Polling Question 1:
California's existing housing prices havefallen nearly 30 percent over the past 12months. What will happen to California’shome prices over the next 12 months?
1. They will increase
2. They will remain flat
3. Decrease another 5 percent
4. Decrease another 10 percent
5. Decrease by 15 percent or more
Polling Question 2:
Which factor will have the most significantimpact on California’s home prices?
1. Availability of mortgage credit
2. Job losses
3. Foreclosure inventory
4. The Troubled Asset Relief Program (TARP)
Consumer Sentiment Index University of Michigan
Sources: Federal Reserve Bank of St. Louis, University of Michigan, Reuters.
080604020098969492908886848280
120
100
80
60
40
Index (1966 Q1= 100)
Retail sales Excluding motor vehicle and parts dealers, United States
Sources: Moody’s Economy.com, U.S. Census Bureau.
0807060504030201009998
12
10
8
6
4
2
0
Percent change from preceding year
Industrial Production Index United States
Sources: Global Insight, Federal Reserve Board.
0807060504030201009998
15
10
5
0
-5
-10
Percent change from preceding year
Consumer Price Index United States
Sources: Global Insight, Bureau of Labor Statistics.
0807060504030201009998
6.0
5.0
4.0
3.0
2.0
1.0
0.0
Percent change from preceding year
All items
Less foodand energy
Oil prices West Texas Intermediate Crude
Sources: Global Insight, Wall Street Journal.
080706050403020100
160
140
120
100
80
60
40
20
0
US$/bbl
0807060504030201009998
30
20
10
0
-10
-20
-30
Percent change from preceding year
Gross private domestic investment Fixed investment, United States
Sources: Global Insight, Bureau of Economic Analysis.
Residential
Non-residential
Exports of goods and services United States
Sources: Global Insight, U.S. Census Bureau.
0807060504030201009998
30
20
10
0
-10
-20
Percent change from preceding year
Real personal consumption expenditures United States
Sources: Global Insight, Bureau of Economic Analysis.
0807060504030201009998
6
5
4
3
2
1
0
Percent change from preceding year
200820072006200520042003
400
300
200
100
0
Basis points
TED spread Difference between 3-month LIBOR and 3-month Treasury bill rate
Sources: Moody's Economy.com, British Bankers' Association, Federal Reserve Board.
*spread as of Oct. 24, 2008
Initial unemployment insurance claims United States
Sources: Global Insight, Bureau of Labor Statistics.
0807060504030201009998
550
500
450
400
350
300
250
200
Thousands of claims
Mortgage spread 30-year mortgage rate minus 10-year constant maturity securities
Sources: Moody's Economy.com, Federal Reserve Board, Freddie Mac.
0807060504030201009998
2.6
2.4
2.2
2.0
1.8
1.6
1.4
1.2
Percentage points
200820072006200520042003
30
20
10
0
-10
-20
-30
-40
Percent change from preceding year
Construction put-in-place United States
Sources: Moody's Economy.com, U.S. Census Bureau.
Non-residential
Residential
0807060504030201009998
4
3
2
1
0
-1
-2
-3
Percent change from preceding year
Non-farm employment California vs. United States
Sources: Bureau of Labor Statistics, Global Insight.
U.S.
California
0807060504030201009998
20
15
10
5
0
-5
-10
-15
Percent change from preceding year
Employment by industry California
Sources: Bureau of Labor Statistics, Global Insight.
Construction
Non-farm
Financialactivities
0807060504030201009998
15
10
5
0
-5
-10
Percent change from preceding year
Housing-related industries Employment, California
Sources: Bureau of Labor Statistics, Global Insight.
Buildingmaterials
Furniturestores
Real estateagents/brokers
Inventory and months supply of homes United States
Sources: Moody's Economy.com, National Association of Realtors.
Months supply of homes on market (R)
Number of homesavailable for sale (L)
0807060504030201009998
4.0
3.5
3.0
2.5
2.0
1.5
1.0
11
10
9
8
7
6
5
4
3
Millions of homes available Number of months
Months supply of homes California
Sources: Moody's Economy.com, California Association of Realtors.
0807060504030201009998
20
15
10
5
0
Number of months
0807060504030201009998
30
20
10
0
-10
-20
-30
-40
Percent change from preceding year
Median sales price, existing single-family home California vs. United States
Sources: Moody’s Economy.com, National Association of Realtors.
California
U.S.
0807060504030201009998
30
20
10
0
-10
-20
Percent change from preceding year
Median, new single-family home sales price California vs. United States
Sources: Moody's Economy.com, U.S. Census Bureau.
California
U.S.
0807060504030201009998
30
20
10
0
-10
-20
-30
-40
Percent change from preceding year
Existing single-family home sales California vs. United States
Sources: Moody’s Economy.com, National Association of Realtors, MDA Data Quick.
California
U.S.
Note: 3Q 2008 estimate for California is based onpreliminary information from DataQuick.
0807060504030201009998
30
20
10
0
-10
-20
-30
-40
-50
Percent change from preceding year
Housing starts Single-family, United States
Sources: Global Insight, U.S. Census Bureau.
Housing starts California
Sources: Global Insight, U.S. Census Bureau.
080604020098969492908886848280
350
300
250
200
150
100
50
150
100
50
0
-50
-100
Thousands of units Percent change from preceding year
Level (L)
% change (R)
0807060504030201009998
60
40
20
0
-20
-40
-60
Percent change from preceding year
Valuation of permits* California
Sources: Moody's Economy.com, Construction Industry Research Board.
Residential
Non-residential
* Three-month moving average applied
0807060504030201009998
16
14
12
10
8
6
4
2
0
Thousands of units
Residential permits* California
Sources: Moody's Economy.com, Construction Industry Research Board.
Multifamily
Single-family
* Three month moving average applied
S&P/Case-Shiller Home Price Index Aggregate index for single-family homes
Sources: Moody's Economy.com, Standard & Poor's, Fiserv, MacroMarkets.
20-city composite
U.S.
200820072006200520042003200220012000
220
200
180
160
140
120
100
80
Index (Jan. 2000 = 100)
Median price, existing single-family homes California
Sources: Moody's Economy.com, National Association of Realtors.
0807060504030201009998
500
450
400
350
300
250
200
150
30
20
10
0
-10
-20
-30
-40
US$ thousands Percent change from preceding year
Level (L)
% change (R)
Median price, existing single-family homes Metros with fastest declining prices, 2007 Q2–2008 Q2
Sources: Moody's Economy.com, National Association of Realtors.
2007 Q2 2008 Q2
Rank Metropolitan area
1 Salinas, CA 709 401 -43.4
2 Merced, CA 315 191 -39.2
3 Stockton, CA 390 247 -36.6
4 Sacramento-Arden-Arcade-Roseville, CA 352 226 -35.6
5 Modesto, CA 242 160 -33.7
6 Cape Coral-Fort Myers, FL 257 172 -33.1
7 Vallejo-Fairfield, CA 520 349 -32.9
8 Riverside-San Bernardino-Ontario, CA 392 264 -32.6
9 Santa Cruz-Watsonville, CA 818 556 -32.0
10 Port St. Lucie, FL 235 162 -31.3
US$ thousands
One-year
percent change
Median price, existing single-family homes Metros with fastest declining prices, 2003 Q2–2008 Q2
Sources: Moody's Economy.com, National Association of Realtors.
2003 Q2 2008 Q2
Rank Metropolitan area
1 Detroit-Warren-Livonia, MI 165 130 -21.3
2 Lansing-East Lansing, MI 134 106 -21.0
3 Davenport-Moline-Rock Island, IA-IL 104 84 -19.0
4 Saginaw-Saginaw Township North, MI 99 81 -19.0
5 Youngstown-Warren-Boardman, OH-PA 90 74 -18.1
6 Greeley, CO 159 132 -16.7
7 Cleveland-Elyria-Mentor, OH 134 112 -16.1
8 Grand Rapids-Wyoming, MI 129 111 -13.9
9 Burlington, NC 131 113 -13.8
10 Canton-Massillon, OH 114 99 -13.1
US$ thousands
Five-year
percent change
One year ago… Five years ago…
If you bought your house…
% change in price, June 07-08 % change in price, June 03-08
Sources: S&P/Case-Shiller, Milken Institute.
< 20%
>= 20% and < 35%
>= 35% and < 50%
>= 50% Sources: Zillow.com, Milken Institute.
United States = 44.8%
Percentage of homes purchased since 2006that now have negative equity
< 1%
>= 1% and < 25%
>= 25% and < 40%
>= 40%Sources: Zillow.com, Milken Institute.
Percentage of homes sold that were in foreclosure(Q2 2008)
United States = 18.6%
Delinquency rates All loans
Sources: Moody's Economy.com, Mortgage Bankers Association.
0807060504030201009998
80
60
40
20
0
-20
-40
Percent change from preceding year
California
U.S.
Delinquency rates of subprime loans Percent change, 2006 Q2-2008 Q2
Least delinquent (-12.9% - 32.8%)Second tier (32.9% - 48.3%)Third tier (48.4% - 77.5%)Most delinquent (77.6% - 192.2%)
Sources: Moody's Economy.com, Mortgage Bankers Association.
Foreclosure rates* All loans
Sources: Moody's Economy.com, Mortgage Bankers Association.
0807060504030201009998
2.0
1.5
1.0
0.5
0.0
Percent
* Started during quarterCalifornia
U.S.
0807060504030201009998
2.5
2.0
1.5
1.0
0.5
0.0
Percent
Foreclosure rates* on prime loans ARM loans
Sources: Moody's Economy.com, Mortgage Bankers Association.
* Started during quarterCalifornia
U.S.
0807060504030201009998
10
8
6
4
2
0
Percent
Foreclosure rates* on subprime loans ARM loans
Sources: Moody's Economy.com, Mortgage Bankers Association.
* Started during quarterCalifornia
U.S.
0807060504030201009998
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Percent
Foreclosure rates* on subprime loans Fixed-rate loans
Sources: Moody's Economy.com, Mortgage Bankers Association.
* Started during quarter
California
U.S.
0807060504030201009998
14
12
10
8
6
4
2
0
Ratio
Ratio of subprime to prime loans in foreclosure* ARM vs. fixed-rate loans
Sources: Moody's Economy.com, Mortgage Bankers Association.
* Started during quarter
Fixed-rateloans
ARM loans
California’s share of foreclosures As percent of U.S. total
Sources: Moody's Economy.com, Mortgage Bankers Association.
08070605040302010099989796959493929190
30
25
20
15
10
5
0
Percent
Mortgage originations for purchases Level
Sources: Moody's Economy.com, HUD, HMDA, Federal Reserve Board.
0807060504030201009998
400
350
300
250
200
150
100
50
1800
1600
1400
1200
1000
800
600
400
US$ billions US$ billions
California (L)
U.S. (R)
Home equity and construction loans Change in value of originations, United States
Sources: Moody's Economy.com, Federal Reserve Board.
Home equity
Construction
0807060504030201009998
40
30
20
10
0
-10
Percent change from preceding year
200820072006200520042003200220012000
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
Percent
Effective interest rates Fixed vs. ARM
Sources: Moody's Economy.com, Mortgage Bankers Association.
30-year fixed
1-yr ARM
200820072006200520042003200220012000
40
30
20
10
0
Percent
ARM share of loans United States
Sources: Moody's Economy.com, Mortgage Bankers Association.
ARMs more common among subprime borrowers California
Sources: Moody’s Economy.com, Mortgage Bankers Association.
0807060504030201009998
70
60
50
40
30
20
10
Percent
Prime ARMSubprime ARM
Regional share of non-jumbo loans purchased byenterprises in first half of 2007 and jumbo mortgageoriginations that were later securitized
Sources: OFHEO, Fannie Mae, Freddie Mac, First American Loan Performance.
JumboConforming
70
60
50
40
30
20
10
0
Percent
CA, 49.2%
CA, 14.4%
FL, 6.7%
FL, 8.1%
IL
WA
TX
WA
VA
NY
Mortgage model switches from originate-to-hold tooriginate-to-distribute
Sources: Federal Reserve, Milken Institute.
Securitized,
15.6%
Held in
portfolio,
84.4%
Securitized,
59%
Held in
portfolio,
41%
Residential mortgage loans1980: Total = $958 billion
Residential mortgage loansQ2 2008: Total = $11.8 trillion
The rise and fall of private-label securitizers
Sources: Federal Reserve, Milken Institute.
Private-label
Fannie Mae
1985total = $110b
2001total = $1.3t
2006total = $2.0t
1st half 2008total = $734b
Freddie Mac
Ginnie Mae
New securities issuance
33%35%
20%42% 13%21%
2%15%
46%
18%
56%
22%29%38%
4%6%
The rise and fall of private-label securitizers
Sources: Federal Reserve, Milken Institute.
Private-label
1985total = $110 B
2001total = $1.3 T
2006total = $2.0 T
1st half 2008total = $734 B
New securities issuance
Fannie Mae, Freddie Mac, Ginnie Mae
2%
98%
20%
80%
56%
44%
6%
94%
Tightened standards for real estate loansNet percentage of domestic respondents tightening standards
for commercial real estate loans
Sources: Federal Reserve, Milken Institute.
-40
-20
0
20
40
60
80
100
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
LTCMDotcom
The end of S&L crisis
Subprime
Sources: Freddie Mac, Federal Reserve, Moody’s Economy.com, Milken Institute.
Spread (right axis)
Federal Reserve cuts Fed funds rate, but mortgagerates remain relatively flat
Most new securities issued in 2007
were rated AAA by S&P
56.0%6,31011,261Total
87.5%78B(+/-)
86.6%683789BB(+/-)
76.1%2,2482,954BBB(+/-)
63.2%1,8862,983A(+/-)
38.1%1,3303,495AA(+/-)
15.1%1561,032AAA
Downgraded/
Total
DowngradedTotalS&P
56 percent of MBS
issued from 2005 to 2007
were eventually downgraded
Sources: Bloomberg, Inside Mortgage Finance, Milken Institute.
Note: A bond is considered investment grade if its credit rating is BBB- or
higher by S&P.
Driving foreclosures:
Strong appreciation or weak economies?
Sources: U.S. Treasury Department, RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.
After housing bubble burst in 2007: Foreclosures
highest for areas with biggest price declines
Sources: RealtyTrac, Office of Federal Housing Enterprise Oversight, Milken Institute.
Sources: Wall Street Journal, Fitch Ratings, Loan Performance.
0807060504030201009998
40
30
20
10
0
Percent
Securitized mortgages California share of U.S. total
*data through August
*
0807060504030201009998
70
60
50
40
30
20
10
0
400
300
200
100
0
-100
US$ billions Percent change from preceding year
Cash-out refinancing United States
Sources: Moody's Economy.com, Federal Reserve Board.
Value (L)
Change (R)
Valuation of multifamily permits California
Sources: Moody's Economy.com, Construction Industry Research Board.
200820072006200520042003
80
60
40
20
0
-20
-40
Percent change from preceding year
0807060504030201009998
400
350
300
250
200
150
100
50
US$ millions
Valuation of nonresidential permits California
Sources: Moody's Economy.com, Construction Industry Research Board.
Commercialbuildings
Industrialbuildings
0807060504030201009998
16
14
12
10
8
6
4
2
0
Percent change from preceding year
Commercial Real Estate Index All sectors, United States
Sources: Moody's Economy.com, S&P, GRA/Charles Schwab Investment Management.
Commercial Real Estate Index - Apartments United States
Sources: Moody's Economy.com, S&P, GRA/Charles Schwab Investment Management.
200820072006200520042003
20
15
10
5
0
-5
Percent change from preceding year
Commercial Real Estate Index By sector, United States
Sources: Moody's Economy.com, S&P, GRA/Charles Schwab Investment Management.
080706050403
20
15
10
5
0
-5
Percent change from preceding year
RetailOfficeWarehouse
Commercial delinquency rates United States
Sources: Moody's Economy.com, American Council of Life Insurers.
0807060504030201009998
1.0
0.8
0.6
0.4
0.2
0.0
Percent change from preceding year
0807060504030201009998
25
20
15
10
5
0
Percent
Office vacancy rates Comprising metro, downtown and suburban average
Sources: Moody's Economy.com, CB Commercial.
Los Angeles
San Francisco
San Jose
0807060504030201009998
20
15
10
5
0
Percent
Industrial vacancy rates By selected metro
Sources: Moody's Economy.com, CB Commercial.
Los Angeles
Sacramento
San Francisco
Real gross domestic product growth
1990 Q1–2010 Q4*
Sources: Bureau of Economic Analysis, Global Insight, Milken Institute projections.
1008060402009896949290
8
6
4
2
0
-2
-4
Compound annual growth rate
*Forecast
Exports of goods and services
2005 Q1–2010 Q4*
Sources: Bureau of Economic Analysis, Global Insight, Milken Institute projections.
201020092008200720062005
25
20
15
10
5
0
Compound annual growth rate
*Forecast
Real gross domestic product growth
By region, 2005 Q1–2010 Q4*
Sources: Bureau of Economic Analysis, Global Insight, Moody’s Economy.com, Milken Institute projections.
201020092008200720062005
5
4
3
2
1
0
-1
-2
-3
Compound annual growth rate
*Forecast
Los AngelesCaliforniaUnited States
Sources: Bureau of Labor Statistics, Global Insight, California Employment Development Department, Milken Institute projections.
201020092008200720062005
3.0
2.0
1.0
0.0
-1.0
-2.0
-3.0
Percent change from preceding year
*Forecast
Los AngelesCaliforniaUnited States
Employment growth
By region, 2005 Q1–2010 Q4*
Unemployment rate
By region, 2005 Q1–2010 Q4*
Sources: Bureau of Labor Statistics, Global Insight, California Employment Development Department, Milken Institute projections.
201020092008200720062005
10.0
9.0
8.0
7.0
6.0
5.0
4.0
Percent
*Forecast
Los AngelesCaliforniaUnited States
Industry Response HOPE NOW Alliance
Sources: HOPE NOW Alliance; www.HOPENow.com
Since July 2007, the HOPE NOW Alliance, a voluntary coalition of thenation’s leading lenders and servicers, has saved nearly 2.3 millionhomeowners from foreclosure.
About 17 percent of homeowners receiving the HOPE NOW-coordinated letters have contacted their servicer, six times the
routine 2-3 percent response rate servicers receive when sendingtheir own letters.
HOPE NOW California loan modifications
Source: HOPE NOW Alliance; www.HOPENow.com
SubprimePrime
20
15
10
5
0
Thousands
Q3 2007 Q4 2007Q1 2008Q2 2008
28
26
24
22
20
18
16
Thousands
Industry response California workouts closed
Source: California Department of Corporations survey of mortgage servicers.
Jan. 08 Feb. 08 Mar. 08 Apr. 08 May 08 June 08 July 08
Impaired transaction markets
0
10
20
30
40
50
60
2004 2005 2006 2007 2008
Summer, 2007
Credit Crunch
Intensifies
Commercial real estate transaction volumeMonthly, 3-month MA
$, BN
10
15
20
25
30
35
40
2004 2005 2006 2007 2008
Down 42% from peak
Average transaction size
Monthly, 3-month MA
$, MM
Recent change in transaction volume
Through April 2008 vs. 2007
%
(78)(73)(77)
(56)(46)
(100)
(75)
(50)
(25)
0
Apart
ment
Industr
ial
Offi
ce
Reta
il
Hote
l
Sources: Real Capital Analytics data through August, MS Estimates.
60
51
37
40
45
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012
Commercial real estate loan maturities
($Bn)
Source: Moody’s Structured Finance research as of February 25,2008; based on initial maturity.
CMBS Issuance and Maturity
78
93
169
203
229
25
52
67
47
57
74
37
0
50
100
150
200
250
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008E
Annual U.S. CMBS Issuance Volume
($Bn)
Source: Morgan Stanley Research as of 2Q 2008.
Transaction activity by buyer type
Transaction volume by buyer type
281
328
439
40
2005 2006 2007 2008, YTD
Other International
Fund Private buyerInstitutional
REIT
Transaction share by buyer type
7 7 512
159 11
9
8
7 86
1925 22 21
8 1323
10
4339
31
42
2005 2006 2007 2008, YTD
Other International
Fund Private buyerInstitutional
REIT
Source: Real Capital Analytics, MS Estimates.
$BN Share,%
0
500
1,000
1,500
2,000
2,500
Dec-97 Dec-03 May-07 Jan-08 Oct-08
AAA AA A BBB
CMBS spreads at record wide levels
1998 - 2006 2007 - Present
BBB:
2500 bps
AAA: 550 bps
A:1600 bps
AA:1200 bps
CMBS fixed rate spreads
Spread over swaps
Source: Morgan Stanley Fixed Income Research, through October 15, 2008.
1.AAA refers to the Super Senior AAA 10 year class (approximately 30% initial credit enhancement).
(1)
Real estate debt financing: Limited and expensive
0
20
40
60
80
100
Apr-07 Oct-08
Representative capital stack1
Based upon a recent transaction (%)
Source: Morgan Stanley
Senior mortgage 65%
1st mezz: 10%
2nd mezz: 10%
Bridge: 5%
Equity: 10%
1st mezz: 10%
2nd mezz: 10%
Equity: 25%L + 350 = 8.82
L + 200 = 7.32
L + 125 = 6.57
L + 90 = 6.22
L + 1100 = 14.75
L + 800 = 11.75
L + 400 = 7.75Senior mortgage 55%
Weighted Avg. Spread:LTV:
L + 121 = 6.5385%
L + 547 = 9.2275%
1.Assumes 30 day LIBOR, 5.32% as of April 2007 and 3.75% as of 20 October 2008.
80
100
120
140
160
180
Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Sep-08 Oct-08
(30)
(20)
(10)
0
10
20
U.S. market valuations
Source: Green Street Advisors, as of October 2, 2008.
Real estate universe net asset value vs. stock prices (1)
Indexed since January 2005 (%)
NAV Price Premium / (Discount) to NAV
1.Includes Apartment, industrial, mall, office and strip center REITs in the Green Street coverage universe.
RetailNAV Premium / (Discount)
(80)%
(60)%
(40)%
(20)%
0%
20%
40%
30% 40% 50% 60% 70% 80% 90% 100%
Debt + Preferred / Total Market Cap
R2 = 0.8145
OfficeNAV Premium / (Discount)
(80)%
(60)%
(40)%
(20)%
0%
20%
40%
30% 40% 50% 60% 70% 80% 90% 100%
Highly leveraged REITs priced at steep discounts
1.As of September 26, 2008; market leverage defined as total debt + preferred / total market capitalization; NAV per Green Street Advisors “WeeklyPricing Update”
Market leverage vs. Premium / (Discount) to NAV
Debt + Preferred / Total Market Cap
BXPBPO
OFC
DEI
KRC
MPG
SLG
VNO
WRE
BDN
CUZ
DREHIW
LRY
CLI
R2 = 0.6392
IndustrialsNAV Premium / (Discount)
(40)%
(20)%
0%
20%
40%
30% 40% 50% 60% 70% 80%
Debt + Preferred / Total Market Cap
R2 = 0.9076
ApartmentsNAV Premium / (Discount)
(40)%
(20)%
0%
20%
40%
30% 40% 50% 60% 70% 80%
Sources: Green Street Advisors, FactSet, SNL.
Debt + Preferred / Total Market Cap
R2 = 0.2241
WRI
REG
KIM
EQYDDR
TCO
SPG
PEI
GRT
GGP
CBL
UDR
PPS
MAA
HME
ESSEQR
CPTBREAVB
AEC
AIV AMB
DCT
FR
PLDDRE
(1)
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