

0.0

Percent

Foreclosure rates* on prime loans ARM loans



U.S.

0807060504030201009998

10

8

6

4

2

0

Percent

Foreclosure rates* on subprime loans ARM loans



U.S.

0807060504030201009998

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Percent

Foreclosure rates* on subprime loans Fixed-rate loans


* Started during quarter

California

U.S.

0807060504030201009998

14

12

10

8

6

4

2

0

Ratio

Ratio of subprime to prime loans in foreclosure* ARM vs. fixed-rate loans


* Started during quarter

Fixed-rateloans

ARM loans

California’s share of foreclosures As percent of U.S. total


08070605040302010099989796959493929190

30

25

20

15

10

5

0

Percent

Mortgage originations for purchases Level

Sources: Moody's Economy.com, HUD, HMDA, Federal Reserve Board.

0807060504030201009998

400

350

300

250

200

150

100

50

1800

1600

1400

1200

1000

800

600

400

US$ billions US$ billions

California (L)

U.S. (R)

Home equity and construction loans Change in value of originations, United States

Sources: Moody's Economy.com, Federal Reserve Board.

Home equity

Construction

0807060504030201009998

40

30

20

10

0

-10


200820072006200520042003200220012000

9.0

8.0

7.0

6.0

5.0

4.0

3.0

2.0

Percent

Effective interest rates Fixed vs. ARM


30-year fixed

1-yr ARM

200820072006200520042003200220012000

40

30

20

10

0

Percent

ARM share of loans United States


ARMs more common among subprime borrowers California

Sources: Moody’s Economy.com, Mortgage Bankers Association.

0807060504030201009998

70

60

50

40

30

20

10

Percent

Prime ARMSubprime ARM

Regional share of non-jumbo loans purchased byenterprises in first half of 2007 and jumbo mortgageoriginations that were later securitized

Sources: OFHEO, Fannie Mae, Freddie Mac, First American Loan Performance.

JumboConforming

70

60

50

40

30

20

10

0

Percent

CA, 49.2%

CA, 14.4%

FL, 6.7%

FL, 8.1%

IL

WA

TX

WA

VA

NY

Mortgage model switches from originate-to-hold tooriginate-to-distribute

Sources: Federal Reserve, Milken Institute.

Securitized,

15.6%

Held in

portfolio,

84.4%

Securitized,

59%

Held in

portfolio,

41%

Residential mortgage loans1980: Total = $958 billion

Residential mortgage loansQ2 2008: Total = $11.8 trillion

The rise and fall of private-label securitizers


Private-label

Fannie Mae

1985total = $110b

2001total = $1.3t

2006total = $2.0t

1st half 2008total = $734b

Freddie Mac

Ginnie Mae

New securities issuance

33%35%

20%42% 13%21%

2%15%

46%

18%

56%

22%29%38%

4%6%

The rise and fall of private-label securitizers


Private-label

1985total = $110 B

2001total = $1.3 T

2006total = $2.0 T

1st half 2008total = $734 B

New securities issuance

Fannie Mae, Freddie Mac, Ginnie Mae

2%

98%

20%

80%

56%

44%

6%

94%

Tightened standards for real estate loansNet percentage of domestic respondents tightening standards

for commercial real estate loans


-40

-20

0

20

40

60

80

100

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

LTCMDotcom

The end of S&L crisis

Subprime

Sources: Freddie Mac, Federal Reserve, Moody’s Economy.com, Milken Institute.

Spread (right axis)

Federal Reserve cuts Fed funds rate, but mortgagerates remain relatively flat

Most new securities issued in 2007

were rated AAA by S&P

56.0%6,31011,261Total

87.5%78B(+/-)

86.6%683789BB(+/-)

76.1%2,2482,954BBB(+/-)

63.2%1,8862,983A(+/-)

38.1%1,3303,495AA(+/-)

15.1%1561,032AAA

Downgraded/

Total

DowngradedTotalS&P

56 percent of MBS

issued from 2005 to 2007

were eventually downgraded

Sources: Bloomberg, Inside Mortgage Finance, Milken Institute.

Note: A bond is considered investment grade if its credit rating is BBB- or

higher by S&P.

Driving foreclosures:

Strong appreciation or weak economies?

Sources: U.S. Treasury Department, RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.

After housing bubble burst in 2007: Foreclosures

highest for areas with biggest price declines

Sources: RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.

Sources: Wall Street Journal, Fitch Ratings, Loan Performance.

0807060504030201009998

40

30

20

10

0

Percent

Securitized mortgages California share of U.S. total

*data through August

*

0807060504030201009998

70

60

50

40

30

20

10

0

400

300

200

100

0

-100

US$ billions Percent change from preceding year

Cash-out refinancing United States

Sources: Moody's Economy.com, Federal Reserve Board.

Value (L)

Change (R)

Valuation of multifamily permits California


200820072006200520042003

80

60

40

20

0

-20

-40


0807060504030201009998

400

350

300

250

200

150

100

50

US$ millions

Valuation of nonresidential permits California


Commercialbuildings

Industrialbuildings

0807060504030201009998

16

14

12

10

8

6

4

2

0


Commercial Real Estate Index All sectors, United States

Sources: Moody's Economy.com, S&P, GRA/Charles Schwab Investment Management.

Commercial Real Estate Index - Apartments United States


200820072006200520042003

20

15

10

5

0

-5


Commercial Real Estate Index By sector, United States


080706050403

20

15

10

5

0

-5


RetailOfficeWarehouse

Commercial delinquency rates United States

Sources: Moody's Economy.com, American Council of Life Insurers.

0807060504030201009998

1.0

0.8

0.6

0.4

0.2

0.0


0807060504030201009998

25

20

15

10

5

0

Percent

Office vacancy rates Comprising metro, downtown and suburban average

Sources: Moody's Economy.com, CB Commercial.

Los Angeles

San Francisco

San Jose

0807060504030201009998

20

15

10

5

0

Percent

Industrial vacancy rates By selected metro

Sources: Moody's Economy.com, CB Commercial.

Los Angeles

Sacramento

San Francisco

Real gross domestic product growth

1990 Q1–2010 Q4*

Sources: Bureau of Economic Analysis, Global Insight, Milken Institute projections.

1008060402009896949290

8

6

4

2

0

-2

-4

Compound annual growth rate

*Forecast

Exports of goods and services

2005 Q1–2010 Q4*

Sources: Bureau of Economic Analysis, Global Insight, Milken Institute projections.

201020092008200720062005

25

20

15

10

5

0


*Forecast

Real gross domestic product growth

By region, 2005 Q1–2010 Q4*

Sources: Bureau of Economic Analysis, Global Insight, Moody’s Economy.com, Milken Institute projections.

201020092008200720062005

5

4

3

2

1

0

-1

-2

-3


*Forecast

Los AngelesCaliforniaUnited States

Sources: Bureau of Labor Statistics, Global Insight, California Employment Development Department, Milken Institute projections.

201020092008200720062005

3.0

2.0

1.0

0.0

-1.0

-2.0

-3.0


*Forecast


Employment growth

By region, 2005 Q1–2010 Q4*

Unemployment rate

By region, 2005 Q1–2010 Q4*

Sources: Bureau of Labor Statistics, Global Insight, California Employment Development Department, Milken Institute projections.

201020092008200720062005

10.0

9.0

8.0

7.0

6.0

5.0

4.0

Percent

*Forecast


Industry Response HOPE NOW Alliance

Sources: HOPE NOW Alliance; www.HOPENow.com

Since July 2007, the HOPE NOW Alliance, a voluntary coalition of thenation’s leading lenders and servicers, has saved nearly 2.3 millionhomeowners from foreclosure.

About 17 percent of homeowners receiving the HOPE NOW-coordinated letters have contacted their servicer, six times the

routine 2-3 percent response rate servicers receive when sendingtheir own letters.

HOPE NOW California loan modifications

Source: HOPE NOW Alliance; www.HOPENow.com

SubprimePrime

20

15

10

5

0

Thousands

Q3 2007 Q4 2007Q1 2008Q2 2008

28

26

24

22

20

18

16

Thousands

Industry response California workouts closed

Source: California Department of Corporations survey of mortgage servicers.

Jan. 08 Feb. 08 Mar. 08 Apr. 08 May 08 June 08 July 08

Impaired transaction markets

0

10

20

30

40

50

60

2004 2005 2006 2007 2008

Summer, 2007

Credit Crunch

Intensifies

Commercial real estate transaction volumeMonthly, 3-month MA

$, BN

10

15

20

25

30

35

40

2004 2005 2006 2007 2008

Down 42% from peak

Average transaction size

Monthly, 3-month MA

$, MM

Recent change in transaction volume

Through April 2008 vs. 2007

%

(78)(73)(77)

(56)(46)

(100)

(75)

(50)

(25)

0

Apart

ment

Industr

ial

Offi

ce

Reta

il

Hote

l

Sources: Real Capital Analytics data through August, MS Estimates.

60

51

37

40

45

0

10

20

30

40

50

60

70

2008 2009 2010 2011 2012

Commercial real estate loan maturities

($Bn)

Source: Moody’s Structured Finance research as of February 25,2008; based on initial maturity.

CMBS Issuance and Maturity

78

93

169

203

229

25

52

67

47

57

74

37

0

50

100

150

200

250

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008E

Annual U.S. CMBS Issuance Volume

($Bn)

Source: Morgan Stanley Research as of 2Q 2008.

Transaction activity by buyer type

Transaction volume by buyer type

281

328

439

40

2005 2006 2007 2008, YTD

Other International

Fund Private buyerInstitutional

REIT

Transaction share by buyer type

7 7 512

159 11

9

8

7 86

1925 22 21

8 1323

10

4339

31

42

2005 2006 2007 2008, YTD

Other International

Fund Private buyerInstitutional

REIT

Source: Real Capital Analytics, MS Estimates.

$BN Share,%

0

500

1,000

1,500

2,000

2,500

Dec-97 Dec-03 May-07 Jan-08 Oct-08

AAA AA A BBB

CMBS spreads at record wide levels

1998 - 2006 2007 - Present

BBB:

2500 bps

AAA: 550 bps

A:1600 bps

AA:1200 bps

CMBS fixed rate spreads

Spread over swaps

Source: Morgan Stanley Fixed Income Research, through October 15, 2008.

1.AAA refers to the Super Senior AAA 10 year class (approximately 30% initial credit enhancement).

(1)

Real estate debt financing: Limited and expensive

0

20

40

60

80

100

Apr-07 Oct-08

Representative capital stack1

Based upon a recent transaction (%)

Source: Morgan Stanley

Senior mortgage 65%

1st mezz: 10%

2nd mezz: 10%

Bridge: 5%

Equity: 10%

1st mezz: 10%

2nd mezz: 10%

Equity: 25%L + 350 = 8.82

L + 200 = 7.32

L + 125 = 6.57

L + 90 = 6.22

L + 1100 = 14.75

L + 800 = 11.75

L + 400 = 7.75Senior mortgage 55%

Weighted Avg. Spread:LTV:

L + 121 = 6.5385%

L + 547 = 9.2275%

1.Assumes 30 day LIBOR, 5.32% as of April 2007 and 3.75% as of 20 October 2008.

80

100

120

140

160

180

Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Sep-08 Oct-08

(30)

(20)

(10)

0

10

20

U.S. market valuations

Source: Green Street Advisors, as of October 2, 2008.

Real estate universe net asset value vs. stock prices (1)

Indexed since January 2005 (%)

NAV Price Premium / (Discount) to NAV

1.Includes Apartment, industrial, mall, office and strip center REITs in the Green Street coverage universe.

RetailNAV Premium / (Discount)

(80)%

(60)%

(40)%

(20)%

0%

20%

40%

30% 40% 50% 60% 70% 80% 90% 100%

Debt + Preferred / Total Market Cap

R2 = 0.8145

OfficeNAV Premium / (Discount)

(80)%

(60)%

(40)%

(20)%

0%

20%

40%

30% 40% 50% 60% 70% 80% 90% 100%

Highly leveraged REITs priced at steep discounts

1.As of September 26, 2008; market leverage defined as total debt + preferred / total market capitalization; NAV per Green Street Advisors “WeeklyPricing Update”

Market leverage vs. Premium / (Discount) to NAV


BXPBPO

OFC

DEI

KRC

MPG

SLG

VNO

WRE

BDN

CUZ

DREHIW

LRY

CLI

R2 = 0.6392

IndustrialsNAV Premium / (Discount)

(40)%

(20)%

0%

20%

40%

30% 40% 50% 60% 70% 80%


R2 = 0.9076

ApartmentsNAV Premium / (Discount)

(40)%

(20)%

0%

20%

40%

30% 40% 50% 60% 70% 80%

Sources: Green Street Advisors, FactSet, SNL.


R2 = 0.2241

WRI

REG

KIM

EQYDDR

TCO

SPG

PEI

GRT

GGP

CBL

UDR

PPS

MAA

HME

ESSEQR

CPTBREAVB

AEC

AIV AMB

DCT

FR

PLDDRE

(1)

california's existing housing prices have fallen nearly 30 ...€¦ · consumer sentiment...

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