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www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
The U.S. Housing Market:The Facts
October, 2009
(949) 870-1210
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
Jody Kahn85 Industry M&A deals
Mollie CarmichaelSVP Lennar, Pulte, Irvine Co.
Don WalkerHome Builder Pres.
Steve Dutra20 yrs industry datamgmt.
Wayne Yamano10 yrs of analysis
Lisa Marquis Jackson18 years of industry reporting
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.
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
Government Intervention Has Been Very Helpful to Home Sales
1. Housing: $8,000 Federal tax credit to buy a house.
2. Mortgage Rates: The lowest in history thanks to Fed intervention and Fannie / Freddie rescue.
3. Down payments: Only 3.5% required through the FHA, whose market share has grown from 2% to 23%.
4. Economy: $800 billion stimulus kicking in soon
Two Key Questions:1. What would have happened without the intervention above?2. What happens if any of the four programs get pulled?
3
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Our View is a “W” Is Most Likely.
4
Temporary PeakTax Credit ExpirationRising Mortgage RatesRising REO Sales
Cyclical BottomJob Growth ReturnsBanks Lending on Balance Sheet
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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
1. Adults With Incomes: We’d like 2 million jobs / year (1.5%), but we have 5.7 million losses (-4.2%).
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
3. 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.
4. Resale Supply: We’d like less than 7 months of resale supply, but we have 9.4 months
Affordability is Fantastic
5. Payments: We’d like Payment / Income of 38% and we have 27%
6. Price: We’d like Price / Income of 3.7 and we have 3.3
5
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1. Adults with incomes: Employment losses are significant and widespread.
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep 2009
6
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“Trusted Analysis for Executive Decisions”
Rising unemployment impacts the young and uneducated, who tend to rent, more severely.
7
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
No signs of job growth soon. Look for temp hiring, more hours worked, and bank credit for businesses as early indicators.
-40%
-20%
0%
20%
40%
60%
80%
100%
1990
-Q2
1991
-Q2
1992
-Q2
1993
-Q2
1994
-Q2
1995
-Q2
1996
-Q2
1997
-Q2
1998
-Q2
1999
-Q2
2000
-Q2
2001
-Q2
2002
-Q2
2003
-Q2
2004
-Q2
2005
-Q2
2006
-Q2
2007
-Q2
2008
-Q2
2009
-Q2
Net % of Large U.S. Banks Reporting Tougher Standards of Business Loans
Large & Medium Firms
Small Firms
Source : Federal Reserve/Board of Governors updated through 2009Q3
-40%
-20%
0%
20%
40%
60%
80%
100%
2004
-Q4
2005
-Q1
2005
-Q2
2005
-Q3
2005
-Q4
2006
-Q1
2006
-Q2
2006
-Q3
2006
-Q4
2007
-Q1
2007
-Q2
2007
-Q3
2007
-Q4
2008
-Q1
2008
-Q2
2008
-Q3
2008
-Q4
2009
-Q1
2009
-Q2
2009
-Q3
Net % of Large U.S. Banks Reporting Tougher Standards of Business Loans
Large & Medium Firms
Small Firms
Source : Federal Reserve/Board of Governors updated through 2009Q3
33.0
33.5
34.0
34.5
35.0
35.5
36.0
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
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Jan
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Jan
-95
Jan
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Jan
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Jan
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Jan
-99
Jan
-00
Jan
-01
Jan
-02
Jan
-03
Jan
-04
Jan
-05
Jan
-06
Jan
-07
Jan
-08
Jan
-09
Recession Year Hours Per Week
U.S. Average Hours Worked Per Week
Source: Census Bureau, updated through July 2009; 33.1
32.9
33.0
33.1
33.2
33.3
33.4
33.5
33.6
33.7
33.8
33.9
Jan
-08
Feb
-08
Mar
-08
Ap
r-08
May
-08
Jun
-08
Jul-
08
Aug
-08
Sep
-08
Oct
-08
No
v-08
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Ap
r-09
May
-09
Jun
-09
Jul-
09
U.S. Average Hours Worked Per Week
Source: Census Bureau, updated through July 2009; 33.1
8
Source: John Burns Real Estate Consulting US Housing Forecast, Sep. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
2. 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. 2009
• Data Date: Jul 2009 / Pub: Sep 2009
9
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“Trusted Analysis for Executive Decisions”
Sales volumes are actually at historical norms, thanks to investors and government intervention.
10
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“Trusted Analysis for Executive Decisions”
New home sales per community is still less than half of norm.
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
11
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“Trusted Analysis for Executive Decisions”
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
-1,500
-1,000
-500
0
500
1,000
1,500
2,000
2,500
3,000
1999
Q4
2000
Q1
2000
Q2
2000
Q3
2000
Q4
2001
Q1
2001
Q2
2001
Q3
2001
Q4
2002
Q1
2002
Q1
2002
Q2
2002
Q3
2002
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2003
Q1
2003
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2004
Q1
2004
Q2
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Q2
2008
Q3
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Q4
2009
Q1
2009
Q2
Excess Vacancy by Type
For Sale
Not For Sale
For Rent
Temporary / In Transition
Seasonal / Second Homes
Source : Census Bureau, data through 2009Q2
12
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“Trusted Analysis for Executive Decisions”
Homeowner vacancy has never been close to this high.
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%Homeowner Vacancy Rate
Source: Census Bureau updated through 2009-Q2; 2.5%
Homeowner Vacancy Rate
1950s l 1960s l 1970s l 1980s l 1990s l 2000s
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
13
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
Houston’s 1983 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.
14
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“Trusted Analysis for Executive Decisions”
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
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“Trusted Analysis for Executive Decisions”
Forecasting a “U” at Low Levels: Single-family construction is at the bottom. Lack of construction financing will keep construction low.
1,033,100
1982: 548,667
1,077,600
1991: 751,000
1,682,000
2009P: 405,000
806,500
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
1970
1971
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2007
2008
Crn
t(S
A)
2009
P20
10P
2011
P20
12P
2013
P
U.S. Single-Family Permits
Single Family Recession Years Long Term Average
Sources: John Burns Real Estate Consulting, Census Bureau for history and JBREC for forecast (Pub:Aug/2009) NSA, Current=SA, (Data: July/09)
YoY SA: -20.3%
Over-Supply
Under-Supply
Sources: John Burns Real Estate Consulting, Census Bureau for history and JBREC for forecast (Pub:Aug/2009) NSA, Current=SA, (Data: July/09)
YoY SA: -20.3%
LTA
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
16
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“Trusted Analysis for Executive Decisions”
4. 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. 2009
• Data Date: Jul 2009 / Pub: Sep 2009
17
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“Trusted Analysis for Executive Decisions”
Listings are low in the West and high in FL.
18
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
Layoffs and Option ARM resets will keep foreclosure starts above 2 million through 2012.
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
4,000,00020
00
2001
2002
2003
2004
2005
2006
2007
2008
2009
P
2010
P
2011
P
2012
P
2013
P
2014
P
2015
P
2016
P
Num
ber o
f Loa
ns
U.S. Annual Foreclosure Forecast ComponentsEconomy-related Foreclosures (JBREC)
Foreclosures from ARM Resets (JBREC)
Baseline Foreclosures (JBREC)
Source: John Burns Real Estate Consulting
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
U.S. Foreclosure Starts (NoDs) Forecast
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“Trusted Analysis for Executive Decisions”
Most defaulted loans have not been taken REO.
Category Rate Number*30+ days Delinquent 3.68% 2,057,120 60-90 days Delinquent 1.68% 939,120 90+ days Delinquent 3.88% 2,168,920 In Foreclosure 4.30% 2,403,700
13.54% 7,568,860
Source: Mortgage Bankers Association
* Sample Size: 44.5 million, but number applied to all 55.9 million U.S. mortgages
LOAN DELINQUENCIES
20
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It is taking 2 years from NoD to REO sale.
21
The typical Notice of Default date on REO homes sold in California in 9/09 was Q3 2006.
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“Trusted Analysis for Executive Decisions”
CA, FL, AZ, GA and NV loan delinquencies are out of control.
22
Quarterly Foreclosure Notices
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At least 7 MSAs had more foreclosure notices than sales in the last year.
23
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For example, Orange County CA has 40% more homes in Shadow Inventory than the total currently listed for sale.
24
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“Trusted Analysis for Executive Decisions”
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.
05,000
10,00015,00020,00025,00030,00035,00040,00045,00050,000
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
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Q4
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Q1
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Q4
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Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
Normal Listings
Distressed Listings
Orange County Listings Forecast
0
2
4
6
8
10
12
14
2009
Q2
2009
Q3
2009
Q4
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
2011
Q3
2011
Q4
2012
Q1
2012
Q2
2012
Q3
2012
Q4
2013
Q1
2013
Q2
2013
Q3
2013
Q4
Normal Mos of Supply
Distressed Mos of Supply
Orange County Mos of Supply
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5. Payments: Affordability is the best since we began tracking it by MSA in 1981.
25%
30%
35%
40%
45%
50%
55%
60%
65%
1981
Q1
1983
Q1
1985
Q1
1987
Q1
1989
Q1
1991
Q1
1993
Q1
1995
Q1
1997
Q1
1999
Q1
2001
Q1
2003
Q1
2005
Q1
2007
Q1
2009
Q1
Median Housing Cost to Income Ratio
Source: JBREC, NAR, updated through Jul 2009; 27.2%
0
1
2
3
4
5
6
7
8
9
10
1981
Q1
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Q1
1985
Q1
1987
Q1
1989
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Q1
1995
Q1
1997
Q1
1999
Q1
2001
Q1
2003
Q1
2005
Q1
2007
Q1
2009
Q1
Housing Cycle Barometer
Source: JBREC, updated through Jul 2009; 0.7
26
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
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“Trusted Analysis for Executive Decisions”
Very few markets have an affordability problem (dark red only).
• Data Date: Jul 2009 / Pub: Sep 2009
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
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“Trusted Analysis for Executive Decisions”
In fact, owning is now cheaper than renting in many markets.Phoenix Homeownership is $198 per month cheaper than renting
28
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
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.
-18%-16%-14%-12%-10%
-8%-6%-4%-2%0%2%
Jul-
07A
ug-0
7S
ep-0
7O
ct-0
7N
ov-
07D
ec-0
7Ja
n-0
8F
eb-0
8M
ar-0
8A
pr-
08M
ay-0
8Ju
n-0
8Ju
l-08
Aug
-08
Sep
-08
Oct
-08
No
v-08
Dec
-08
Jan
-09
Feb
-09
Mar
-09
Ap
r-09
May
-09
Jun
-09
Jul-
09
Nominal Appreciation (NAR)
Real Appreciation (JBREC)
Single-Family Median Home Price, YOY Change
Source: NAR, updated through Jul, 2009; -14.6%
$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
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Jan
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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 Jul, 2009; $178,300
29
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Sep. 2009
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“Trusted Analysis for Executive Decisions”
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
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The higher the price, the slower the sales.Demand / Supply ratio has improved at lower price points and worsened at higher price points.
31
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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
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Pricing Truth
So Cal: Most home values are stabilizing, but not in Riverside.
33
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Pricing Truth
North Florida: Most home values are falling rapidly.
34
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We rely on feedback from the ground each month to supplement stats with color on market conditions.
Comments From August 2009 Survey
35
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“Trusted Analysis for Executive Decisions”
Home prices are back to 2003 levels and likely headed to 2002 levels.
60
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1990
1991
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1999
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2001
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2003
2004
2005
2006
2007
2008
Cur
rent
(c)
2009
P
2010
P
2011
P
2012
P
2013
P
Ind
exed
100
in
2000
U.S. National Home Price Indices
S&P/Case-Shiller National Price (b)
JBREC National Median Price with Forecasts
NAR Median Price RSF(a)
FHFA Purchase-Only Index (d)
Economy.com MSA rollup
John Burns R.E. Consulting, NAR, Economy.com MSA rollup, S&P/CS (Pub: Aug/09 Market Monitor)
(a) Monthly price values weighted by RSF NSA sales values. / (b) S&P/Case-Shiller U.S. National Home Price Index, Q1 of each year / (c) CS through 2009Q2 / (d) FHFA Purchase Only Index, Q1 of each year
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
36
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Price troughs are likely to vary by market.
37
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A+When?Early Indicator: Housing Cycle GPA
• Helps us to “Call a bottom”• Leading indicator for Home Price Appreciation• Tracks market fundamentals:
– Demand: Need for housing from household and job growth, and demonstrated by sales activity
– Supply: New home construction and resale listings – Affordability: Consumers’ ability to qualify for a
loan– U.S. Economic Health: 60 other factors including
consumer confidence and stock market wealth
38
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Housing Cycle GPAA
B
C
D
F
Housing Cycle GPA
GPA
risin
g fro
m
D to B
GPA falling from
B to D
Strategy:• Get Land Light• Get Debt Light• Take on JV Partners
Strategy:• Option land with fixed
takedown prices• IRR is higher the
longer you wait
Builder Strategy
39
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-50%-40%-30%-20%-10%0%+10%+20%+30%+40%+50%+60%+70%
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
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1996
1997
1998
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2000
2001
2002
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2005
2006
2007
2008
Curr
ent
Hou
sing
Cyc
le G
PA
Real
Pri
ce A
ppre
c YO
Y
Positive Real Apprec Negative Real Apprec Housing Cycle GPA
San Diego, CA Housing Cycle GPAA+AA-B+BB-C+CC-D+DD-F
San Diego, CA Housing Cycle GPA
Source: John Burns Real Estate Consulting (Data: Jul/09, Pub: Sep/09)
A+AA-B+BB-C+CC-D+DD-F
San Diego Housing Cycle GPA has historically been a 2 to 3-year leading indicator
40
3 yrs2 yrs
2 yrs 3 yrs
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Housing Cycle GPA
LA
Chi
Atl
PhxDal
DC
IE
Phi
Min
OCSD
StL
NYTpa
Blt
Sea
Den
Oak
Mia
Edi
Por
Cin
Sac
FtWOrl
SAt
KC
Det
LV
Hou
Housing Cycle GPAA
B
C
D
FDo Nothing
Source: John Burns Real Estate Consulting (Data: Jul/09, Pub: Sep/09)*GPA Improving/Declining based on 6-mo change of 6-mo moving average
Market Type:NormalDemandSupplyAffordability
41
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The economic health of the builder’s MSA makes a big difference.
Rank BuilderWtd Avg Housing
Cycle GPA#1 Brookfield Homes 1.10#2 Standard Pacific 0.93#3 Pulte 0.93#4 NVR 0.88#5 KB Home 0.88#6 Lennar 0.87#7 M.D.C. Holdings 0.85#8 Toll Brothers 0.84#9 Meritage 0.83
#10 Beazer 0.79#11 Technical Olympic USA 0.78#12 DR Horton 0.78#13 K Hovnanian 0.77#14 Ryland 0.76#15 WCI 0.74#16 Centex 0.69#17 M/I Homes 0.46#18 Orleans Homebuilders 0.45
Wtd Avg All Builders 0.81
Housing Cycle GPA
0.81
Housing Cycle GPA by BuilderWtd Avg Housing Cycle GPA Wtd Avg All Builders
Source: John Burns Real Estate Consulting (Data: Jul/09, Pub: Sep/09)
42
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
• All markets are bad today.• This could be very different in 2010.
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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.
-$190,000
-$180,000
-$170,000
-$160,000
-$150,000
-$140,000
-$130,000
-$120,000
-$110,000
-$100,000
-$90,000
-$80,000
-$70,000
-$60,000
-$50,000
-$40,000
-$30,000
-$20,000
-$10,000
$0
Orle
ans
Hom
ebui
lder
sM
/I H
omes
Mer
itage
NV
RR
ylan
dT
echn
ical
Oly
mpi
c U
SAC
ente
xD
R H
orto
nK
Hov
nani
anB
eaze
rL
enna
rPu
lteK
B H
ome
M.D
.C. H
oldi
ngs
Tol
l Bro
ther
sSt
anda
rd P
acif
icW
CI
Bro
okfi
eld
Hom
es
3-year Market Price Appreciation
Source: See Methodology Section
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Orle
ans
Hom
ebui
lder
s
Bro
okfi
eld
Hom
es
NV
R
K H
ovna
nian
Mer
itage
Cen
tex
Tol
l Bro
ther
s
Len
nar
DR
Hor
ton
Bea
zer
Ryl
and
KB
Hom
e
Tec
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al O
lym
pic
USA
WC
I
M.D
.C. H
oldi
ngs
Stan
dard
Pac
ific
M/I
Hom
es
Pulte
7-year Market Price Appreciation
Source: See Methodology Section
43
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
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)
• A 1.3 % pt higher rate of job loss
• A 4.6 % pt greater decline in construction
Average of M.D.C. Holdings'sM.D.C. Holdings all Builders7 Rank8
PRICE OF MARKETWtd Ave Median Price of Market1 $176,612 $178,008 101-Year Market Price Appreciation1 -$48,755 -$37,734 151-Year Market Price Appreciation Rate1 -21.6% -17.5% 163-Year Market Price Appreciation2 -$92,084 -$68,070 143-Year Market Price Appreciation Rate2 -34.3% -27.7% 15
MARKETWtd Ave Payroll Employment Growth Rate1,3 -5.2% -3.9% 18Wtd Ave Employment/Permit Ratio1,6 -8.9 -8.5 12Wtd Ave Current/Peak Permits1,4 20.0% 24.6% 3Wtd Ave HCB™ (Affordability) Rating1,5 2.2 2.6 5
COMMUNITIESTotal Active 228 272 10Community Count 6 mo. Chg -8.4% -12.8%Community Count 12 mo. Chg -24.0% -22.2%
% Asset Community 1-Year Price 1-Year % Price
Region Allocation Count % of Total Appreciation¹ Appreciation¹
NORTHEAST 20% 37 16% -$51,601 -19%MIDWEST 0% 0 0% $0 0%SOUTHEAST 0% 0 0% $0 0%NORTHWEST 0% 0 0% $0 0%NORTHERN CA REGION 1% 2 1% -$72,875 -27%SOUTHWEST 66% 162 71% -$47,906 -23%TEXAS 0% 0 0% $0 0%SOUTHERN CALIFORNIA 7% 11 5% -$75,500 -23%NORTHERN FLORIDA 6% 16 7% -$29,375 -16%SOUTHERN FLORIDA 0% 0 0% $0 0%
Total / Wtd Ave 100% 228 100% -$48,755 -21.6%(1) Weighted (Wtd) averages are based on the number of communities that each builder has in each metro area. This could be somewhat misleading
because, in a normal market, a Pulte / Del Webb community could sell 1,000 homes per year and a neighborhood could sell 40 homes.
(2) Assumes that the land price was determined 3 years before the home was sold and that the builder was able to raise or lower prices by the same dollar
amount that the median home price increased or decreased in that market. We have the data to calc for 1- and 2-year assumptions too.
(3) Strong job growth is considered good.
(4) High permit levels are normally considered bad due to a plethora of supply. When the current market recovers, an increase in permits will be a good
sign since it will reflect increasing demand.
(5) Scale is 0 to 10. A low reading is good affordability, and a high reading is bad affordability. Most areas with exceptionally high HCBs experienced the greatest price
appreciation during the recent housing bubble. Even though prices have dropped significantly since then, affordability remains an issue in these markets.
(6) Ratio less than 1 indicates that supply exceeds demand.
(8) This builder's rank among the 18 public homebuilders tracked by JBREC (descending order: 1=highest, 18 lowest)
Weighted Average Market Condition Analysis
M.D.C. Holdings Regional Diversification
M.D.C. Holdings Peer Comparison
Exposure Appreciation
44
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
JB’s 4 year Theory of REO DispositionHousing Construction Loans were the first problems and will be sold first.
• Bid – Ask• Spread
Appraisal Received
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Builders won’t pay more than book value, as book value exceeds market value.Raw Land is virtually worthless to builders right now.
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Our portfolio valuation team is consistently finding values that are 50% below loan and original book value balance.
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Nghd Lot and or ValuationDate Count Loan Count Information MarketsJan-08 51 3,300 43% of Loan Balance Arizona, SoCal, Central Cal, TexasJul-08 83 12,416 SoCal, CentralCal, NorCal,Nevada, ArizonaOct-08 53 5,300 44% of Loan Balance These were mostly SFD loans so = Equivalent NghdsOct-08 63 9,017 Arizona, CentralCal, Nevada, SoCal,Washington, PortlandJan-09 128 12,830 30% of Book Value 44% of Loan AmountFeb-09 31 2,839 41% of Loan Balance Oregon, WashingtonApr-09 74 9,233 FloridaApr-09 224 11,223 32% Loan Balance SoCal,CentralCal, NorCal, Arizona,Nevada, Colorado, Utah, NewMexico,Texas,Idaho, WashingtonMay-09 99 7,091 60% Loan balance SoCal, CentralCal,NorCal,Arizona,Colorado,Houston,Washington DCMay-09 169 15,328 46% of Book / 73% of Loan Balance SoCal, Central Cal, Utah, Texas, Arizona, Minnesota, Florida,Washington DCJul-09 181 21,323 SoCalJul-09 117 11,122 SoCal, Central Cal, TexasSep-09 62 9,283 SoCal, NorCal, Arizona, Houston, Austin, FloridaNov-09 154 10,910 SoCal, Central Cal, Utah, Texas, Arizona, Minnesota, Florida,Washington DC
1,489 141,215
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Tampa submarket analysis shows the importance of looking beyond the metro level.
SubmarketGrades
A
B
C
D
F
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Within various MSAs, the move up builders have better locations.
In better locations:• Land values fall a lesser
percentage (dollars may be more)
• Buyer demand returns first (near job centers and better schools)
• Home prices fall later in the cycle (less distress with more stable homeowner profile)
Rank BuilderWtd Avg
Submarket GPA#1 Toll Brothers 3.14#2 WCI 3.29#3 Technical Olympic USA 3.02#4 Orleans Homebuilders 3.27#5 Pulte 2.83#6 Meritage 2.72#7 Ryland 2.91#8 Centex 2.61#9 M/I Homes 2.61
#10 Brookfield Homes 2.53#11 Lennar 2.60#12 K Hovnanian 2.46#13 NVR 2.43#14 Beazer 2.58#15 Standard Pacific 2.52#16 DR Horton 2.38#17 KB Home 2.42#18 M.D.C. Holdings 2.13
Wtd Avg All Builders 2.65
Submarket Grade
0.81
Wtd Avg Housing Cycle GPA Wtd Avg All Builders
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Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
Community counts drive revenue.Way down: CTX, HOV, KB, PHM, RYL, LENFlat: DHI, NVR, TOL, MDC, SPF
100
200
300
400
500
600
700
800
900
1,000
1,100
Active Community Counts by BuilderPublic Builders with 100+ projects
Feb-09 Mar-09 Apr-09
May-09 Jun-09 Jul-09
50
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
M&A activity was high during the boom years, but some builders had better timing.
• Bad Timing: HOV and SPF dominated the 2005 transactions
• Poor Timing: LEN, MTH, TOL and KB were also acquisitive in 2003-2005
• Great timing: DHI acquisition binge ended in 2001, PHM and CTX in 2003, Ryland in 1998
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
51
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“Trusted Analysis for Executive Decisions”
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.
$0
$2,000,000
$4,000,000
$6,000,000
$8,000,000
$10,000,000
$12,000,000
$14,000,000
2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q
20092008200720062005
TLTM
Avg
SG
&A
(00
0)
SG&A
0%2%4%6%8%
10%12%14%16%18%
2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q3Q2Q1Q4Q
20092008200720062005
LTM
Avg
SG
&A
as
% o
f Rev
enue
SG&A as % of Revenue
52
Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Aug. 2009
www.realestateconsulting.com
“Trusted Analysis for Executive Decisions”
Conclusions for Informed Investors• Prices 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.
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“Trusted Analysis for Executive Decisions” 54
Temporary PeakTax Credit ExpirationRising Mortgage RatesRising REO Sales
Cyclical BottomJob Growth ReturnsBanks Lending on Balance Sheet
The recovery shape will be determined by: 1) the rate of job growth, 2) the timing of REO sales, and 3) mortgage rates and terms.
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About John Burns Real Estate Consulting Founded in 2001 by
John Burns20 professionals6 cities
North AmericaIrvine, CA (HQ)San Diego, CASacramento, CADallas, TXPalm Beach, FLPortsmouth, NH
Contact Tel (949) 870-1200Fax (949) 870-1299
The best decisions are made by those with the right information.
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John Burns, President & CEOQ & A