Quarterly Report

Q2- Los Angeles County

Is The Market FALLING?

Capital Redevelopment Group LLC | Coganomics | Volume 42 July 2011

Los Angeles-Long Beach-Santa Ana Area Local Market Report, Second Quarter 2011

Today's Market
Median Price (Red Line) and One-year Price Growth
$700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0
2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2

40% 30% 20% 10% 0% -10% -20% -30% -40%

Los Angeles
Price Activity Current Median Home Price (2011 Q2)
1-year (4-quarter) Appreciation (2011 Q2) 3-year (12-quarter) Appreciation (2011 Q2) 3-year (12-quarter) Housing Equity Gain* 7-year (28 quarters) Housing Equity Gain* 9-year (36 quarters) Housing Equity Gain* *Note: Equity gain reflects price appreciation only

U.S.
$171,567 -2.9% -17.5% -$36,500 -$22,400 $7,733 $729,250 $417,000

Local Trend
Prices are still down from a year ago, but the trend is improving The relatively recent correction in local home prices wiped out most of the equity gained over the last 7 years

$292,300 -4.3% -30.2% -$126,600 -$146,100 $12,700 $729,250 $729,750 40%

Conforming Loan Limit** FHA Loan Limit

Most buyers in this market have access to government-backed financing

Local Median to Conforming Limit Ratio not comparable **Note: the 2009 loan limits for FHA and the GSEs were extended through 2010.

1,000s 700 600 500 400 300 200 100 0

State Home Sales (Red Line) and Sales Growth

100% 80% 60% 40% 20% 0% -20% -40%

2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006 Q4 2007 Q4 2008 Q4 2009 Q4 2010 Q4 2011 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2 Q2

Home Sales State Existing Home Sales (2011 Q2 vs 2010 Q2)

California -8.3%

U.S.
-12.7% Local sales growth continues to be weak

Drivers of Local Supply and Demand

Local Economic Outlook 12-month Job Change (Jun) 12-month Job Change (May) 36-month Job Change (Jun) Current Unemployment Rate (Jun) Year-ago Unemployment Rate 1-year (12 month) Job Growth Rate

Los Angeles -11,300 -7,200 -451,800 11.6% 11.7% -0.2%

U.S.
Not Comparable Not Comparable Not Comparable 9.2% 9.5% 0.5% Emplyoment continues to decline and will weigh on demand in some areas Los Angeles's unemployment rate lags the national average, but has improved relative to the same period last year Local employment growth is poor and needs to improve

Share of Total Employment by Industry

Los Angeles-Long Beach-Santa Ana Area #N/A Natural Constructio n Governmen Resources 4.5 Natural Resour 0.1% and Mining 3.3% t Manufacturi Construction14.2% 3.3% 0.1% 170.6 ng 10.2% Other Manufacturing 10.2% 526.7 Services Trade/Transpo 18.8% 969.5 3.4% #N/A #N/A

U.S.
Resources Natural 0.6% Mining and 0.6% Constru 0.6% Governmen t Other Manufac9.0% Services15.9% Trade/T 19.1% 4.2% Leisure & Informa2.1% Hospitality Financi 5.9% 10.6%

#N/ANatural

Constructio n 0.6% Manufacturi ng 9.0%

Information

Leisure & Hospitality Financial Act 11.1%

4.5% 6.0% 15.0% 13.3%

230.7 310.1
772.1 684.3

Prof. & Busin Educ. & Heal

Trade/Tran sportation/U tilities 18.8%

Trade/Tran sportation/ Utilities 19.1%

Profess13.2% Educat 15.0%

573.8 Health Services 3.4% Other Service 176.7 Prof. & 13.3% Government 14.2% Business 729.3 Services #N/A #N/A 15.0% #N/A #N/A

Educ. Leisure & Ho & 11.1%

Financial Activities 6.0% 96.6%

Information 4.5%

Leisure10.6% Educational
& Health Other S4.2% Services 15.0% Govern15.9% Profession

Information Financial 2.1% Activities 5.9%

#N/A al &
Business Services 13.2%

#N/A #N/A #N/A #N/A

NA NA -200 -3,300 -1,900 NA -12,800 Information Financial Activities

12-month Employment Change by Industry in the Los Angeles-Long Beach-Santa Ana Area (Jun - 2011) Goods Producing Natural Resources/Mining/Construction Natural Resources and Mining Construction Manufacturing Service Providing Excluding Government Trade/Transportation/Utilities 15,600 -3,200 500 9,900 12,000 -4,400 -23,500

Prof. & Business Services Educ. & Health Services Leisure & Hospitality Other Services Government

State Economic Activity Index 12-month change (2011 - Jun) 36-month change (2011 - Jun)

California 2.5% -3.4%

U.S.
2.2% -4.3% California's economy is stronger than the nation's, but slowed from last month's 2.52% change

New Housing Construction

Local Fundamentals 12-month Sum of 1-unit Building Permits through Jun 2011

Los Angeles 4,367

U.S.
not comparable

The current level of construction is 51.3% below the long-term average

8-year average for 12-month Sum of 1-Unit Building Permits

8,973

Reduced construction will limit new supply to the market, allowing demand not comparable to catch up with the inventory more quickly -14.5% Construction is on the rise relative to last year, suggesting that the local inventory has stabilized

Single-Family Housing Permits (Jun 2011) 12-month sum vs. a year ago

21.0%

Construction: 12-month Sum of Local Housing Permits

(Historical Average Shown in Red Dashed Line)

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0

While new construction is the traditional driver of supply in real estate, foreclosures now have a strong impact on inventories, particularly at the local level. Rising inventories, through construction or foreclosure, place downward pressure on the median home prices.

State Total Foreclosure Rate vs. U.S Average

(U.S. Average in Blue Dashed Line)

7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Source: Mortgage Bankers' Association

Foreclosures by Type
Monthly Market Data May 2011

Los Angeles
10.8 % 82.9% 6.3% 10.8% 82.9 % 5.0 % 6.3%

U.S.
5.9 % The Los Angeles market has been able 89.1% 5.0% 5.9% to contain both subprime and prime 89.1 lending issues % 3.3%
3.26 %

Market Share:
Prime (blue), Alt-A (green), and Subprime (red)

PRIME:
Foreclosure + REO Rate

3.11 %
Nov-11

2.74 %

2.7%

3.34 % Nov-11

There was a substantial decline compared to November of last year Compared to the national average, today's local prime rate is low The local subprime rate eased modestly relative to November of last year Locally, today's foreclosure rate is low relative to the national average The alt-A foreclosure rate rose slightly over the most recent 6 months The May rate for Los Angeles is low compared to the national average

May-11 3.1%

3.3% May-11 18.1%

SUBPRIME:
Foreclosure + REO Rate

15.32 % Nov-11

14.3%
14.26 % May-11 17.9 3%

18.0 8%

15.3%

Nov-11

17.9% May-11

ALT-A:
Foreclosure + REO Rate

11.65 % Nov-11

11.68 %

11.7%
14.9 0% Nov-11

15.0% 15.0
3%

May-11 11.7%

14.9% May-11

The "foreclosure + REO rate" is the number of mortgages, by metro area, that are either in the foreclosure process or have completed the foreclosure process and are owned by banks divided by the total number of mortgages for that area. Source: First American CoreLogic, LoanPerformance data

Prime Foreclosures and Delinquencies in Process

Monthly Market Data May 2011

Los Angeles
7.7% 8.8%
8.77 %

U.S.
9.9%
7.45 %

6.8%

7.3%
7.25 %

7.5%
6.80 % May-11

Prime: 60-day Delinquent

9.93 %

7.68 %

May-10

Nov-11

May-11

The local 60-day delinquency rate fell over the 6-month period ending in May suggesting that 90-day delinquencies will decline in the near future

May-10

Nov-11

6.8%

7.7%
7.74 % Nov-11

8.9%

5.9%
6.42 %

6.2%
6.16 %

6.4%
5.88 %

Prime: 90-day Delinquent

8.85 % May-10

6.79 % May-11

The 90-day delinquency rate in Los Angeles fell over the 6-month period ending in May

May-10

Nov-11

May-11

2.7%

3.1%
3.11 %

2.8%

3.3%
2.90 % May-10

3.3%
3.34 %

Prime: Foreclosure + REO Rate

2.75 %

2.74 %

May-10

Nov-11

May-11

Nov-11

2.9% The decline of both the 60 and 90-day delinquency rates over the most recent 3.26 % 6-month period suggests a decline in the local foreclosure rate in the near May-11 future.

Source: First American CoreLogic, LoanPerformance data

Affordability
Long-Term Trend: Ratio of Local Mortgage Servicing Cost to Income
(Local Historical Average Shown in Red, U.S. Average in Green)

45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Monthly Mortgage Payment to Income

Ratio for 2009 Ratio for 2011 Q2 Historical Average

Los Angeles 17.1% 15.4% 26.4%

U.S.
15.1% 14.7% 22.0% Historically strong and an improvement over the first quarter of 2011 Weaker affordability than most markets

Recent Trend - Local Mortgage Servicing Cost to Income

(Historical Average Shown in Red Dashed Line)

30% 25% 20% 15% 10% 5% 0% 2009 Q3 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2

Median Home Price to Income

Ratio for 2010 Ratio for 2011 Q2 Historical Average

Los Angeles 2.8 2.5 3.4

U.S.
2.4 2.4 2.7 The price-to-income ratio has fallen and is below the historical average Less affordable than most markets

Ratio of Local Median Home Price to Local Average Income

(Local Historical Average Shown in Red, U.S. Average in Green)

6.0 5.0 4.0 3.0 2.0 1.0 0.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

The Mortgage Market

30-year Fixed Mortgage Rate and Treasury Bond Yield
280 240 200 160 120 80 40 0
2006 Q2 Q4 2007 Q2 Q4 2008 Q2 Q4 2009 Q2 Q4 2010 Q2 Q4 2011 Q2

7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Spread (left axis)

30-Year FRM (Right axis)

10-Year Treasury Bond (Right Axis)

A steady flow of progressively weaker economic news reported in May and June combined to weigh on Treasury bonds in the 2nd quarter, driving the yield on the 10-year Treasury near record lows. The rate on the 30-year fixed rate mortgage followed suit, but the gap between the two opened up as investors sought out better returns than MBS as well as to avoid the risk of refinances. Concerns about the U.S. government's debt along with the sluggish economy are unlikely to be resolved in the near term. Furthermore, the Federal Reserve has made it clear that it will actively support an environment that would foster economic growth through low rates. As result, mortgage rates are expected to remain low through the fall and into 2012. The low rates will help consumers and businesses alike to navigate this economic soft patch, but they will also remove a layer of urgency from the home buying process, which could drag on home sales.

A Closer LookFHA Role Locally

FHA Market Share
2010 FHA Originations
Los Angeles

U.S. 989,842 20.2% 0.1

Maine Hawaii Wisconsin Ohio South Dakota Iowa West Virginia Arkansas Massachusetts Mississippi Kansas North Carolina Kentucky Idaho Oklahoma Illinois Florida South Carolina Nebraska Tennessee Georgia New York New Hampshire Alabama Missouri Nevada Texas Minnesota Vermont North Dakota New Mexico Louisiana Oregon Indiana Arizona Washington Pennsylvania Michigan New Jersey Connecticut Colorado District of Columbia Rhode Island Virginia Delaware Maryland California Utah

FHA Market Share as of Q1 2010

126,846 2010 Market Share 27.1% 23.0%

2011 Q1 Market Share

FHA's market share fell sharply during the housing boom. Home sellers preferred to work with non-FHA lenders in order to avoid the FHA's more stringent and time consuming underwriting. Since the power in the housing market resided with the sellers at that time, usage of FHA loans fell off. As the real estate market shifted, so did the FHA's market share. FHA's market share this year is higher than the historical average, but down from the height of last year's tax-credit induced sales surge. The tax credit brought in many low-income and first time buyers, FHA's target market. Locally, the FHA's share of originations in Los Angeles fell from 27.1% in 2010 to 23.0% in the first quarter of this year. The FHA's market share is likely to remain historically elevated until the housing market returns to normal in the coming years.

0%

5%

10%

15%

20%

25%

30%

35%

40%

Geographic Coverage for this Report

The Los Angeles area referred to in this report covers the geographic area of the Los Angeles-Long Beach-Santa Ana metro area as officially defined by the Office of Management and Budget of the U.S. Government. The official coverage area includes the following counties:

Los Angeles County, Los Angeles County, Orange County, and Orange County

More information on the OMB's geographic definitions can be found at http://www.whitehouse.gov/omb/inforeg_statpolicy/