February 2009

United States Housing OutlookWhen Will Markets Recover?

THE CONCORD GROUP

Andrew Borsanyi

(415) 397-5490

aab@theconcordgroup.com

THE CONCORD GROUP

Executive Summary

• For-sale housing market conditions and forecasted recovery scenarios for U.S. and key regions

• History – Boom, Bubble, Bust

• TCG Market Outlook– Strong long-term demographic demand – 2010: Increased sales velocity– Q2 2011: Supply/demand balance

• Opportunities– Land/lot development precede recovery by 12 to 18 months – Re-entitlement and planning immediately– Submarket supply/demand conditions

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History

• 2001 to 2006: Boom, Bubble– 1970 to 2003 U.S. homes appreciated 6% annually– 2004 to 2005 prices appreciated 11% annually

• Housing Boom Factors– 2.1 jobs created per building permit 1970 to 1999– Baby boom generation reach peak-buying ages– Interest rates at historical lows– Capital gains tax law added in 1997– Tech bust in early 2000s

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Bust

• Volume – – 505k last 12 months sales (Nov. 2008)– 1.28MM 2005 peak – 61% drop– Total volume estimated at 550k-575k including attached product

• Price – – Same product down 21% from peak, 17% Y/Y (Dec. 2008)– Certain markets worse – High foreclosure volumes causing downward pressure

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Regional Conditions

• High growth markets experience sharpest declines• Mix-adjusted same product pricing drop deeper than overall average

New Home Sales Volume Average New Home Price Same Product PriceMarket Peak LTM Δ Peak Peak LTM (1) Δ Peak Y/Y Δ Δ Peak Y/Y Δ United States 1,283,000 505,000 -60.6% $313,600 $296,600 -5.4% -3.7% -21.0% -16.6%Dallas 43,100 19,200 -55.5% 233,000 224,400 -3.7% 1.0% -4.6% -3.0%Charlotte 22,400 16,100 -28.1% 314,700 313,700 -0.3% 8.0% -5.8% -4.4%Seattle 15,200 6,100 -59.9% 420,700 411,100 -2.3% -2.3% -11.4% -10.2%Boston 2,800 700 -75.0% 467,600 450,300 -3.7% -2.5% -12.8% -6.0%S.F. Bay Area 16,700 8,000 -52.1% 738,500 658,300 -10.9% -6.1% -21.0% -16.0%Orange County 5,900 2,100 -64.4% 834,800 706,000 -15.4% -15.4% -21.0% -13.7%DC/Baltimore 33,900 9,300 -72.6% 504,600 410,000 -18.7% -11.4% -26.3% -18.7%Tampa 46,400 16,200 -65.1% 304,300 272,500 -10.5% -4.2% -30.5% -19.8%Sacramento 14,200 4,900 -65.5% 451,000 358,200 -20.6% -14.1% -31.0% -19.1%Orlando 52,900 18,000 -66.0% 255,000 231,500 -9.2% -8.8% -33.0% -15.0%Inland Empire 34,100 8,000 -76.5% 492,000 405,600 -17.6% -16.0% -34.0% -17.0%Los Angeles 11,000 3,700 -66.4% 608,600 594,300 -2.3% 3.4% -34.4% -27.9%Las Vegas 45,000 7,100 -84.2% 449,000 327,000 -27.2% -26.0% -39.3% -31.7%Phoenix 55,400 15,600 -71.8% 290,400 253,600 -12.7% -9.5% -40.6% -32.7%

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Outlook Methodology• Forecast annual new home demand

– Base Growth: Published employment and demographic forecasts– Qualify for affordability, homeownership, turnover, obsolescence – Assume 2008 sales rate for next 12-18 months – Higher medium-term recovery sales rate assuming job growth– Conservatively forecast demographic demand follows

• Assess Competitive Inventory– Standing units, actively-marketed lots and recently-built foreclosures– Months supply = (competitive inventory ÷ varied sales rates) x 12

• Recovery Milestones– Land Market: 12 months supply of competitive inventory reached– Housing Market: Currently available competitive inventory eliminated

• Price Forecast– Conservative new home buyer financing assumptions– Adjustment needed for reversion to long-term affordability ratio

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New Home Supply• Standing inventory

• Lots in actively marketed projects

• Recently built foreclosures

• 1.975MM estimated units available• 4 Years of supply at current run rates• Historically 1-2 years of supply

CompetitiveMarket InventoryUnited States 1,975,000Boston 3,900Orange County 10,500Los Angeles 16,900Sacramento 20,200Seattle 22,800S.F. Bay Area 30,600Charlotte 35,200Inland Empire 46,700Las Vegas 47,900Tampa 49,400Dallas 63,100Orlando 67,400DC/Baltimore 68,300Phoenix 86,600

Sources: U.S. Census Bureau/HUD; HanleyWood;

MetroStudy; RealtyTrac; The Concord Group

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New Home Demand Projections

• Demand Framework– Household growth (1.3MM new HHs annually)– Turnover and obsolescence– Percent own and percent buy new– Financing assumptions

• TCG Long-Term Demand– 895K units annually– Baseline demand not reached until 2011– In-line with new home sales in early 2000s

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Price Forecast

• Current U.S. income to housing with 20 year average

• Certain regions still require additional drops to reach long-term average

• Likely overcorrection of additional 5-10%– Distressed/REO sales– High builder inventory– Tougher lending standards– Poor buyer sentiment

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TCG U.S. Market Outlook

• New home sales volumes bottom in 2009

• Peak to trough same-product price correction of 25-30%– Currently same product price down 21%– Pricing bottom reached by end of 2009

• Minimal or zero price appreciation through 2010

• Moderate, single digit price appreciation in 2011+

• Recovery Milestones:– Land Market: Q2 2010– Housing Market: Q2 2011

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Regional Market Outlook

• Leaders: Proximity to employment, schools, amenities• Laggards: Heavy foreclosures, edge commuter locations

Blended Mo. RecoveryMarket Supply Land HousingUnited States 32 2Q 10 2Q 11Charlotte 25 4Q 09 4Q 10Tampa 28 1Q 10 1Q 11Dallas 29 2Q 10 2Q 11Seattle 30 2Q 10 2Q 11Boston 30 2Q 10 2Q 11S.F. Bay Area 32 2Q 10 2Q 11

Orange County 33 3Q 10 3Q 11Orlando 33 3Q 10 3Q 11Sacramento 35 4Q 10 4Q 11Los Angeles 36 4Q 10 4Q 11Inland Empire 37 4Q 10 4Q 11DC/Baltimore 37 4Q 10 4Q 11Phoenix 43 3Q 11 3Q 12Las Vegas 44 3Q 11 3Q 12

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California• San Francisco Bay Area

– 31% decline in same product price from peak versus 20% nationally– Outlying suburbs facing largest price declines due to high foreclosure sales; downtown San

Francisco has held up relatively well but is feeling downward price pressures as luxury condo market subsides

– Continued job losses in financial sector will weaken local economy through 2009 (contributes to ¼ of total output in the MSA)

• Los Angeles– Three layers – urban, Santa Clarita and Antelope Valley – Outlying areas such as Antelope Valley suffering most due to increased affordability of more

proximate Los Angeles suburbs– Effects of decline in housing and mortgage market spilling over to other areas of the economy

– job losses in 2008 expected to continue through 2009 with growth returning in late 2010– Pent up demand for housing and services yields market turnaround in 2011

• Inland Empire– New home sales volume down 77% from peak versus national decline of 61% from peak– Foreclosure sales 84% of total sales volume, 4.5 times national average of 20%– Regional unemployment rate 10.2% ranks 333rd among 369 MSAs (versus 7.6% nationally)– High volume of competitive inventory homes pushing market recovery date to late 2011– West end cities such as Rancho Cucamonga and Chino Hills outperforming region due to their

proximity to core employment nodes– Still attractive long term as outlet for SoCal growth

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Mountain• Phoenix

– 33% drop same product price Y/Y; 41% off from peak– Median home price back to 2002 levels, nationally at 2004 levels– Recovery projected to lag most new home markets due to significant land availability – Core areas (within 20 miles of downtown) to recover first with prolonged suffering in exurban

areas, specifically southeast submarket (e.g. Casa Grande) – Strong underlying growth story

• Las Vegas– 32% drop in same product price Y/Y; 39% off from peak – Existing home sales up, largely due to foreclosures (65% of resales) – Nevada leads U.S. in “underwater” mortgages – 47% have negative equity – Overbuilding/high speculation investor buying led to oversupply– 20,000-30,000 hotel room deliveries projected next 3 years– Long-term outlook positive – strong population growth, land constraints due to regional location

(surrounded by mountains), second home market, gaming industry, international destination• Denver

– 4% drop in same product price Y/Y versus 17% for most MSA’s– Denver county has faired better than outlying counties such as Adams and Douglas– Financial-sector job losses put damper on employment growth in 2008; medium-term growth

will be led by service sectors– May see increased population growth as California businesses look for cheaper alternatives– Ranks first among nation’s most desirable places to live - 54% of all residential moves in 2008

were inbound

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Florida• Miami

– Same product home price down 29% Y/Y– Service-based economy: relatively low skill level of labor pool likely to limit income growth– Miami condo developers selling inventory in bulk; December 2008 bulk sales in downtown

Miami closed mid-$100 per square foot range– Coastal markets detached strongest; Downtown Miami has highest unsold supply

• Tampa– Diversified economy less reliant on second home demand than other FL– Services sector and Port growth catalysts for economic progress 2011-2014– Unemployment rate 8.3% versus 7.6% nationally as of January 2009– 4% housing units in foreclosure versus 1.8% nationally, 122% increase since 2007

• Orlando– January 2009 existing sales up 37% versus last year – foreclosures 50% of sales– 6.7% housing units in foreclosure versus 1.8% nationally– Low second home demand coupled with high inventory – Ex-urban commuter markets to the West of downtown struggling more than established areas– Smallest Y/Y employment decrease among all Florida markets (-1.7% or 19,100 jobs)– Key industries in Orlando – healthcare, education, defense manufacturing and

tourism/hospitality – potentially weather downturn

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Southeast• Charlotte

– Lagged national downturn; among last markets to bust– Significant job loss since October 2008 due to financial sector collapse (Bank of America,

Wachovia headquarters)– Cleveland and Gaston counties (suburban counties) reporting 11% unemployment –

significantly worse than more urban Mecklenburg County (5%)

• Atlanta– Same product home price down 11% Y/Y, 2003 price levels– Outlying suburbs and urban condos drive oversupply– Third highest vacancy rate for homes, condos and apartments among 75 metros – Credit crisis and real estate downturn have led to major job losses in local construction and

finance industries

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Northeast and Mid-Atlantic• Boston

– 7% decline in same product home price Y/Y; 15% down from peak– Newly constructed suburban high-end homes suffering most, especially near western I-495

loop (e.g. Harvard, Westford, Bolton), as more desirable central suburbs become affordable– Present climate making historically elite communities more accessible

• New York– 9% decline in same product home price Y/Y; 13% down from peak– Sales significantly down– Financial crisis shocks felt most acutely by high-end product– Many projects (approximately 27,000 units) halted or converted to rental; large luxury projects

in previously non-luxury markets particularly affected – some buildings selling condos in bulk at large discounts (up to nearly 50%)

• DC-Baltimore– 9% decline in same product home price Y/Y– biggest annual price drop in nearly a decade;

28% down from peak– Metro area slightly buoyed by government activity and low unemployment; exurban markets

experiencing greater stress as areas closer to city have become more affordable– Obama administration’s federal expansions expected to increase wealth and number of

households in region– Outer coastal areas (e.g. Delaware shore, Prince George’s) struggling with decreased second

home demand

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Texas• Dallas

– 3% drop in same product home price Y/Y; 6% off from peak – Did not experience same run-up in home prices as other growth areas with peak price

appreciation of approximately 9% in 2006– Continues to outperform U.S. with 1.4% employment growth in 2008 due to solid

diversification– Easy permitting practices allow for quick development process

• Houston– Prices remain steady – overall median home price flat Y/Y – Economic growth tied to energy sector, remains strong with 57,000 jobs added in 2008

(2.2% growth)– Drops in energy prices will have negative impact on overall economy

• Austin– Steady single-digit home price appreciation throughout 2000s – Employment growth of 1.2% in 2008 outperforms U.S. but slowing – Signs of weakness in high-tech employment industry– Relatively low home inventory levels and limited foreclosures are highlights – region likely to

be among first to recover as a result

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Pacific Northwest• Seattle

– 10% decline in same product price Y/Y versus 17% for most MSA’s – Foreclosures up 80% Y/Y, limited impact overall (0.9% of housing units versus 1.8%

nationally)– 12% home sales were foreclosures versus 20% nationally– City of Seattle resale market hit less hard than outlying areas, with smaller sales/price drops – Major layoffs coming with Microsoft, Boeing and JP Morgan (as part of Washington Mutual

acquisition) announcing company-wide cutbacks of 5,000, 10,000 and 9,200 respectively– Short-term strength/potential liability = presence of large companies like Microsoft and Boeing

that drive growth in their respective industries– Long-term strength as location for West Coast business expansion; more metropolitan than

OR but less expensive than CA with rich talent base, port access and low business costs• Portland

– Same product home price down 10% Y/Y versus 17% for 20-MSA composite – Foreclosures up 107% Y/Y, limited impact overall (1.2% of housing units versus 1.8%

nationally)– 12% home sales were foreclosures versus 20% nationally– Supply-constrained market with core urban neighborhoods currently outperforming suburbs– Well-educated local labor force attracts investment in research and high-tech industries,

particularly well-positioned in alternative energy– Construction, finance and logging/wood product manufacturing sectors hit hard by local and

national housing downturn– Viewed as lower cost West Coast investment option compared to Seattle and California

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Investment Opportunities

• TCG Bullish on Long-Term U.S. Housing Market– High demographic growth– Governmental support for ownership– Home ownership preferences.

• Favorable Deal Conditions– High potential for distressed assets– Reduction in bid/ask spreads– Overcorrection of home prices

• Near-Term Strategies– Land/lot development precede recovery by 12-18 months– Re-entitlement, planning and product development– Identify regional and submarket opportunities

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TCG Valuation Strategy

• Market Supply and Demand Analyses

• Site Assessment and Programming

• Valuation Approach– Cash flow limited finished lot and no raw land sale prior to land

market recovery– Conservative liquidation and going-concern evaluation

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About The Concord Group• Leading real estate strategy firm with offices in Newport

Beach, San Francisco and Boston• 50 consultants complete over 350 assignments annually

in the U.S., Europe, Asia and Latin America• Services include market and consumer analyses,

transaction due diligence and asset valuation• Recent private equity assignments include multiple

analyses of distressed assets of commercial banks and new acquisitions for next-cycle development

• Assist developer and financial clients on value maximization of assets

• Cover all property types (commercial, residential and land) and work under tight due diligence deadlines

130 Newport Center Drive, Suite 230, Newport Beach, California 92660 | Phone: 949.717.6450 | Fax: 949.717.6444

251 Kearny Street, 6th Floor, San Francisco, California 94108 | Phone: 415.397.5490 | Fax: 415.397.5496

77 Summer Street, 7th Floor, Boston, Massachusetts 02110 | Phone: 617.451.1100 | Fax: 617.451.1171Newport Beach | San Francisco | Boston

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United States Housing OutlookWhen Will Markets Recover?

THE CONCORD GROUP