John Burns National Housing Update

Housing Industry Update

John Burns, Wayne Yamano

[email protected]

949-870-1210Week of 2/22/10

mailto:[email protected]

2

PRESENTATION ORGANIZATION

MAXIMIZEREWARD / RISK

1. JBREC Resources

2. 16 Weeks of Positive News

3. You Have to Make 3 Big Bets

4. The Big Negative: Shadow Inventory

5. The Big Positive: Affordability

6. The Need for More Homes

7. The Ability to Sell Homes

8. Conclusions

3

Jody Kahn85 Industry M&A deals, New England-based

Mollie CarmichaelSVP Lennar, Pulte, Irvine Co., Irvine-based

Don WalkerFormer Home Builder Pres., San Diego-based

Steve Dutra20 yrs industry datamgmt., No Cal-based

Wayne Yamano10 yrs of analysis, Irvine-based

Lisa Marquis Jackson20 years of industry reporting, TX based

Our experienced management team stays on top of housing issues by:

Buying, charting and forecasting all of the data we can, by MSA.

Analyzing all of the data for a diverse group of execs.

Surveying those in the field who manage thousands of new homecommunities, and interviewing local expertise where we do not haveoffices.

Investigating breaking news and legislation.

Managing market research teams who visit thousands of communitieseach year as part of customized consulting assignments.

Managing major market feasibility and valuation assignments.

Analyzing commercial real estate trends.

Pulling it all together for a diverse group of executive clients(builders, developers, lenders, private equity, hedge funds, etc.). John Burns

Founder

Lesley DeutchWall St. researcher, FL based

4

Full Knowledge: Our Retainer clients make decisions with excellent information.

US Housing Forecast

Complete history andcharts on 60+ indicators,including forecasts.

Regional Analysis

Complete data and analysisby MSA.

Builder Market Conditions

Look up each builder’smarkets and communitycount by market.

Local Expert CallEach month, we recordqualitative feedback fromour local market experts.

The Summit

Our diversified client basemeets to debate the issuesand learn from each other.

Best Data

We spend a fortuneon data that we willprovide in Excel uponrequest.

Industry Contactsand Knowledge

We can introduceyou to the players.

Consultants

We are trustedadvisors on bigdecisions.

Consultations

We help you pull it alltogether.

Special Research

We give our clients anearly “heads up” onpertinent issues.

Proprietary Survey

Highly accurate report onmarket conditions within 4days of monthend.

Banks /Manufacturers

Housing’s implicationson related industries.

Leading Research

We answer the toughquestions.

http://www.realestateconsulting.com/reports/hbimm.aspx

5



1. JBREC Resources







8. Conclusions

6

The news since Halloween has generally been very positive.

7

Summary of Positive Surprises

• Opening of the debt markets

• Tax credit extension and expansion

• NOL carryback extension

• No major changes to FHA

• Falling Mortgage Rates

• Better employment picture

• Rising land prices

Be more bullish! A lot has changed in 16 weeks.

8

The debt markets opened up, even to builders whose target share price (by several analysts) was $0.

Impact: More builder confidence, more competition and more liquidity.

9

The tax credit was extended and expanded to move-up buyers..

Impact: Muted Dec / Jan sales decline.November closings were pushed to December. Buyers with renewed confidence will buy this Spring.

10

Public builders will receive more than $4.4 billion in tax refunds. The recent extension from 2 years to 5 years will reduce their Debt/Cap by 9%.

Impact: Big Positive. Better balance sheets will result in more competition for home sales and land acquisition.The tax ruling saved a few builders and increased the cash position of all builders.

11

An insolvent FHA will keep insuring loans with minimal changes.

Impact: Slightly Positive. We were anticipating continued support, but with more stringent underwriting than proposed.

Source: Citi

12

Fixed Rates are down slightly from August, with more optimism that they will stay low.

Impact: Slightly More PositiveWe were expecting a slight upward trend.

13

Employment losses were at their worst in August, and have recovered better than anticipated.

Impact: Slightly More PositiveWe were expecting recovery, but not quite as quickly.

14

One result has been that the land market has heated up.

Impact: Positive for the economy.Starts and sales will rise more quickly. Banks will lose much less on disposition.

15

In the meantime, housing hasn’t been this affordable in 30+ years, at least!

$1,000/Month!Half of all mortgages today requires a 5% down payment and cost less than $1,000 per month.

25%

30%

35%

40%

45%

50%

55%

60%

1981Q

1

1983Q

1

1985Q

1

1987Q

1

1989Q

1

1991Q

1

1993Q

1

1995Q

1

1997Q

1

1999Q

1

2001Q

1

2003Q

1

2005Q

1

2007Q

1

2009Q

1

Median Housing Cost to Income Ratio

Source: JBREC, NAR, updated through Dec 2009; 27.2%

16


1. JBREC Resources







8. Conclusions


17

Big Bet #1: Mortgage rates.We assume they stay low and then rise to 7.0% and

7.5% in 2012 and 2013

18

Big Bet #2: Job GrowthWe assume jobs turns MoM positive in July 2010, YoY

positive in January 2011, and 2% thereafter.

19

Big Bet #3: Government Intervention will disappear in July.

1. Housing: $8,000 / $6,500 Federal tax credit to buy a house through June 2010.

2. Mortgage Rates: Will stay low.

3. Down payments: Mostly 5% or less required through the FHA.

4. Economy: Should have mild

job growth by mid-2010.

20

Down Payment is a Huge Obstacle.Government low down payment programs comprise

59% of new home sales.

21



1. JBREC Resources







8. Conclusions

22

Recent Headlines

23

Layoffs and Option ARM resets have driven foreclosure starts above 3 million, and they will stay high for years.

Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

P

20

10

P

20

11

P

20

12

P

20

13

P

20

14

P

20

15

P

20

16

P

Nu

mb

er

of

Loan

s

U.S. Annual Foreclosure Starts (NOD) Forecast

Economy-related Foreclosure Starts (JBREC)

Foreclosure Starts from ARM Resets (JBREC)

Baseline Foreclosure Starts (JBREC)

Source: John Burns Real Estate Consulting using Mortgage Bankers Assoc and other data

24

At least 7 MSAs had more pre-foreclosure notices than sales in the last year.

25

… so where’s the supply?• REO is not the problem, because banks sell quickly

• The problem is the massive number of delinquent homesthat will eventually be sold as REO or short sale

14.4% mortgage delinquency in U.S.=5 million units Shadow Inventory

=10 months of shadow supply

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

15%

Q1_

2000

Q3_

200

0

Q1_

2001

Q3_

2001

Q1_

2002

Q3_

2002

Q1_

2003

Q3_

2003

Q1_

200

4

Q3_

2004

Q1_

2005

Q3_

2005

Q1_

2006

Q3_

2006

Q1_

2007

Q3_

200

7

Q1_

2008

Q3_

2008

Q1_

2009

Q3_

2009

Source: Mortgage Bankers Association, NSA

Total U.S. Mortgage Delinquency

… and growing

26

Total Filings are rising faster than REO filings, showing growing shadow inventory of REOs.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000Ja

n 0

7F

eb

07

Ma

r 0

7A

pr 0

7M

ay 0

7Ju

n 0

7Ju

l 07

Au

g 0

7S

ep

07

Oct 0

7N

ov 0

7D

ec 0

7Ja

n 0

8F

eb

08

Ma

r 0

8A

pr 0

8M

ay 0

8Ju

n 0

8Ju

l 08

Au

g 0

8S

ep

08

Oct 0

8N

ov 0

8D

ec 0

8Ja

n 0

9F

eb

09

Ma

r 0

9A

pr 0

9M

ay 0

9Ju

n 0

9Ju

l 09

Au

g 0

9S

ep

09

Oct 0

9N

ov 0

9D

ec 0

9

Pre-Foreclosure and REO Filings

Total Filings (Pre-Foreclosures and REOs)

Total REO Filings

Source: RealtyTrac (Dec 09 Data), John Burns Real Estate Consulting

27

CA, FL, NV, and AZ are where REO sales will be highest.TX, Northeast, Atlantic and the Midwest will have

less REO distress

Quarterly Foreclosure Notices


28

CA, FL, NV and AZ have Highest Delinquency

Mortgage Delinquency %

Delinquency% by Territory

20%+

15%

12.5%

10%

5%

<5%

>30% Delinquency:

Ft Myers, Naples, Miami,

Orlando

>25% Delinquency: Merced, Stockton,

Riverside-San Bernardino, Modesto

29

FL, Inland CA and Chicago Will Be Hit Hardest by Shadow Inventory

Months of Shadow Inventory

24+ months:Orlando, Miami

20+ months:Riverside-San Bernardino,

Bakersfield, Fresno

21 months:Chicago

30

Metros with Greatest Shadow Months of SupplyMetros with Greatest Shadow Months of Supply

Shadow Shadow Resale Estimated Current JBREC

Months of Inventory Sales Metro Median Affordability

Metro Supply (base case)3,6 (10-yr Avg) Delinquency %

2 Price Index™

1 Stockton, CA 27 22,344 9,808 28.1% $160,000 0.9

2 Orlando, FL 27 81,309 36,589 30.3% $140,000 2.5

3 Modesto, CA 25 15,904 7,490 26.3% $139,500 0.9

4 Miami, FL (MDiv) 24 82,735 41,699 33.0% $176,000 3.6

5 Riverside-San Bernardino, CA 22 132,895 72,868 27.5% $173,500 1.4

6 Bakersfield, CA 22 21,572 11,930 24.5% $125,000 1.5

7 Lakeland, FL 21 16,340 9,201 24.0% $105,000 1.9

8 Fort Worth, TX (MDiv) 21 39,793 22,568 15.8% $113,600 3.6

9 Chicago, IL (MDiv) 21 199,822 114,914 18.7% $195,000 2.5

10 Port St. Lucie, FL 21 16,685 9,703 31.2% $115,000 0.9

11 Fresno, CA 20 17,463 10,726 19.0% $155,000 2.9

12 Lake-Kenosha, IL-WI (Mdiv) 19 20,192 12,649 16.6% $216,926 1.0

13 Vallejo-Fairfield, CA 18 11,935 7,769 20.6% $215,000 1.5

14 Fort Lauderdale, FL (MDiv) 18 64,502 42,610 26.7% $171,000 1.8

15 Tacoma, WA (MDiv) 18 19,087 12,696 18.3% $220,000 5.2

16 Fort Myers, FL 18 26,435 17,849 49.1% $89,000 0.5

17 Las Vegas, NV 18 60,273 41,271 27.5% $135,000 0.2

18 Sacramento, CA 17 53,060 36,902 17.6% $210,000 2.1

19 San Antonio, TX 17 27,837 19,480 13.6% $140,000 4.4

20 Los Angeles, CA (MDiv) 17 148,585 104,932 15.6% $335,000 3.8

21 Tampa, FL 16 81,595 59,954 22.2% $127,000 3.1

22 Jacksonville, FL 16 29,665 21,885 16.4% $150,000 4.2

23 Bethesda, MD (MDiv) 16 30,047 22,309 15.8% $335,099 5.2

24 Melbourne, FL 16 14,507 10,891 18.9% $125,000 2.4

25 Houston, TX 16 84,026 63,865 14.2% $151,200 4.2

31

Closer look at Methodology:Riverside-San Bernardino Shadow Inventory

Riverside-San Bernardino, CA Shadow Inventory

California Estimated

Delinquency % Metro Metro

Category (MBA) Adjustment1

Delinquency %2

In Foreclosure 5.83% +68.7% 9.83%

90+ Days 5.87% +68.7% 9.90%

60 Days 1.70% +68.7% 2.87%

30 Days 2.93% +68.7% 4.94%

Total 16.33% 27.55%

Liquidation Probability

Upside Base Downside

Category Scenario3

Case3

Scenario3

In Foreclosure 80.0% 90.0% 100.0%

90+ Days 75.0% 85.0% 99.0%

60 Days 70.0% 80.0% 95.0%

30 Days 50.0% 60.0% 70.0%

Total 71.8% 81.8% 93.7%

Estimated # of Shadow Inventory6

Delinquent (based on liquidation probabilities above)

Loans in Upside Base Downside

Category Metro4

Scenario3

Case3

Scenario3

In Foreclosure 65,458 52,366 58,912 65,458

90+ Days 65,907 49,430 56,021 65,248

60 Days 19,087 13,361 15,270 18,133

30 Days 32,897 16,449 19,738 23,028

Total 183,350 131,606 149,941 171,867

Less: Units already listed on MLS7

(17,046) (17,046) (17,046)

Shadow Inventory6

114,560 132,895 154,821

Plus: Current MLS Listings 27,865 27,865 27,865

Total Supply 142,425 160,760 182,686

Months of Supply - Shadow 18.9 21.9 25.5

Months of Supply - MLS 4.6 4.6 4.6

Total Months of Supply 23.5 26.5 30.1

Total Metro Mortgages5: 665,593

10-yr Avg Annual Metro Resale Sales: 72,868

1) State-level mortgage delinquency from MBA

2) Metro adjustment based on relative ratio of NODs per mortgage

3) Estimate of mortgage

delinquency for metro

4) How many of the delinquent loans will become supply?Used a range of liquidation probabilities

32





Delinquency %2

In Foreclosure 5.83% +68.7% 9.83%

90+ Days 5.87% +68.7% 9.90%

60 Days 1.70% +68.7% 2.87%

30 Days 2.93% +68.7% 4.94%

Total 16.33% 27.55%



Category Scenario3

Case3

Scenario3

In Foreclosure 80.0% 90.0% 100.0%

90+ Days 75.0% 85.0% 99.0%

60 Days 70.0% 80.0% 95.0%

30 Days 50.0% 60.0% 70.0%

Total 71.8% 81.8% 93.7%




Category Metro4

Scenario3

Case3

Scenario3

In Foreclosure 65,458 52,366 58,912 65,458

90+ Days 65,907 49,430 56,021 65,248

60 Days 19,087 13,361 15,270 18,133

30 Days 32,897 16,449 19,738 23,028

Total 183,350 131,606 149,941 171,867


(17,046) (17,046) (17,046)

Shadow Inventory6

114,560 132,895 154,821


Total Supply 142,425 160,760 182,686










Delinquency %2

In Foreclosure 5.83% +68.7% 9.83%

90+ Days 5.87% +68.7% 9.90%

60 Days 1.70% +68.7% 2.87%

30 Days 2.93% +68.7% 4.94%

Total 16.33% 27.55%



Category Scenario3

Case3

Scenario3

In Foreclosure 80.0% 90.0% 100.0%

90+ Days 75.0% 85.0% 99.0%

60 Days 70.0% 80.0% 95.0%

30 Days 50.0% 60.0% 70.0%

Total 71.8% 81.8% 93.7%




Category Metro4

Scenario3

Case3

Scenario3

In Foreclosure 65,458 52,366 58,912 65,458

90+ Days 65,907 49,430 56,021 65,248

60 Days 19,087 13,361 15,270 18,133

30 Days 32,897 16,449 19,738 23,028

Total 183,350 131,606 149,941 171,867


(17,046) (17,046) (17,046)

Shadow Inventory6

114,560 132,895 154,821


Total Supply 142,425 160,760 182,686






5) Total mortgages from Census American Community Survey

Metro Mortgages

Metro Delinquency






Delinquency %2

In Foreclosure 5.83% +68.7% 9.83%

90+ Days 5.87% +68.7% 9.90%

60 Days 1.70% +68.7% 2.87%

30 Days 2.93% +68.7% 4.94%

Total 16.33% 27.55%



Category Scenario3

Case3

Scenario3

In Foreclosure 80.0% 90.0% 100.0%

90+ Days 75.0% 85.0% 99.0%

60 Days 70.0% 80.0% 95.0%

30 Days 50.0% 60.0% 70.0%

Total 71.8% 81.8% 93.7%




Category Metro4

Scenario3

Case3

Scenario3

In Foreclosure 65,458 52,366 58,912 65,458

90+ Days 65,907 49,430 56,021 65,248

60 Days 19,087 13,361 15,270 18,133

30 Days 32,897 16,449 19,738 23,028

Total 183,350 131,606 149,941 171,867


(17,046) (17,046) (17,046)

Shadow Inventory6

114,560 132,895 154,821


Total Supply 142,425 160,760 182,686






6) Subtract currently listed shadow units

RESULT:115K to 155K

units ofShadow Inventory

33



1. JBREC Resources







8. Conclusions

34

Home prices are back to 2003 levels in many markets.


35

Prices have corrected to… “what year?” 2001-2004

Albuq.

Austin

Bakersfield

Baltimore

Boston (MDiv)

Charleston

Charlotte

Chicago (MDiv)

Dallas

DenverDurham

Ft Laud.

Ft Worth

Fresno

Hanford

HoustonJacksonvilleLas Vegas

Los Angeles

Madera

Merced

Miami(MDiv)Minneapolis

Modesto

Myrtle Beach

Napa

Naples

Oakland

Orange County

OrlandoPhoenix

Port St. Lucie

Portland

RaleighReno Richmond

Riverside-SB

SacramentoSalt Lake City

San Antonio

San Diego

San Jose

Santa Rosa Seattle(MDiv)

Stockton

Tacoma

Tampa

Tucson

Vallejo

Ventura

Wash.D.C.,(MDiv)

West Palm B.

YubaYuma

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

Jan

-00

Mar

-00

May

-00

Jul-

00

Sep

-00

No

v-00

Jan

-01

Mar

-01

May

-01

Jul-

01

Sep

-01

No

v-01

Jan

-02

Mar

-02

May

-02

Jul-

02

Sep

-02

No

v-02

Jan

-03

Mar

-03

May

-03

Jul-

03

Sep

-03

No

v-03

Jan

-04

Mar

-04

May

-04

Jul-

04

Sep

-04

No

v-04

Jan

-05

Mar

-05

May

-05

Jul-

05

Sep

-05

No

v-05

Jan

-06

Mar

-06

May

-06

Jul-

06

Sep

-06

No

v-06

Last Month Current Median Price Achieved (2006 and Prior)

Off the chart

Metro

Current

Median Price

Last

Achieved

Atlanta $116,806 Sep-98

Indianapolis $101,101 Jun-97

Provo $145,883 Sep-97

36

In fact, owning is now cheaper than renting in many marketsSacramento homeownership is $41 per month cheaper than renting


37

Affordability is the Big Positive Elephant in the Room

We are placing more emphasis on affordability – Sensitivity analysis shows us that rates could go to 7.5% and housing would still be historically affordable.

If prices rise 5% and rates go to 8%

38

Very few markets have an affordability problem(dark red only)


39

New home price erosion is almost over.

Source: John Burns Real Estate Consulting, Feb. 2010 survey of 2,000+ new home communities.

40

Pricing softened a bit in No Cal last month, but had been flat prior to that.

41

Potential Upside is Affordability. Housing will still be affordable if prices go up 5% and rates rise to 7.5% (our

2013 forecast).

42



1. JBREC Resources







8. Conclusions

43

Methodology 1: The need for more homes. Zero.

Demand = 0

A growing number of adults

with jobs creates demand.

We’d like 2 million jobs /

year (1.5%), but we have 4.1

million losses (-3.0%).

Housing Stock = Too much

Normally, we need 1.7 million total

homes constructed every year (1.3

mil new households + 400,000 for

replacement and 2nd homes), but we

exceeded this for 5 consecutive

years, and have about 2 million

more vacant homes than needed.

Affordability Favors Homeownership

Payments: We’d like Payment / Income of 38% and we have 27%!!

Price: We’d like Price / Income of 3.7 and we have 3.4!!

44

Demand: Adults with incomesEmployment losses are significant and widespread, but this is

improving quickly.


45

MSA data is calculated YOY (purple line), but monthly employment losses have stabilized (columns).

46

Signs of job growth areemerging. Look for temphiring, more hours worked,and bank credit for businessesas early indicators.


47

So Cal’s 1990s recessionary downturn lasted 8 yearsSimilar to Current U.S. Job Losses:

So Cal lost 7% of its employment base from

1990 – 1994 and didn’t recover all the jobs

until 1997

“L” Construction Recovery:So Cal construction remained verylow for 8+ years

“V” Price Recovery”:So Cal prices fell 22% from 1991 – 1995 and did not recover full values until 1999

48

Excess Housing StockWe have almost 2 million excess vacant homes, all added since 2002.

} 500K Meant to Be Owner Occupied

-1,000

-500

0

500

1,000

1,500

2,000

2,500

19

99

Q4

20

00

Q1

20

00

Q2

20

00

Q3

20

00

Q4

20

01

Q1

20

01

Q2

20

01

Q3

20

01

Q4

20

02

Q1

20

02

Q2

20

02

Q3

20

02

Q4

20

03

Q1

20

03

Q2

20

03

Q3

20

03

Q4

20

04

Q1

20

04

Q2

20

04

Q3

20

04

Q4

20

05

Q1

20

05

Q2

20

05

Q3

20

05

Q4

20

06

Q1

20

06

Q2

20

06

Q3

20

06

Q4

20

07

Q1

20

07

Q2

20

07

Q3

20

07

Q4

20

08

Q1

20

08

Q2

20

08

Q3

20

08

Q4

20

09

Q1

20

09

Q2

20

09

Q3

Excess V

acant H

ousin

g U

nits (

000s)

Excess Vacancy by Type

For Sale

Not For Sale

For Rent

Temporary / In Transition

Seasonal / Second Homes

Source: Census Bureau, John Burns Real Estate Consulting, data through 2009Q3


49

Homeowner vacancy has never been close to this high, showing a real demand for no more homes constructed purely based on the need for shelter.

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%Homeowner Vacancy Rate

Source: Census Bureau updated through 2009-Q3; 2.6%

Homeowner Vacancy Rate

1950s l 1960s l 1970s l 1980s l 1990s l 2000s


50

Houston’s 1983 oversupply downturn lasted 9 years

“L” or “U” Construction RecoveryConstruction in Houston fell 88% from 1983 to 1987, and stayed low through 1996.

V Price RecoveryHouston home prices fell 25% from 1983 – 1987, and did not recover full values until 1992.

51

Standing inventory has shrunk to the point where new home construction will begin again, purely for

business reasons.


52

Forecasting “U” Construction at Low Levels:Single-family construction is at the bottom. Lack of construction

financing will keep construction low


53

New home sales are bottoming, but won’t reach 1996 levels for at least 4 more years.


54



1. JBREC Resources







8. Conclusions

55

Methodology 2: The ability to sell homes. Excellent! But…

Demand = 5.8 millionThe norm is that 4.6% of all households buy a home every year, and we are at 5.2%.

For-sale Supply = Normal, but…The norm is 7.3 months of resale supply, and we have 7.2 months. 5 million Shadow Inventory homes will soon be for sale though!

Affordability Will Help Cushion the Shadow Inventory BlowPayments: We’d like Payment / Income of 38% and we have 27%!!Price: We’d like Price / Income of 3.7 and we have 3.4!!

56

Months of Supply of Homes For Sale Measures the Balance of Demand and Supply.

The Long-Term Averages Since 1982 (first year of supply data) are:

• 3.6% home price appreciation ( ~0.9% in real dollars)

• 7.3 months of resale supply

In the last 13 months, supply has fallen from 11.0 months to 7.2 months.

http://www.aagaines.com/man/scale1.html

57

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

Jul-

07

Aug

-07

Sep

-07

Oct-

07

No

v-0

7D

ec

-07

Jan

-08

Feb

-08

Mar-

08

Ap

r-08

May-0

8Jun

-08

Jul-

08

Aug

-08

Sep

-08

Oct-

08

No

v-0

8D

ec

-08

Jan

-09

Feb

-09

Mar-

09

Ap

r-09

May-0

9Jun

-09

Jul-

09

Aug

-09

Sep

-09

Oct-

09

No

v-0

9D

ec

-09

Nominal Appreciation (NAR)

Real Appreciation (JBREC)

Single-Family Median Home Price, YOY Change

Source: NAR, updated through Dec, 2009; 1.4%

$60,000

$90,000

$120,000

$150,000

$180,000

$210,000

$240,000

$270,000

Jan

-81

Jan

-82

Jan

-83

Jan

-84

Jan

-85

Jan

-86

Jan

-87

Jan

-88

Jan

-89

Jan

-90

Jan

-91

Jan

-92

Jan

-93

Jan

-94

Jan

-95

Jan

-96

Jan

-97

Jan

-98

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Nominal Median (NAR)

Real Median - Current $ (JBREC)

Single-Family Median Home Price

Sources: NAR, JBREC, updated through Dec, 2009; $177,500

3

5

7

9

11

13

15

Jun

-82

Jun

-83

Jun

-84

Jun

-85

Jun

-86

Jun

-87

Jun

-88

Jun

-89

Jun

-90

Jun

-91

Jun

-92

Jun

-93

Jun

-94

Jun

-95

Jun

-96

Jun

-97

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Months Supply of Existing Home Inventory

Source: NAR, updated through Dec, 2009; 7.2 months

6

7

8

9

10

11

12

Jul-

07

Aug

-07

Sep

-07

Oct-

07

No

v-0

7D

ec

-07

Jan

-08

Feb

-08

Mar-

08

Ap

r-08

May

-08

Jun

-08

Jul-

08

Aug

-08

Sep

-08

Oct-

08

No

v-0

8D

ec

-08

Jan

-09

Feb

-09

Mar-

09

Ap

r-09

May

-09

Jun

-09

Jul-

09

Aug

-09

Sep

-09

Oct-

09

No

v-0

9D

ec

-09

Months Supply of Existing Home Inventory

Source: NAR, updated through Dec, 2009; 7.2 months

Price and Inventory are

highly correlated.

58

Strong Home Buyer DemandIn CA and FL, resale sales are increasing rapidly from very low levels, while they are falling in Texas and elsewhere.


59

Sales volumes are actually above historical norms, thanks to investors and government intervention


2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%1

96

81

96

91

97

01

97

11

97

21

97

31

97

41

97

51

97

61

97

71

97

81

97

91

98

01

98

11

98

21

98

31

98

41

98

51

98

61

98

71

98

81

98

91

99

01

99

11

99

21

99

31

99

41

99

51

99

61

99

71

99

81

99

92

00

02

00

12

00

22

00

32

00

42

00

52

00

62

00

72

00

82

00

9Q

42

00

9P

20

10

P2

01

1P

20

12

P2

01

3P

Homes Sold as % of Households

Existing Homes Sold as % of HouseholdsNew Homes Sold as % of Households

Source: National Association of Realtors, JBREC, (Data Q4-2009, Pub : Jan / 2009)

Historical Median

60

New home sales per community is still less than half of norm, but has been relatively

stable for 9 months.


61

Data Date: Dec/Jan 2010 / Pub: Feb 2010

> 13

9 to 13

7 to 9

5 to 7

0 to 4

Months of Supply

By Metro

Resale Months of Supply is very low in the West, where prices are trending up, and high in Florida.

Still high in FL

62



1. JBREC Resources







8. Conclusions

63

So We Have Two Elephants in the Room.

The Positive ElephantAffordability

The Negative ElephantShadow Inventory

http://www.aagaines.com/man/scale1.html

64

Our Best Bet is That They Balance Each Other Out.

5 million Shadow Homes

Great Affordability

Plan for “2003” home prices, which means:• Rising prices in hardest hit “desirable” areas• Continued falling prices in most outlying undesirable areas• Continued Falling prices in areas that haven’t finished correcting, such as the high-end or Carolinas.

Plan for home builder profitability:• Impairments leave 4% pre-tax margin• Reduced incentives improve those margins• New land will have low margins too.• Market share to public builders who don’t need a construction loan.• Starts to increase.

65

Our Conclusion = Slowly Rising Prices

• Most likely scenario is that

Shadow Inventory is sold

over several years, during

a time of a recovering

economy and great affordability.– Downward pressure will occur from Shadow

Inventory and rising mortgage rates

– Upward pressure will occur from great affordability and low down payment programs.

66

Bet on the Demographics.Young families and retirees are next.

6.0%

12.1%

15.3%

10.7%

16.0%

18.9%

21.0%

5.9%

10.7%

16.9%

9.5%

14.5%

21.9%

20.6%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0%

Young Families

Elem. Families

Mature Families

Couples <45

Singles

Empty Nesters

Retirees

Households

2000

2010

2000 and 2010 Percentage of Households by Lifestage Group in USA

67

Young families will grow everywhere.

68

Move-up Families will decline in numbers.

69

Luxury and 2nd home buyer growth will be regional.

70

Empty nester and retiree growth will be huge everywhere.

71

In Housing, Timing is EverythingEarly Indicator: Housing Cycle GPA

• Helps us to “Call a bottom”

• Leading indicator for Home Price Appreciation

• Tracks market fundamentals:

o Demand: Need for housing from household and job growth, and demonstrated by sales activity

o Supply: New home construction and resale listings

o Affordability: Consumers’ ability to qualify for a loan

o U.S. Economic Health: 60 other factors including consumer confidence and stock market wealth

72

Housing Cycle GPAA

B

C

D

F

Housing Cycle GPA

Strategy:Get Land LightGet Debt LightTake on JV Partners

Strategy:Option land with fixedtakedown prices IRR is higher the longeryou wait

Strategy

73

All markets have a poor grade for risk, but there are more markets on the upswing than the downswing.


74

What Would I Do With This?

• Look at Price / Tangible Book because that is how the builders look at acquiring each other.

• Pay attention to entry-level and retiree focus.

• Pay attention to management’s willingness to bet heavy on land.

• Pay attention to geographic concentrations (see our monthly report)

75

Builder Geographic Concentrations

Builder Northern

Florida

Southern

Florida

Midwest Texas So. CA N. CA &

Reno

South

West

North

East

North

West

Total

Beazer 11% 0% 12% 21% 3% 0% 17% 23% 0% 100%

Brookfield Homes 0% 0% 0% 0% 33% 12% 0% 45% 9% 100%

DR Horton 10% 3% 8% 26% 4% 2% 16% 4% 4% 100%

K Hovnanian 4% 1% 12% 30% 3% 5% 4% 25% 0% 100%

KB Home 14% 1% 0% 36% 12% 8% 19% 0% 0% 100%

Lennar 12% 8% 8% 32% 8% 7% 10% 8% 0% 100%

M.D.C. Holdings 7% 0% 0% 0% 3% 0% 74% 16% 0% 100%

M/I Homes 17% 0% 62% 0% 0% 0% 0% 6% 0% 100%

Meritage 8% 0% 0% 67% 2% 3% 20% 0% 0% 100%

NVR 1% 0% 21% 0% 0% 0% 0% 65% 0% 100%

Orleans Homebuilders 4% 0% 7% 0% 0% 0% 0% 60% 0% 100%

Pulte 6% 7% 17% 17% 2% 6% 13% 13% 2% 100%

Ryland 12% 2% 23% 29% 3% 1% 6% 7% 0% 100%

Standard Pacific 15% 4% 0% 14% 22% 16% 10% 0% 0% 100%

Toll Brothers 6% 5% 11% 6% 3% 6% 14% 40% 0% 100%

Builder Northern

Florida

Southern

Florida

Midwest Texas So. CA N. CA &

Reno

South

West

North

East

North

West

Total

Beazer 26 0 27 50 8 1 40 53 0 234

Brookfield Homes 0 0 0 0 11 4 0 15 3 33

DR Horton 74 20 61 197 31 13 124 32 33 755

K Hovnanian 10 2 34 83 9 15 10 70 0 276

KB Home 24 1 0 61 21 14 33 0 0 170

Lennar 51 35 33 139 36 30 42 36 0 439

M.D.C. Holdings 13 0 0 0 5 0 132 28 0 178

M/I Homes 19 0 70 0 0 0 0 7 0 113

Meritage 14 0 0 122 3 5 37 0 0 181

NVR 3 0 107 0 0 0 0 339 0 519

Orleans Homebuilders 3 0 6 0 0 0 0 51 0 85

Pulte 45 52 124 124 17 40 91 94 11 724

Ryland 30 5 56 71 8 2 14 18 0 246

Standard Pacific 25 7 0 23 35 26 17 0 0 162

Toll Brothers 15 13 30 17 9 17 37 105 0 265

126

42

29

22

*As of last collection date: January 2010

37

0

17

0

70

25

South

East

29

0

170

43

16

18%

8%

(# of total active communities per builder)

15%

0%

13%

29%

17%

17%

0%

23%

16%

9%

8%

0%

Builder Geographic ExposureJanuary - 2010

(% of total active communities per builder)

South

East

12%

76

Builders’ Market Supply MetricsBased on Geographic Concentration

• Brookfield and Meritage have less downward pricing pressure based on the markets they are in

– Brookfield heavy in CA

– Meritage heavy in TX

Resale Months of Supply Shadow Months of Supply Negative Equity Homeowner Vacancy Rate Summary

Rank Builder

Wtd Avg Resale

Months of

Supply Rank Builder

Wtd Avg Shadow

Months of Supply Rank Builder

Wtd Avg

Negative

Equity* Rank Builder

Wtd Avg

Vacancy

Rate**

#1 Brookfield Homes 4.4 #1 NVR 12.8 #1 Orleans Homebuilders 15.0% #1 Brookfield Homes 2.2%

#2 Meritage 6.0 #2 M.D.C. Holdings 12.9 #2 NVR 16.3% #2 Meritage 2.5%

#3 K Hovnanian 6.7 #3 Brookfield Homes 14.5 #3 K Hovnanian 18.6% #3 K Hovnanian 2.5%

#4 M.D.C. Holdings 6.7 #4 Toll Brothers 15.2 #4 M/I Homes 21.0% #4 NVR 2.6%

#5 KB Home 7.0 #5 K Hovnanian 15.7 #5 Ryland 21.7% #5 Orleans Homebuilders 2.6%

#6 Beazer 7.0 #6 Beazer 15.7 #6 Meritage 22.3% #6 Toll Brothers 2.8%

#7 Lennar 7.1 #7 KB Home 16.0 #7 DR Horton 22.6% #7 Lennar 2.8%

#8 Standard Pacific 7.3 #8 Pulte-(Centex) 16.0 #8 Pulte-(Centex) 23.8% #8 KB Home 2.8%

#9 Toll Brothers 7.4 #9 Meritage 16.1 #9 Beazer 24.3% #9 Ryland 2.8%

#10 Pulte-(Centex) 7.7 #10 Orleans Homebuilders 16.2 #10 Toll Brothers 25.8% #10 DR Horton 2.8%

#11 DR Horton 7.8 #11 Standard Pacific 16.3 #11 Lennar 26.0% #11 Beazer 2.8%

#12 Ryland 7.8 #12 Lennar 16.3 #12 Brookfield Homes 26.4% #12 Pulte-(Centex) 2.9%

#13 NVR 8.2 #13 DR Horton 16.4 #13 KB Home 27.6% #13 Standard Pacific 2.9%

#14 M/I Homes 10.7 #14 Ryland 16.8 #14 Standard Pacific 29.5% #14 M.D.C. Holdings 3.1%

#15 Orleans Homebuilders 12.6 #15 M/I Homes 17.1 #15 M.D.C. Holdings 33.5% #15 M/I Homes 3.3%

Median for All Builders 7.3 Median for All Builders 16.0 Median for All Builders 23.8% Median for All Builders 2.8%

*2009 3Q Negative Equity from First American Core Logic **Vacancy rate for 2009 by state

77

Accurate Information = Best Decisions

[email protected]

(949) 870-1200

John Burns National Housing Update

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