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FORECAST AND STRATEGY STOCKTON - CALIFORNIA

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FORECAST AND STRATEGY STOCKTON - CALIFORNIA Powered By Docstoc
					FORECAST AND STRATEGY




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STOCKTON - CALIFORNIA
December 2010




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         16485 Laguna Canyon Road, Suite 130 | Irvine, CA 92618 | 949-870-1200 | www.realestateconsulting.com
TABLE OF CONTENTS




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                                 OBJECTIVE                                            3




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                                 EXECUTIVE SUMMARY                                    4
                                 MACRO ECONOMIC TRENDS                                11
                                 HOUSING TRENDS                                       18




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                                 DEMAND AND SUPPLY                                    27
                                 FORECLOSURES AND SHADOW INVENTORY                    32
                                 AFFORDABILITY                                        36
                                 DEMOGRAPHIC TRENDS                                   41
                                 FUTURE HOUSING DEMAND BY LIFESTAGE AND PRICE POINT   43
                                 GEOGRAPHIC INDICATORS AND SUBMARKET GRADING          50
                                 PRODUCT POSITIONING STRATEGIES                       56
                                 BUILDER ENVIRONMENT                                  59
                                 APPENDIX: DATA SOURCES AND METHODOLOGY               63

 www.realestateconsulting.com                                                              2
OBJECTIVE




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                                 The 2011 Forecast and Strategy report is designed to help Decision Makers in Home




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                                 Segmentation and Land Acquisition make the most-informed strategic decisions for buying
                                 land and selling homes over the next several years.

                                 Combining quantitative and qualitative factors, our analysis and forecast of housing market
                                 conditions addresses:




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                                    – Economic / Demographic Shifts and Timing: Understand the fundamentals
                                        that are driving market condition and what the outlook for these fundamentals
                                        will be over the next several years. We analyze trends of the key market-level
                                        statistics to provide insight on housing demand, supply and affordability conditions.




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                                    – Submarket Analysis and Market Positioning: We have developed a
                                        submarket grading tool that blends on-the-ground market knowledge with key
                                        metrics such as as employment proximity and foreclosure activity. This insight
                                        helps you to make smart acquisitions by understanding which submarkets have the




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                                        greatest potential for strong absorption and price appreciation.
                                    – Demand by Life Stage and Price Range: Our proprietary demand model
                                        reconciles home buyer household composition growth with sales velocity. This
                                        tool offers great insight into the household composition (young couples, empty
                                        nesters, etc.) of home buyers by price range, and what future growth will be so
                                        you can build what will be in the greatest demand in the coming years.

                                 The ultimate goal is to help you with your plans for success in 2011.




  www.realestateconsulting.com                                                                                                  3
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EXECUTIVE SUMMARY




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BUILD YOUR STRATEGY AROUND THESE TOP TEN MARKET FINDINGS




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  1.    Flat Home Prices: Prices will remain flat at best, with some further depreciation likely in outlying locations
        or areas hit hardest by foreclosures. Some relief is possible in 2012.




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  2.    Construction Costs Likewise: Costs have come down dramatically over the last few years, and Central
        Valley builders can often build for under $50/ sq. ft. Costs will be stable for at least the short-term.
  3.    Price is King: Like it or not, low prices will be the deciding factor for most buyers, so getting down to the
        price “sweet spot” is paramount.




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  4.    Families and Others: Build for families because they remain the dominant buyer type. However, Stockton is
        diverse (partly fed by Bay Area households), and there will be gradually increasing demand for lower-




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        maintenance options favored by somewhat older non-family buyers.
  5.    Bay Area Conveyor Belt: High prices and a lack of family-friendly product in the Bay Area will always push
        households into the Central Valley. Be ready for a resumption in that trend and, meanwhile, be thankful for Bay
        Area investors absorbing competitive distressed resales.




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  6.    Be Patient With Land: Buy and build now only in clear “A” locations. Buy and hold in “B” locations and
        ignore everything else.
  7.    Beware Big Builders:There is no avoiding them, but the national builders have lower costs and will be more
        aggressive on discounting pricing to maintain market share.
  8.    Best Bets: Conventional product (lot size at least 5,000 sq. ft.) in lower-$200,000s in a decent location,
        especially Manteca or Lathrop.
  9. Count the REOs: Distressed properties remain a major concern and will be for a while.
  10. Apartment Option: The Gen Y wave + ex-homeowners = rising rental demand. This will be more gradual in
        inland markets like Stockton, but be prepared for it.

  www.realestateconsulting.com                                                                                            5
KEY MARKET INDICATORS AND HOUSING TRENDS




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High levels of distress will delay real recovery in the Stockton market. Positive job growth is likely to return in 2011, but the metro area is




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likely to see price declines and temporarily higher resale sales in the near term as a result of distressed homes clearing the market.

    •   Stockton’s housing market conditions will appear better in 2011, helped by increased levels of distressed/investor sales:
           • Median resale price up 0.6% from 2010. Significant price declines have already occurred in this market, and a mix shift




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              will prevent prices from falling further in 2011. However, continued high levels of distressed sales will likely result in a
              declining median price in 2012 .
           • Permits up 44% from extremely low levels in 2010 to 1,300 permits in 2011, and rising to 2,700 permits by 2015.
           • Resale sales volume up 19% from 2010 to 12,500 transactions, buoyed by increased levels of distressed sales. As the
              inventory of distressed homes begins to sell off, we expect a drop in resale transactions to 8,000 sales in 2015.




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    •   The key economic assumptions driving this forecast are:
           • Job losses of 2,000 in 2010, followed by a gain of 2,000 jobs in 2011 and improving growth thereafter. Losses in many
              sectors of the economy will have moderated by mid-2011.




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           • Conforming mortgage rates of 5.00% in 2011 and continued government support of FHA, Freddie Mac and Fannie Mae
              mortgage underwriting policies.
           • High supply of distressed properties in the market that push months of supply up from today’s level of 3 months. We
              estimate that the shadow inventory – homes not currently on the market and in one form of distress that we believe will




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              be eventually liquidated/sold – is more than 8 times the current level of MLS listings, which will continue to put pressure on
              prices for the next several years.
    •    The great majority of the decline has already occurred in the Stockton market, evidenced by the following:
           •   Price: Monthly payments – including the mortgage, interest, taxes and insurance – are back to 1999 levels. Investors and
               entry-level buyers are seizing the opportunity to purchase. The percentage of households who can afford the median-
               priced home with a 30-year fixed rate mortgage and 20% down will have risen from just 14% in 2006 to 67% in 2011.
           •   Permits: Permits in Stockton likely bottomed in 2009 below 800 units, which is the lowest level on record and just 11% of
               the peak level in 2003
           •   Resale Sales: Following a rebound in sales activity in 2008 and 2009, resale sales are falling once again, but remain well
               above 2007’s trough. Resales should rise in the near term, but fall again beginning in 2013 as the distressed inventory begins
               to diminish.
           •   New Home Sales: New home sales likely bottomed in 2009 at fewer than 800 transactions – one-seventh of the 2004
               peak.
    www.realestateconsulting.com                                                                                                                  6
DEMOGRAPHICS AND DEMAND




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In the near-term, the target buyers in the Stockton MSA will be entry-level or first-time buyers, due to equity losses and foreclosure




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competition. Demand will be strongest for homes priced below $200,000, which is 60% of the market.

    •    Stockton’s housing market has overcorrected because of the tremendous foreclosure distress. The resulting exceptional
         affordability has drawn first-time buyers and investors into the resale housing market, which led to a significant rebound in




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         resale volume in 2008 and 2009. The lower price points and high supply of distressed existing home sales has made it quite
         difficult to produce new homes with any material profit margins in the Stockton area.
    •    Home prices in Stockton have been pushed downward by distressed properties, rising unemployment, and tight credit. These
         factors mean new homes capture a very small part of the overall housing market, particularly as distressed resale transactions
         have picked up in the last several years. The new home market share will likely begin to increase as distressed homes in the




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         market begin to sell off and as construction levels once again begin to rise.
    •    Demand in 2011 will center on entry-level product, with more than 60% of the estimated 10,224 primary housing units of
         demand at price points at or below $200,000. Nearly 90% of the market will be under $300,000.
    •




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         Couples Under 45 without children will lead the way with 24% of demand, but family buyers will still make up nearly half of all
         sales – even as their demand is impacted by high levels of negative equity. Family buyers are estimated to account for nearly
         4,700 units of primary demand in 2011.
                                                  Young    Elem.    Mature Couples            Empty                 % of
                             Stockton, CA MSA




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                                                 Families Families Families  <45   Singles   Nesters Retirees Total Total
                        Under $100,000             331      249      238     223     466       116     220    1,843 18%
                        $100,000 - $150,000        369      308      218     468     432       185     168    2,149 21%
                        $150,000 - $200,000        424      352      259     633     286       207     121    2,281 22%
                        $200,000 - $250,000        302      252      252     500     120       189      71    1,686 16%
                        $250,000 - $300,000        156      137      233     306     40        171      28    1,072 10%
                        $300,000 - $350,000         80       74      137     169     21        103      14     599   6%
                        Over $350,000               68       70      152     156     15        120      12     594   6%
                          Total                   1,730    1,444    1,489   2,456   1,380     1,091    635 10,224 100%
                          % of Total               17%      14%      15%    24%     13%       11%      6%     100%

    •    The lower price points (under $200,000) will be dominated by Singles and younger families, while Couples Under 45, Mature
         Families, and Empty Nesters are the key segments for comparatively higher-end housing. However, there is very limited “high-
         end” demand in Stockton, with homes priced at $300,000 or above accounting for an estimated 12% of total demand.



   www.realestateconsulting.com                                                                                                            7
COMPETITIVE STRATEGY CONSIDERATIONS




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The Stockton market is quiet and highly competitive based on price, with demand concentrated below $250,000 or even below $200,000 in




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the new home market. Builders should focus on the best locations and even then be patient.

   •     As indicated by the demand analysis above, Stockton demand is concentrated at lower price points, effectively at the entry-
         level and some first move-up. Distressed properties are almost always priced below the market established by conventional




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         listings and are competitive with new homes. These two factors – inexpensive distressed resales and the bulk of demand at
         lower price points – mean there is typically a highly competitive market landscape at prices that have the most market appeal.
         Differentiating yourself by product and location thus becomes critical for a builder to survive in this congested landscape.
   •     In the aggregate, there are more than 60,000 lots at some point in the planning process in and around the city of Stockton
         alone , with thousands more in Lathrop and Manteca and still several thousand lots remaining at Mountain House near the




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         Alameda County line. However, many of these lots – and particularly those in Stockton – are at an early planning stage and
         are highly unlikely to enter the market within the next decade (if ever) due to lack of financing, lack of full entitlements,
         infrastructure issues, etc.
   •     The greatest concentration of available lots is in Stockton is in the northern part of the city, particularly the northwest along




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         and around Eight Mile Road. This is a generally attractive, newly growing area, but has been decimated by foreclosures and is
         riddled by underwater households. This area will eventually return to health and be a key new home node, but this is not
         imminent. Other outlying parts of the city should be ignored indefinitely.
   •     Absorption rates for new home communities are typically one to two homes per month – if that. This market area is




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         relatively quiet, though the Lathrop/Manteca submarket is the most active with +/- 15 active new home communities. There
         are only three in Stockton. One success story has been Del Webb’s Woodbridge active adult community in Manteca, which
         has sold more than ten homes per month since opening and even six per month in 2010, making it one of the best
         performers in the entire state.
   •     Use broker co-op fees and outreach to the brokerage community to help drive traffic to your sales office.
   •     Find several equity partners if you need them and look aggressively for debt, which will probably require recourse.
   •     Monitor the mortgage industry carefully, including pending changes in FHA,VA, USDA, Fannie Mae and Freddie Mac programs.
   •     There are many target opportunities to explore given the many shifts in the market today. We are studying these profiles by
         market in detail and can provide additional insight to your segmentation, product development and strategic efforts based on
         your investment strategy for the future.




   www.realestateconsulting.com                                                                                                              8
ACQUISITION RECOMMENDATIONS




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Finished lots in the best locations can fetch pricing approaching $100,000, but most lot pricing is below this and demand is limited. Offer




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conventional lot sizes in good locations priced in the low-$200,000s to compete in the new home market.

               Subject                                                           Comments




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    Land Transactions and Values      Finished lots in Lathrop and Manteca can garner about $25,000 to +/- $35,000, with higher
                                      values in Manteca and meaningful builder interest. Lots in Mountain House are the most
                                      desirable and have recently traded for between $70,000 and $90,000+. Stockton finished lots
                                      are “worth” about $20,000 currently, but there is little demand. Generally, the main areas of
                                      interest are Mountain House and, at a lesser price point, the Lathrop/Manteca area.




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    Buy and Sell Strategy             The most clearly “ready-to-go” locations in this MSA are Mountain House and
                                      Lathrop/Manteca. Some builders have recently bought lots at Mountain House to market




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                                      neighborhoods in 2011. The Lathrop/Manteca area is comparatively healthy, aided by its relative
                                      proximity to Bay Area commuters and investors and the lack of activity in Tracy. Stockton and
                                      most other communities throughout the Central Valley continue to struggle with foreclosures.
                                      Smaller communities throughout the county (e.g., Ripon, Lodi) should be ignored for now, given




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                                      the small market size and outlying location.
    Hot Products and Price            Active adult is really the only “hot” product in this market at present, but with only one active
    Niches                            community, it is difficult to call this a trend. Otherwise this market should be supplied by
                                      conventional detached single-family product at price points that do not rise far above the low-
                                      $200,000s. In places like Stockton, pricing should be more in the high-$100,000s. This is not
                                      the time to offer creative higher-density options. Mountain House can support pricing into the
                                      $300,000s and possibly low-$400,000s.
    Cold Product and Price Points     Anything over $300,000 is a very tough sell, no matter the location or the product (again, with
                                      the exception of Mountain House). Higher-density options or larger-lot, upscale homes are not
                                      good bets for now. There has always been an extremely limited attached market in Stockton,
                                      though, eventually some townhomes and small-lot detached product will be necessary to
                                      service entry-level younger buyers.


   www.realestateconsulting.com                                                                                                               9
ACQUISITION RECOMMENDATIONS




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Lathrop and Manteca are the most attractive communities in the MSA and the only places that make sense in the near-term for potential




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acquisitions. Stockton (given its size) and Tracy/Mountain House (given their locations) will eventually be viable again.

              Subject                                                            Comments




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  Top Submarket Opportunities       The Southeast submarket, home to Lathrop and Manteca, combines new home activity with some
                                    land availability to form the best submarket opportunity in the MSA. There is land in the East
                                    submarket (which includes the city of Stockton), but low demand and a weak market. Land
                                    opportunities in the North submarket (Lodi) and the Tracy submarket are more limited.

  Geographic Considerations         Though Stockton is the main jobs node and a substantial metro area, the housing market there is




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                                    weak and glutted with foreclosures and underwater households. Though there are also plenty of
                                    foreclosures in Lathrop and Manteca, these are more active new home areas at present and benefit
                                    from relative proximity to Bay Area buyers, as well as a better residential reputation compared to




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                                    many parts of Stockton. Tracy is an attractive residential address, but has building restrictions and
                                    high fees that limit development. Mountain House also has an established residential appeal, but
                                    foreclosures diminished its appeal. As foreclosures there have recently diminished and its
                                    neighborhood environment has matured, Mountain House’s proximity to Bay Area buyers has
                                    generated interest.




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                                    In Stockton, the best areas are generally in the western parts of the city, but are largely built out.
                                    The north and northwest became a growth node at the end of the hot market period, but, partly in
                                    consequence, this area is now saddled with foreclosed and soon-to-be foreclosed homes.

                                    Other smaller communities, such as Lodi or Ripon, should be able to support a very limited
                                    amount of new home activity when the market has stabilized, but will never be major new home
                                    nodes.

                                    Generally, there is an abundance of potential lots, but the viability of a great number of these lots is
                                    open to question, as is the likelihood that they will enter the market any time soon.




   www.realestateconsulting.com                                                                                                                10
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MACRO ECONOMIC TRENDS




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MARKET RISK PROFILE




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Stockton’s housing fundamentals are slightly weaker, after showing improvement in 2008 and 2009. The weakening in the fundamentals




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suggests that any near-term price appreciation that may occur will be moderate.




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      •




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            Our Housing Cycle Risk Index, which has historically been a one- to two-year leading indicator on home price
            appreciation, shows that Stockton’s fundamentals are weakening after showing improvement in 2009. The Housing
            Cycle Risk Index – which measures the health of the Stockton housing market based on the performance of 24
            market fundamentals – had improved from a historically low level in 2007 to a “C-” level by 2009, stemming from
            improvements in the Supply and Affordability components. While Affordability remains excellent, the Supply
            fundamentals have weakened and the Demand fundamentals remain at historical lows.




   www.realestateconsulting.com                                                                                                      12
MARKET RISK METHODOLOGY




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The Housing Cycle Risk Index has proven to be a very good 1-2 year leading indicator for home price appreciation / depreciation.




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        When the fundamentals improve after an economic collapse, it is a time to consider taking more risk and planning on a




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        recovery. Rising fundamentals usually means price appreciation is likely to occur, and the Housing Cycle Risk Index has
        proven to be a very good 1-2 year leading indicator for home price appreciation / depreciation. In some markets, the
        improvement has been almost immediate. In other markets, the improvement has taken several years.

        Our Housing Cycle Risk Index takes into account the following fundamentals:




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                  Demand                         Supply                         Affordability                       Economy
      New home sales volume              Permit activity             JBREC Affordability Index              U.S. Economy




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      Resale volume                      Permits/peak                Home equity
      Median resale price                Listings                    Fixed/adjustable mortgage rates
      Job growth                         Months of supply
      Population growth                  Job growth/permit ratio
      Realtor market ratings




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   www.realestateconsulting.com                                                                                                    13
EMPLOYMENT GROWTH




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Job losses have eased significantly in Stockton in the last year, and employment stabilization should occur in 2011, with continued job




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growth in the following years.


                                                             EMPLOYMENT GROWTH




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                                         10,000

                                          5,000

                                              0

                                          -5,000




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                                        -10,000

                                        -15,000




                                               a    2011P
                                                    2012P
                                                    2013P

                                                    2015P
                                                    2010P



                                                    2014P
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                                                     2009
                                                     1999


                                                     2002




                                                   Current
                                                    W&S Employment Growth              Labor Force




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           •     Payroll employment losses have eased significantly in the Stockton market in the last year, although the metro area
                 will likely see an average loss of 2,000 jobs (1.0%) for 2010. Job growth is expected to be positive in 2011, regaining
                 the 2,000 jobs lost in 2010. Stockton will have lost 9% of its peak employment in 2007 by the time job losses
                 subside.

           •     The labor force data is showing slightly fewer losses in the last year. The labor force survey measures the change in
                 the employment level based on where people live rather than where they work.

           •     The unemployment rate is very high at 16.6%, which is up from one year ago. While positive job growth is
                 expected for 2011, it will take some time for the unemployment rate to return to normal levels.


   www.realestateconsulting.com                                                                                                            14
EMPLOYMENT BY SECTOR




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The Government sector, which is one of Stockton’s largest, has lost the most jobs in the last year. Stockton has a well-diversified job base,




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but is underweighted in the sectors generally considered to be high-income sectors.




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                           CURRENT EMPLOYMENT GROWTH BY                           EMPLOYMENT BY SECTOR - % OF TOTAL
                                      SECTOR
              1,000                                                         30%
                500                                                                  Metro
                  0                                                         25%      U.S.
               -500
             -1,000                                                         20%




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             -1,500
                                                                            15%
             -2,000
             -2,500
                                                                            10%
             -3,000




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             -3,500                                                          5%
             -4,000
             -4,500                                                          0%
                      FA    Info PBS Cons EHS Gov   LH   Mfg   OS   TTU           Cons EHS   FA   Gov   Info   LH   Mfg   OS   PBS TTU




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         •       Stockton is beginning to show positive year-over-year job gains in several sectors, including Manufacturing and
                 Education & Health Services. However, the metro area has lost nearly 4,000 jobs in the Government sector in the
                 last 12 months. In the other sectors where job growth is negative, the metro area is generally losing fewer jobs
                 that it was one year prior.

         •       Compared to the nation as a whole, Stockton has a significantly larger percentage of jobs in the Trade,
                 Transportation & Utilities sector, which accounts for more than 25% of the jobs in the market, and in the
                 Government sector, which accounts for nearly 20%. The metro area has a lower concentration in nearly all other
                 sectors.




   www.realestateconsulting.com                                                                                                             15
ANNUAL AVERAGE MORTGAGE RATE TRENDS




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Mortgage rates are expected to begin to rise slowly in 2011 from today’s record-low levels. Rising rates will be balanced out by falling prices




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in the near-term.




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                                                     ANNUAL AVERAGE MORTGAGE RATE
                                         11.0%
                                                                                          30-Yr Fixed
                                         10.0%
                                                                                          ARM
                                          9.0%
                                          8.0%




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                                          7.0%
                                          6.0%
                                          5.0%




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                                          4.0%
                                          3.0%




                                                  2010P
                                                  2011P
                                                  2012P
                                                  2014P
                                                  2013P
                                                  2015P
                                                   1988
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                                                   2008
                                                   1996




                                                   2003




                                                   2009
                                                 Current

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         •    Mortgage rates are likely to rise in 2011, with the 30-year fixed rate averaging 5.00% and the 1-year ARM averaging
              4.25%. Rising mortgage rates will negatively impact affordability across the nation over the next several years. We
              are forecasting a rise in the 30-year fixed-rate mortgage rate to 6.5% in 2014-2015 and a rise in the 1-year ARM
              rate to 5.75% in 2014-2015. Rising inflation in 2011 and later is the reason we believe mortgage rates will rise.




   www.realestateconsulting.com                                                                                                              16
ANNUAL AVERAGE POPULATION GROWTH




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Stockton is expected to average population growth of 1.2% per year over the next 5 years, adding approximately 8,600 people per year.




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While slower than growth in the early 2000s, the population is expected to grow at a faster rate than in recent years.




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                                                     ANNUAL AVERAGE POPULATION & EMPLOYMENT GROWTH
                                      Population Growth                                                                                                                              Employment Growth
                            25,000                                                                                                                                                                                                   10,000



                            20,000                                                                                                                                                                                                   5,000




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                            15,000                                                                                                                                                                                                   0




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                            10,000                                                                                                                                                                                                   -5,000



                             5,000                                                                                                                                                                                                   -10,000




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                                  0                                                                                                                                                                                                  -15,000




                                                                                                                                                                           Current


                                                                                                                                                                                             2011P
                                                                                                                                                                                                     2012P




                                                                                                                                                                                                                             2015P
                                                                                                                                                                                                             2013P
                                                                                                                                                                                                                     2014P
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                                                    1993




                                                                         1996
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                                                                                                                                                      2007
                                                                                                                                                             2008
      •     We are forecasting 1.3% population growth in 2011, with the addition of approximately 9,000 people, and we
            expect similar growth over the next couple of years. Employment losses have contributed to recent low rates
            of population growth, and we are forecasting an improvement as employment growth returns to the market.
            Population growth estimates are very rough, as good data is not readily available.




   www.realestateconsulting.com                                                                                                                                                                                                                17
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HOUSING TRENDS




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ANNUAL RESALE SALES AND PRICING




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Resale sales activity is expected to pick up over the next several years as more distressed homes hit the market. Resale prices will likely fall




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further as a result. As distressed activity in the market begins to trail off, we expect sales to decline and prices to begin to rise.

                                                   ANNUAL RESALE HOME SALES & PRICE
                                          16,000                                               $450,000




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                                                         Home Sales                            $400,000
                                          14,000
                                                         Median Price                          $350,000
                                          12,000
                                                                                               $300,000
                                          10,000
                                                                                               $250,000
                                           8,000
                                                                                               $200,000




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                                           6,000
                                                                                               $150,000
                                           4,000                                               $100,000
                                           2,000                                               $50,000




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                                               0                                               $0




                                                   Current
                                                    2010P

                                                    2013P
                                                    2014P
                                                    2015P
                                                    2011P
                                                    2012P
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                                                     2003
                                                     2004
                                                     2006
                                                     2007
                                                     2008
                                                     2009
                                                     1993




                                                     2000



                                                     2005




                            S
                                     2006     2007     2008     2009    Current  2010P    2011P    2012P    2013P    2014P    2015P
Annualized Resale Home Sales         8,760    4,943   11,531   12,759   10,748   10,500   12,500   13,000   12,000   10,000    8,000
  1-Year Growth Rate                 -35%     -44%     133%     11%      -21%     -18%     19%       4%      -8%      -17%     -20%
Median Resale Home Price           $401,833 $351,097 $205,433 $154,107 $164,500 $162,000 $163,000 $155,000 $160,000 $165,000 $172,000
  1-Year Growth Rate                 3.0%    -12.6%   -41.5%   -25.0%    3.1%     5.1%     0.6%    -4.9%     3.2%     3.1%     4.2%


         •      The latest resale data for Stockton shows that the rolling 12-month count has been declining since mid-2009, and we
                forecast that it will end 2010 at 10,500 transactions, which is 18% below the 2009 total. Sales should increase again to
                13,000 transactions by 2012 as some of the distressed “shadow” inventory comes to market. Resale sales are expected
                to drop to 8,000 transactions in 2015 as distressed homes sell off.
         •      The median resale price will rise 5% in 2010 due to a shift in the mix of homes sold away from the lowest price points.
                We expect minimal appreciation in 2011, with the median price declining nearly 5% in 2012 due to increased levels of
                distressed sales. Annual appreciation of 3-4% should occur in the following years.


    www.realestateconsulting.com                                                                                                               19
HISTORICAL SALES BY PRICE DISTRIBUTION




                                                                                                         e
Stockton has witnessed a significant shift in price point over the last 4 years, with nearly two-thirds of recent sales occurring under




                                                                                                        l
$200,000. By comparison, in 2001, fewer than half of the sales were under $200,000.

                                                            STOCKTON RESALE PRICE DISTRIBUTION
             Price Range                2001       2002        2003    2004     2005      2006                     2007       2008         2009       2010 H1




                                                                                                      p
            Below $100,000              11%         6%          4%       2%      1%        2%                       3%        12%          26%          22%
         $100,000 - $149,999            17%         9%          5%       3%      2%        3%                       3%        16%          21%          22%
         $150,000 - $199,999            20%        17%         12%       6%      3%        3%                       5%        19%          19%          20%
         $200,000 - $249,999            19%        21%         19%      11%      5%        4%                       8%        18%          14%          14%
         $250,000 - $299,999            15%        19%         20%      17%      7%        8%                      14%        14%           9%          10%
         $300,000 - $349,999            10%        13%         16%      17%     11%       10%                      16%        10%           5%           6%




                                                         m
         $350,000 - $399,999             5%         7%         12%      16%     15%       13%                      14%         5%           2%           3%
         $400,000 - $449,999             2%         3%          6%      11%     14%       13%                      12%         3%           1%           2%
         $450,000 - $499,999             1%         1%          3%       7%     12%       11%                       8%         2%           0%           1%
              $500,000 +                 1%         2%          4%      10%     31%       34%                      18%         2%           1%           1%




                                                       a
      Total                             100%       100%        100%    100%     100%     100%                      100%       100%         100%        100%

                                                            Resale Home Sales by Price Point
        35%

        30%




                                 S
        25%

        20%

        15%

        10%

           5%

           0%
                Below $100,000   $100,000 -    $150,000 -    $200,000 -   $250,000 -    $300,000 -    $350,000 -      $400,000 -     $450,000 -     $500,000 +
                                  $149,999     $199,999       $249,999    $299,999      $349,999      $399,999        $449,999       $499,999

                  2001           2002          2003          2004         2005         2006          2007           2008           2009           2010 H1

       •        Very few high-priced homes are transacting in Stockton, with just 1% of sales in the last 12 months above $500,000. In
                2006, this price point accounted for one-third of all resales.


   www.realestateconsulting.com                                                                                                                                  20
ANNUAL NEW HOME SALES AND PRICING




                                                                                          e
New home sales activity is bouncing along the bottom in Stockton and should begin to increase over the next several years as construction




                                                                                         l
activity picks up and job growth returns to the market. New home sales in the recovery will likely be similar to the 1990s.

                                                ANNUAL NEW HOME SALES & PRICE




                                                                                       p
                                      7,000                                                $600,000
                                                   Home Sales
                                      6,000                                                $500,000
                                                   Median Price
                                      5,000
                                                                                           $400,000
                                      4,000
                                                                                           $300,000




                                                m
                                      3,000
                                                                                           $200,000
                                      2,000

                                      1,000                                                $100,000




                                              a
                                          0                                                $0




                                               2013P
                                               2010P
                                               2011P

                                               2014P
                                               2015P
                                               2012P
                                              Current
                                                1989
                                                1991
                                                1992
                                                1993
                                                1994
                                                1995
                                                1996
                                                1997
                                                1998
                                                2000
                                                2001
                                                2002
                                                2003
                                                2004
                                                2005
                                                2007
                                                2008
                                                2009
                                                1990




                                                1999




                                                2006




                           S
                                    2006     2007     2008     2009    Current     2010P        2011P   2012P    2013P     2014P        2015P
Annualized New Home Sales           3,795    2,583    1,213     787      802        800          900    1,100    1,300     1,400        1,700
  1-Year Growth Rate                -28%     -32%     -53%     -35%      -3%        2%           13%     22%      18%       8%           21%
Median New Home Price             $514,397 $429,938 $349,768 $279,232 $237,500
  1-Year Growth Rate                8.2%    -16.4%   -18.6%   -20.2%   -12.4%


            •     After peaking in 2004, new home sales activity in Stockton is currently at one-seventh of that level, with just 800
                  transactions forecast for 2010, which is lower than any year in the downturn of the 1990s. We expect new home
                  sales activity to grow by 100 to 200 transactions per year over the next several years.
            •     The median new home price has declined significantly from its 2006 peak. New home sales prices are a function of
                  the mix of home being sold at any given time, and can fluctuate greatly. Resale prices are a better indicator of
                  market conditions. We provide new home price statistics merely as a courtesy.



   www.realestateconsulting.com                                                                                                                 21
ANNUAL RESALE AND NEW HOME SALES COMPARISON




                                                                                         e
Currently, Stockton’s new home sales activity is 7% of the total market. This percentage has dropped largely due to reduced supply and a




                                                                                        l
dramatic slowdown in acquisition due to market conditions. We expect new home sales to comprise 18% of all sales activity by 2015.




                                                                                      p
                                                 ANNUAL RESALE VERSUS NEW HOME SALES




                                                  m
                                       16,000
                                       14,000        Resale

                                       12,000        New

                                       10,000




                                                a
                                         8,000
                                         6,000
                                         4,000
                                         2,000




                           S
                                            0




                                                 Current
                                                  2010P
                                                  2011P
                                                  2012P

                                                  2014P
                                                  2015P
                                                  2013P
                                                   1990
                                                   1991
                                                   1992
                                                   1993
                                                   1994
                                                   1995
                                                   1996
                                                   1997
                                                   1998
                                                   1999
                                                   2000

                                                   2002
                                                   2003
                                                   2004
                                                   2005
                                                   2006

                                                   2008
                                                   2009
                                                   2001




                                                   2007




   www.realestateconsulting.com                                                                                                            22
ANNUAL RESALE AND NEW HOME PRICE COMPARISON




                                                                                           e
The median resale sales price is currently 31% below the new home median price. This is largely due to the significant level of distressed




                                                                                          l
sales activity in the resale market at the present time.




                                                                                        p
                    MEDIAN HOME PRICE GROWTH                                         ANNUAL RESALE VERSUS NEW HOME
       40%                                                                                    MEDIAN PRICE
                      New                                               $600,000
       30%




                                                m
                      Resale                                                            Resale
       20%                                                              $500,000
                                                                                        New
       10%
                                                                        $400,000
        0%




                                              a
      -10%                                                              $300,000
      -20%
                                                                        $200,000
      -30%
      -40%                                                              $100,000
      -50%




                            S
                                                                              $0
              2010P


              2013P
              2014P
              2015P
              2011P
              2012P
             Current
               1991
               1992
               1993
               1994
               1995
               1996
               1997
               1998

               2000
               2001
               2002
               2003

               2005
               2006
               2007
               2008
               2009
               1990




               1999




               2004




                                                                                   Current
                                                                                    2010P
                                                                                    2011P
                                                                                    2012P
                                                                                    2013P
                                                                                    2014P
                                                                                    2015P
                                                                                     1990
                                                                                     1991
                                                                                     1992
                                                                                     1993
                                                                                     1994
                                                                                     1996
                                                                                     1997
                                                                                     1998
                                                                                     1999
                                                                                     2000
                                                                                     2001
                                                                                     2002
                                                                                     2003
                                                                                     2004
                                                                                     2005
                                                                                     2006
                                                                                     2007
                                                                                     2008
                                                                                     2009
                                                                                     1989




                                                                                     1995




   www.realestateconsulting.com                                                                                                              23
INVESTOR MARKET SHARE




                                                                                              e
Investor activity is on the rise, due to the presence of distressed opportunities in the market. Current investor activity is twice the level of




                                                                                             l
2007 and currently accounts for nearly one-quarter of all sales in the market.


                % OF INVESTOR SALES TO TOTAL SALES                                     QUARTERLY % OF INVESTOR SALES TO




                                                                                           p
      25%                                                                    28%
                                                                                                 TOTAL SALES
                                                                             26%
      23%
                                                                             24%
      21%                                                                    22%
      19%                                                                    20%
                                                                             18%




                                                  m
      17%                                                                    16%
      15%                                                                    14%
                                                                             12%
      13%                                                                    10%




                                                a
      11%                                                                     8%




                                                                                   2005Q2




                                                                                   2008Q2




                                                                                   2009Q2
                                                                                   2005Q1

                                                                                   2005Q3
                                                                                   2005Q4
                                                                                   2006Q1
                                                                                   2006Q2
                                                                                   2006Q3
                                                                                   2006Q4
                                                                                   2007Q1
                                                                                   2007Q2
                                                                                   2007Q3
                                                                                   2007Q4
                                                                                   2008Q1

                                                                                   2008Q3
                                                                                   2008Q4
                                                                                   2009Q1

                                                                                   2009Q3
                                                                                   2009Q4
                                                                                   2010Q1
                                                                                   2010Q2
       9%
              2003    2004     2005   2006   2007     2008    2009




                             S
         •     While current investor activity is nearly flat year-over-year, it is significantly higher than in 2007 and prior.
               Approximately 12% of sales in 2007 were to investors. In 2010Q2, nearly twice that amount – or 23.7% – of the
               total sales were made to investors.

         •     DataQuick calculates investor activity by comparing the zip code for the property and the owner’s mailing address
               for property tax statements and determining where they differ. This calculation includes only sales where both the
               recorded site and mail zip code are known. Actual activity is probably higher because some owners do not change
               the property tax address, especially if property taxes are impounded by the lender.




    www.realestateconsulting.com                                                                                                                   24
APARTMENT OCCUPANCY




                                                                                                                                         e
Apartment occupancy rates have been increasing in recent quarters, and the current occupancy rate is more than 95%, which is similar to




                                                                                                                                        l
the average for the last 15 years.

                    ANNUAL AVERAGE OCCUPANCY RATE
     98%




                                                                                                                                      p
     97%

     96%

     95%

     94%




                                                                                   m
     93%
                                                                                                                              •   The average apartment occupancy rate in
                                                                                                                                  Stockton has increased to 95.4% . Stockton has
     92%                                                                                                                          maintained an average occupancy rate of 95%




                                                                                 a                                  Current
                                                                                                                                  over the last 15 years, and has not dropped
           1994
                  1995
                         1996
                                1997
                                       1998
                                              1999
                                                     2000
                                                            2001
                                                                   2002
                                                                          2003


                                                                                        2006
                                                                                               2007
                                                                                                      2008
                                                                                 2004




                                                                                                             2009
                                                                                                                                  below 93% in that time.

                    QUARTERLY AVERAGE OCCUPANCY RATE                                                                          •   We watch the apartment market for signs that




                                          S
     97%                                                                                                                          conditions will be getting better or worse. Rising
                                                                                                                                  rents and maintaining high occupancy rates are
     96%
                                                                                                                                  generally good signs of a healthy economy.
     95%

     94%

     93%

     92%

     91%
           2004-3q
           2004-4q

           2005-2q
           2005-3q
           2005-4q
           2006-1q
           2006-2q
           2006-3q
           2006-4q
           2007-1q
           2007-2q
           2007-3q
           2007-4q
           2008-1q
           2008-2q

           2008-4q
           2009-1q

           2009-3q
           2009-4q
           2010-1q
           2010-2q
           2010-3q
           2005-1q




           2008-3q


           2009-2q




   www.realestateconsulting.com                                                                                                                                                        25
RENT: MORTGAGE PAYMENT RELATIONSHIP




                                                                                       e
Rents have been declining in Stockton, where the cost of owning the median-priced home is now lower than the monthly cost to rent.




                                                                                      l
                   HOUSING COST OF OWNING THE MEDIAN PRICED
                  DETACHED HOME VERSUS RENTING AN APARTMENT
      $2,500




                                                                                    p
                     Monthly After Tax
                     Housing Costs
      $2,000
                     Average Asking Rent
      $1,500                                                              •    On a monthly basis, it is currently $77more
                                                                               expensive to rent the average apartment than to
      $1,000                                                                   own the median-priced home. We expect this gap




                                               m
                                                                               to narrow as apartments compete with the low
       $500
                                                                               monthly payments in the resale market.
         $0                                                               •    The average asking rental rate has declined 2.2%




                                             a
                                                                               in the last year to $843. Rents fell nearly 3% in



               Current

                2012P
                2013P
                2014P
                2010P
                2011P


                2015P
                 1982
                 1983
                 1984
                 1986
                 1987
                 1988
                 1990
                 1991
                 1992
                 1994
                 1995
                 1996
                 1997
                 1998
                 1999
                 2000
                 2001
                 2002
                 2003
                 2005
                 2006
                 2007
                 2009
                 1981


                 1985


                 1989


                 1993




                 2004


                 2008
                                                                               2009.
                                                                          •    The monthly after-tax cost of owning the median-
                       QUARTERLY AVERAGE ASKING RENT                           priced resale home in Stockton is expected to




                           S
           $900
                                                                               rise by 3.3% in 2011, but fall 1.7% in 2012 as the
                                                                               median price declines.
           $880
                                                                          •    We expect to see monthly housing costs continue
           $860                                                                in the high-$700 to low-$800 range over the next
           $840                                                                several years due to changes in the median price
                                                                               and mortgage rates.
           $820

           $800

           $780

           $760
                  2004-3q
                  2004-4q

                  2005-2q
                  2005-3q

                  2006-1q
                  2006-2q

                  2006-4q
                  2007-1q
                  2007-2q
                  2007-3q
                  2007-4q
                  2008-1q
                  2008-2q
                  2008-3q
                  2008-4q
                  2009-1q
                  2009-2q
                  2009-3q
                  2009-4q
                  2010-1q
                  2010-2q
                  2010-3q
                  2005-1q


                  2005-4q


                  2006-3q




   www.realestateconsulting.com                                                                                                      26
                      p le
DEMAND




         a m
         AND SUPPLY




S                            27
DEMAND / SUPPLY GRADES




                                                                                        e
The demand fundamentals have weakened as home sales activity has diminished and job losses have continued. The supply fundamentals




                                                                                       l
have also weakened as listings have increased from very low levels and permits have begun to rise.




                                                                                     p
                                                                  •     The Demand component of the Housing Cycle
                                                                        Risk Index has returned to an “F” level, after
                                                                        picking up to a “D-” from late 2008 to late 2009,




                                              m
                                                                        helped by the tax credit and increased levels of
                                                                        distressed sales. As sales activity has trailed off
                                                                        in the last year and job losses continue, the
                                                                        Demand fundamentals have taken another leg




                                            a
                                                                        down.




                           S
                                                                  •     The Supply component of the Housing Cycle
                                                                        Risk Index has weakened recently to a “C+,”
                                                                        which is a significant drop from much better
                                                                        conditions in early 2009. The weakening has
                                                                        occurred as permit levels have risen and listings
                                                                        have grown more than 50% in the last year.




   www.realestateconsulting.com                                                                                                      28
PERMIT ACTIVITY




                                                                                             e
While permits will grow over the next several years from today’s record-low levels, plan for overall construction levels that will only reach




                                                                                            l
to the lows of the 1990s downturn by 2014.




                                                                                          p
                        TOTAL PERMITS (12 mos.)
    8,000
    7,000
                                                                        •     Permit activity in Stockton is increasing from extremely
                                                                              low levels, but growth over the next several years will
    6,000
                                                                              still be quite low in comparison to this market’s history.
    5,000                                                                     Permits troughed below 800 units in 2009, which was
    4,000                                                                     just 11% of the market peak in 2003. Permits should




                                                 m
    3,000                                                                     rise to 2,700 annual units by 2015, which is comparable
    2,000                                                                     to the average annual level during the 1990s.
    1,000                                                               •     Permits have generally been rising over the last year,




                                               a
        0                                                                     and are up nearly 25% from very low levels one year
            Current                                                           prior.
             2011P
             2012P
             2013P
             2014P
             2015P
             2010P
              1988
              1989
              1990
              1991
              1992
              1993
              1994
              1995
              1996
              1997
              1998
              1999
              2000
              2001
              2002
              2003
              2004
              2005


              2009
              2006
              2007
              2008


      MF
      SF




                           S
SF Permits                         2006      2007      2008      2009       Current   2010P     2011P     2012P      2013P     2014P       2015P
Single-Family Permits (12 mos.)    3,461     2,201      765       792        837       900      1,200     1,400      1,800     2,000       2,500
  1-Year Growth Rate               -39%      -36%      -65%       4%         24%       14%       33%       17%        29%       11%         25%

Multifamily Permits                 191       225       54         0         12          0        100       100       100       100         200
  1-Year Growth Rate                3%        18%      -76%      -100%      140%        0%       100%       0%        0%        0%         100%

Total Permits                      3,652     2,426      819       792        849       900       1,300     1,500     1,900     2,100       2,700
  1-Year Growth Rate               -38%      -34%      -66%       -3%        25%       14%       44%       15%        27%      11%         29%




   www.realestateconsulting.com                                                                                                                    29
EMPLOYMENT GROWTH AND POPULATION GROWTH TO PERMIT RATIOS




                                                                                       e
Improved job growth and continued low construction levels in 2011 means that housing demand and supply will come into better balance –




                                                                                      l
a trend that should continue for the next several years.

                EMPLOYMENT GROWTH TO PERMIT RATIO
      4.0




                                                                                    p
      2.0
      0.0
     -2.0                                                            •    The employment growth to permit ratio should return to
     -4.0
                                                                          positive territory in 2011 due to positive job growth, and
     -6.0
     -8.0
                                                                          will likely maintain a healthy level as construction levels




                                              m
    -10.0                                                                 remain low. Job losses from 2008 through 2010 have kept
    -12.0                                                                 the ratio negative in recent years. After remaining at
    -14.0                                                                 generally healthy levels through 2007, the E/P ratio fell to
    -16.0                                                                 record-low levels when housing collapsed and the economy




                                            a
                                                                          fell into recession. We expect that the ratio will be at 1.5 in
             Current

              2011P
              2012P

              2014P
              2015P
              2010P


              2013P
               1991
               1992
               1993
               1994
               1995
               1996
               1997
               1998
               1999
               2000
               2001
               2002
               2003
               2004

               2006
               2007

               2009
               2005


               2008

                                                                          2011 and that the metro area will add more than 2 jobs for
                                                                          every permit issued in the following several years.
                  POP. GROWTH TO BLDG. PERMIT RATIO




                           S
        12                                                           •    The population growth to permit ratio is currently 10.9,
        10                                                                based on decent levels of population growth and extremely
                                                                          low permit levels. This ratio should begin to decline over the
            8
                                                                          next several years as population growth slows and permit
            6                                                             activity increases, adding three people for every one permit
                                                                          by 2015.
            4

            2

            0
                Current
                 2010P
                 2011P
                 2012P
                 2013P
                 2015P
                 2014P
                  1988
                  1989
                  1990
                  1991
                  1992
                  1994
                  1995
                  1996
                  1997
                  1998
                  1999
                  2000
                  2001
                  2002
                  2003
                  2004

                  2007
                  2008
                  2009
                  1993




                  2005
                  2006




   www.realestateconsulting.com                                                                                                             30
DEMAND TO SUPPLY RATIO




                                                                                        e
Housing demand and supply will return to balance in 2011, as more solid job growth returns to the market.




                                                                                       l
                                                    DEMAND TO SUPPLY RATIO (D/S)




                                                                                     p
                                         5.0

                                         0.0

                                        -5.0




                                                 m
                                       -10.0

                                       -15.0




                                               a
                                       -20.0




                                               Current

                                                2011P



                                                2015P
                                                2010P

                                                2012P
                                                2013P
                                                2014P
                                                 1991
                                                 1992
                                                 1993
                                                 1994
                                                 1995
                                                 1996
                                                 1997
                                                 1998
                                                 1999
                                                 2000
                                                 2001
                                                 2002
                                                 2003
                                                 2004
                                                 2005
                                                 2006
                                                 2007
                                                 2008
                                                 2009



                           S
        •     Our demand to supply ratio compares the employment growth/permit ratio with the number of
              employees/household. Another way to look at this is the ratio of the rate of employment growth to the rate of
              housing unit growth. A demand / supply ratio of 1.0-1.2 is generally considered a balanced market.
        •     The demand to supply ratio should improve to 1.8 in 2011 from its projected value of -2.6 for 2010. Mounting job
              losses in Stockton have led to a dramatic drop in the demand to supply ratio. As with the employment growth to
              permit ratio, the demand to supply ratio should remain quite healthy for the next several years.




   www.realestateconsulting.com                                                                                                  31
                            p le
       a m
FORECLOSURES AND SHADOW INVENTORY




S                                   32
PRE-FORECLOSURE NOTICE TRENDS




                                                                                               e
Pre-foreclosure notices are beginning to decline, but remain at very high levels overall.




                                                                                            p l
                                               a m
                            S
          •     The rolling 12-month count of pre-foreclosure notices has declined for 3 consecutive quarters, although the
                volume of pre-foreclosure activity is still quite high in this market. In the 12 months through 2010 Q3, there were
                approximately 10,000 recorded pre-foreclosure notices issued, which is down from more than 15,000 notices
                issued in the prior 12-month period. Pre-foreclosure notices are an indicator of future home sales that will be
                distress sales, which will put downward pressure on home prices.
          •     There were approximately 80% as many pre-foreclosure notices issued in all of Stockton as there were home sales
                during the 12-month period ending 2010 Q3. While the ratio is still too high, it is improved from the prior two
                years. The rate of notices issued in 2010 Q3 was more than 11 per 1,000 households, as compared to nearly 18
                notices issued per 1,000 households one year prior.




    www.realestateconsulting.com                                                                                                      33
PRE-FORECLOSURE DENSITY BY ZIP CODE




                                                                                         e
Stockton has a very heavy concentration of distressed homes, and the areas west of the 5 freeway generally have the highest concentration




                                                                                        l
of foreclosure activity within this metro area.

        •     The map below shows the level of




                                                                                      p
              foreclosure distress in each zip code in
              the Stockton metro area, based on the
              density of pre-foreclosure notices
              issued in the last 12 months per 1,000
              households. The highest levels of
              distress, indicated in red, are to the




                                                m
              southwest. The zip codes to the north
              show less distress by comparison.




                           S                  a
   www.realestateconsulting.com                                                                                                         34
SHADOW INVENTORY SUMMARY




                                                                                                                                            e
Stockton has more than 18,600 units of “shadow” inventory, which is very high in relation to current listings levels and will continue to put




                                                                                                                                           l
pressure on home prices over the next several years.

     •        The 22 months of “shadow” inventory, or homes not currently on the market and in one form of distress that we
              believe will be eventually liquidated/sold, is more than 8 times the number of homes currently listed on the




                                                                                                                                         p
              market.

                                                                                 Stockton, CA Shadow Inventory
                                                                         Estimated # of                   Shadow Inventory4
                                                                          Delinquent                  (based on liquidation probabilities)




                                                                        m
                                                                            Loans in        Upside                Base                   Downside
                                                                                   2                1                    1
                                            Category                         Metro         Scenario               Case                   Scenario1

                                            In Foreclosure                     7,600                     6,080                      6,840                       7,600
                                            90+ Days                           10,356                    7,767                                                 10,252




                                                                      a
                                                                                                                                    8,803
                                            60 Days                            2,119                     1,483                      1,695                       2,013
                                            30 Days                            4,079                     2,040                      2,447                       2,855
                                              Total                            24,154                    17,370                    19,785                      22,720

                                               Less: MLS-Listed Distressed Units 5                       (1,138)                   (1,138)                     (1,138)




                                      S
                                                 Shadow Inventory4                                       16,232                    18,647                      21,582
                                               Plus: Current MLS Listings                                2,150                      2,150                       2,150
                                                 Total Supply                                            18,382                    20,797                      23,732
                                               Months of Supply - Shadow                                   18.8                      21.6                        25.1
                                               Months of Supply - MLS                                      2.5                        2.5                         2.5
                                               Total Months of Supply                                      21.3                      24.1                        27.5

                                            Total Metro Mortgages 3:                                    101,294
                                            10-yr Avg Annual Metro Resale Sales:                         10,338

      Footnotes
      1 - Liquidation probability scenarios were based on a study of probabilities used by leading credit analysts and analysis of county records data
      2 - Total Metro Mortgages X Estimated Metro Delinquency %
      3 - Estimate of total mortgages, adjusted from the 2006-2008 American Community Survey (Census)
      4 - # of currently distressed properties that will ultimately become supply
      5 - Assumed that U.S. distressed listings as % of total listings was 32% (same as % distressed sales, then adjusted that % based on differential between metro total mortgage delinquency and U.S. total
      mortgage delinquency)


   www.realestateconsulting.com                                                                                                                                                                                  35
                p le
       a m
AFFORDABILITY




S                      36
AFFORDABILITY INDEX AND GRADE




                                                                                               e
Stockton’s affordability is excellent, due to the significant decline in the median price over the last 4 years. Affordability should remain




                                                                                              l
excellent in the near term.




                                                                                            p
                                                                                     •     The Affordability component of the Housing
                                                                                           Cycle Risk Index has risen to an “A+” level




                                                  m
                                                                                           during the last year, due to record-low
                                                                                           mortgage rates and median prices that
                                                                                           remain extremely low. This suggests it is a
                                                                                           good time to buy homes and land.




                                                a
                                                                                     •     A significant piece of the overall Affordability
                                                                                           grade is our measurement of the cost of
                                                                                           owning the median-priced resale home




                            S
              MEDIAN HOUSING COSTS TO MEDIAN
                       INCOME RATIO                                                        versus the median household income, taking
   70%
   65%
                                                                                           into account the mortgage rates at each
   60%                                                                                     point in time.
   55%
   50%
   45%
                                                                                     •     This ratio is currently near its all-time low,
   40%                                                                                     which means that today’s affordability
   35%                                                                                     conditions are excellent.
   30%
   25%
   20%
         Current
          2010P
          2011P

          2013P

          2015P
          2012P

          2014P
           1988
           1989

           1991
           1992
           1993

           1995
           1996
           1997

           1999
           2000
           2001

           2003
           2004
           2005

           2007
           2008
           2009
           1990



           1994



           1998



           2002



           2006




    www.realestateconsulting.com                                                                                                               37
JBREC AFFORDABILITY INDEX




                                                                                             e
Affordability is excellent in Stockton due to falling prices and record-low mortgage rates. Affordability conditions are not likely to change




                                                                                            l
significantly in the near term, even as prices and mortgage rates begin to rise from today’s very low levels.


       •    Affordability in Stockton is excellent due to low




                                                                                          p
            mortgage rates and prices that have fallen significantly
            in the last several years. Our JBREC Affordability Index,
            which measures the relationship between the monthly
            costs of owning the median-priced home and the
            median household income, is currently at 0.3 in                             QUARTERLY JBREC AFFORDABILITY INDEX
            Stockton on a scale from 0 to 10 (best to worst




                                                 m
                                                                              10.0
            affordability), where a 5 represents the historical                9.0
            median, dating back to 1981.                                       8.0
                                                                               7.0




                                               a
                                                                               6.0
       •    Stockton reached its historical worst affordability in             5.0
            early 2006 as prices skyrocketed, even surpassing the              4.0
            worst affordability conditions of the high-interest-rate           3.0
            environment of the early 1980s. The historical best                2.0




                           S
            affordability occurred in 2009, following several years            1.0
            of rapidly declining median prices.                                0.0




                                                                                     2012P

                                                                                     2015P
                                                                                     2011P
                                                                                     2013P
                                                                                     2014P
                                                                                      1981
                                                                                      1982
                                                                                      1983
                                                                                      1984
                                                                                      1985
                                                                                      1986
                                                                                      1987
                                                                                      1989
                                                                                      1990
                                                                                      1991
                                                                                      1992
                                                                                      1993
                                                                                      1994
                                                                                      1995
                                                                                      1996
                                                                                      1997
                                                                                      1998
                                                                                      1999
                                                                                      2000
                                                                                      2002
                                                                                      2003
                                                                                      2004
                                                                                      2005
                                                                                      2006
                                                                                      2007
                                                                                      2008
                                                                                      2009
                                                                                      2010
                                                                                      1988




                                                                                      2001
       •    Affordability conditions are likely to remain excellent
            in the near-term, weakening only slightly as the median
            price and mortgage rates begin to rise. We expect the
            housing-cost-to-income ratio to remain in the 23-25%
            range in the near-term.


                                       2006      2007      2008        2009   Current   2010P    2011P     2012P     2013P     2014P     2015P
JBREC Affordability Index               9.3       7.5       3.2         0.4     0.3      0.5      0.7       0.4       0.7       1.0       1.2
Median Housing Costs/Median Income     64%       57%       32%         23%     23%       23%      24%       23%       24%       25%       25%


   www.realestateconsulting.com                                                                                                                 38
INTEREST RATE IMPACT ON AFFORDABILITY




                                                                                                                                   e
A 100-basis-point rise from today’s incredibly low mortgage rates could price up to 9% of buyers at the low end of the market out of




                                                                                                                                  l
qualifying for a mortgage.




                                                                                                                                p
                                                                           Stockton, CA Mortgage Interest Rate Sensitivity
                                                     120,000
                                                               110,177
                                                                                                                                 $200,000    $300,000
                                                                                                                                 $400,000    $500,000
                                                                                    100,650                                      $600,000    $700,000
                                                     100,000
                                                                                              91,086
                       Households That Can Qualify




                                                                             m
                                                                                                                       81,820
                                                      80,000   75,006                                                           72,729

                                                                            63,961                                                           64,126




                                                                           a
                                                      60,000
                                                                                                54,236
                                                                48,727
                                                                                                                45,152
                                                                            39,239
                                                      40,000
                                                                                              31,082                                37,100   30,629
                                                                  31,360




                                                     S
                                                                               22,370                       23,048
                                                                18,730                         16,781
                                                      20,000                                                                        17,661   13,576
                                                                             13,554                             12,149
                                                                                                 9,442                              9,004     6,827
                                                                                                                7,021
                                                               11,985       8,448                                                   5,500         4,458
                                                                                              6,022       4,879
                                                          0                                                                     3,712          2,701
                                                               4.0%          5.0%             6.0%              7.0%            8.0%          9.0%

                                                                                                Mortgage Rate




        •     The chart above measures the change in the number of households that can qualify for a mortgage if mortgage
              rates rise or fall. The lines represent loan amounts, assuming a 20% down payment on the home purchase.




   www.realestateconsulting.com                                                                                                                           39
EQUITY IMPACT ON AFFORDABILITY




                                                                                          e
Buyers who bought at the peak of the market in 2006 will continue to experience significant losses in homeowner equity. However,




                                                                                         l
affordability conditions have improved significantly for entry-level buyers who can afford a down payment.




                                                                                       p
               HOMEOWNER EQUITY BASED ON MEDIAN                                       PERCENT OF HOUSEHOLDS WHO CAN
       $400,000
                     RESALE HOME PRICE                                                  AFFORD MEDIAN RESALE HOME
                                                                          80%
       $300,000                                                           70%
       $200,000                                                           60%




                                               m
       $100,000                                                           50%
             $0                                                           40%
      -$100,000                                                           30%
      -$200,000                                                           20%




                                             a
      -$300,000                                                           10%



                   2012P



                   2015P
                   2010P
                   2011P



                   2014P
                   2013P
                    1998
                    1999
                    2000
                    2001
                    2002
                    2003

                    2005
                    2006
                    2007
                    2008
                    2009
                    2004




                  Current




                                                                                 2010P
                                                                                 2011P
                                                                                 2012P
                                                                                 2013P
                                                                                 2014P
                                                                                 2015P
                                                                                  1990
                                                                                  1991
                                                                                  1992
                                                                                  1993
                                                                                  1994
                                                                                  1995
                                                                                  1996

                                                                                  1998
                                                                                  1999
                                                                                  2000
                                                                                  2001
                                                                                  2002
                                                                                  2003
                                                                                  2004
                                                                                  2005
                                                                                  2006
                                                                                  2007

                                                                                  2009
                                                                                  1989




                                                                                  1997




                                                                                  2008

                                                                                Current
                    3-year owner                 7-year owner                       20% Down, FRM                  0% Down, ARM




                           S
                    10-year owner                15-year owner                      7-Year Equity Down



        •     The median resale sales price has declined by more than $165,000 in the last three years, which translates to
              significant equity losses for buyers who bought at or near the market peak. While the median home that is
              currently transacting is likely a different home than the median home transacting three years ago, it is clear from
              the trends that home equity has taken a significant hit. As shown in the chart above at left, 7-year homeowner
              equity is also quite negative for buyers who bought in 2003, and will turn even more negative in 2012 and 2013 for
              those who bought at the peak of the market.
        •     Low mortgage rates and prices that are lower have allowed an increasing number of households to be able to
              afford the median-priced home. An estimated 67% of Stockton households will be able to afford the median-priced
              home in 2011, based on a 20% down payment and a 30-year fixed-rate mortgage.



   www.realestateconsulting.com                                                                                                     40
                     p le
       a m
DEMOGRAPHIC TRENDS




S                           41
POPULATION TRENDS BY AGE GROUP




                                                                                                                                    e
Population growth in Stockton will be strongest for the younger and older demographics. The population for those in their 50s will rise a




                                                                                                                                   l
slower rate and is likely to fall for those in their 40s.


                                                                                                                                          Population Aged 30-34 in Stockton, CA




                                                                                                                                 p
                     Age by Year 2000 in Stockton, CA                                    Population Aged 25-29 in Stockton, CA
12,000                                                                       80,000                                              60,000

                                                                             70,000
10,000                                                                                                                           50,000
                                                                             60,000
 8,000                                                                                                                           40,000
                                                                             50,000

                                                                             40,000                                              30,000




                                                                               m
 6,000

                                                                             30,000
 4,000                                                                                                                           20,000
                                                                             20,000

 2,000                                                                                                                           10,000
             Teens    20s    30s    40s    50s    60s                        10,000




                                                                             a
    0                                                                             0                                                   0




                                                                                      1995
                                                                                      1996
                                                                                      1997
                                                                                      1998
                                                                                      1999




                                                                                      2013
                                                                                      2014
                                                                                      2015
                                                                                      1990
                                                                                      1991
                                                                                      1992
                                                                                      1993
                                                                                      1994




                                                                                      2000
                                                                                      2001
                                                                                      2002
                                                                                      2003
                                                                                      2004
                                                                                      2005
                                                                                      2006
                                                                                      2007
                                                                                      2008
                                                                                      2009
                                                                                      2010
                                                                                      2011
                                                                                      2012




                                                                                                                                          1990




                                                                                                                                          1999
                                                                                                                                          2000
                                                                                                                                          2001




                                                                                                                                          2010
                                                                                                                                          2011
                                                                                                                                          2012
                                                                                                                                          1991
                                                                                                                                          1992
                                                                                                                                          1993
                                                                                                                                          1994
                                                                                                                                          1995
                                                                                                                                          1996
                                                                                                                                          1997
                                                                                                                                          1998



                                                                                                                                          2002
                                                                                                                                          2003
                                                                                                                                          2004
                                                                                                                                          2005
                                                                                                                                          2006
                                                                                                                                          2007
                                                                                                                                          2008
                                                                                                                                          2009



                                                                                                                                          2013
                                                                                                                                          2014
                                                                                                                                          2015
                                                                       100
                            30




                                                        70
             10


                     20




                                   40


                                          50


                                                 60




                                                             80


                                                                  90
         0




                     Population Aged 40-44 in Stockton, CA                            Population Aged 50-54 in Stockton, CA               Population Aged 60-64 in Stockton, CA
                                                                             50,000                                              40,000




                                               S
60,000
                                                                             45,000                                              35,000
50,000                                                                       40,000
                                                                                                                                 30,000
                                                                             35,000
40,000
                                                                                                                                 25,000
                                                                             30,000

30,000                                                                       25,000                                              20,000

                                                                             20,000                                              15,000
20,000                                                                       15,000
                                                                                                                                 10,000
                                                                             10,000
10,000
                                                                                                                                  5,000
                                                                              5,000

    0                                                                            0                                                   0




                                                                                                                                          1992
                                                                                                                                          1993




                                                                                                                                          2001
                                                                                                                                          2002




                                                                                                                                          2010
                                                                                                                                          2011
                                                                                                                                          1990
                                                                                                                                          1991


                                                                                                                                          1994
                                                                                                                                          1995
                                                                                                                                          1996
                                                                                                                                          1997
                                                                                                                                          1998
                                                                                                                                          1999
                                                                                                                                          2000


                                                                                                                                          2003
                                                                                                                                          2004
                                                                                                                                          2005
                                                                                                                                          2006
                                                                                                                                          2007
                                                                                                                                          2008
                                                                                                                                          2009


                                                                                                                                          2012
                                                                                                                                          2013
                                                                                                                                          2014
                                                                                                                                          2015
                                                                                      1991



                                                                                      1995



                                                                                      1999




                                                                                      2004



                                                                                      2008



                                                                                      2012
                                                                                      1990

                                                                                      1992
                                                                                      1993
                                                                                      1994

                                                                                      1996
                                                                                      1997
                                                                                      1998

                                                                                      2000
                                                                                      2001
                                                                                      2002
                                                                                      2003

                                                                                      2005
                                                                                      2006
                                                                                      2007

                                                                                      2009
                                                                                      2010
                                                                                      2011

                                                                                      2013
                                                                                      2014
                                                                                      2015
         1992


         1995


         1998


         2001


         2004


         2007




         2014
         1990
         1991

         1993
         1994

         1996
         1997

         1999
         2000

         2002
         2003

         2005
         2006

         2008
         2009
         2010
         2011
         2012
         2013

         2015




     www.realestateconsulting.com                                                                                                                                                 42
                                e
                                         Consumer




                               l
                                                    Location




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                                                         Price




          m
                                                    Product




        a
FUTURE HOUSING DEMAND BY LIFESTAGE AND PRICE POINT




S                                                                43
HOUSEHOLDS BY LIFESTAGE




                                                                                                    e
Overall, the combined Families groups – who generally have a higher propensity to buy homes – will likely comprise 41% of the households




                                                                                                   l
in Stockton in 2011. Older buyers, including Empty Nesters and Retirees, comprise the next-largest groups.




                                                                                                 p
                                      2011 Summary Distribution of 228,315 Households in Stockton, CA
                                                                   MSA

                                    Young Families                 16,565




                                               m
                                    Elem. Families                               30,203


                                   Mature Families                                                 47,695




                                             a
                                      Couples <45                     19,909


                                           Singles                             27,117




                           S
                                     Empty Nesters                                           41,894


                                          Retirees                                               44,932


                                                     0   10,000   20,000     30,000     40,000   50,000     60,000
                                                                           Households




         •     For 2011, Mature Families comprise the largest household group, followed by Retirees and Empty Nesters.
         •     The combined Families groups – those households with children under the age of 18 and who generally have a greater
               propensity to buy a home – represent more than 94,000 households.



   www.realestateconsulting.com                                                                                                        44
HOUSEHOLD BUYING DEMAND BY LIFESTAGE




                                                                                                   e
Families’ share of home buying activity in 2011 is expected to be 46% of the market, which is higher than their share of households.




                                                                                                  l
Couples Under 45 and Singles will also have a greater share of home purchases than overall households.


   2011 Summary of Annual Home Buying Demand (10,224 Homes) in                      2011 Percentage of Buying Demand (10,224 Homes) in Stockton, CA




                                                                                                p
                        Stockton, CA MSA                                                                         MSA

                                                                                    Young Families                                   16.9%
  Young Families                                      1,730                                                      7.3%


                                                                                     Elem. Families                          14.1%
   Elem. Families                                 1,444                                                                     13.2%




                                                        m
                                                                                    Mature Families                             14.6%
  Mature Families                                 1,489                                                                                       20.9%

                                                                                                                                                   24.0%




                                                      a
     Couples <45                                                    2,456              Couples <45
                                                                                                                   8.7%

            Singles                           1,380                                        Singles                           13.5%
                                                                                                                          11.9%




                            S
   Empty Nesters                          1,091                                      Empty Nesters                      10.7%
                                                                                                                                        18.3%

         Retirees               635                                                        Retirees             6.2%
                                                                                                                                          19.7%

                      0   500     1,000      1,500        2,000   2,500     3,000    % of Demand
                                                                                                      0%   5%     10%       15%         20%       25%      30%
                                          Home Purchases                             % of HH




        •       For 2011, total homes sales (new and resale) are projected to be approximately 13,400 in the Stockton MSA. Investors
                are projected to be 3,176 of these sales. Couples Under 45 (who may be planning families), Singles and families will
                dominate the remaining 10,224 home purchases in 2011.


   www.realestateconsulting.com                                                                                                                            45
ANNUAL BUYING DEMAND BY LIFESTAGE AND PRICE DISTRIBUTION




                                                                                                           e
Demand for housing in 2011 is likely to be strongest in the lower price points, with more than 60% of the sales occurring in price points




                                                                                                          l
under $200,000. Only 12% of the demand for homes in 2011 will be in price points over $300,000.

                                              2011 Summary of Annual Home Buying Demand (10,224 Homes) in Stockton, CA MSA




                                                                                                        p
                                      3,000
                                                                                                                             Over
                                                                                                                             $350,000
                                      2,500                                                                                  $300,000 -
                                                                                                                             $350,000
                                      2,000                                                                                  $250,000 -
                     Home Purchases




                                                                                                                             $300,000
                                      1,500                                                                                  $200,000 -




                                                                m
                                                                                                                             $250,000
                                      1,000                                                                                  $150,000 -
                                                                                                                             $200,000
                                       500                                                                                   $100,000 -




                                                              a
                                                                                                                             $150,000
                                         0                                                                                   Under
                                                                                                                             $100,000
                                                Young      Elem.      Mature    Couples   Singles    Empty      Retirees
                                               Families   Families   Families    <45                 Nesters




                                         S
                                                                 Young    Elem.    Mature Couples            Empty                 % of
                                         Stockton, CA MSA
                                                                Families Families Families  <45   Singles   Nesters Retirees Total Total
                         Under $100,000                           331      249      238     223     466       116     220    1,843 18%
                         $100,000 - $150,000                      369      308      218     468     432       185     168    2,149 21%
                         $150,000 - $200,000                      424      352      259     633     286       207     121    2,281 22%
                         $200,000 - $250,000                      302      252      252     500     120       189      71    1,686 16%
                         $250,000 - $300,000                      156      137      233     306     40        171      28    1,072 10%
                         $300,000 - $350,000                       80       74      137     169     21        103      14     599   6%
                         Over $350,000                             68       70      152     156     15        120      12     594   6%
                           Total                                 1,730    1,444    1,489   2,456   1,380     1,091    635 10,224 100%
                           % of Total                             17%      14%      15%    24%     13%       11%      6%     100%


        •     Singles will purchase the greatest number of homes in the under-$150,000 price point. The demand for homes priced
              over $250,000 is predominately in the Couples Under 45 and Mature Families lifestage groups.



   www.realestateconsulting.com                                                                                                             46
ANNUAL BUYING DEMAND FORECAST BY LIFESTAGE




                                                                                                        e
Demand for primary new and resale housing is projected to increase through 2012, but begin to decline in the following years as the




                                                                                                       l
distressed resale inventory sells off. Move-up buyers will gain a greater share of the market as the impact of equity losses diminishes.

                                                         Stockton, CA MSA Total Demand by Lifestage
                                     3,000




                                                                                                     p
                                     2,500

                                     2,000

                                     1,500
                             Sales




                                                           m
                                     1,000

                                      500




                                                         a
                                        0
                                               Young       Elem.         Mature Couples <45     Singles      Empty     Retirees
                                              Families    Families      Families                             Nesters
                                                     2010p       2011p         2012p       2013p         2014p     2015p




                           S
                                                                                  Total                                     2015p %
                                                                     2010p   2011p     2012p    2013p      2014p    2015p    of Total
                                             Young Families          1,582    1,730     1,667   1,427      1,099     856     11.6%
                                             Elem. Families          1,095    1,444     1,673   1,722      1,600    1,441    19.5%
                                             Mature Families         1,129    1,489     1,725   1,776      1,651    1,486    20.1%
                                             Couples <45             2,246    2,456     2,366   2,025      1,560    1,214    16.4%
                                             Singles                 1,262    1,380     1,330   1,138       877      683      9.2%
                                             Empty Nesters            827     1,091     1,264   1,301      1,209    1,088    14.7%
                                             Retirees                 481      635       735     757        704      633      8.6%
                                               TOTAL                 8,622   10,224 10,758      10,148     8,698    7,401    100.0%
                                              % Chg from 2010                18.6% 24.8%        17.7%      0.9%    -14.2%

     •     The majority of future demand in the near term will continue to come from Couples Under 45 with no children.
           Mature and Elementary Families and Empty Nesters will see their share of total sales activity increase as they begin
           to recover from significant losses in homeowner equity that make it difficult to sell their current homes today.

   www.realestateconsulting.com                                                                                                            47
FORECAST ASSUMPTIONS




                                                                                           e
Rising mortgage rates will slow the rate of sales growth in the recovery in this market, and high levels of negative equity among current




                                                                                          l
homeowners will weaken the market share of move-up buyers in the near term, resulting in a shift to more entry-level or first-time buyers.

        •     If mortgage rates rise significantly above the 6.5% we are projecting by 2015, sales volumes will likely be lower than




                                                                                        p
              projected, impacting all lifestages. Renters will have a more difficult time qualifying for homes, and existing
              homeowners will be less likely to move because their current mortgage rate will be lower than their potential
              future mortgage rate, which will encourage them to stay put. Conversely, lower mortgage rates will increase sales
              volumes. Our analysis shows that demand by price range changes by approximately 9% for a 100 basis point
              change in mortgage rate at the lowest price points.




                                                m
        •     The lack of mobility by existing homeowners who owe more than the value of their house has already been
              factored into our analysis. If there had been no equity erosion, we would be projecting more move-up activity. The
              propensity to purchase by elementary families, mature families, empty nesters and retirees has been discounted by




                                              a
              36% for each lifestage group, because of these factors. These estimates were derived by knowing that
              approximately 58% of all Stockton mortgage holders owe more than their house is worth, and assuming that 80%
              of these homeowners with negative equity continue living in their home in the near term (the latter is a ballpark
              estimate, as we could not find empirical evidence to support this percentage).




                           S
   www.realestateconsulting.com                                                                                                          48
DOMINANT DEMOGRAPHIC BY GEOGRAPHY – CURRENT HOUSEHOLDS




                                                                                         e
The east side of the Stockton MSA has a high concentration of affluent and prosperous households. There is also a high concentration of




                                                                                        l
family households on the west side of the MSA.




                                               m                                      p
                           S                 a
   www.realestateconsulting.com                                                                                                           49
                               e
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                                            Location




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GEOGRAPHIC INDICATORS AND SUBMARKET GRADING




S                                                         50
SUBMARKET RECOMMENDATIONS AND CHARACTERISTICS




                                                                                            e
The submarkets to the north of the metro area are the most desirable in terms of economic and demographic fundamentals.




                                                                                           l
        •    We developed the Submarket Grades to help you quickly ascertain the quality of assets by their location within a




                                                                                         p
             metro area. We know that asset values ultimately can be affected by being on the right or wrong side of a particular
             street, so we only expect this tool to be used as a quick reference, rather than a replacement for good due
             diligence.

        •    Our recommendations by submarket are as follows:




                                                 m
              • Buy and Hold: North and Tracy
              • Invest and Sell: Stockton-SE
              • Invest with Very Long-Term Payback Horizon: Stockton-W and Stockton-E




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        •    To help you with your location strategy, we have compiled the most important statistics, which are shown below.
             This is a very high-level analysis, and we are certain that individual properties in each submarket can vary substantial
             because of their neighborhood characteristics, freeway proximity, or other issues:




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               •    Incomes: The highest incomes are in Tracy, Stockton-SE and Stockton-W.
               •    Education: The most-educated residents are in the North, Tracy and Stockton-W.
               •    Crime: The lowest crime rates are in Stockton-SE, North and Tracy.
               •    Employment: The best employment proximity is in the North, Stockton-E and Stockton-W.
               •    Land: Land is most available in Tracy and Stockton-SE.




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HOUSEHOLDS AND EMPLOYMENT BY GEOGRAPHY




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The greatest concentrations of households and businesses are in the city of Stockton, with pockets around Lodi, Tracy and Manteca as well.




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                  Households/Area Square Mile                                                 Business/Area Square Mile




                                               m                                      p
                           S                 a             5,000


                                                           2,500


                                                           0
                                                                                                                                    1,100


                                                                                                                                    550


                                                                                                                                    0



   www.realestateconsulting.com                                                                                                           52
NET WORTH AND CRIME BY GEOGRAPHY




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Net worth is highest in the areas surrounding Lodi/Woodbridge and Tracy. Crime tends to be highest where the greatest concentrations of




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households and businesses are.


                       Average Net Worth                                                 Total Crime/Area Square Mile




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                           S                a            $900k


                                                         $525k

                                                         $150k
                                                                                                                                 750


                                                                                                                                 375


                                                                                                                                 0



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OVERALL SUBMARKET GRADING




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The North and Tracy submarkets are the most desirable , based on economic and demographic factors, but often lack available




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opportunities. Land is generally more available in the East, West, and Southeast submarkets.



                                                                                                   A-B Markets:




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                                                                                                   Buy & Hold

                                                                                                                :




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                                                                                                   Invest & Sell

                                                                                                   D-F Markets:




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                                                                                                   Long-Term
                                                                                                   Patient Money




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                                                                          Submarket
                                                                            Grades
                                                                                A
                                                                                 B
                                                                                 C
                                                                                 D
                                                                                 F

                                                                   Land Availability
                                                                    1     High
                                                                    2     Medium
                                                                    3     Low

                                                      Emerging Markets
                                                       +    Potential Improvement
                                                       -    Potential Decline


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SUBMARKET GRADING METHODOLOGY




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                                                                                             Strategy
                                            A                         B                          C                             D                      F




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                                                    Buy & Hold                               Buy & Sell               Invest with Very Long-Term Payback Horizon


                                                                       Submarket Grade Components & Weighting
                                                                                                                                                   Land
                                                                                                                                                                      Emerging/Declining
                                Submarket          High Incomes        Educated Residents            Low Crime          Employment Proximity     Availability
                                  Grade
                                                       30%                    30%                      20%                          20%                         Pre-Foreclosures
                                                                                                                                                   Rating                          Rank    Rating




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                  Submarket                     2008 Income   Rank    Bachelor's/HH   Rank     Crime/Zip         Rank      Emp/HH         Rank                     /1000 HHs
         STK-North                  A             $51,421         4       0.21         1         65.0             2          1.06          1          3               36            1
         STK-Tracy                  B             $78,329         1       0.21         2         74.3             3          0.82          4          1               97            5          +
         STK-SE                     C             $57,319         2       0.15         5         59.8             1          0.82          5          1               65            3
         STK-Stockton W             D             $53,914         3       0.20         3         159.3            5          0.85          3          2               85            4




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         STK-Stockton E             F             $44,963         5       0.17         4         137.6            4          1.01          2          3               64            2          -




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                                  Consumer




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                                             Location




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                                                   Price




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                                               Product



PRODUCT POSITIONING STRATEGIES




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TARGET LIFESTAGES AND PRICE POINTS




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Though Couples Under 45 are the most numerous single segment, families of one sort or another comprise nearly half of the Stockton




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housing market. Singles and Empty Nesters are also important, and Retirees will gain market share.




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                                                                   •    Target Lifestages:        Couples under 45 are the
                                                                        single largest bloc of homebuyers in Stockton at
                                                                        nearly one-quarter of demand. However,
                                                                        combining the three family categories results in
                                                                        46% of demand from families. Young Families are
                                                                        slightly more numerous than Mature and




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                                                                        Elementary Families in terms of home purchase
                                                                        demand. Singles and Empty Nesters are also
                                                                        important buyer segments in Stockton, but the




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                                                                        market is clearly family and older couple-
                                                                        oriented.

                                                                   •    Target Price Points: The bulk of demand will be




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                                                                        below $200,000, certainly below $250,000. The
                                                                        sub-$200,000 market niche must compete
                                                                        directly with a wealth of foreclosures, making for
                                                                        a crowded and competitive housing market.
                                                                        Detached product in better locations can sell in
                                                                        the mid- to occasionally high-$200,000s, but
                                                                        being in the low-$200,000s is a safer bet. Prices
                                                                        under $200,000 for new homes in Stockton is
                                                                        likely necessary. Only 12% of demand is over
                                                                        $300,000.




   www.realestateconsulting.com                                                                                                      57
PRODUCT SOLUTIONS BY LIFESTAGE




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Families are the dominant buyer segment, so high bedroom counts and conventional lot sizes – preferably in a comparatively decent school




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district – are the best bets. Couples Under 45, Empty Nesters, and Singles are also important.


                                              •     Couples Under 45 (currently no children): This group is very well-represented




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                                                    in Stockton, despite the great number of family households. Often these households
                                                    are young couples that are effectively “pre-families,” but there are many mature dual-
                                                    income, no kids (DINKs) households as well.
                                                       •    Young couples planning to have kids: small-lot detached and conventional lot
                                                            (5,000-6,000 sq. ft.) detached, with an emphasis on affordability. They are
                                                            typically working somewhere in the Bay Area, so their main alternative is




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                                                            renting closer to work. They will accept higher densities as the market
                                                            improves and prices rise.
                                                       •    DINKs – a major part of a diverse market. They will accept lower-




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                                                            maintenance ,higher-density options in many other locations, but are mainly in
                                                            conventional detached housing in Stockton due to the dominance of that
                                                            product type in this market. A potential target for small-lot detached product
                                                            and possibly townhomes, but can get that closer to employment in the Bay




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                                                            Area, so relative buying power can purchase more conventional detached
                                                            product in Stockton.
                                              •     Families: Families are still key in Stockton, often fleeing from high Bay Area prices.
                                                    A larger bedroom count is necessary, with optional room configurations and some
                                                    yard space, as well as seeking comparatively better schools (e.g., Ripon, and often a
                                                    knock on the city of Stockton).
                                              •     Singles: Similar to the younger portion of Couples Under 45, but an option is to
                                                    rent either locally or in some part of the Bay Area where many work. When buying,
                                                    they will gravitate toward affordable detached, but a there is a potential attached
                                                    market here based on low-maintenance, affordability and convenience.
                                              •     Although we have focused on the growing segments, there will be activity across all
                                                    lifestages. We will be happy to work with you to design the most appealing homes for
                                                    your particular location and density.

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BUILDER ENVIRONMENT




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TOP 10 BUILDERS




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Stockton is a heavily concentrated MSA, with the top 10 builders capturing 83% of the new home sales activity. Publicly traded builders




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account for 5 of the 10 biggest builders and the two largest by far – KB Home and Pulte – are both publics.


                                                                                                  2009 Net             Market




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    Rank           Parent Company / Company                                                         Sales              Share
         1         KB Home                                                                                  169         19.9%
         2         Pulte Homes / Del Webb                                                                   158         18.6%




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         3         Woodside Homes                                                                             77         9.0%
         4         McRoy-Wilbur Communities                                                                   58         6.8%




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         5         Standard Pacific Homes                                                                     52         6.1%
         6         Taylor Morrison                                                                            49         5.8%




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         7         Atherton Homes                                                                             44         5.2%
         8         Shea Homes                                                                                 44         5.2%
         9         FCB Homes                                                                                  35         4.1%
        10         Award Homes                                                                                20         2.4%
                   Top 10 Total Market Share                                                                706         83.0%

   Source: Hanley Wood Market Intelligence

   www.realestateconsulting.com                                                                                                           60
TOP 10 BUILDERS NICHE POSITIONS




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    KB – Major public builder focusing on entry-level product. Has one of the few active projects in the city of Stockton (Riverbend)
      that has been successful with pricing mainly below $200,000.
    Pulte / Del Webb – Del Webb’s Woodbridge active adult community in Manteca is one of the best-performing new home




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      communities in California. Pulte is at Mountain House. Centex, though currently without any Stockton communities, has long
      been a major presence in the Central Valley.
    Woodside – Major regional developer and builder with substantial presence in Sacramento to the immediate north and with
     multiple communities in Stockton and Manteca. Key builder in the region with affordable new home product typically priced in
     the low-$200,000s.




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    McRoy-Wilbur Communities – Historically somewhat active Central Valley private builder. Currently in Ripon, as well as
      Turlock in neighboring Stanislaus County.




                                            a
    Standard Pacific – National builder with a significant, but not huge historical presence in the Central Valley. Currently with two
      very affordably priced communities in the Montage masterplan in Manteca, and also a community in Turlock.
    Taylor Morrison – Like Standard Pacific, a quality national builder with a Central Valley presence, but currently with only one
      move-up community in Manteca.




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    Atherton – Local builder with one community in Manteca. This community is a larger lot move-up product, which has
      historically been this builder’s focus.
    Shea – Major national private builder and master developer of Mountain House near Tracy. Has three communities in Mountain
      House and will eventually open a Trilogy active adult community there. Mountain House communities are priced from the
      mid-$300,000s to the low-$400,000s. Though high for this market now, these prices are not much more than half what they
      would have been during the hot market period.
    FCB – Stockton-based local builder with communities in Stockton (now sold out, but was priced in the low-$200,000s) as well as
      in the Modesto area to the south. Historically mainly a move-up builder.
    Award – Private builder based in the Bay Area with selective targeting of smaller communities in the Bay Area and the Central
      Valley.


  www.realestateconsulting.com                                                                                                           61
PUBLIC BUILDER LOCATIONS




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                           S
 Sources: builder websites, John Burns Real Estate Consulting

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APPENDIX: DATA SOURCES AND METHODOLOGY




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DATA SOURCES AND METHODOLOGY




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      Limiting Conditions




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      • The information contained in this report involved the assembly of many data elements and is subject to human
          error. Readers of this report take full responsibility for their own actions, including investment decisions, without any liability
          to John Burns Real Estate Consulting, Inc. There will usually be differences between projected and actual results, and the
          differences may be material. We have no liability with respect to the achievement of any projections or forecasts.




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      Data Sources
      • DataQuick: resale and new home sales volume, resale and new home sales median price, investor sales activity, pre-
         foreclosure notices (sales and pricing information for some markets from Economy.com, NAR, Texas Real Estate Center and
         MRIS)




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      • Census Bureau: permits, population, households
      • Bureau of Labor Statistics: employment, unemployment, median household income
      • RealFacts: apartment rent, apartment occupancy




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      • REIS: apartment rent
      • Freddie Mac: mortgage rates
      • Realtor.com: listings (listings for some markets from local MLS)
      • RealtyTrac: pre-foreclosure notices
      • Mortgage Bankers Association: shadow inventory information (calculations by John Burns Real Estate Consulting)
      • Collateral Analytics:
      • ESRI: Demographic maps
      • Builder Magazine: Top 10 builders
      • John Burns Real Estate Consulting: forecasts, builder community counts, Affordability Index, Housing Cycle Risk Index



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DATA SOURCES AND METHODOLOGY




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      Housing Demand Model Methodology




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      Understanding the Model
      • We have developed a proprietary model that forecasts demand for future housing by:
          • determining the demographic composition of households who already live in the area and forecasting their
              composition in the future (by aging everyone) and forecasting migration,




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          • determining the propensity of each type of household to purchase a home in a given year based on solid
              Census Bureau data,
          • determining the ability of each household to afford a home based on income and current down payment




                                            a
              requirements,
          • reconciling the demographic demand above with recent actual purchasing activity,
          • forecasting price, affordability and sales volume by price range based on our view of economic conditions
              outlined in the previous section of this report, and




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          • forecasting home sales by lifestage/household composition and price range to help you target the groups
              most in need of housing that they cannot find in the resale market.

      This forecast is also available by submarket for an additional charge.

      •     Our methodology differs from traditional housing demand models by focusing not on the need for new housing to
            accommodate growth (which is zero demand when there are substantial job losses and net outmigration), but
            instead on dominant life stage trends in the area and their home buying trends. Estimates for housing demand
            combine both new and resale homes.




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HOUSING DEMAND METHODOLOGY




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Housing Demand Model Methodology




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       Results
       • We segment home buyers into 7 distinct lifestage groups based on the age of the oldest child and the oldest adult,
           and investors:
            • Young Families: Families (including single parents) with oldest child under age 5.
            • Elementary Families: Families (including single parents) with children aged 5 to 11.




                                            m
            • Mature Families: Families (including single parents) with oldest child aged 12 to 17 (note that this child
                 would also be their youngest child if the older children are 18 or older).
            • Couples Under 45: Married couples under age 45 with no children. Some of these may be planning on




                                          a
                 having children.
            • Singles: Single individuals under age 45 with no children. Some of these may be planning on having children.
            • Empty Nesters: All households between age 45 and 64 with no children.
            • Retirees: All households age 65+ with no children.




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            • Investors: Investor buyers include second home buyers as well as those who intend to flip the home for a
                 profit or rent the home. The demographic profile of these investors is not available.




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CONTACT US




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                                 Thank you on behalf of the



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                                John Burns Real Estate Consulting Team.
                        For more information or questions about our methodology, please contact Chris Porter.




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                      16485 Laguna Canyon             12555 High Bluff Drive         5330 Primrose Drive
                              Road                         Suite 210                       Suite 228
                            Suite 130                 San Diego, CA 92130            Fair Oaks, CA 95628
                        Irvine, CA 92618
                          949-870-1200


                                 Additional offices in: Lake Worth, FL; Irving, TX; Portsmouth, NH




 www.realestateconsulting.com                                                                                   67

				
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