The Economic Outlook

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1 The Economic Outlook 5th Annual Meyers Research: Housing Market Outlook April 18, 2018 Robert A. Kleinhenz, Ph.D. Economist/Executive Director of Research LLC

2 Outline U.S. Economy State Economy So Cal/Local Outlook Local Real Estate Conclusion/Looking Ahead 2

3 Heard in the Headlines Tax Cuts Stimulus to Economy? Long Run Impact? US Labor Market Slowing Sign of Recession? Can US Grow Faster? Housing Affordability Crisis/Housing Shortage? 3

4 U.S. Economy 4

5 Vital Signs of the US Economy GDP Growth Rate Labor Market Conditions Inflation Rate 5

6 GDP 2017: 2.3% : 2.5 to 2.8% Gross Domestic Product YTY % Change Contribu)ons to Change in GDP Sector Consumer Investment Net exports Government Total GDP % Chg * * Does not add up due to rounding 6

7 Consumer Spending: Flywheel of Economy 8% 6% 4% 2% 0% -2% -4% -6% -8% Real Consumer Spending by Type (Y-o-Y Growth to January 2018) Services Goods Source: Federal Reserve Board of St. Louis 7

8 Real Disposable Personal Income Growth 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% -4% YTY % Change Source: Federal Reserve Board of St. Louis 8

) 6% 600 500 5% 400 300 4% 200 100 3% 2% 0 1990Q1 1993Q1 1996Q1 1999Q1

9 Lower Saving Rate, Growing Wealth 7% Consumer Savings Rate 700 Real Average Wealth per Household (FOF, Thous.) 6% % % % 2% Q1 1993Q1 1996Q1 1999Q1 2002Q1 2005Q1 2008Q1 2011Q1 2014Q1 2017Q1 Home Equity Other Net Wealth Source: Federal Reserve Board of St. Louis 9

10 Credit Card Use Accelerating, but 10% YTY % Change Outstanding Credit Card Balances 5% 0% -5% -10% -15% -20% Source: Federal Reserve Board of St. Louis 10

11 No Debt Overhang Household Financial Obligation Ratio 19% 18% 18% 17% 17% 16% 16% 15% 15% 14% Household Debt to Income Ratio Source: Federal Reserve Board of St. Louis 11

12 Business Spending Up 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Fixed Investment Structures Equipment Intellectual Property 12

13 International Trade Deficit: Pros/Cons $ Millions (Yr.=2009) 3,010 Ex-Goods Ex-Svcs Im-All 2,510 2,010 1,510 1, Deficit:

14 Tax Cuts and Spending Increases Mean Deficit (-) or Surplus (+) as % of GDP

15 Macro-Economy at a Glance Sector CONSUMERS BUS. INVESTMENT GOVERNMENT NET TRADE SUMMARY Outlook Steady solid growth Acceleration, energy drag over Flat/Up Slightly Imports & Exports up, Imports larger NET Negative Domestic Spending Up 15

16 Full Employment, Slower Job Growth Unemployment Rate Yr-To-Yr % Change in Jobs 18% % 14% 12% 10% 8% 6% % 2% 1.0 U-3 U Source: Federal Reserve Board of St. Louis 16

Plenty of Job Openings, Not Enough Workers 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% JOLT Job Openings Rate in % Sector Level (000s) Rates Feb-17 Feb-18 Feb-17 Feb-18 Total 5,618 6,052 3.7 3.

17 Plenty of Job Openings, Not Enough Workers 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% JOLT Job Openings Rate in % Sector Level (000s) Rates Feb-17 Feb-18 Feb-17 Feb-18 Total 5,618 6, Total private 5,118 5, Education & Health 1,228 1, Trade, Transportation & Util , Professional & Business Leisure and hospitality Government Manufacturing Financial activities Other services Construction Information Mining and logging Source: Bureau of Labor Statistics 17

18 Labor Force Growth Constrains Potential GDP Growth 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Labor Force Growth 67% 66% 65% 64% 63% 62% 61% 60% LF Participation Rate 18

19 Inflation Historically Low But Rising Kyser Center for Economic Research

20 Economic Policy 20

21 Fiscal Policy & Other Economic Issues Immigration: reforms enable economic growth International Trade: consumers or producers? Infrastructure: $4.5 trillion needed Health Care: spending reform, not insurance reform 21

22 Need Changes to US Health Care National Health Spending As a Share of GDP Per Capita Healthcare Spending 2015, PPP Adjusted 20% 18% 16% 2.1% / Decade 3.3% / Decade USA $9,402 France $5,428 Norway $7,832 Canada $5,421 14% 12% Switzerland $7,300 Belgium $5,340 10% 8% Sweden $6,285 Australia $4,873 6% 4% Netherlands $6,209 Finland $4,467 2% 0% Germany $6,204 Japan $4, Austria $6,143 UK $3,717 22

23 Monetary Policy Rock-bottom federal funds rate Adjusting to labor market, inflation, GDP Market rates less tied to FFR than in the past Yield curve dynamics FFR increases push up short end Balance sheet activities push up long end Liquidity keep long end market rates low 23

24 Financial Markets 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Fed Funds Rate 10 Year Yield 30 Year Mort Source: Federal Reserve Board of St. Louis 24

25 Yield Curve US Treasury Securities 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4/13/17 10/13/17 4/13/18 1 Mo 3 Mo 6 Mo 1 Yr 2 Yr 3 Yr 5 Yr 7 Yr 10 Yr 20 Yr 30 Yr Source: Federal Reserve Board of St. Louis 25

26 The Recent Panic 3.0% 10-Yr. Government Bond Yields 3,000 SP % 2, % 2, % 1, % Jan-15 Jan-16 Jan-17 Jan-18 1,000 Jan-15 Jan-16 Jan-17 Jan-18 Source: Organization for Economic Co-operation and Development 26

27 State Economy 27

28 CA & US at Full Employment CA & US at Full Employment Unemployment Rate, Seasonally Adjusted 16% 14% 12% 10% 8% 6% 4% 2% 0% CA: 4.3% US: 4.1% 4.3% Lowest on Record (1976+) Source: California Employment Development Department 28

Unemployment Rate (%, SA) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.

29 Unemployment Rate (%, SA) Unemployment Rates California Inland Empire Los Angeles Orange County Source: California Employment Development Department 29

30 Job Gains Across All CA Industries Industry Feb-18 (000s)Change (000s) % Change Total Nonfarm 17, % Health Care 2, % Construction % Leisure and Hospitality 1, % Prof Sci and Tech 1, % Logistics 2, % Government % Admin Support 1, % Retail Trade 1, % Education % Manufacturing 1, % Financial Activities % Wholesale Trade % Other Services % Information 533 (2) -0.4% Source: California Employment Development Department 30

31 CA Among Fastest Growing States 31

32 Gross Product Q3-17: YTY % Changes -- CA (2.3%) 32

33 Metro Areas Vary in % Job Gains Stockton MSA RV-SB Fresno MSA San Jose MSA Sacramento MSA Kern County Oakland MSA Sonoma County Orange County San Diego County San Francisco MD Ventura County LA County Year to Year % Chg. (Feb-18) 0% 1% 2% 3% 4% Source: California Employment Development Department 33

34 Largest Absolute Gains in So Cal MSA Feb-18 YTY Change Jobs (Seasonally Adjusted) LA County 61,000 RV-SB 49,600 San Jose MSA 31,100 Orange County 30,300 San Diego County 27,200 Oakland MSA 25,300 Sacramento MSA 25,100 San Francisco MD 19,900 Fresno MSA 10,600 Stockton-Lodi MSA 8,500 Kern County 5,600 Source: California Employment Development Department 34

The Big Slowdown 4% 3% 2% 1% 0% State and National Job Growth Loca)on 2017 14-15 15-16 16-17 Los Angeles MD 4,441,600 2.2% 2.6% 1.

1% Oakland MD 1,164,300 3.3% 3.3% 2.4% San Francisco MD 1,117,900 4.9% 4.0% 2.4% San Jose MSA 1,099,200 3.8% 3.1% 2.

35 The Big Slowdown 4% 3% 2% 1% 0% State and National Job Growth Loca)on Los Angeles MD 4,441, % 2.6% 1.3% Orange County 1,619, % 2.6% 2.2% Inland Empire 1,454, % 3.6% 3.8% San Diego MSA 1,454, % 2.7% 2.1% Oakland MD 1,164, % 3.3% 2.4% San Francisco MD 1,117, % 4.0% 2.4% San Jose MSA 1,099, % 3.1% 2.6% Sacramento MSA 970, % 3.4% 2.2% California United States Fresno MSA 345, % 3.5% 2.8% Ventura County 304, % 1.3% 1.3% Source: California Employment Development Department 35

36 Millions California Taxable Sales (+4.9% in 2017) $180 $160 $140 $120 $100 $80 $60 $40 $20 $0 Source: California Board of Equalization 36

37 Local Real Estate / Construction 37

38 CA Existing Home Sales & Median Price 700, , , , , , ,000 Sales (SAAR) Median Price 0 Jan-00 Aug-00 Mar-01 Oct-01 May-02 Dec-02 Jul-03 Feb-04 Sep-04 Apr-05 Nov-05 Jun-06 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Dec-09 Jul-10 Feb-11 Sep-11 Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Feb-18 Source: California Association of Realtors 38

39 So Cal Residential Outlook Price Change Sales Change Feb-17 Jan-18 Feb-18 MTM YTY YTY Los Angeles $470,200 $564,100 $527, % 12.1% -3.9% Orange $745,000 $780,000 $805, % 8.1% -1.0% Riverside $367,250 $397,250 $396, % 7.9% -0.8% San Bernardino $265,000 $277,000 $278, % 4.9% -2.0% San Diego $559,950 $590,000 $605, % 8.0% -3.9% Ventura $582,500 $660,720 $609, % 4.5% -7.1% Source: California Association of Realtors 39

40 Housing Affordability: % of HHs Affording Median Priced Home State/Region/County Q4-16 Q4-17 Los Angeles Orange County Riverside County San Bernardino County San Diego County Ventura California Source: California Association of Realtors 40

41 Apartment Rents Rising $2,000 $1,800 $1,600 $1,400 $1,200 $1,000 $800 Metro Rents County Wages Rents Share Ventura $57,789 $1,700 35% Los Angeles $63,236 $1,830 35% Santa Barbara $52,911 $1,526 35% Orange $63,849 $1,827 34% Riverside $45,219 $1,293 34% San Bernardino $45,762 $1,293 34% Inland Empire Orange County MD Los Angeles MD San Diego San Diego $60,887 $1,696 33% San Luis Obispo $44,816 $1,147 31% Source: REIS, QCEW 41

42 State Housing Construction 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Building Permits New Pop / Permits California 4.1 Tulare 4.0 Ventura 6.8 Los Angeles 4.0 Contra Costa 6.6 Fresno 4.0 Sonoma 6.1 San Mateo 3.4 Alameda 5.9 Kern 3.0 Santa Barbara 5.3 Santa Clara 3.0 San Bernardino 5.0 Orange 2.8 Solano 4.6 Placer 2.1 Single Family Multi Family Riverside 4.5 San Francisco 2.1 San Diego 4.2 Sacramento 0.7 Source: CIRB 42

43 Homeownership Rate Low. Future Course? 70 Homeownership Rate 65 Percentage California United States Source: Census Bureau 43

44 Housing in CA: New NOT Normal Signs of stress: Homeownership rate at lowest in decades Escalating rents Insufficient building despite growing demand Not just about affordable housing Needs at all income levels across owners as well as renters How to Address Chronic Housing Problems Less about making housing affordable to households Really about supply: Construction Aligning construction with actual needs 44

45 State Legislation May Trigger Changes SB35 On Feb 1, 2018 the state released the list of cities that are behind on their housing goals are thus required to streamline housing approvals under housing bill, SB 35. As it turns out, 97% of CA cities have not met their housing goals. 45

46 U.S. Outlook Continued US Growth: 2017: 2.3%, 2018: % Domestic Spending Will Continue Oil Prices: Steady in $50-65/barrel range Inflation: Low, But Rising Financial Markets: Rates Up, Volatility in Equities Policy Uncertainty 46

47 CA/Local Outlook Growth constrained by limited labor force growth Leading sectors: Construction, Consumer-serving Sectors, Tourism, Health Care, Def/Aero Housing shortages: owner-occupied and rentals Time to invest in future growth, long-run stability 47

48 Beacon s work in Housing Beacon Economics Founded in 2007,, an LLC and certified Small Business Enterprise (SBE) with the state of California, is an independent research and consulting firm dedicated to delivering accurate, insightful, and objectively-based economic analysis. Leveraging unique proprietary models, vast databases, and sophisticated data processing, the company specializes in services like industry analysis, workforce analysis, economic policy analysis, economic impact analysis, and real estate market analysis. equips its clients with both the data and insights required to understand the significance of on-the-ground realities and make informed business and policy decisions based on them. Sample Clients: Building Industry Association of Southern California, Inc. California Apartment Association Armbruster Goldsmith & Delvac LLP Long Beach Downtown Development Corporation 48

49 Land Use and Housing Needs works with clients to provide in-depth analysis of real estate market conditions across commercial and residential sectors in order to provide an impartial and informed empirical framework for clients and public sector decision makers. Sample indicators and topics: Financial & Development Feasibility Inclusionary Housing Policies Housing Affordability Analysis Pro Forma Analysis Multi-Family Forecasting Land Use Element Analysis Fee Impact Analysis Market Reports Commercial Real Estate Trends Housing Needs Forecasts recent project experience illustrates the breadth and broad analytic scope of the work we do for real estate industry clients and in the areas of housing policy and real estate development. 49

The US and California Economic Outlook

Regional Economic Forum April 25, 2018 The US and California Economic Outlook Robert A. Kleinhenz, Ph.D. Economist/Executive Director of Research LLC Outline U.S. Economy State & Region Conclusion/Looking