The housing market is showing signs of stabilization but remains fragile. Government intervention has helped boost home sales through tax credits and low mortgage rates but pulling back any of these programs could cause prices to decline further. While affordability is high due to low prices and interest rates, demand remains weak due to high unemployment. A wave of foreclosures continuing through 2012 will keep supply high and put downward pressure on home prices, though Texas may be less affected due to having addressed its subprime issues earlier. Recovery is expected to be a long "U" shaped process rather than a quick "V" as construction remains low and excess inventory gets absorbed.

1. Housing Market OverviewOctober 30, 2009 (949) 870-1210 jburns@realestateconsulting.com

2. Our View is a “W” Is Most Likely. 2 Temporary Peak Tax Credit Expiration Rising Mortgage Rates Rising REO Sales Cyclical Bottom Job Growth Returns Banks Lending on Balance Sheet

3. Government Intervention Has Been Very Helpful to Home Sales Housing: $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 soon Two Key Questions: What would have happened without the intervention above? What happens if any of the four programs get pulled?

4. How Do We Make Sense of The Worst Economy in 51 Years and the Best Affordability in 37 Years? Demand is Weak, but Bottoming Out Adults 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 Improving New 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 months Affordability is Fantastic Payments: We’d like Payment / Income of 38% and we have 27% Price: We’d like Price / Income of 3.7 and we have 3.3

5. 1. Job Growth: No signs of job growth soon. Look for temp hiring, more hours worked, and bank credit for businesses as early indicators. 5 Source: John Burns Real Estate Consulting US Housing Forecast, Sep. 2009

6. Texas’ job losses have been more recent. 6

7. 2. Sales volume: New home sales per community is still less than half of norm. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

8. TX new home sales are down 60% from 2006. 8

9. National sales volumes are actually at historical norms, thanks to investors and government intervention.

10. TX resales have fallen back to 2002 levels. 10

11. 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. 2009

12. Houston’s 1983 downturn lasted 9 years. V Price Recovery Houston home prices fell 25% from 1983 – 1987, and did not recover full values until 1992. “L” or “U” Construction Recovery Construction in Houston fell 88% from 1983 to 1987, and stayed low through 1996. 12

13. 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. 13

14. 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. 2009

15. TX permits are back to 1996 levels and headed to 1994 levels. 15

16. 4. Resale Supply: Listings are low in the West and high in FL. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Oct. 2009 16

17. Listings haven’t risen much in TX. 17

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

19. Most defaulted loans have not been taken REO.

20. It is taking 2 years from NoD to REO sale. 20 The typical Notice of Default date on REO homes sold in California in 9/09 was Q3 2006.

21. At least 7 MSAs had more foreclosure notices than sales in the last year. 21

22. Foreclosure notices are trending down in TX as the high subprime problem is long gone. 22

23. 5. Payments: Affordability is the best since we began tracking it by MSA in 1981. 23 Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

24. Owning is now cheaper than renting in many markets.Las Vegas Homeownership is $171 per month cheaper than renting. 24 Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

25. 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 COUNTY U.S. 25 Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009

26. 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.

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

28. During August, California 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.

29. JB’s 4 year Theory of REO DispositionHousing Construction Loans were the first problems and will be sold first. Bid – Ask Spread Appraisal Received

30. Conclusions for Informed Builders Housing will stabilize when we have job growth and no needed intervention. The excess vacancy will take years to fill. A tsunami of distressed home sales will create a buyer’s market, causing prices to fall, but less in TX. Government intervention is helping a lot. Government intervention will determine the extent and timing of future price declines. 30

32. 20 professionals

34. San Diego, CA

35. Sacramento, CA

36. Dallas, TX

37. Palm Beach, FL