Economic Update

Minority Depository Institutions Advisory Committee April 7, 2015

Richard Nisenson, Director, Industry

and Regional Analysis

Agenda

U.S. economy strengthening; others weak or slowing

– U.S. labor market

– Potential rise in U.S. interest rates

– Drop in oil prices

Real estate markets continue to recover; extent of recovery varies across markets and property type

– Home prices and affordability

– Residential and commercial construction

2

-3

-2

-1

0

1

2

3

4

07 08 09 10 11 12 13 14 15 16

4.8

9.9

4

5

6

7

8

9

10

07 08 09 10 11 12 13 14 15 16

Quarterly average unemployment rate, % Real GDP, annual % change

Sources: BEA, BLS, Blue Chip Economic Indicators (March2015)

Real GDP growth forecast for 2015 above 3%, driving unemployment towards 5%

Recession Recession

3

Blue Chip Consensus

5.7

4.9

0

1

2

3

4

5

6

92 98 04 10

As long-term unemployment and part-timers being absorbed, earnings growth edging higher

Source: BLS (data through 4Q:2014)

Employment Cost Index:

year-to-year change, percent

Compensation

Wages & salaries

Measures of labor underutilization,

percent of labor force

Unemployed up to 14 weeks

Employed part-time for economic reasons

Unemployed over 26 weeks

4

U.S. growth accelerating while EU and Japan struggle and emerging markets slow

5

Source: Oxford Economics; January 2015 forecast

-2

0

2

4

6

8

10

-2

0

2

4

6

8

10

China EmergingMarkets

Brazil UK Eurozone Japan US World

Real GDP, annual % change

14 15F

97-07 avg

5

Treasury yield curve expected to flatten through 2015 into 2016

0

1

2

3

4

5

04 05 06 07 08 09 10 11 12 13 14 15 16

10-year Treasury rate

3-month Treasury rate

Percent

Sources: FRB, Blue Chip Consensus Forecast (March 2015). Historical data through 4Q:2014.

Recession

Blue Chip Consensus Forecast

6

Coming rate increase cycle expected to be mild from a historical perspective

Source: FRB, OCC Econ calculations

* 2015-17 cycle assumes first rate increase at July 2015 FOMC meeting, rising to a peak fed funds rate target by December 2017. Assumption of a 3% fed funds rate target by December 2017 aligns with several baseline rate forecasts as of December 2014. Assumption of a 4.25% fed funds rate target by December 2017 reflects highest FOMC member forecast as of December 2014 (median forecast = 3.63%).

Intensity of federal funds rate increases (basis point increase / # months from trough to peak)

1986-1989 1994-1995 1999-2000 2004-2006 2015-2017*5.9% to 9.8% over 30 months

3.0% to 6.0% over 14 months

4.75% to 6.5% over 13 months

1.0% to 5.25% over 26 months

If assume a 6.5% funds rate by Dec. 2017

If assume a 4.25% funds rate by Dec. 2017

0% to 3.00% over 30 months

(consensus forecast)

7

8

Sources: EIA, WSJ, Haver Analytics (data through January 2015)

Down 60% in 4 months

Sharp drops in oil prices are not uncommon;

current cycle largely driven by supply growth

Down 55% in 7 months

Price West Texas Intermediate Oil, $/barrel (log scale)

Down 70% In 5 months

Down 45% in 5 months

Down 35% in 10 months

Down 33% in 7 months

Manufacturers, particularly in Midwest and South, benefit from lower oil prices…

Sources: Census Bureau, EIA, Moody’s Analytics

Petroleum used by manufacturing sector per dollar of output, 2013

>142

59 to 142

<59

U.S.=100

9

…as do consumers, particularly in non-oil South and mountain states…

Sources: BEA, EIA, Moody’s Analytics

Gasoline expenditure share of disposable income, %, 2012

>4.6

<3.9

3.9 to 4.6

U.S.=3.9

10

…but energy-producing states hurt by lower oil prices

Mining and extraction share of real GDP, %, 2013

11

US.=2.1

>5

1 to 5

<1

Sources: Census Bureau, EIA, Moody’s Analytics

26%

6%

8%

6% 14%

8%

6%

12%

11%

17%

34%

Agenda

U.S. economy strengthening; others weak or slowing

– U.S. labor market

– Potential rise in U.S. interest rates

– Drop in oil prices

Real estate markets continue to recover; extent of recovery varies across markets and property type

– Home prices and affordability

– Residential and commercial construction

12

Home price appreciation slowing in most states

Source: Black Knight (formerly LPS), through December 2014 Note: Black Knight data represents prices of non-distressed transactions; they compute discount-corrected REO and short sale prices and combines them with non-distressed sale prices.

-25

-15

-5

5

15

25

01 02 03 04 05 06 07 08 09 10 11 12 13 14

Home price index, year-to-year change, %

U.S.

CA

TX

FL

13

NJ

14

Source: Black Knight (formerly LPS), data through December 2014 at the metro division level. Note: Represents prices of non-distressed transactions; Black Knight computes discount-corrected REO and short sale prices and combines them with non-distressed sale prices.

Home prices are rising, but remain below prior peak in some metros

Newark, NJ

McAllen, TX

Charlotte, NC

Philadelphia, PA

U.S.

Los Angeles, CA

Miami, FL

change (%) Dec:13-Dec:14 change (%) prior peak to Dec:14

San Francisco

0 5 10 15 -25 -15 -5 5 15

Shawnee, OK

0

2

4

6

8

10

12

14

Source: NAR, Census Bureau, Moody’s Analytics; data at the metro division level

Median home price to median household income ratio

15

Relationship between home prices and income varies widely across local markets

Boom peak

Recent low

4Q:14

16

Multifamily starts back to historical averages; single-family starts remain subdued

Source: Black Knight (formerly LPS), through December 2014 Note: Black Knight data represents prices of non-distressed transactions; they compute discount-corrected REO and short sale prices and combines them with non-distressed sale prices.

0

1

2

3

Housing construction relative to area trend has recovered fastest in tech and energy areas

Source: Census Bureau, Moody’s Analytics; note: housing starts includes multifamily units; data at the metro division level

2012-2014 average annual housing starts index (1 = 82-14 average)

82-14 avg=1

17

Apartment construction surges while other property types remain below historical norms Growth in existing CRE space by property type

Source: CoStar Portfolio Strategy 4Q:2014 baseline forecast for 54 Tier 1 markets

y/y supply growth %

1.9

0.6 0.5

1.1

2.4

0.9

0.6

1.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Apartment Office Retail Warehouse

4Q:14 4Q:15 F 20-Year Average

18

Summary

U.S. economy strengthening; others weak or slowing

– U.S. labor market tightening

– Rise in U.S. interest rates complicated by international factors

– Both gainers and losers from drop in oil prices

– Real estate markets continue to recover; extent of recovery varies across markets and property type

– Home price growth slowing and affordability varies widely across U.S.

– Housing in tech and energy-reliant areas and apartments seeing fastest growth in construction

19