THE ECONOMY AND MONETARY POLICY

THE ECONOMY AND MONETARY POLICY

America’s economic system has been and is currently a regulated, capitalistic, private enterprise system.
Although individuals, partnerships, corporations, limited liability companies, pension funds, investment trusts,
and hedge funds, own and control real property and the means of production of goods and services (including
the subsequent distribution and allocation of goods and services), the federal government intervenes and
influences general economic trends. This intervention is occurring on an ever increasing basis. While often
controversial, the stated objective of government intervention is to ensure reasonable competition, to allow for
the identification of those who fail to comply with applicable law established for consumer protection, and to
achieve and maintain a viable, growing, fair, and equitable economy.

Role of Real Estate in the National Economy

Real estate plays four major roles in the national economy:

Net Worth

Real estate consisting of land and improvements make up a very large portion of and substantially contribute to
the total net worth of the United States and of the several states.

Income Flow

As we see on the circular flow chart of our economy (next page), money is paid for the use of real estate (rent)
and for the raw materials, labor, capital and management used in construction work of all kinds (the agents of
production).

Major Employer

In California, real estate and related industries (e.g. brokerage, construction, design professionals, management,
banking, financial services, title, escrow, and appraisal) are major employers and these industries contribute
significantly to the gross domestic product in the nation and in this state.

Appreciation, Inflation, and Deflation

After having been in decline for much of the 1990’s, residential real estate values stabilized and, in many
markets, market values substantially increased through 2005. In some markets, real estate market values
continued to increase during 2006 and up to the middle of 2007. Market values of residential real properties
then peaked throughout the country and, experienced substantial declines from 20 to 50% (depending on
markets, geography, and demographics).

The value of income-producing properties declined following the enactment of the Tax Reform Act of 1986
(TRFA). Depending upon the market and geographic location, market values of these “commercial properties”
(income producing properties other than 1 to 4 dwelling units) fell between 25 and 50% from their previous
peaks. Commercial properties thereafter increased in market value until they peaked again in 2006. Since 2006,
the melt down of the mortgage market and the related affect on the national economy has caused the values of
commercial properties to once again decline. Between 2006 and 2010, market values of these properties have
fallen by as much as 40 to 50% (depending on markets, location, and security property type).

The supply of components needed for the production of goods and services