Monthly Survey of Real Estate Agents

Transcription

1 Americas/United States Equity Research Homebuilding / MARKET WEIGHT Research Analysts Daniel Oppenheim, CFA dan.oppenheim@credit-suisse.com Michael Dahl michael.dahl@credit-suisse.com Monthly Survey of Real Estate Agents CHANNEL CHECK Slips Further in August; Buyers Focused on Foreclosures and Bargains August brings another month of weak traffic; losing some traction in hard-hit markets. Our Monthly Survey of Real Estate Agents showed a modest decline in August, with agents continuing to cite buyer hesitation about falling home prices and difficulty obtaining a mortgage as the key challenges. We did see changes among markets, though, as several markets that had seen better traffic in recent months (based on the better affordability from lower home prices) experienced significantly weaker traffic in August. Pricing continued its slide, with our price index falling to 20, from 21 (readings below 50 point to sequentially lower prices). off slightly overall; earlier bright spots dimming. Our traffic index fell to 25.9, down from 27.4 in July with any reading below 50 pointing to traffic below expectations. Unfortunately, markets such as Ft Myers, Las Vegas, Sacramento, and Washington, D.C. (all of which had seen better traffic in recent months) all saw traffic drop by over 10 points in August. Only the Inland Empire (Riverside-San Bernardino, CA) showed continued improvement. We did see better trends in both Miami and San Diego with slightly better traffic in Houston and Phoenix. On positive side, inventory levels closer to stabilizing. Our traffic index increased to 38 in August, up from 35 in July (with a level of 50 indicating flat inventories sequentially with levels above 50 pointing to falling inventory levels). Denver, Las Vegas, Minneapolis, Orlando, Phoenix, San Francisco, Sarasota, and Tucson were among the markets showing flat or falling inventory levels in August. We continue to believe that declining inventory levels are necessary for home price stabilization. DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit researchdisclosures or call +1 (877) U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of Credit Suisse in the United States can receive independent, third party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at or call or equity.research@credit-suisse.com to request a copy of this research.

2 Table of Contents Overview of Results....3 Survey Methodology...4 Top 20 Housing Markets Atlanta, Georgia 6 Austin, Texas 7 Charlotte, North Carolina 8 Chicago, Illinois 9 Dallas, Texas 10 Denver, Colorado 11 Fort Myers, Florida 12 Houston, Texas 13 Jacksonville, Florida 14 Las Vegas, Nevada 15 Los Angeles, California 16 Miami, Florida 17 Minneapolis, Minnesota 18 New York-Northern New Jersey 19 Orlando, Florida 20 Phoenix, Arizona 21 Riverside-San Bernardino [Inland Empire], California 22 Seattle, Washington 23 Tampa, Florida 24 Washington, D.C. 25 Additional Key Housing Markets 26 Baltimore, Maryland 27 Boston, Massachusetts 28 Charleston, South Carolina 29 Cincinnati, Ohio 30 Columbus, Ohio 31 Detroit, Michigan 32 Nashville, Tennessee 33 Philadelphia-Southern New Jersey 34 Port St. Lucie, Florida 35 Portland, Oregon 36 Raleigh, North Carolina 37 Richmond, Virginia 38 Sacramento, California 39 San Antonio, Texas 40 San Diego, California 41 San Francisco, California 42 Sarasota, Florida 43 Tucson, Arizona 44 Virginia Beach, Virginia 45 Wilmington, North Carolina 46 Historical Survey Trends by Market 47 *Markets are characterized based on permit activity and listed in Alphabetical order Monthly Survey of Real Estate Agents 2

3 Slips Further in August; Buyers Focused on Foreclosures and Bargains For those who may be unfamiliar with our survey, we center our indices around 50 so that readings above 50 indicate positive or improving trends and readings below 50 indicate negative or worsening trends. Please see page 5 for a full description of our survey methodology. August brings another month of weak traffic, losing some traction in hard-hit markets. Our Monthly Survey of Real Estate Agents showed a modest decline in August, with agents continuing to cite buyer hesitation about falling home prices and difficulty obtaining a mortgage as the key challenges. We did see changes among markets, though, as several markets that had seen better traffic in recent months (based on the better affordability from lower home prices) experienced significantly weaker traffic in August. Pricing continued its slide, with our price index falling to 20, from 21 (readings below 50 point to sequentially lower prices). off slightly overall, earlier bright spots dimming. Our traffic index fell to 25.9, down from 27.4 in July with any reading below 50 pointing to traffic below expectations. Unfortunately, markets such as Ft Myers, Las Vegas, Sacramento, and Washington, D.C. (all of which had seen better traffic in recent months) all saw traffic drop by over 10 points in August. Only the Inland Empire (Riverside-San Bernardino, CA) showed continued improvement. We did see better trends in both Miami and San Diego with slightly better traffic in Houston and Phoenix. Exhibit 1: Off Slightly in July, But Seeing Some Better Signs on Inventory Buyer Index Home Price Index Home Listings Index Time to Sell Index Incentive Month Index Apr May Jun Jul Aug Point change (1.5) (0.9) (0.7) On positive side, inventory levels closer to stabilizing. Our traffic index increased to 38 in August, up from 35 in July (with a level of 50 indicating flat inventories sequentially with levels above 50 pointing to falling inventory levels). Denver, Las Vegas, Minneapolis, Orlando, Phoenix, San Francisco, Sarasota, and Tucson were among the markets showing flat or falling inventory levels in August. We continue to believe that declining inventory levels are necessary for home price stabilization. Monthly Survey of Real Estate Agents 3

4 Survey Methodology We survey real estate agents, as we believe that agents will provide an accurate assessment of housing market trends in both the new and existing home markets. Even though homebuilders sell new homes, we believe that it is crucial to have an understanding of the existing home market as the existing home market is substantially larger than the new home market (approximately 85%/15%) and trends in the existing home market dictate trends in the new home market. Each month we ask five main questions, which are all listed below. In August, we received responses from 2,100 real estate agents across the country. We then review these responses and calculate an index for each of the questions with high numbers indicating positive or improving trends and low numbers indicating negative or worsening trends. An index of 50 would indicate a neutral trend. Note that for items such as incentives, a low index level would indicate a higher level of incentives, as higher incentives represent a negative trend. Similarly, for the number of listings and the length of time needed to sell a house, an increase in listings (a negative trend) and an increase in the time needed to sell a house (a negative trend) both correspond to low index values. 1) Are traffic levels in-line with, above, or below your expectations for this time of year? (Because of seasonality to traffic trends generally more traffic in Spring and less in Fall/Winter we ask about traffic relative to the expectations for this time of year rather than how traffic compared to the prior month.) A traffic index above 50 means that traffic was above the expectations of agents, a traffic index of 50 means that traffic was in-line with expectations, and a traffic index below 50 means that traffic was below expectations. 2) Have prices remained the same, increased, or decreased over the past 30 days? A price index above 50 indicates that prices increased over the past 30 days, a price index of 50 indicates that prices were flat, and a price index below 50 indicates that prices decreased. 3) Have incentives remained the same, increased, or decreased over the past 30 days? An incentive index above 50 indicates that incentives decreased over the past 30 days, an incentive index of 50 indicates that incentives were unchanged, and an incentive index below 50 indicates that incentives increased. 4) Do you see the same, more, or fewer, listings as compared with 30 days ago? An inventory (listings) index above 50 indicates that the inventory of homes for sale decreased over the past 30 days, an inventory index of 50 indicates that inventories were unchanged, and an inventory index below 50 indicates that inventories increased. 5) Does it take the same, more, or less time to sell a house? A time to sell index above 50 indicates that the time needed to sell a home decreased over the past 30 days, a time to sell index of 50 indicates that the time needed to sell a home was unchanged, and a time to sell index below 50 indicates that the time needed to sell a home increased. Monthly Survey of Real Estate Agents 4

5 Exposure to Key New Home Markets The market exposure of homebuilders to the key housing markets is outlined in the table below. Exhibit 2: Summary of Homebuilders Exposure to Key New Home Markets 2007 Market 1-family Market Exposure permits CTX DHI HOV KBH LEN MDC MTH NVR PHM RYL SPF TOL WCI Atlanta, GA 31,121 2% 3% * 3% * * * * 4% 7% * * * Austin, TX 12,137 2% 4% * 3% 5% * 5% * 2% 3% * * * Charlotte, NC 15,185 2% 1% * 1% * * * 9% 1% 3% * * * Chicago, IL 18,153 2% 3% 4% * 4% * * * 5% 7% * 2% * Dallas, TX 27,653 7% 6% 5% 4% 5% * 1 * 2% 5% 7% * Denver, CO 7,912 1% 6% * 4% 3% 1 * * 1% 4% 4% * * Fort Myers, FL 4,357 1% * 12% * 4% * * * 3% * * * 19% Houston, TX 42,070 * 5% 11% 7% 12% * 6% * 3% 8% * * * Jacksonville 7,352 1% 4% * 2% 1% 7% * * 3% * * * 6% Las Vegas, NV 13,473 3% 5% * 1 4% 2 5% * 8% 4% * 4% * Los Angeles, CA 9,382 2% 4% 2% 1% 1% * * * 2% * * Miami, FL 7,086 * * * * 3% * * * * * * * 8% Minneapolis 7,613 3% 2% 2% * 2% * * * 2% 5% * * * NY-NJ 12,318 2% * * * 1% * * 8% 4% Orlando, FL 11,801 * 2% * 5% 3% * * * 4% 5% * * * Phoenix, AZ 26,494 5% 11% * 5% 4% 17% 23% * 12% 5% 16% 7% * Inland Empire, CA 16,104 4% 6% 13% 7% 8% 5% 2% * 5% 6% 8% * Seattle, WA 12,406 1% 1% * * * * * * * * * * * Tampa, FL 8,056 * * 5% 2% 6% * * * 3% 5% 12% * 6% Washington, DC 14,914 3% 1 * 3% 8% * 27% 2% 3% * 23% 4% Source: Company data, Credit Suisse estimates Exhibit 3: Profit Concentration in Key Areas Market CTX DHI HOV KBH LEN MDC MTH NVR PHM RYL SPF TOL WCI Arizona 1 15% 5% 1 5% 24% 33% * 12% 8% 12% 7% * California % 35% % * 19% 12% 5 2 * Florida 12% 1 17% 14% 24% 7% 7% * 17% 15% 19% 7% 9 Nevada 4% 5% * 1 7% 2 7% * 14% 7% * 6% * Washington D.C. 5% 2% 16% * 5% 1 * 6 5% 1 * 25% 4% Total 61% 52% 65% 69% 71% 8 71% 6 67% 52% 81% 65% 94% Source: Company data, Credit Suisse estimates Monthly Survey of Real Estate Agents 5

6 Atlanta, GA Slight Improvement in Driven by Distress Sales (31,121 single-family permits in 2007, 2nd largest homebuilding market in the country) Challenges from tight credit, weak economy persist, but traffic slightly higher as lower prices restore affordability. Our buyer traffic index increased slightly to 19 in August from 16 in July, indicating modestly higher traffic over the past 30 days, though still at well below agents expectations (any reading below 50 suggests traffic below expectations). While most agents continued to say that low buyer confidence as a result of falling home prices, tough lending standards, and a weakening economy is keeping buyers on the sidelines, several noted that well-priced homes are beginning to draw interest. This is especially true for distressed listings, according to one agent, Listings under $150,000 are getting the most traffic, especially foreclosures. Still, there were several agents who saw weakness for every one agent who noted an increase in traffic. So, not surprisingly, it seems that homes must be priced very aggressively to draw traffic. High inventory, foreclosures continue to pressure home prices. Home prices continued to fall in August, as our price index was unchanged at 19 from 18 in July (readings below 50 suggest lower prices over the past 30 days), pressured by high inventory levels and a growing pipeline of foreclosures. Foreclosures have been particularly painful for existing sellers, according to agents, as a result of the increased competition and also since appraisers are including foreclosure sales in comparable analyses. Our home listings and time to sell indices measured 38 and 16, respectively, in August (from 32 and 16 in July), with any readings below 50 indicating deteriorating trends. Move-up traffic is stagnant because more first-time buyers are bargain hunting and going for distressed properties. Buyer traffic picked up, which is unusual for this time of year, perhaps in response to the pending elimination of down-payment assistance. Ryland and Pulte Homes have the most exposure. Ryland has the greatest exposure to Atlanta with approximately 6% of net sales, followed by Pulte Homes with 4%. Exhibit 4: Foreclosures Set a Clearing Price, but Too Low for Most to Compete With Levels Versus Expectations 9% 21% 71% How Do the Recent 30 Days Compare to the Prior 30 Days... 37% 63% 61% 31% 7% 71% 26% 3% Time to Sell Monthly Survey of Real Estate Agents 6

7 Austin, TX Agents Continue to See Weak Demand as Buyers Remain Skittish (12,137 single-family permits in 2007, 13th largest market in the country) up slightly, but still at dismal levels as lack of mortgage financing remains a problem. Our buyer traffic index inched up to 14 in August from 11 in July, indicating slightly higher traffic levels relative to last month, but traffic continued to disappoint agents as any reading below 50 indicates traffic below agents expectations. We ve recently heard some conflicting reports about the Austin market, where some contacts say it remains one of the healthier housing markets due to its solid local economy, but the agents we surveyed have continued to note weakness over the past several months, largely due to the tightening lending criteria and the broadening economic weakness. Several agents said that relocation demand, long a steady source of demand in Austin, has been focused on the rental market lately since would-be buyers can t sell their existing homes in other markets. Price declines appear modest so far, but rising inventory is worrisome. Our home price index fell slightly to 39 in August from 41 in July, indicating modestly lower prices over the past 30 days (a reading of 50 would suggest flat prices). We think price declines will likely remain modest, though signs of weak demand and increasing inventory levels are worrisome. Our home listings index fell to 13 in August from 17 in July, suggesting higher inventory sequentially (any reading below 50), while our time to sell index a good indicator of future price trends also deteriorated, falling to 5 in August from 14 in July, as nearly all agents surveyed said it took longer to sell a home this month. Jumbo rates remain too high, conventional loans are harder to qualify for, and low/no-doc loans are gone. Without economic and inflation fears more people would be buying here. Meritage and D.R. Horton have the most exposure. Meritage has the greatest exposure to Austin with approximately 7% of net sales, followed by D.R. Horton with 5%. Exhibit 5: Tighter Credit Continues to Impact Demand Levels Versus Expectations 27% 10 8 How Do the Recent 30 Days Compare to the Prior 30 Days... 79% 94% 73% % 3 24% 18% 3% 3% 3% Time to Sell Monthly Survey of Real Estate Agents 7

8 Charlotte, NC Buyers Lack Urgency, Despite Good Deals Available (15,185 single-family permits in 2007, 7th largest market in the country) Buyers remain uneasy due to weak economy, job uncertainty. Buyer traffic remained very weak in August, as our traffic index slipped to 11 from 13 in July, indicating traffic well below agents expectations (readings below 50 point to traffic below expectations). Agents saw few encouraging signs this month, as buyers remained wary due to increasing uncertainty surrounding the economy and potential for further layoffs from some of the area s large employers. According to one agent, Sellers are very motivated to sell, but buyers are postponing buying decisions. Many agents said buyers are likely waiting for signs of price stabilization, especially since financing conditions remain difficult. Prices continue to fall, led by banks and builders. Home prices fell further in August, as our price index came in at 19 (from 17 in July), with readings below 50 suggesting lower home prices over the past 30 days. Agents said banks and homebuilders continue to lead prices lower, as banks slash prices on REO prices to work through the growing foreclosure inventory and builders continue to offer generous discounts and incentives on standing inventory. Still, inventory continued to increase, as our home listings index was unchanged at 27 in August from 26 in July, with any reading below 50 indicating a deteriorating trend. Our time to sell index also showed deterioration, as our index measured 13 in August (from 11 in July). Higher inventory and the longer time to sell suggest further price declines are likely in the coming months. Buyers are concerned that rates are climbing in a declining economy. We hit a brick wall as soon as homebuyers were in place for the new school year. NVR, Ryland, and Hovnanian have the most exposure. NVR has the greatest exposure to Charlotte with approximately 1 of sales, followed by Ryland and Hovnanian with approximately 3% each. Exhibit 6: Buyers Remain Hesitant Due to Uncertain Economy Levels Versus Expectations 5% 14% 82% How Do the Recent 30 Days Compare to the Prior 30 Days... 61% 59% 39% 36% 77% 2 5% 2% Time to Sell Monthly Survey of Real Estate Agents 8

9 Chicago, IL The Waiting Game Continues (18,153 single-family permits in 2007, 5th largest market in the country) was weaker than expected, even taking into account the normal seasonal slowdown. Buyers remained few and far between in August, as our buyer traffic index was down slightly to 19 in August from 21 in July, disappointing agents even though they expected weaker traffic in the seasonally slow month (readings below 50 suggest traffic below agents expectations). While there were a few agents who sounded an optimistic note, commenting that some investors and bargain hunters seemed to be entering the market, the responses this month were dominated by a negative tone with comments such as, People are afraid to buy now, Buyers can t get approved for any loans, and Economic worries are worsening. We think prices need to fall even further in order to improve affordability enough to overcome weak buyer confidence. Prices fall further on weak demand, high inventory levels. Home prices fell further in August, as our price index came in slightly higher at 17 from 14 in July but any reading below 50 suggests sequentially lower prices. According to one agent, There is too much competition with short sales and foreclosures there are a lot of good deals to be had though Still, rising inventory levels and a longer time to sell suggest further price declines are needed in the coming months. Our home listings index measured 27 in August (from 19 in July), while our time to sell index measured 14 (from 15 in July), with readings below 50 indicating higher inventory and a longer time needed to sell a home, respectively. The recent stimulus package has yielded no results so far. The amount of required down-payment seems to be beyond what many buyers can swing. Ryland, Lennar, and Hovnanian have the most exposure. Ryland has the greatest exposure to Chicago with approximately 7% of sales in the market, followed by Lennar Corp. and Hovnanian with 4% of sales. Exhibit 7: Nervous Buyers Waiting for Further Price Declines Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 71% 9% % 66% 55% 4 34% 2 4% 4% Time to Sell Monthly Survey of Real Estate Agents 9

10 Dallas, TX Slight Up-Tick in Due to Lower Prices, but Demand Remains Weak (27,653 single-family permits in 2007, 3rd largest market in the country) Modest improvement in traffic, but most buyers stick to the sidelines. Our traffic index improved to 28 in August from 22, indicating modestly better traffic over the past 30 days but absolute levels well below agents expectations (any reading below 50 suggests buyer traffic below expectations). Similar to last month, agents saw an increasing willingness from sellers to negotiate on price, and said that listings priced right were generating traffic. In particular, the growing numbers of attractively priced foreclosure properties are generating the most interest, according to several agents. However, the majority of agents continued to cite weak buyer traffic due to the lack of available and affordable mortgage products and fears of further price declines. Absent a shift back to looser lending standards, which we do not see occurring, we think lower prices are likely needed to restore affordability and spur demand. Elevated inventory levels to pressure prices further. Home prices continued to fall in August, as our price index was unchanged at 27 (readings below 50 suggest lower home prices over the past 30 days). Agents said sellers are more willing to make a deal, but buyers remain hesitant, although cheap pricing on foreclosures is driving some into action. However, inventories continued to creep higher, as our home listings index fell to 38 from 43 in August (readings below 50 indicate sequentially higher inventory levels) and our time to sell index (a good leading indicator of price trends) came in unchanged at 21, below a neutral reading of 50. These leading indicators point to further price declines in the coming months. Many people seem to be on hold, waiting to see what is going to happen in the economy. I think traffic would be higher if the PMI/lending guidelines weren't constantly tightening. However, the availability of short sales and foreclosures/preforeclosures are driving buyers into the market. Centex, Ryland and D.R. Horton have greatest exposure. Centex has the greatest exposure to Dallas, capturing 9% of its sales in the market, followed by Ryland and D.R. Horton with 8% each. Exhibit 8: Tight Credit Remains a Key Constraint Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 56% 12% 32% % 5 52% 46% 44% 3 4% 4% 6% Time to Sell Monthly Survey of Real Estate Agents 10

11 Denver, CO Improving Inventory Levels a Promising Sign, but More is Needed (7,912 single-family permits in 2007, 22nd largest market in the country) Agents split as some see bargain hunters entering the market but others see little traffic. Buyer traffic was unchanged at modest levels in August, as our traffic index was unchanged at 33 (any reading below 50 suggests traffic below agents expectations). Agents seemed to differ on the level and quality of buyer traffic this month, however, as some noted an increase in traffic as bargain hunters are starting to take advantage of distressed prices and first-time buyers are looking to close ahead of the pending elimination of down-payment assistance. Other agents said even serious buyers continue to have difficult finding financing under today s lending standards and this is particularly tough for jumbo loans. With hesitant buyers and the upcoming elimination of downpayment assistance only adding to the credit challenges, we think it is still too early to call a bottom here. Absorption of excess inventory aided by lack of new construction. Home prices continued to fall in August, as our price index was unchanged at 27 from 26 in July (readings below 50 suggest lower home prices). Lower prices, along with a lack of new construction many agents say there is essentially no construction and some builders are exiting the market completely seem to be helping begin to absorb some of the excess inventory, as our home listings index pointed to flat to slightly lower inventory levels in August (our index improved to 54 from 50 in July). This was the fourth consecutive month of flat or lower inventory. However, the overhang remains large and will likely take some time to work through before a more normal pricing environment returns. Lenders are dumping REO properties on the market at half price. More buyers are trying to get a house before some loan programs go away, like seller assisted down-payments. MDC Holdings and D.R. Horton have the greatest exposure. MDC Holdings has the greatest exposure to Denver with approximately 12% of sales, followed by D.R. Horton with approximately 6% of sales. Exhibit 9: Lower Prices are Encouraging Buyers, but Continued Tightening of Lending Standards Remain a Challenge Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 47% 13% 39% % 6 57% 46% 37% 27% 16% 3% Time to Sell Monthly Survey of Real Estate Agents 11

12 Ft. Myers, FL Buyers Pause as the Bottom Appears Further Away (4,357 single-family permits in 2007, 45th largest market in the country) Some buyers continue to search for deals, but many wait for signs of a market bottom. Buyer traffic deteriorated in August as our traffic index fell to 41 from 57 in July, indicating lower traffic below agents expectations for the first time in five months (readings below 50 suggest weaker than expected traffic). Agents continued to comment that bargain hunters are searching for deals, but seemed less enthusiastic this month as most are looking, but not buying. Agents attributed the wait and see approach to the fact that prices continue to fall and have shown no signs that a bottom is near despite earlier hopes that prices were stabilizing. We think it is unlikely prices will bottom anytime soon given the massive inventory overhang, but one positive is that lower prices should help affordability further which is a key driver of long term demand. Price declines help move some inventory, but growing foreclosure pipeline keeps inventory on the rise. Home prices continued to fall in August, as our home price index slipped to 14 from 17 in July (any readings below 50 indicate sequentially lower home prices). Buyer hesitancy and the growing pipeline of foreclosures pressured pricing and continued to add to inventory levels. Our home listings index fell to 36 in August from 43 in July, indicating higher inventory over the past 30 days (any reading below 50). Meanwhile, the time needed to sell a home continued to lengthen as our time to sell index was unchanged at 21 from 20 in July (readings below 50 indicate a deteriorating trend), a negative indicator for future pricing trends. First-time buyer traffic is weak due to the tougher lending environment. There are more people looking, but not buying. There are many choices with low-priced foreclosures and good deals on existing homes. WCI Communities and Hovnanian have the most exposure. WCI has the greatest exposure to Fort Myers with approximately 22% of net sales, followed by Hovnanian with 11% following its 2005 acquisition of First Homebuilders of Florida. Exhibit 10: Leading Indicators Point to Further Price Declines Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 41% 23% 36% % % 41% 27% 9% 5% Time to Sell Monthly Survey of Real Estate Agents 12

13 Houston, TX Remains Scattered; Tighter Lending Continues to Impact Buyers (42,070 single-family permits in 2007, largest market in the country) improves slightly but the difficult financing environment remains an impediment. Out traffic index pointed to a modest improvement in buyer traffic in August, increasing to 26 from 19 in July, but continues to suggest overall traffic levels below agents expectations (any reading below 50 indicates traffic below agents expectations). Agents said that job growth, particularly in the energy sector, should support steady demand in Houston, but few buyers are able to qualify for a loan under the constantly changing lending guidelines. Unfortunately, we think this environment may worsen even further in the coming months with the elimination of down-payment assistance programs, which have become a key part of the market in recent months as a substitute for subprime and Alt-A products. On average we think 2 of recent buyers have used down-payment assistance, but think this percentage is even higher in some Texas markets, including Houston, which relied heavily on non-prime financing. Home prices nearly stable, but rising inventory points to further declines. Our home price index improved to 48 in August from 39 in July, suggesting prices were close to flat over the past 30 days (a reading of 50 would suggest sequentially flat home prices). However, we think this is likely temporary and a seasonal issue (despite being flat relative to July, our checks indicate prices continue to fall year over year) and expect the growing supply of homes for sale (our home listings index came in at 44 in August, below a neutral reading of 50) to lead to increased price competition in the coming months. The longer time needed to sell a home also points to future price declines, as our index was unchanged at 20 in August from 18 in July with any reading below 50 indicating a longer time to sell. There is little financing available for borrowers. Homebuilders are offering fixed-rate loans at 5.5% in order to reduce monthly payments and improve affordability. Lennar, Hovnanian, and KB Home have the most exposure to Houston with approximately 12%, 9%, and 8%, respectively, of their net sales. Exhibit 11: Risk of a Leg Down in as Down-Payment Assistance Goes Away Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 63% 15% 22% % 59% 59% 41% 26% 22% 19% 7% Time to Sell Monthly Survey of Real Estate Agents 13

14 Jacksonville, FL Buyers Lack Urgency, and in Many Cases, Ability to Buy (7,352 single-family permits in 2007, 24th largest market in the country) Increased traffic in August, but only on distressed listings. Buyer traffic remained weak in August, below agents expectations, despite the increase in our traffic index to 18 from 11 in July (readings below 50 indicate traffic below agents expectations), as agents said the only increase in traffic they saw was when advertising REO listings. One agent added, There also seems to be a rush to try to take advantage of down-payment assistance programs before they are gone in October. However, most agents acknowledged fears of further price declines and tighter lending criteria are keeping buyers on the sidelines unless there are great deals available (such as on foreclosures), and there is no sense of urgency given the large selection of inventory to choose from. Foreclosures, builder discounts weigh on pricing. Home prices continued to fall in August as our price index came in at 20 (from 15 in July), with readings below 50 pointing to sequentially lower prices. Agents said banks are becoming more aggressive as they confront the reality of increasing foreclosures, while one agent saw a builder cut prices on standing inventory by 25% in one community. Nevertheless, Inventory continued to increase, as our home listings index fell to 30 in August from 39 in July (readings below 50 indicate higher inventory levels). Unfortunately, we think meaningful further price declines are needed in order to restore affordability and help work down the large overhang of homes for sale to a more neutral level. has increased slightly because of the short sales and foreclosures. People still believe more foreclosures are coming, and prices will still go down over the next 6-12 months. Lennar Corp., Hovnanian, and KB Home have the most exposure to Jacksonville with approximately 12%, 9%, and 8%, respectively, of their sales. Exhibit 12: Excess Inventory to Pressure Pricing Further Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 75% 1 15% % 5 45% 4 4 5% 5% Time to Sell Monthly Survey of Real Estate Agents 14

15 Las Vegas, NV Subsides as Buyer Fears, Lack of Lending Return to Forefront (13,473 single-family permits in 2006, 9th largest market in the country) Shaky confidence, tighter lending leading to decline in traffic. Buyer traffic deteriorated in August after several months of decent traffic, as our traffic index fell to 35 from 46 in July, indicating traffic below agents expectations (readings below 50 suggest traffic below agents expectations). Agents noted a mixed picture this month, as foreclosures continued to attract bargain hunters but other listings saw little action as buyer confidence remained shaky. In addition, the upcoming elimination of down-payment assistance programs seemed to have a mixed impact in August as some agents saw an increased number of buyers trying to get approved before the October 1 st deadline, but others said traffic dropped off as the month went on as it became less likely that any new buyers would be able to get a loan approved and an appraisal completed in enough time to still use down-payment assistance. Unless comparable alternative financing emerges, we fear the elimination of these programs will ultimately lead to another leg down in prices. Bank sales keep inventory steady, but at the expense of pricing. The ongoing foreclosure problems continued to pressure home prices in August, as banks unloaded REO properties and builders lowered prices in response to the increased competition. Our price index fell to 16 from 20 in July, with readings below 50 suggesting lower home prices. Meanwhile, the increase in forced sales helped keep inventory steady, as our home listings index fell slightly to 51 in August from 55 in July but remained in-line with a flat inventory level of 50. Still, high inventory levels and continued foreclosure problems will continue to pressure pricing over the coming months. Comments from real estate agents Bank-owned properties are being offered at blowout prices. Banks are not capable of managing all the REO and short sales they have. Buyers fear prices will go lower and still will not pull the trigger. KB Home and Pulte have most exposure to Vegas. KB Home has the greatest exposure to Las Vegas with 11% of net sales, followed by Pulte with 7%. Exhibit 13: Little Outside of Distressed Listings Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 48% 17% 35% % 53% 33% 33% 35% 31% 24% 14% 4% Time to Sell Monthly Survey of Real Estate Agents 15

16 Los Angeles, CA Foreclosures Generate Interest, but Little Else Moving (9,382 single-family permits in 2007, 17th largest market in the country) unchanged, but little action outside of foreclosures. Buyer traffic levels appeared similar to those seen in July, modestly below agents expectations, as our traffic index increased slightly to 39 in August from 37 (a reading of 50 would suggest traffic inline with expectations). Agents continued to note substantial interest in foreclosure properties being sold by banks at sharp discounts, but saw scarce traffic beyond that as buyers remained cautious. Several said that the level of interest isn t the problem; the ability to buy is. According to one agent, Buyers want to buy at these prices. A lack of lending is the problem. On the positive side, we are encouraged that there at least seems to be a clearing price in the market. However, it appears for now to be at a very low price that traditional sellers have a tough time competing with, and buyers remain limited by the tighter lending environment. Sharp discounts offered on foreclosures help keep inventory in check. Banks continued to lead the way lower on pricing in August, as our price index fell to 12 from 17 in July, with any readings below 50 suggesting lower prices over the past 30 days. Agents saw lower prices across the board, but said the foreclosures were the only ones low enough to meet buyer demands. However, this did at least help inventory remain close to stable in August, as our home listings index increased to 46 from 35 in July, close to a neutral reading of 50. Despite the temporary stabilization, the elevated absolute levels of inventory mean that further price declines are likely to come over the next several months. Mainly REO s and short sales are selling; little else is as prices are still way too high. I have a lot of REO listings and the traffic is heavy to purchase them. Prices have fallen 4 from peak levels on some homes. Hovnanian, KB Home, Standard Pacific and MDC have the most exposure. Approximately 3% of Hovnanian s sales come from L.A., the most among the large builders, followed by 2% from KB Home, Standard Pacific, and MDC Holdings. Exhibit 14: Substantial Buyer Interest in Foreclosures Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 42% 2 38% % 48% 48% 48% 38% 25% 13% 5% Time to Sell Monthly Survey of Real Estate Agents 16

17 Miami, FL Lower Prices Spur Buyer Interest, but Challenges Remain (7,086 single-family permits in 2007, 26th largest market in the country) Market remains split as agents dealing with distressed properties see better traffic but the rest of the market appears listless. Our buyer traffic index pointed to better traffic in August, although still below agents expectations, as our traffic index improved to 39 from 22 in July (any reading below 50 suggests traffic below agents expectations). In general, agents said the extreme sense of fear among buyers continues to linger given the ongoing price declines, but at least in some cases the prices have fallen to such a low level that buyers are willing to get off the fence. Unfortunately, this is primarily occurring on foreclosure and short sale listings. According to one agent, Poorly priced properties are not getting ANY activity. This is similar to comments we ve heard in other hard-hit markets, where it seems traffic remains sluggish outside of distressed listings. Inventory continues to increase, despite efforts from banks to work through foreclosures. Home prices fell further in August, as our price index was unchanged at 13, with readings below 50 indicating lower home prices over the past 30 days. Banks continued to discount foreclosures sharply and other sellers tried a variety of incentives ranging from price discounts to rate buy-downs, yet inventory continued to increase in August. Our home listings index increased to 35 in August from 26 in July, but any reading below 50 indicates sequentially higher inventory. We think this will continue to pressure home prices this fall. Offers have been made on many short sales; however, the banks have been extremely slow to approve them. There are more REO bank-owned properties being sold. is up and buyers are looking for bargains. They are making low ball offers to find highly motivated sellers. WCI Communities and Lennar Corp. have the most exposure. WCI Communities and Lennar have the greatest exposure to Miami with approximately 12% and 2% of sales, respectively. Exhibit 15: Increase in Forced Sales, but Pipeline of New Foreclosures Continues to Expand Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 47% 26% 27% % 55% 6 43% 35% 22% 2% 2% 5% Time to Sell Monthly Survey of Real Estate Agents 17

18 Minneapolis, MN Up Slightly, but Traditional Sellers have Trouble Competing with Banks (7,613 single-family permits in 2007, 23rd largest market in the country) remains at modest levels despite increase in action on bank-owned properties. Our buyer traffic index increased slightly to 32 in August from 28 in July, indicating higher traffic over the last 30 days but levels still below agents expectations (readings below 50 suggest traffic below expectations). However, agents said that traffic was generally tepid, except that there continues to be an increase in buyer interest for foreclosure listings. This is similar to trends we saw in other markets. Outside of bankowned properties, traffic was scarce, as agents blamed a combination of the weakening economy and further tightening in the lending environment. On the lending side, agents appeared fearful of the pending elimination of down-payment assistance programs since they had become a large part of the market in recent months and now there will be effectively no 10 financing options. Prices down, but inventory heading in the right direction. Home prices continued to fall in August, as our price index fell to 13 from 19 in July, as any reading below 50 indicates lower prices over the past 30 days. Recent price declines, particularly on foreclosure listings, have resulted in a modest increase in traffic the last couple of months, which seems to have started to bring down inventory levels. Our home listings index improved to 62 in August from 58 in July, indicating a modest decline in inventory (any reading above 50 indicates sequentially lower inventory levels). We believe this trend could reverse as foreclosures continue to increase, but would view a peak in inventories as a positive sign as that is the first step towards stable pricing. Lender rules are changing by the week it seems and we've had transactions affected by appraisals. Buyers are buying vacant REO properties but this is not creating move-up buyers. Ryland, D.R. Horton, Centex, and Lennar have the greatest exposure. Ryland has the greatest exposure to Minneapolis with approximately 4% of net sales, followed by D.R. Horton, Centex and Lennar with 3% each. Exhibit 16: Solid on Foreclosures, Light on Other Listings due to Tight Lending, Weak Economy Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 56% 2 24% % 68% 53% 31% 37% 21% 3% 1% 1 Time to Sell Monthly Survey of Real Estate Agents 18

19 New York-Northern NJ Buyer Fears Continue to Drag on Market (12,318 single-family permits in 2007, 12th largest market in the country) Buyers remain cautious, waiting for prices to fall further. Buyer traffic was unchanged at weak levels in August, as our traffic index came in at 27 (from 26 in July), with any reading below 50 indicating traffic below agents expectations. Agents said buyers continued to hunker down and assume a wait-and-see approach as they expect prices to come down further but are uncertain of how bad things will get given the weakening economy. According to one agent, Buyers are afraid to make offers. They don t know where this real estate market is going. Adding to fears is the tight lending criteria and elevated jumbo mortgage rates. With caution in the air, agents say any offers they have seen from buyers are very low. Prices continue to fall as inventory grows, but more declines likely. Home prices continued to fall in August, as our price index slipped to 16 from 20 in July, with any reading below 50 suggesting lower home prices over the past 30 days. Still, prices have not declined enough, according to buyers, as sellers have become more willing to negotiate but still are reluctant to meet buyer demands. Meanwhile, inventory continued to grow as a result of this standoff, as our home listings index came in at 35 (up from 32 in July) and our time to sell index fell to 15 from 20 in July, with readings below 50 indicating higher inventory and a longer time to sell, respectively, and suggesting further price declines are likely in the coming months. Mortgages are hard to come by and buyers are bidding very low. It seems like the little activity we were seeing has stopped and buyers are back to waiting again. Toll Brothers and Hovnanian have the greatest exposure. Toll Brothers and Hovnanian have the most exposure to the New York-Northern NJ area market and hold a significant supply of land to fuel their growth in the area. Toll Brothers and Hovnanian generated the largest percentage of sales in the area with 5% each. Exhibit 17: Buyers Continue to Fear Further Price Declines Levels Versus Expectations 9% 55% More than expected 36% Meets expectations Less than expected How Do the Recent 30 Days Compare to the Prior 30 Days... 2% 28% 7 38% 56% 78% 15% 7% 7% Time to Sell Monthly Survey of Real Estate Agents 19

20 Orlando, FL Deteriorates as Lower Prices Aren t Enough to Draw Buyers Back Into the Market (11,801 single-family permits in 2007, 14th largest market in the country) Buyer traffic deteriorates as summer ends and buyers wait for signs of stabilization. Our traffic index fell to 17 in August from 32 in July, indicating lower traffic over the past month and absolute levels well below agents expectations (readings below 50 suggest traffic below expectations). Similar to last month, agents said buyers remained on the sidelines reluctant to move given the continued price declines, lack of available/affordably mortgage products and a worsening economic outlook. This month, however, agents said buyers seemed even more hesitant and even well-priced listings appeared to receive spotty traffic (although foreclosures did continue to draw interest). Agents attributed this to even tighter lending conditions, which we fear may only be made worse by the pending elimination of down-payment assistance programs. Prices fall further; stable inventories likely a seasonal issue. Home prices fell further in August, as our price index was unchanged at 14 from 13 in July (readings below 50 suggest lower home prices over the past 30 days). Low prices on foreclosure listings pressured other sellers to reduce price in order to remain competitive, according to agents, although it is difficult competing with banks. Inventory levels appeared unchanged in August, as our home listings index improved to 50 from 47 in July (consistent with a neutral reading of 50), but we think this is likely a seasonal issue as inventories are typically stable at this time of year and expect rising foreclosures to add to inventory levels in the coming months. In addition, overall inventory levels remain extremely high, meaning there is unfortunately no end in sight for price declines. The sluggish economy, high food and gas prices, and little available credit are all negatively impacting traffic. Buyers simply feel the market hasn t hit bottom yet. Ryland, KB Home, and Lennar have the greatest exposure. Ryland has the largest percent of sales from Orlando at approximately 6%, followed by KB Home and Lennar with 4% each. We also expect Hovnanian to rapidly increase exposure to Orlando following its recent acquisition of Cambridge Homes. Exhibit 18: Further Price Declines Needed to Spur Sales, Work Down Inventory Levels Levels Versus Expectations 7% 19% 74% How Do the Recent 30 Days Compare to the Prior 30 Days... 2% 24% 74% 43% 55% 2% 57% 29% 14% Time to Sell Monthly Survey of Real Estate Agents 20

21 Phoenix, AZ Buyers Rush to Take Advantage of Down-Payment Assistance; Agents Worry About Fall (26,494 single-family permits in 2007, 4th largest market in the country) Boost in traffic ahead of elimination of down-payment assistance programs. Agents saw an increase in traffic in August, as our buyer traffic index improved to 32 from 28 in August, though traffic remained below agents expectations as measured by and index of 50. Agents widely cited the pending elimination of down-payment assistance programs as the reason for the temporary increase in activity in traffic as buyers rushed to take advantage of the programs. According to one agent, Down-payment assistance (DPA) programs will be ending, so there is a slight flurry of activity from buyers who were on the fence. However, agents seemed worried that traffic will take another leg down once these programs are gone this fall, with one agent saying, This market will tank even further with the withdrawal of these programs. Foreclosures and short sales continue to weigh on home prices. Home prices continued to fall in August, as our price index increased to 18 from 11 in July but any reading below 50 suggests sequentially lower home prices. Agents said foreclosures remain a key problem in Phoenix, as the growing pipeline is continuing to negatively impact appraisals and force sellers to reduce pricing even further. However, the banks are starting to work through their inventory, which is helping overall inventory levels to remain relatively stable. Our home listings index slipped to 46 in August from 50 in July, but remained essentially in-line with a neutral reading of 50 (a reading of 50 suggests flat inventory). Still, our time to sell index was unchanged at 33 in August from 32 in July, indicating a longer time needed to sell over the past 30 days (any reading below 50) and pointing to further price declines in the coming months. In areas of short sales and REO sales, a nondistressed house is very difficult to get appraised DPA going away led to an increase in traffic; otherwise traffic volume would have been lower than normal. MDC Holdings, Standard Pacific, Meritage, Pulte Homes, D.R. Horton and Toll Brothers have the greatest exposure. MDC and Standard Pacific have the largest exposure to Phoenix, contracting approximately 19% of total unit sales in the area, followed by Meritage (18%), Pulte (16%), D.R. Horton (11%) and Toll (1). Exhibit 19: Increase in May be Short-Lived Levels Versus Expectations How Do the Recent 30 Days Compare to the Prior 30 Days... 51% 16% 32% % 56% 49% 42% 39% 33% 9% 5% 1% Time to Sell Monthly Survey of Real Estate Agents 21