Scott SambucciCOO, Altos Research

Housing Market Musings SJREI | 02/01/2012

THE CONSTANT GROWTH MYTH

Capita per inventoryThe other way to think about

housing affordability

Capita Per Inventory: National Picture

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100

200

300

400

500

600

Capita Per Inventory

- 50 100 150 200 250 300 350 400 450 500 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Altos Research "Capita per Inventory" vs. Active Market Prices

Median Price Linear (Median Price)

Stamford, CT

McAllen, TX

Metropolitan Area Capita per Inventory

Wells Fargo HOI Rank

2011 Median Family Income

'(000s) Median Price Change

Pop '00 to '10Unemployment Rate:

Sept '11 BLS

Honolulu, HI 530 223 $ 81.6 $ 755,000 8.8% 5.7%

San Francisco-Oakland-Fremont MSA 456 224 $ 101.6 $ 675,000 5.1% 9.2%

San Jose-Sunnyvale-Santa Clara, CA 408 217 $ 103.6 $ 701,000 5.8% 9.6%

Mc Allen-Edinburg-Mission, TX 378 214 $ 33.7 $ 158,000 36.1% 12.3%

Los Angeles-Long Beach-Glendale, CA ^^^ 333 220 $ 64.0 $ 595,000 3.8% 11.3%

San Diego-Carlsbad-San Marcos, CA 288 213 $ 74.9 $ 600,000 10.0% 9.7%

Santa Barbara-Santa Maria-Goleta, CA 287 212 $ 72.3 $ 1,000,000 6.2% 8.6%

New York-New- Jersey MSA 245 225 $ 67.4 $ 535,000 3.1% 8.3%

Santa Cruz-Watsonville, CA 235 219 $ 85.8 $ 561,000 2.7% 10.1%

San Luis Obispo-Paso Robles, CA 229 218 $ 74.4 $ 530,000 9.3% 9.3%

Greensboro-High Point, NC 223 151 $ 54.6 $ 172,000 12.49% 10.4%

Lakeland-Winter Haven, FL 219 9 $ 53.8 $ 139,000 24.4% 12.0%

Springfield, IL 214 31 $ 69.1 $ 153,000 4.3% 7.4%

Harrisburg-Carlisle, PA 198 32 $ 72.5 $ 176,000 7.9% 7.0%

Flint, MI 189 11 $ 57.7 $ 89,000 -2.4% 10.6%

Lansing-East Lansing, MI 186 6 $ 67.8 $ 128,000 3.6% 7.7%

Houston-Sugar Land-Baytown, TX 184 181 $ 66.0 $ 316,000 26.11% 8.6%

Burlington-South Burlington, VT 184 165 $ 75.7 $ 328,000 6.22% 4.2%

Sacramento--Arden-Arcade--Roseville, CA 179 110 $ 75.1 $ 248,000 19.9% 11.5%

Youngstown-Warren-Boardman, OH-PA 173 18 $ 54.9 $ 95,000 -6.2% 8.9%

Virginia Beach-Norfolk-Newport News, VA-NC 171 120 $ 69.9 $ 269,000 6.05% 7.3%

Austin-Round Rock-San Marcos, TX 167 159 $ 74.9 $ 286,000 37.3% 7.4%

Carson City, NV 158 6 $ 68.3 $ 202,000 5.4% 12.4%

Memphis, TN-MS-AR 158 148 $ 58.3 $ 170,000 9.20% 10.5%

Dayton, OH 157 22 $ 62.4 $ 109,000 -0.8% 9.2%

Rockford, IL 152 10 $ 63.4 $ 113,000 9.1% 13.4%

Charlotte-Gastonia-Rock Hill, NC-SC 150 183 $ 67.5 $ 213,000 32.14% 10.7%

Ogden-Clearfield, UT 148 21 $ 70.6 $ 206,000 23.6% 6.9%Indianapolis-Carmel, IN 142 18 $ 66.0 $ 159,000 15.2% 8.1%Toledo, OH 142 16 $ 61.7 $ 130,000 -1.2% 9.2%Canton-Massillon, OH 141 13 $ 58.1 $ 98,000 -0.6% 9.0%Columbia, SC 137 153 $ 63.6 $ 172,000 18.61% 9.2%Bridgeport-Stamford-Norwalk, CT 135 216 $ 105.3 $ 931,000 3.9% 7.9%Ocala, FL 92 17 $ 49.9 $ 163,000 28.0% 12.4%Portland-Vancouver-Hillsboro, OR-WA 46 170 $ 72.0 $ 299,000 5.44% 8.4%

So what?

Wells Fargo HOI Rank

2011 Median Family Income '(000s)

Median Price

Change Pop '00 to

'10

Unemployment Rate: Sept

'11 BLS

CORREL Capita per Inventory 53.8% 31.2% 56.7% -4.6% -6.6%

CORREL Wells Fargo

HOI Rank 44.5% 75.7% 13.8% -14.2%

10/7/20110

200

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1000

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1400

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PALO ALTO SAN MATEO LOS ALTOS DUBLINOAKLAND SAN JOSE SACRAMENTO BAKERSFIELD

Capita per Inventory: Bay Area cities

Homeownership Rates & The Rental Market

What does this mean for investors?

Gen Y home ownership: A dream deferred?

http://www.cbsnews.com/8301-505143_162-57324851/gen-y-home-ownership-a-dream-deferred/

Millennials not looking for McMansions (unless they have to move back in with the parents)

http://grist.org/cities/2011-01-14-millennials-not-looking-for-mcmansions-unless-they-have-to-live/

Total Households Native Naturalized US Citizen Non-US Citizens0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Owner occupied Renter occupied

Several factors other than demographic changes may explain the broad-based increases in homeownership rates. Unfortunately, however, there is little research available to quantify their effects; therefore, the ideas in this section are more speculative than the demographic analysis. With that said, it seems plausible that one of the more important factors explaining the broad-based increase in homeownership from 1994 to 2004 could be the myriad of innovations in the mortgage finance industry that occurred during that time…

Several innovations helped propel the rise of the subprime market during the 1990s and into the 2000s. Although definitions of subprime mortgages vary, in essence they are loans given to households with lower credit quality, and they entail higher than average interest rates.

FRBSF Economic Letter - November 3, 2006“The Rise in Homeownership”

http://www.frbsf.org/publications/economics/letter/2006/el2006-30.html

Homeownership Rates: Bubble Markets

Are REOs really a good deal?

What does this mean for investors?

The Foreclosure Discount: Myth or Reality?John P. Harding (University of Connecticut, Center for

Real Estate and Urban Economic Studies), Eric Rosenblatt (Fannie Mae), Vincent W. Yao

“Using a large sample of REO purchases, we identify a control sample of non-distressed property purchases that closely match the REOs in terms of property characteristics, location and time of sale and find that with the exception of a small number of extraordinary returns from short-term investing in REOs, typical REO buyers earn approximately 1.4%/year above the return from price appreciation associated with the purchase of a non-distressed property and that the original price discount needed to generate that excess return is less than typical transaction costs.”

Uncle Sam’s Policies

Do they work?

Programs. Lots of ProgramsREO Rental Initiative (Freddie Mac)National Real Estate Owned (REO) Rental Policy (Fannie Mae)Deed-for-Lease (Fannie Mae)Department of Housing & Urban Development Neighborhood Stabilization Program REO-to-Rental (US Federal Reserve)Federal Housing Finance Agency REO InitiativeUS ElectionHAMP, HARP, HARP II, HAFATax Credit

http://www.fhfa.gov/webfiles/23196/REO2112F.pdf

Scott Sambuccie: scott@altosresearch.comp: (415) 931 7942t: @scottsambucci