The document outlines the state of the U.S. housing market as of October 2009, noting significant government interventions that have supported home sales and warnings about future challenges if such support is withdrawn. It highlights issues such as high vacancy rates, substantial foreclosures, and the need for new home construction, while also emphasizing improved affordability for buyers. The report concludes that while prices have stabilized temporarily, a wave of distressed sales is likely to lead to further declines, contingent on economic recovery indicators.

1. The U.S. Housing Market:The FactsOctober, 2009(949) 870-1210jburns@realestateconsulting.com

2. Our experienced team stays on top of housing issues by:Buying and charting 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 home communities, and interviewing local expertise where we do not have offices.Investigating breaking news and legislation.Managing market research teams who visit thousands of communities each year as part of customized consulting assignments.Managing major portfolio valuation assignments.Interacting regularly with a diverse group of executive clients (builders, developers, lenders, private equity, hedge funds, regulators, etc.), and forecasting prices, sales, and starts by MSA using the best data and knowledge available.Steve Dutra20 yrs industry datamgmt.Wayne Yamano10 yrs of analysisJody Kahn85 Industry M&A dealsLisa Marquis Jackson18 years of industry reportingMollie CarmichaelSVP Lennar, Pulte, Irvine Co.Don WalkerHome Builder Pres.2

3. Government Intervention Has Been Very Helpful to Home SalesHousing: $8,000 Federal tax credit to buy a house.Mortgage Rates: The lowest in history thanks to Fed intervention and Fannie / Freddie rescue.Down payments: Only 3.5% required through the FHA, whose market share has grown from 2% to 23%.Economy: $800 billion stimulus kicking in soonTwo Key Questions:What would have happened without the intervention above?What happens if any of the four programs get pulled?3

4. Our View is a “W” Is Most Likely.4Temporary PeakTax Credit ExpirationRising Mortgage RatesRising REO SalesCyclical BottomJob Growth ReturnsBanks Lending on Balance Sheet

5. How Do We Make Sense of The Worst Economy in 51 Years and the Best Affordability in 37 Years?Demand is Weak, but Bottoming OutAdults With Incomes: We’d like 2 million jobs / year (1.5%), but we have 5.7 million losses (-4.2%).Home Buyers: We’d like 4.6% of Households to buy homes every year, and we have 4.6%.Supply is Too High but ImprovingNew Home Supply: We need up to 1.7 million total homes constructed every year (1.3 mil new HH in normal times + 400K for replacement and 2nd homes). We exceeded this for 5 consecutive years, and have about 2 million more vacant homes than needed.Resale Supply: We’d like less than 7 months of resale supply, but we have 9.4 monthsAffordability is FantasticPayments: We’d like Payment / Income of 38% and we have 27%Price: We’d like Price / Income of 3.7 and we have 3.35

6. 1. Adults with incomes: Employment losses are significant and widespread.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep 20096

7. Rising unemployment impacts the young and uneducated, who tend to rent, more severely.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 20097

8. No signs of job growth soon. Look for temp hiring, more hours worked, and bank credit for businesses as early indicators.8Source: John Burns Real Estate Consulting US Housing Forecast, Sep. 2009

9. Data Date: Jul 2009 / Pub: Sep 20092. Home Buyers: In CA and FL, resale sales are increasing rapidly from very low levels, while they are falling in Texas and elsewhere.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 20099

10. Sales volumes are actually at historical norms, thanks to investors and government intervention.10

11. New home sales per community is still less than half of norm.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 200911

12. 3. New Home Supply: We have 2 million excess vacant homes- all added since 2002.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 200912

13. Homeowner vacancy has never been close to this high.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 200913

14. Houston’s 1983 downturn lasted 9 years.V Price RecoveryHouston home prices fell 25% from 1983 – 1987, and did not recover full values until 1992.“L” or “U” Construction RecoveryConstruction in Houston fell 88% from 1983 to 1987, and stayed low through 1996.14

15. So Cal’s 1990s downturn lasted 8 years.Similar 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 very low for 8+ years.“V” Price Recovery”:So Cal prices fell 22% from 1991 – 1995 and did not recover full values until 1999.15

16. Forecasting a “U” at Low Levels: Single-family construction is at the bottom. Lack of construction financing will keep construction low.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 200916

17. Data Date: Jul 2009 / Pub: Sep 20094. Resale Supply: Listings are falling rapidly, but there are pent-up listings from Bank REO, future foreclosures and real people who want to move.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 200917

18. Listings are low in the West and high in FL.18Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

19. Layoffs and Option ARM resets will keep foreclosure starts above 2 million through 2012.U.S. Foreclosure Starts (NoDs) ForecastSource: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

20. Most defaulted loans have not been taken REO.20

21. It is taking 2 years from NoD to REO sale.21The typical Notice of Default date on REO homes sold in California in 9/09 was Q3 2006.

22. CA, FL, AZ, GA and NV loan delinquencies are out of control.22Quarterly Foreclosure Notices

23. At least 7 MSAs had more foreclosure notices than sales in the last year.23

24. For example, Orange County CA has 40% more homes in Shadow Inventory than the total currently listed for sale.24

25. Our best estimate is that future distressed sales will add about 8 to 9 months of supply to the OC market, assuming current sales pace.

26. 5. Payments: Affordability is the best since we began tracking it by MSA in 1981.26Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

27. Data Date: Jul 2009 / Pub: Sep 2009Very few markets have an affordability problem (dark red only).Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

28. In fact, owning is now cheaper than renting in many markets.Phoenix Homeownership is $198 per month cheaper than renting 28Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

29. 6. Price: Reports of price appreciation are wrong.A shift to low-priced homes in worse neighborhoods drove Q4 2008 – Q2 2009 prices down.ORANGE COUNTYU.S.29Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

30. Orange County Example: From 7/08 – 5/09, the transaction volume shifted to the low priced zip codes, driving the median price down much more than true prices really fell. Today’s reported appreciation is due to a shift back.30

31. The higher the price, the slower the sales.Demand / Supply ratio has improved at lower price points and worsened at higher price points.31

32. During August, California and S. Florida new home prices turned positive for the first time since the downturn began.Source: John Burns Real Estate Consulting, Sept 2009 survey of 1,855 new home communities. 32

33. Pricing TruthSo Cal: Most home values are stabilizing, but not in Riverside.33

34. Pricing TruthNorth Florida: Most home values are falling rapidly.34

35. We rely on feedback from the ground each month to supplement stats with color on market conditions.Comments From August 2009 Survey35

36. Home prices are back to 2003 levels and likely headed to 2002 levels. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 200936

37. Price troughs are likely to vary by market.37

38. When?Early Indicator: Housing Cycle GPAA+Helps us to “Call a bottom”Leading indicator for Home Price AppreciationTracks market fundamentals:Demand: Need for housing from household and job growth, and demonstrated by sales activitySupply: New home construction and resale listings Affordability: Consumers’ ability to qualify for a loanU.S. Economic Health: 60 other factors including consumer confidence and stock market wealth38

39. Housing Cycle GPABuilder StrategyGPA falling fromB to DGPA rising fromD to BStrategy:Get Land LightGet Debt LightTake on JV PartnersStrategy:Option land with fixed takedown pricesIRR is higher the longer you wait39

40. San Diego Housing Cycle GPA has historically been a 2 to 3-year leading indicator402 yrs3 yrs3yrs2yrs

41. Housing Cycle GPA41

42. The economic health of the builder’s MSA makes a big difference.42All markets are bad today.This could be very different in 2010.Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009

43. CA, FL, NV and AZ concentrations have hurt Brookfield, WCI, SPF the most.Toll, MDC, KB, PHM and LEN have been hit hard too.TX and NC presence has provided less market volatility for MTH, NVR, RYL, DHI, CTX, HOV and BZH.43Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009

44. Regional differences can make a huge difference in builder performance.MDC Holdings’ heavy concentration in the Southwest means their housing markets have:Dropped $24K/house more than others (last 3 yrs)

45. A 1.3 % pt higher rate of job loss

46. A 4.6 % pt greater decline in construction44Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009

47. JB’s 4 year Theory of REO DispositionHousing Construction Loans were the first problems and will be sold first.Bid – AskSpreadAppraisal Received45

48. Builders won’t pay more than book value, as book value exceeds market value.Raw Land is virtually worthless to builders right now.46

49. Our portfolio valuation team is consistently finding values that are 50% below loan and original book value balance.47

50. Tampa submarket analysis shows the importance of looking beyond the metro level.48

51. Within various MSAs, the move up builders have better locations.In better locations: Land values fall a lesser percentage (dollars may be more)

52. Buyer demand returns first (near job centers and better schools)

53. Home prices fall later in the cycle (less distress with more stable homeowner profile)49Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009

54. Community counts drive revenue.Way down: CTX, HOV, KB, PHM, RYL, LENFlat: DHI, NVR, TOL, MDC, SPF50Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009

55. M&A activity was high during the boom years, but some builders had better timing.Bad Timing: HOV and SPF dominated the 2005 transactions

56. Poor Timing: LEN, MTH, TOL and KB were also acquisitive in 2003-2005

57. Great timing: DHI acquisition binge ended in 2001, PHM and CTX in 2003, Ryland in 1998Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 200951

58. M&A is a way to reduce SG&A as a % of revenue.SG&A has declined 58%from $12.1 billion peak to $5.1 billion per year, but continues its steady rise as % of revenue, from 10% in 2005 to almost 16% today.52Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009

59. Conclusions for Informed InvestorsPrices of most homes are declining or have stabilized temporarily.Demand for more housing is declining, not growing.The excess vacancy will take years to fill.A tsunami of distressed home sales will create a buyer’s market, causing prices to fall.Government intervention is helping a lot.Government intervention will determine the extent and timing of future price declines.53

60. 54The recovery shape will be determined by: 1) the rate of job growth, 2) the timing of REO sales, and 3) mortgage rates and terms.Temporary PeakTax Credit ExpirationRising Mortgage RatesRising REO SalesCyclical BottomJob Growth ReturnsBanks Lending on Balance Sheet

61. About John Burns Real Estate ConsultingFounded in 2001 by John Burns

62. 20 professionals

63. 6 citiesNorth AmericaIrvine, CA (HQ)

64. San Diego, CA

65. Sacramento, CA

66. Dallas, TX

67. Palm Beach, FL

68. Portsmouth, NHContact Tel (949) 870-1200

69. Fax (949) 870-1299contact@realestateconsulting.comThe best decisions are made by those with the right information. 55John Burns, President & CEOQ & A