The Housing Market Report Card October 20, 2011 Tim Sullivan, Principal

The Housing Market Report Card October 20, 2011 Tim Sullivan, Principal 1

The Housing Market Report Card For the School of Rock Hard Knocks October 26, 2011 Tim Sullivan, Principal 2

Agenda 1. Housing Market Performance 2. Behind the Scenes Factors 3. Apartment Insights 4. Consumer Snapshots 5. Phoenix Update 6. The Road to Recovery 3

Diverse group of experts with industry wide knowledge Nationwide team for coast to coast coverage Firm has completed compliance and ethics training with Integrity Research 4

New home sales coming down from a disappointing Spring Source: John Burns Real Estate Consulting, Housing From the Frontlines, October 2011 5

Resale sales volume slipping too Source: John Burns Real Estate Consulting, U.S. Housing Analysis & Forecast, October 2011 6

New home prices have not increased Source: John Burns Real Estate Consulting, Housing From the Frontlines, October 2011 7

Discounting inconsistent across regions Source: John Burns Real Estate Consulting, Housing From the Frontlines, October 2011 8

Resale price corrections have varied a lot by market. Prices have corrected to. what year? Atlanta Phx Minn Orlando LA DC Seattle Texas Source: John Burns Real Estate Consulting, Regional Analysis and Forecast, October 2011 9

Prices to turn positive in late 12/early 13 Source: NAR; Economy.com MSA rollup; S&P/CS; John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 10

Construction will recover, but slowly 2015 volume will be 55% of 2005 peak 193% increase in MF permits, 61% increase in SF Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 11

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Consumer Confidence Index 160 140 U.S. Consumer Confidence Consumer Confidence Index Historical Average 120 100 80 60 40 20 Source : Conference Board, updated through Sep, 2011; 45.4 12

Some markets reach equilibrium earlier 2012: Orange County, CA and San Antonio, TX 2013: Washington D.C., Philadelphia, Dallas, Fort Worth, Minneapolis, Baltimore, Portland, Boston 2014: Seattle, San Diego, Phoenix, New York, Los Angeles, Nassau NY, San Francisco, 2015: Houston, Atlanta, Riverside-San Bernardino, Tampa, St. Louis, Denver, Oakland, Ft. Lauderdale 2016: Sacramento, Orlando, Miami, Chicago, Newark 2017: Kansas City, Las Vegas Thereafter: Indianapolis, Cleveland, Warren MI, Cincinnati, Pittsburgh, Edison NJ, Columbus and Detroit and the best submarkets will recover even earlier 13

The bottom line Price is about available supply and demand Banks are NOT going to dump distressed (vacant) supply Currently adding less to supply, while demand is growing Best submarkets will recover earlier Already seeing rising rents and stable prices in the best neighborhoods = indicates falling vacancy and better demand There will be opportunities Equilibrium is when each metro will need new construction again as a whole Builders can find opportunities in the best submarkets that have less vacancy, and where people want to live 14

Grade for Housing Market: D (Demand) + A (Affordability) = C 15

Agenda 1. Housing Market Performance 2. Behind the Scenes Factors 3. Apartment Insights 4. Consumer Snapshots 5. Phoenix Update 6. The Road to Recovery 16

Economic Growth Is Not Robust GDP growth grew in 2Q11 Job growth still positive Unemployment ticked up in Sept. Inflation starting to show Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 17

The economy added 103K jobs in Sept. YOY job gains have now been positive for the past 13 months Annual job losses continue in Government (-327K) Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 18

and affordability is amazing Mortgage rates are still historically low Housing costs very low in relation to incomes Housing has never been this affordable in comparison to rents 19

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P U.S. back to equilibrium in 2015 Construction averaging 1.03MM/yr through 2015 Household growth averaging 1.46MM/yr through 2015 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0-500,000 Excess Vacancy Source: John Burns Real Estate Consulting, May 2011 20

Highest excess vacancy in NV, AZ, FL and GA 21

Millions Shadow Inventory Declining Return to normal by 2016 as: Foreclosure starts continue to decline Liquidation of shadow inventory continues at heightened pace 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1.04 1.25 1.29 1.19 1.13 1.08 1.07 Shadow Inventory 1.61 2.77 4.71 4.69 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P 2016P Source: John Burns Real Estate Consulting, April 2011 4.47 3.84 2.88 2.10 1.55 1.19 22

Millions Is the worst behind us? Based on our forecasts: 50% of the Foreclosure Notices have been filed 9.3 MM of 17.8 MM total foreclosure notices have been filed Only 30% of the distressed homes have been sold 4.3 MM of 13.8 MM total distressed sales have occurred 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Foreclosure Starts Distressed Sales Foreclosure Starts & Distressed Sales 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011P 2012P 2013P 2014P 2015P 2016P Source: John Burns Real Estate Consulting, April 2011 23

Homeownership back to 62% by 2015 Driven by: Continued decline in HO rate in the younger age groups Unprecedented number displaced by foreclosure Majority of new households formed as renters 2004 Peak 70.1% Current 65.9% 64% 62% Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 24

Homeownership increases with age 3 MM current owners will lose their homes to foreclosure (alone brings HO rate down) New households will have to overcome poor credit, lack of down payment and tight mortgage underwriting to become owners 1.5 MM more young adults living with parents than in 2000 They will be renters first 25

Grade for Behind the Scenes Factors (Foreclosures, Shadow Inventory, Economic Growth) F Last Year D This Year 26

Election 2012: Barrier to Action? 27

Agenda 1. Housing Market Performance 2. Behind the Scenes Factors 3. Apartment Insights 4. Consumer Snapshots 5. Phoenix Update 6. The Road to Recovery 28

Demand is flooding into apartments and not into for-sale housing. For-Sale Rental 29

Apartment demand is booming and will vastly outstrip supply We are projecting 6.3 million new renter households from 2010-2015 as a result of the falling homeownership rate and changing demographics. This is almost four times the level of multi-family construction we are projecting for 2011-2015. Source: Census Bureau; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 30

Vacancies are improving in almost every metro area Source: REIS; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 31

It starts with the economy; jobs and apartments are tightly correlated While the economy has definitely slowed, year-over-year non-seasonally adjusted employment growth remains positive. Through August, nonfarm payroll has grown by 1.0% YOY, with 1.28 million jobs added in the last 12 months. Source: BLS; REIS; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 32

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 (millions) Long-term apartment fundamentals are fantastic 25-34 year-olds projected to increase by 2.6 million people over the next 5 years. This age segment has a higher propensity to rent. 39 38 37 36 35 34 33 32 31 US Population Age 25-34 Sources: John Burns Real Estate Consulting, US Census Bureau Source: Census Bureau; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 33

Current rent growth is positive in most metro markets Source: REIS; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 34

Cap rates have started to rise slightly across the apartment sector Source: RCA; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 35

Strong Growth Outlook for Multi-Family Sector Source: RCA; John Burns Real Estate Consulting, Apartment Analysis & Forecast, Sept. 2011 36

Grade for Apartment Market: A (Demand Characteristics) + B (Bubble) = A- 37

Agenda 1. Housing Market Performance 2. Behind the Scenes Factors 3. Apartment Insights 4. Consumer Snapshots 5. Phoenix Update 6. The Road to Recovery 38

Study Methodology & Sample Size:JBREC National Consumer Survey E-mail Survey: We invited nearly1 million consumers to participate in a comprehensive 54-question survey about their next home. Partners: Almost 30 builders and developers joined in the effort by helping write the questions and sending the e-mail to their lists. Sample Size: Nearly 10,000 participated. 3,254 of these respondents were Boomers. 39

2011 #1 Finding: Design Matters. Home Design and Personalization are As Important As Price. Most have responded to price. Design is the opportunity. Price and location are still important, but our major finding for the study is that the emotional power behind personalizing the home is the driving factor to buy. There are many findings throughout this report. We are excited to see you put these findings to great use in 2012+.

Consumers demand that new home construction be state-of-the-art. From a consumer s perspective: Latest and Greatest Expected: With all new products, consumers expect the best technology. The same goes for their home if they are buying new. Better Absorption: Premiums for better technology are tough to achieve. However, builders with better technology are likely to get better sales. Green = Cash: Green technology is not about saving the environment, and it is not a generational trend. In fact, Gen Y is the least likely group to pay $5,000 more for an energy-efficient home. 41

Consumers expect new home construction to be energy efficient. There was overwhelming agreement (96%) that new home construction should be energy efficient (EE) at no additional cost. 74% did say they will pay $5,000 more for a home with EE features than for a home without, but this is captured in the new home premium. Use this as a reasonable guideline for what you expect to recover. Only 50% said that EE features were more important than designer features such as wood floors and granite counters. Don t force them to trade! 42

Consumers need education on monthly savings. 93% are willing to purchase EE products for savings. It s up to you to educate your consumer! 1. 93% said HVAC was an important consideration of their home purchase when we told them that it accounts for 50% of their energy bills. 2. Only 42% will pay for green products that don t save them money. Many took a neutral position, perhaps because they don t understand the cost/value of green products. There is an opportunity to educate and influence while their minds are not made up. MONTHLY PMT OUR ENERGY EFFICIENT HOME OLDER HOME Electricity $22 $60 Water $20 $35 Mortgage $1,220 $1,220 Total $1,262 $1,315 3. Do the math for the buyer. Show them the savings if you expect them to value the product. 43

Boomers are Opportunity #1 Today. Beginning January 1 st, 2011, every single day more than 10,000 Baby Boomers will reach the age of 65. This will continue every day for the next 19 years. Generation Silent Boomers X Y Ages: 25 to 30 Years Born 1925-1945 1946-1964 1965-1979 1980*- 2000 Y Ages: 11 to 30 1980*-2000 Age Range Year 2011 Year 2015 66 to 86 70 to 90 47 to 65 51 to 69 32 to 46 36 to 50 25+ only 26 to 31 25 to 35 11 to 31 Population 29M 75M 63M 44M 87M Opportunity 2015 Silent #4 Boomers #1 X #2 Y #3 44

Raleigh-Cary, NC Las Vegas, NV Phoenix, AZ Fort Worth, TX Dallas, TX San Antonio, TX Houston, TX Atlanta, GA Tampa, FL Miami, FL Minneapolis, MN-WI Sacramento, CA San Diego, CA Riverside-San Bern, CA Orange County, CA Los Angeles, CA Oakland, CA Edison, NJ Denver, CO Seattle, WA St. Louis, MO-IL Washington, D.C Newark-Union, NJ-PA Chicago, IL Cincinnati, OH Portland, OR-WA Philadelphia, PA New York, NY-NJ Baltimore, MD Pittsburgh, PA Detroit-Warren, MI The 55+ population growth over the next five years is projected for the Southwest, Southeast, Texas, and Florida markets. 25% Five-Year Change in Population: Ages 55-64, 2010-2015 20% 15% 10% 5% 0% Source: Economy.com 45

Customer research may be more important than market research but far more difficult. -Peter Drucker

Grade for Consumer A (For those looking) + D (For Those on the Sideline) = C+ 47

Agenda 1. Housing Market Performance 2. Behind the Scenes Factors 3. Apartment Insights 4. Consumer Snapshots 5. Phoenix Update 6. The Road to Recovery 48

Building permits at lowest level in 30 years Peak 2005 Total Permits 69,230 2011P Total Permits 8,700 Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 49

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Numerical Growth Percent Change The Driver is Back: Jobs 125,000 100,000 75,000 50,000 25,000 0-25,000-50,000-75,000-100,000-125,000-150,000 Last 12 Mos. +38,700 jobs Previous 12 Mos. -17,400 jobs 15% 10% 5% 0% -5% -10% -15% -20% Numerical Growth Percent Change Source: BLS; John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 50

Phoenix s Job Base Sets the Stage Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 51

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Current Price Prices of New and Resale Homes No Longer Close $300,000 $250,000 $200,000 September 2011 New - $189,700 Resale - $117,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $150,000 $100,000 $50,000 $0 Resale Price New Price Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 52

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Current 2011P 2012P 2013P And it is Now Cheaper to Own Than to Rent in Phoenix Monthly After-Tax Housing Cost of Owning Versus Renting $1,400 $1,200 $1,000 $800 $600 $400 Monthly After-Tax Housing Costs Average Asking Rent Source: Realfacts (100+ units); John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 53

Phoenix San Diego Los Angeles Minneapolis Atlanta Orange County Tampa Chicago Wash D.C. Seattle Boston Denver New York, (MDiv) Fort Worth Dallas Philadelphia Houston Austin San Antonio -33% -28% -17% -20% -4% -6% 17% 4% 1% 1% 16% 12% 0% 13% 6% 23% 19% 13% 26% 22% 23% 19% 27% 30% 26% 22% 24% 18% 21% 35% 34% 36% 51% 60% 61% 74% 82% 91% Many reasons to own: In Phoenix, the monthly cost of owning is usually 35% more expensive than renting. Today, it is 17% cheaper. 100% Historical Own/Rent Difference vs. Current Difference Sorted by Biggest Variance from Historical 80% 60% Historical Average Current (2Q11) 40% 20% 0% -20% -40% Source: John Burns Real Estate Consulting, Apartment Analysis and Forecast, September 2011 54

Total Transactions Back to Late 90s Levels 225,000 200,000 2011P = ±106,100 (+9% YOY) 175,000 150,000 125,000 100,000 75,000 50,000 25,000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 New Existing Source: Dataquick; John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 55

Quarterly JBREC Affordability Index TM shows Record Affordability Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 56

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Current 2011P 2012P 2013P And this is Supported by Median Housing Costs to Median Income Ratio 45% 40% 2011P = 17% 35% 30% 25% 20% 15% 10% Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 57

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Current 2011P 2012P 2013P Unfortunately, Lost Equity and a Lack of a Down Payment Holds the Market Back $200,000 $150,000 $100,000 $50,000 $0 -$50,000 -$100,000 -$150,000 3-year owner 7-year owner 10-year owner 15-year owner Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 58

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Current So Apartment Occupancies are Now on the Rise 100% 99% 98% 97% 96% 95% 94% 93% 92% 91% 90% 89% 88% 87% 86% Peak 1999 = 95% Current = 91% Source: Realfacts; John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 59

Pre-Foreclosure Notices Have Fallen in Phoenix Source: John Burns Real Estate Consulting, Metro Analysis and Forecast, October 2011 60

Listings There is a 3.4-Month Supply of Resale Units (Based on Sept. 2011 Sales) in Phoenix Jan-04 Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan-09 Jun Nov Apr Sep Feb Jul Total Existing Sales 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Sept. Inventory 26,950 Sept. Sales 7,892 = 3.4 Mos. 12,000 10,000 8,000 6,000 4,000 2,000 0 0 Listings Total Existing Sales Source: ARMLS; John Burns Real Estate Consulting 61

Shadow Inventory Summary A high level of shadow inventory in the Phoenix market will continue to put downward pressure on prices in this market. The 10 months of shadow inventory, or homes not currently on the market and in one form of distress that we believe will be eventually liquidated/sold, is over 3 times the number of homes currently listed on the market. Phoenix, AZ Shadow Inventory Estimated # of Shadow Inventory 4 Delinquent (based on liquidation probabilities) Loans in Upside Base Downside Category Metro 2 Scenario 1 Case 1 Scenario 1 In Foreclosure 36,806 29,445 33,125 36,806 90+ Days 34,334 25,751 29,184 33,991 60 Days 11,209 7,846 8,967 10,649 30 Days 26,126 13,063 15,676 18,288 Total 108,476 76,105 86,952 99,734 Less: Distressed Units already listed on MLS 5 (9,023) (9,023) (9,023) Shadow Inventory 4 67,082 77,929 90,711 Plus: Current MLS Listings 26,190 26,190 26,190 Total Supply 93,272 104,119 116,901 Months of Supply - Shadow 8.7 10.1 11.8 Months of Supply - MLS 3.4 3.4 3.4 Total Months of Supply 12.1 13.5 15.2 Total Metro Mortgages 3 : 778,367 10-yr Avg Annual Metro Resale Sales: 92,334 Footnotes 1 - Liquidation probability scenarios were based on a study of probabilities used by leading credit analysts and analysis of county records data 2 - Total Metro Mortgages X Estimated Metro Delinquency % 3 - Estimate of total mortgages, adjusted from the 2006-2008 American Community Survey (Census) 4 - # of currently distressed properties that will ultimately become supply 5 - Assumed that U.S. distressed listings as % of total listings was 32% (same as % distressed sales, then adjusted that % based on differential between metro total mortgage delinquency and U.S. total mortgage delinquency) 62 62 2Q2011

Grade for Phoenix Jobs? Supply? Affordability? D Last Year B- This Year 63

Agenda 1. Housing Market Performance 2. Behind the Scenes Factors 3. Apartment Insights 4. Consumer Snapshots 5. Phoenix Update 6. The Road to Recovery 64

Job growth is key. Texas, Seattle, Raleigh and Phoenix are growing. Source: John Burns Real Estate Consulting, Regional Analysis and Forecast, October 2011 Region 1-Year Growth 1-Year Growth Rate S. California 35,800 0.4% N. California 27,700 0.5% CALIFORNIA 63,500 0.5% N. Florida 19,000 0.5% S. Florida 23,300 0.8% FLORIDA 42,300 0.6% Texas 187,400 2.0% Midwest 207,600 0.8% Northeast 170,200 0.6% Northwest 56,600 1.1% Southeast 36,100 0.2% Southwest 58,500 0.9% 65

Employers are looking to hire Monster.com Employment Index and Employer Recruitment Activity Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 66

On a national level, affordability is exceptional 39% 23% Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 67

Personal Savings Rate is up and also paving way for future down payments Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 68

Value of Revolving Consumer Debt has fallen approximately 5.4% over last year 23% drop since 12/08 Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 69

6.2 Months of new home supply but absolute number of unsold homes is lowest since 1963 164,000 Source: John Burns Real Estate Consulting, U.S. Analysis & Forecast, October 2011 70

Be very bullish long-term! Strong Demographics: Growth of 20-34 year old segment along with pent-up demand will fuel demand for apartments over the next five years. Housing Market Weakness: Lower income growth and credit issues will drive people to rent. Homeownership rate will fall. Modest Construction Pipeline: While multifamily permits are expected to double, they will remain below demand. Continue to Monitor Both Markets! Housing and apartments are related, and as the housing market recovers, it will take demand away from apartments. Phoenix is Adapting: Meritage and energy efficiency (Lyons Gate); Lennar-Multi-generational (Layton Lakes) 71

Some Comments on Participation A public builder Will beat plan. Prominent MPC Traffic is up 10%. Sales are up 30% over 2010. Some notable supply changes: 10/3/2010 10/3/2011 % Change Active Listings 44,856 26,954-40% Sales Per Year 91,076 99,611 9% Average Price/Year $173,894 $157,644-9% Lender Owned Active Listings 8,501 3,053-64% % Sales Lender Owned this Month 47% 37% -21% Source: Cromford Report What we hear in the field: Fewer open subdivisions/less competition. But Uncertainty reigns. 72

Final Report Card: Time for a Cool Change? Grade Trend Housing Market Performance C Behind the Scenes Factors D Apartment Insights A- Consumer Snapshots D Phoenix Update B- Road to Recovery C 73

Make Great Decisions Using Great Analysis tsullivan@realestateconsulting.com (858) 558-8384 74