2. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
3. Our experienced management team stays on top of housing issues by: Buying, charting and forecasting 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 market feasibility and valuation assignments. Analyzing commercial real estate trends. Pulling it all together for a diverse group of executive clients (builders, developers, lenders, private equity, hedge funds, etc.). Steve Dutra 20 yrs industry data mgmt., No Cal-based Wayne Yamano 10 yrs of analysis, Irvine-based Jody Kahn 85 Industry M&A deals, New England-based Lisa Marquis Jackson 20 years of industry reporting, TX based Mollie Carmichael SVP Lennar, Pulte, Irvine Co., Irvine-based Don Walker Former Home Builder Pres., San Diego-based Lesley Deutch Wall St. researcher, FL based John Burns Founder
4. Full Knowledge: Our Retainer clients make decisions with excellent information. Proprietary Survey Highly accurate report on market conditions within 4 days of monthend. Banks /Manufacturers Housing’s implications on related industries. Best Data We spend a fortune on data that we will provide in Excel upon request. US Housing Forecast Complete history and charts on 60+ indicators, including forecasts. Industry Contacts and Knowledge We can introduce you to the players. Regional Analysis Complete data and analysis by MSA. Leading Research We answer the tough questions. Builder Market Conditions Look up each builder’s markets and community count by market. Consultants We are trusted advisors on big decisions. Local Expert CallEach month, we record qualitative feedback from our local market experts. Special Research We give our clients an early “heads up” on pertinent issues. The Summit Our diversified client base meets to debate the issues and learn from each other. Consultations We help you pull it all together.
5. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
6. The news since Halloween has generally been very positive.
7. Be more bullish! A lot has changed in 16 weeks. Summary of Positive Surprises Opening of the debt markets Tax credit extension and expansion NOL carryback extension No major changes to FHA Falling Mortgage Rates Better employment picture Rising land prices
8. The debt markets opened up, even to builders whose target share price (by several analysts) was $0. Impact: More builder confidence, more competition and more liquidity.
9. The tax credit was extended and expanded to move-up buyers.. Impact: Muted Dec / Jan sales decline.November closings were pushed to December. Buyers with renewed confidence will buy this Spring.
10. Public builders will receive more than $4.4 billion in tax refunds. The recent extension from 2 years to 5 years will reduce their Debt/Cap by 9%. Impact: Big Positive. Better balance sheets will result in more competition for home sales and land acquisition. The tax ruling saved a few builders and increased the cash position of all builders.
11. An insolvent FHA will keep insuring loans with minimal changes. Impact: Slightly Positive. We were anticipating continued support, but with more stringent underwriting than proposed. Source: Citi
12. Fixed Rates are down slightly from August, with more optimism that they will stay low. Impact: Slightly More Positive We were expecting a slight upward trend.
13. Employment losses were at their worst in August, and have recovered better than anticipated. Impact: Slightly More Positive We were expecting recovery, but not quite as quickly.
14. One result has been that the land market has heated up. Impact: Positive for the economy. Starts and sales will rise more quickly. Banks will lose much less on disposition.
15. In the meantime, housing hasn’t been this affordable in 30+ years, at least! $1,000/Month! Half of all mortgages today requires a 5% down payment and cost less than $1,000 per month.
16. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
17. Big Bet #1: Mortgage rates.We assume they stay low and then rise to 7.0% and 7.5% in 2012 and 2013
18. Big Bet #2: Job GrowthWe assume jobs turns MoM positive in July 2010, YoY positive in January 2011, and 2% thereafter.
19. Big Bet #3: Government Intervention will disappear in July. Housing: $8,000 / $6,500 Federal tax credit to buy a house through June 2010. Mortgage Rates: Will stay low. Down payments: Mostly 5% or less required through the FHA. Economy: Should have mild job growth by mid-2010.
20. Down Payment is a Huge Obstacle.Government low down payment programs comprise 59% of new home sales.
21. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
23. Layoffs and Option ARM resets have driven foreclosure starts above 3 million, and they will stay high for years. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
24. At least 7 MSAs had more pre-foreclosure notices than sales in the last year.
25. … so where’s the supply? REO is not the problem, because banks sell quickly The problem is the massive number of delinquent homes that will eventually be sold as REO or short sale 14.4% mortgage delinquency in U.S. =5 million units Shadow Inventory =10 months of shadow supply … and growing
26. Total Filings are rising faster than REO filings, showing growing shadow inventory of REOs.
27. CA, FL, NV, and AZ are where REO sales will be highest.TX, Northeast, Atlantic and the Midwest will haveless REO distress Quarterly Foreclosure Notices Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
28. CA, FL, NV and AZ have Highest Delinquency >30% Delinquency: Ft Myers, Naples, Miami, Orlando >25% Delinquency: Merced, Stockton, Riverside-San Bernardino, Modesto
29. FL, Inland CA and Chicago Will Be Hit Hardest by Shadow Inventory 21 months: Chicago 20+ months: Riverside-San Bernardino, Bakersfield, Fresno 24+ months: Orlando, Miami
31. Closer look at Methodology:Riverside-San Bernardino Shadow Inventory 2) Metro adjustment based on relative ratio of NODs per mortgage 1) State-level mortgage delinquency from MBA 3) Estimate of mortgage delinquency for metro 4) How many of the delinquent loans will become supply? Used a range of liquidation probabilities
32. 5) Total mortgages from Census American Community Survey x x = Metro Mortgages Metro Delinquency Liquidation Probability 6) Subtract currently listed shadow units RESULT: 115K to 155K units of Shadow Inventory
33. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
34. Home prices are back to 2003 levels in many markets. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
36. In fact, owning is now cheaper than renting in many marketsSacramento homeownership is $41 per month cheaper than renting Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
37. Affordability is the Big Positive Elephant in the Room We are placing more emphasis on affordability – Sensitivity analysis shows us that rates could go to 7.5% and housing would still be historically affordable. If prices rise 5% and rates go to 8%
38. Very few markets have an affordability problem(dark red only) Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
39. New home price erosion is almost over. Source: John Burns Real Estate Consulting, Feb. 2010 survey of 2,000+ new home communities.
40. Pricing softened a bit in No Cal last month, but had been flat prior to that.
41. Potential Upside is Affordability. Housing will still be affordable if prices go up 5% and rates rise to 7.5% (our 2013 forecast).
42. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
43. Methodology 1: The need for more homes. Zero. Housing Stock = Too much Normally, we need 1.7 million total homes constructed every year (1.3 mil new households + 400,000 for replacement and 2nd homes), but we exceeded this for 5 consecutive years, and have about 2 million more vacant homes than needed. Demand = 0 A growing number of adults with jobs creates demand. We’d like 2 million jobs / year (1.5%), but we have 4.1 million losses (-3.0%). Affordability Favors Homeownership Payments: We’d like Payment / Income of 38% and we have 27%!! Price: We’d like Price / Income of 3.7 and we have 3.4!!
44. Demand: Adults with incomesEmployment losses are significant and widespread, but this is improving quickly. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
45. MSA data is calculated YOY (purple line), but monthly employment losses have stabilized (columns).
46. Signs of job growth are emerging. Look for temp hiring, more hours worked, and bank credit for businesses as early indicators. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
47. So Cal’s 1990s recessionary 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
48. Excess Housing StockWe have almost 2 million excess vacant homes, all added since 2002. } 500K Meant to Be Owner Occupied Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
49. Homeowner vacancy has never been close to this high, showing a real demand for no more homes constructed purely based on the need for shelter. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
50. Houston’s 1983 oversupply downturn lasted 9 years “L” or “U” Construction Recovery Construction in Houston fell 88% from 1983 to 1987, and stayed low through 1996. V Price Recovery Houston home prices fell 25% from 1983 – 1987, and did not recover full values until 1992.
51. Standing inventory has shrunk to the point where new home construction will begin again, purely for business reasons. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
52. Forecasting “U” Construction at Low Levels:Single-family construction is at the bottom. Lack of construction financing will keep construction low Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
53. New home sales are bottoming, but won’t reach 1996 levels for at least 4 more years. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
54. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
55. Methodology 2: The ability to sell homes. Excellent! But… Demand = 5.8 million The norm is that 4.6% of all households buy a home every year, and we are at 5.2%. For-sale Supply = Normal, but… The norm is 7.3 months of resale supply, and we have 7.2 months. 5 million Shadow Inventory homes will soon be for sale though! Affordability Will Help Cushion the Shadow Inventory Blow Payments: We’d like Payment / Income of 38% and we have 27%!! Price: We’d like Price / Income of 3.7 and we have 3.4!!
56. Months of Supply of Homes For Sale Measures the Balance of Demand and Supply. The Long-Term Averages Since 1982 (first year of supply data) are: 3.6% home price appreciation ( ~0.9% in real dollars) 7.3 months of resale supply In the last 13 months, supply has fallen from 11.0 months to 7.2 months.
58. Strong Home Buyer DemandIn 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, Feb. 2009
59. Sales volumes are actually above historical norms, thanks to investors and government intervention Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
60. New home sales per community is still less than half of norm, but has been relatively stable for 9 months. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
61. Data Date: Dec/Jan 2010 / Pub: Feb 2010 Resale Months of Supply is very low in the West, where prices are trending up, and high in Florida. Still high in FL
62. PRESENTATION ORGANIZATION JBREC Resources 16 Weeks of Positive News You Have to Make 3 Big Bets The Big Negative: Shadow Inventory The Big Positive: Affordability The Need for More Homes The Ability to Sell Homes Conclusions MAXIMIZE REWARD / RISK
63. So We Have Two Elephants in the Room. The Positive Elephant Affordability The NegativeElephant Shadow Inventory
80. All markets have a poor grade for risk, but there are more markets on the upswing than the downswing. Source: John Burns Real Estate Consulting Housing Industry Market Monitor, Feb. 2009
81. What Would I Do With This? Look at Price / Tangible Book because that is how the builders look at acquiring each other. Pay attention to entry-level and retiree focus. Pay attention to management’s willingness to bet heavy on land. Pay attention to geographic concentrations (see our monthly report)
83. Builders’ Market Supply MetricsBased on Geographic Concentration Brookfield and Meritage have less downward pricing pressure based on the markets they are in Brookfield heavy in CA Meritage heavy in TX
