The Concord Group's Housing Recovery Forecast

United States Housing Outlook When Will Markets Recover? THE CONCORD GROUP February 2009 Andrew Borsanyi (415) 397-5490 [email_address]

Executive Summary
For-sale housing market conditions and forecasted recovery scenarios for U.S. and key regions
History – Boom, Bubble, Bust
TCG Market Outlook
Strong long-term demographic demand
2010: Increased sales velocity
Q2 2011: Supply/demand balance
Opportunities
Land/lot development precede recovery by 12 to 18 months
Re-entitlement and planning immediately
Submarket supply/demand conditions

History
2001 to 2006: Boom, Bubble
1970 to 2003 U.S. homes appreciated 6% annually
2004 to 2005 prices appreciated 11% annually
Housing Boom Factors
2.1 jobs created per building permit 1970 to 1999
Baby boom generation reach peak-buying ages
Interest rates at historical lows
Capital gains tax law added in 1997
Tech bust in early 2000s

Bust
Volume –
505k last 12 months sales (Nov. 2008)
1.28MM 2005 peak – 61% drop
Total volume estimated at 550k-575k including attached product
Price –
Same product down 21% from peak, 17% Y/Y (Dec. 2008)
Certain markets worse
High foreclosure volumes causing downward pressure

Regional Conditions
High growth markets experience sharpest declines
Mix-adjusted same product pricing drop deeper than overall average

Outlook Methodology
Forecast annual new home demand
Base Growth: Published employment and demographic forecasts
Qualify for affordability, homeownership, turnover, obsolescence
Assume 2008 sales rate for next 12-18 months
Higher medium-term recovery sales rate assuming job growth
Conservatively forecast demographic demand follows
Assess Competitive Inventory
Standing units, actively-marketed lots and recently-built foreclosures
Months supply = (competitive inventory ÷ varied sales rates) x 12
Recovery Milestones
Land Market: 12 months supply of competitive inventory reached
Housing Market: Currently available competitive inventory eliminated
Price Forecast
Conservative new home buyer financing assumptions
Adjustment needed for reversion to long-term affordability ratio

New Home Supply
Standing inventory
Lots in actively marketed projects
Recently built foreclosures
1.975MM estimated units available
4 Years of supply at current run rates
Historically 1-2 years of supply

New Home Demand Projections
Demand Framework
Household growth (1.3MM new HHs annually)
Turnover and obsolescence
Percent own and percent buy new
Financing assumptions
TCG Long-Term Demand
895K units annually
Baseline demand not reached until 2011
In-line with new home sales in early 2000s

Price Forecast
Current U.S. income to housing with 20 year average
Certain regions still require additional drops to reach long-term average
Likely overcorrection of additional 5-10%
Distressed/REO sales
High builder inventory
Tougher lending standards
Poor buyer sentiment

TCG U.S. Market Outlook
New home sales volumes bottom in 2009
Peak to trough same-product price correction of 25-30%
Currently same product price down 21%
Pricing bottom reached by end of 2009
Minimal or zero price appreciation through 2010
Moderate, single digit price appreciation in 2011+
Recovery Milestones:
Land Market: Q2 2010
Housing Market: Q2 2011

Regional Market Outlook
Leaders: Proximity to employment, schools, amenities
Laggards: Heavy foreclosures, edge commuter locations

California
San Francisco Bay Area
31% decline in same product price from peak versus 20% nationally
Outlying suburbs facing largest price declines due to high foreclosure sales; downtown San Francisco has held up relatively well but is feeling downward price pressures as luxury condo market subsides
Continued job losses in financial sector will weaken local economy through 2009 (contributes to ¼ of total output in the MSA)
Los Angeles
Three layers – urban, Santa Clarita and Antelope Valley
Outlying areas such as Antelope Valley suffering most due to increased affordability of more proximate Los Angeles suburbs
Effects of decline in housing and mortgage market spilling over to other areas of the economy – job losses in 2008 expected to continue through 2009 with growth returning in late 2010
Pent up demand for housing and services yields market turnaround in 2011
Inland Empire
New home sales volume down 77% from peak versus national decline of 61% from peak
Foreclosure sales 84% of total sales volume, 4.5 times national average of 20%
Regional unemployment rate 10.2% ranks 333 rd among 369 MSAs (versus 7.6% nationally)
High volume of competitive inventory homes pushing market recovery date to late 2011
West end cities such as Rancho Cucamonga and Chino Hills outperforming region due to their proximity to core employment nodes
Still attractive long term as outlet for SoCal growth

Mountain
Phoenix
33% drop same product price Y/Y; 41% off from peak
Median home price back to 2002 levels, nationally at 2004 levels
Recovery projected to lag most new home markets due to significant land availability
Core areas (within 20 miles of downtown) to recover first with prolonged suffering in exurban areas, specifically southeast submarket (e.g. Casa Grande)
Strong underlying growth story
Las Vegas
32% drop in same product price Y/Y; 39% off from peak
Existing home sales up, largely due to foreclosures (65% of resales)
Nevada leads U.S. in “underwater” mortgages – 47% have negative equity
Overbuilding/high speculation investor buying led to oversupply
20,000-30,000 hotel room deliveries projected next 3 years
Long-term outlook positive – strong population growth, land constraints due to regional location (surrounded by mountains), second home market, gaming industry, international destination
Denver
4% drop in same product price Y/Y versus 17% for most MSA’s
Denver county has faired better than outlying counties such as Adams and Douglas
Financial-sector job losses put damper on employment growth in 2008; medium-term growth will be led by service sectors
May see increased population growth as California businesses look for cheaper alternatives
Ranks first among nation’s most desirable places to live - 54% of all residential moves in 2008 were inbound

Florida
Miami
Same product home price down 29% Y/Y
Service-based economy: relatively low skill level of labor pool likely to limit income growth
Miami condo developers selling inventory in bulk; December 2008 bulk sales in downtown Miami closed mid-$100 per square foot range
Coastal markets detached strongest; Downtown Miami has highest unsold supply
Tampa
Diversified economy less reliant on second home demand than other FL
Services sector and Port growth catalysts for economic progress 2011-2014
Unemployment rate 8.3% versus 7.6% nationally as of January 2009
4% housing units in foreclosure versus 1.8% nationally, 122% increase since 2007
Orlando
January 2009 existing sales up 37% versus last year – foreclosures 50% of sales
6.7% housing units in foreclosure versus 1.8% nationally
Low second home demand coupled with high inventory
Ex-urban commuter markets to the West of downtown struggling more than established areas
Smallest Y/Y employment decrease among all Florida markets (-1.7% or 19,100 jobs)
Key industries in Orlando – healthcare, education, defense manufacturing and tourism/hospitality – potentially weather downturn

Southeast
Charlotte
Lagged national downturn; among last markets to bust
Significant job loss since October 2008 due to financial sector collapse (Bank of America, Wachovia headquarters)
Cleveland and Gaston counties (suburban counties) reporting 11% unemployment – significantly worse than more urban Mecklenburg County (5%)
Atlanta
Same product home price down 11% Y/Y, 2003 price levels
Outlying suburbs and urban condos drive oversupply
Third highest vacancy rate for homes, condos and apartments among 75 metros
Credit crisis and real estate downturn have led to major job losses in local construction and finance industries

Northeast and Mid-Atlantic
Boston
7% decline in same product home price Y/Y; 15% down from peak
Newly constructed suburban high-end homes suffering most, especially near western I-495 loop (e.g. Harvard, Westford, Bolton), as more desirable central suburbs become affordable
Present climate making historically elite communities more accessible
New York
9% decline in same product home price Y/Y; 13% down from peak
Sales significantly down
Financial crisis shocks felt most acutely by high-end product
Many projects (approximately 27,000 units) halted or converted to rental; large luxury projects in previously non-luxury markets particularly affected – some buildings selling condos in bulk at large discounts (up to nearly 50%)
DC-Baltimore
9% decline in same product home price Y/Y– biggest annual price drop in nearly a decade; 28% down from peak
Metro area slightly buoyed by government activity and low unemployment; exurban markets experiencing greater stress as areas closer to city have become more affordable
Obama administration’s federal expansions expected to increase wealth and number of households in region
Outer coastal areas (e.g. Delaware shore, Prince George’s) struggling with decreased second home demand

Texas
Dallas
3% drop in same product home price Y/Y; 6% off from peak
Did not experience same run-up in home prices as other growth areas with peak price appreciation of approximately 9% in 2006
Continues to outperform U.S. with 1.4% employment growth in 2008 due to solid diversification
Easy permitting practices allow for quick development process
Houston
Prices remain steady – overall median home price flat Y/Y
Economic growth tied to energy sector, remains strong with 57,000 jobs added in 2008 (2.2% growth)
Drops in energy prices will have negative impact on overall economy
Austin
Steady single-digit home price appreciation throughout 2000s
Employment growth of 1.2% in 2008 outperforms U.S. but slowing
Signs of weakness in high-tech employment industry
Relatively low home inventory levels and limited foreclosures are highlights – region likely to be among first to recover as a result

Pacific Northwest
Seattle
10% decline in same product price Y/Y versus 17% for most MSA’s
Foreclosures up 80% Y/Y, limited impact overall (0.9% of housing units versus 1.8% nationally)
12% home sales were foreclosures versus 20% nationally
City of Seattle resale market hit less hard than outlying areas, with smaller sales/price drops
Major layoffs coming with Microsoft, Boeing and JP Morgan (as part of Washington Mutual acquisition) announcing company-wide cutbacks of 5,000, 10,000 and 9,200 respectively
Short-term strength/potential liability = presence of large companies like Microsoft and Boeing that drive growth in their respective industries
Long-term strength as location for West Coast business expansion; more metropolitan than OR but less expensive than CA with rich talent base, port access and low business costs
Portland
Same product home price down 10% Y/Y versus 17% for 20-MSA composite
Foreclosures up 107% Y/Y, limited impact overall (1.2% of housing units versus 1.8% nationally)
12% home sales were foreclosures versus 20% nationally
Supply-constrained market with core urban neighborhoods currently outperforming suburbs
Well-educated local labor force attracts investment in research and high-tech industries, particularly well-positioned in alternative energy
Construction, finance and logging/wood product manufacturing sectors hit hard by local and national housing downturn
Viewed as lower cost West Coast investment option compared to Seattle and California

Investment Opportunities
TCG Bullish on Long-Term U.S. Housing Market
High demographic growth
Governmental support for ownership
Home ownership preferences.
Favorable Deal Conditions
High potential for distressed assets
Reduction in bid/ask spreads
Overcorrection of home prices
Near-Term Strategies
Land/lot development precede recovery by 12-18 months
Re-entitlement, planning and product development
Identify regional and submarket opportunities

TCG Valuation Strategy
Market Supply and Demand Analyses
Site Assessment and Programming
Valuation Approach
Cash flow limited finished lot and no raw land sale prior to land market recovery
Conservative liquidation and going-concern evaluation

About The Concord Group
Leading real estate strategy firm with offices in Newport Beach, San Francisco and Boston
50 consultants complete over 350 assignments annually in the U.S., Europe, Asia and Latin America
Services include market and consumer analyses, transaction due diligence and asset valuation
Recent private equity assignments include multiple analyses of distressed assets of commercial banks and new acquisitions for next-cycle development
Assist developer and financial clients on value maximization of assets
Cover all property types (commercial, residential and land) and work under tight due diligence deadlines
130 Newport Center Drive, Suite 230, Newport Beach, California 92660 | Phone: 949.717.6450 | Fax: 949.717.6444 251 Kearny Street, 6th Floor, San Francisco, California 94108 | Phone: 415.397.5490 | Fax: 415.397.5496 77 Summer Street, 7th Floor, Boston, Massachusetts 02110 | Phone: 617.451.1100 | Fax: 617.451.1171 Newport Beach | San Francisco | Boston

United States Housing Outlook When Will Markets Recover? THE CONCORD GROUP

The Concord Group's Housing Recovery Forecast

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