Home Price Index - Q2 2015

Adkins Capital Management Overview of U.S. Residential Housing Market

Adkins 60-City Home Price Index

Second Quarter, 2015

CONTENTS The purpose of this presentation is to provide an overview and assessment of:

The events and trends that have transpired in the residential housing market

for the second quarter of 2015; and

The home price level for a select group of cities that make up the Adkins 60-

City Home Price Index.

This presentation provides an overview and assessment of:

Adkins Capital Management

U.S. Housing Events

U.S. Housing Trends

ARĤVA Analytics Home Price-level Analytical Methodology

Application of the ARĤVA Analytical Methodology

Top Five Overpriced Cities in the U.S.

Top Five Underpriced Cities in the U.S.

Conclusion

Contact Information

1 Adkins Capital Management, LLC.

Adkins Capital Management Privately owned and independently operated company.

Exclusive focus on residential real estate.

Company not affiliated with any parties associated with

the residential housing industry.

Our mission is to bridge the gap in the residential

housing market, where deficiencies in public policy,

regulation, product structure, and personnel have

created an environment where prospective home buyers

need objective information and useful analytical tools to

make a prudent home purchase decision.

Adkins Capital Management, LLC. 2

More than 15 years of real estate analysis experience, more than 10 years of

institutional investment consulting experience, and more than seven years of

freelance financial writing experience.

Author of more than 20 published articles, including publications by Forbes,

Investor’s Business Daily, Yahoo, Investopedia, Financial Edge, and more than

230 news organizations worldwide.


Our Goal: Offer prospective home buyers a comprehensive, accurate, automated,

user-friendly and affordable residential real estate analysis software application,

while providing contemporary information about the trends and events that are

taking place in the residential housing market, in an economical, efficient, and

effective manner.

Our Commitment: Make Adkins Capital Management, the ARĤVA Residential

Real Estate Analysis Software Application, and our residential real estate

research, the premier analytical source for prospective home buyers to use in order

to make a prudent home purchase decision.

Adkins Capital Management Our Product and Service: Developer of

an Internet-based residential real estate

analysis software application.

Adkins Residential Home Valuation

Analyzer (ARĤVA).

ARĤVA ANALYTICS - finance-

based and expense-based analytical

methodologies.

OVERVIEW OF U.S. HOUSING EVENTS FOR THE QUARTER

For the second quarter of this year, the impact of foreclosures throughout the U.S. residential

housing market was the primary topic of discussion.

According to a report produced by CoreLogic:

A recovering economy and healthier housing market has pushed the number of

seriously delinquent mortgages (90 days ore more past due) to the lowest level

since May 2008.

At approximately 41,000 completed foreclosures, the monthly total has

fallen by nearly two-thirds since peaking in September 2010.

Completed foreclosures averaged just 21,000 per month nationwide

between 2000 and 2006.

Florida had the most completed foreclosures (110,000) in the country over the

past year, followed by Michigan (50,000), Texas (34,000), Georgia (28,000), and

Ohio (28,000).

Since September 2008, 5.6 million homes have been lost to foreclosure.



A comprehensive Stateline analysis produced by the American Sociological Review titled

“Neighborhood Foreclosures, Racial/Ethnic Transitions, and Residential Segregation,” provided a

host of key foreclosure findings:

The U.S. housing crisis of the late 2000s was one of the most profound residential disasters

of the past century.

Between 2005 and 2012, there were 9.3 million unique foreclosures. Since 2008, roughly 1

out of 12 household have begun the foreclosure process.

33 million moves occurred between 2009 and 2010, up from 30.5 million between

2007 and 2008. The dramatic increase in moves has been attributed to the increase in

foreclosures.

According to a Federal Reserve study in 2011, among foreclosed movers, the vast

majority (90%) relocated within their current metropolitan area.

The burden of the foreclosure crisis was not evenly distributed, with African Americans and

Latino Households much more likely to face foreclosure than Caucasians and Asians.

The foreclosure crisis represents arguably the most substantial migration event of the past

several decades, exceeding the Great Migration (1910 – 1970) and the Dust Bowl exodus

(1930s).


The foreclosure crisis that hit the U.S. in 2007 was precipitated by a pernicious combination of

unsustainable lending practices, irresponsible borrowing, and unrealistic expectations about the

appreciation of real estate.

Federal policy played an important role in setting the stage for the foreclosure crisis, most notably

in the form of banking deregulation that facilitated the use of high-risk lending and underwriting

strategies, as well as federal efforts to preempt laws intended to protect consumers against

predatory lenders.

Foreclosures will likely have a profound impact on neighborhood distress and instability, leading to

a density of vacant, neglected, and abandoned properties, heightening the appearance of

neighborhood deterioration, driving up crime, and increasing the likelihood of racial transition.



ASSESSMENT OF U.S. HOUSING TRENDS FOR THE QUARTER

According to Bankrate.com, the national average mortgage loan interest rate for a 30-year fully-

amortized fixed-rate loan began the quarter at 3.88% and ended the quarter at 4.19%. Since June of

2011, the national average mortgage loan interest rate for a 30-year fixed-rate loan has been less than

4.61%.

Most financial pundits expected the national average mortgage loan interest rate for a 30-year

fixed-rate loan to increase slightly over the quarter.

Recent comments made by the chairman of the Federal Reserve has led most financial pundits to

believe that an increase in the key Federal Funds rate will take place by the end of this year.

This in turn will likely cause upward pressure on mortgage loan interest rates in the future.

The future level of mortgage loan interest rates will also likely be dependent upon the operating

status of the Government Sponsored Enterprises, and their future role in the housing market.

Prospective home buyers should closely follow the level of mortgage loan interest rates in

their community.

A mortgage loan interest rate of approximately 5.3% will require home owners to repay to

the lender twice the amount of their mortgage loan if they make their scheduled

repayments and carry their loan to maturity.

This fact illustrates the high cost of interest expense for borrowers over time, and

illustrates why the Federal Reserve’s interest rate policy may have a very negative

impact on the price-level of residential housing in the future.


ADKINS RESIDENTIAL HOME VALUATION ANALYZER HOME PRICE-LEVEL ANALYTICAL METHODOLOGY

ARĤVA ANALYTICS

JUSTIFIED MORTGAGE LOAN INTEREST RATE

Represents the cost of debt for a 30-year fully-amortized fixed-rate mortgage loan that

equates the median home price level for a city with the median household income

level for the city.

Based on the assumption that 28% of household income is the largest amount of

money that should be spent in order to repay the principal and interest costs for a 30-

year fully-amortized fixed-rate mortgage loan.

8

JUSTIFIED PERCENTAGE OF HOUSEHOLD INCOME

Represents the percentage of pre-tax household income that would have to be spent by

the people that live in a city in order to justify the relationship between the median

household income level for the city and the median home price level for the city.

Based on the month-ending national average mortgage loan interest rate for a 30-year

fully-amortized fixed-rate mortgage loan.

Adkins Capital Management, LLC.

APPLICATION OF THE ARĤVA ANALYTICAL METHODOLOGY

According to the U.S. Census Bureau, median household income was $52,250 in 2013 and $30,056 in 1989.

In comparison, the median new home price was $265,092 in 2013 and $120,383 in 1989.

At first observation of the chart above, it appears that there is a significant problem in the housing market, as

the new home price level has inflated at a much higher rate than household income (120% v 74%).

However, the dramatic difference in the national average mortgage loan interest rate for a 30-year fixed-rate

mortgage loan in 2013 (3.98%) versus 1989 (10.32%) raises some key points to consider:

In 2013, 29% of household income would have to be spent in order to justify the median home price

level, or the national average mortgage loan interest rate would have to be 3.7%. The spread between

29% and 28% and 3.98% and 3.7% represents the degree of overpricing of new homes.

In 1989, 44% of household income would have to be spent in order to justify the median home price

level, or the national average mortgage loan interest rate would have to be 5.75%. The spread

between 44% and 28% and 10.32% and 5.75% represents the degree of overpricing of new homes.

Therefore, in 1989 (2013), based on the justified percentage of household income amount, and the justified

mortgage loan interest rate amount, the median home price level for new homes was significantly (only

slightly) overpriced nationwide.

9

$0

$200,000

$400,000

Median Household Income Median Home Price

2013

1989


ARĤVA ANALYTICS - TOP FIVE OVERPRICED CITIES IN THE U.S.

26 cities that make up the Adkins 60-City Home Price Index were classified as overpriced.

It is not possible to justify the home price level for the top five overpriced cities by reducing the mortgage loan interest rate

from 4.19% to 0.0%.

In order to classify the homes in the top five overpriced cities as underpriced, it would need to be deemed prudent by

prospective home buyers to spend more than the justified percentage of household income in order to repay the costs of a

mortgage loan.

In order to justify the median home price level for each city, the median required household income level would need to

increase to the respective range of $88,295 and $156,010.

Based on the median household income level, the quarter ending national average mortgage loan interest rate, and the

assumption that no more than 28% of pre-tax household income should be spent in order to repay the principal and interest

costs of a mortgage loan, the justified home price level for the top five overpriced cities fell within the respective range of

$168,810 and $333,498.

10

Adkins 60-City

Home Price

Index

Median

Household

Income Level

Median

Home Price

Level

Justified

Mortgage

Loan

Interest

Rate

Justified

Percentage

of Household

Income

Required

Median

Household

Income

Level

Justified

Home Price

Level

Bridgeport, CT $35,379 $421,300 None 70% $88,295 $168,810

Honolulu $57,479 $677,600 None 70% $142,010 $274,260

New York City $49,461 $549,000 None 66% $115,059 $236,002

San Francisco $69,894 $744,400 None 63% $156,010 $333,498

Los Angeles $46,148 $481,900 None 62% $100,996 $220,194


ARĤVA ANALYTICS - TOP FIVE UNDERPRICED CITIES IN THE U.S.

34 cities that make up the Adkins 60-City Home Price Index were classified as underpriced.

In order to classify homes in the top five underpriced cities as overpriced:

The national average mortgage loan interest rate would have to increase from 4.19% to more

than the justified mortgage loan interest rate for each city; or

It would have to be deemed imprudent by prospective home buyers to spend as much as the

justified percentage of household income in order to repay the costs of a mortgage loan.

11

Adkins 60-City

Home Price

Index

Median

Household

Income Level

Median Home

Price Level

Justified

Mortgage Loan

Interest Rate

Justified

Percentage of

Household

Income

Detroit, MI $25,193 $31,450 19.7% 8%

Wichita, KS $44,184 $128,900 8.95% 18%

Sioux Falls, SD $50,470 $162,400 7.9% 19%

Little Rock, AR $40,976 $135,600 7.6% 20%

Wilmington, DE $38,325 $130,200 7.3% 20%


CONCLUSION

Given the events that have transpired in the residential housing market this century, and taking

into account the fact that buying a home will likely be the largest single financial transaction that

prospective home buyers will ever make, and the bulk of their net worth will likely be tied up in

their home, prospective home buyers should subscribe to use the ARĤVA Residential Real

Estate Analysis Software Application in order to accurately assess:

the level of underpricing or overpricing of homes in their community;

the largest amount of money they should spend in order to purchase a home;

the amount of money they would need to earn on an annual basis in order to be able to

afford to purchase a specific home;

total home ownership costs expressed as a percentage of household income; and

how much a home would need to appreciate in value each year in order to offset the

costs associated with owning the home.

By analyzing residential real estate from these perspectives, prospective home buyers should be

able to make a prudent home purchase decision.


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REVIEW THE ADKINS 60-CITY HOME PRICE INDEX

ACCESS THE ADKINS RESIDENTIAL REAL ESTATE

ANALYSIS SOFTWARE APPLICATION


CONTACT INFORMATION

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