Tim Sullivan NYC 8 30 07

GLGi: National Housing Market Perspective: 

GLGi: National Housing Market Perspective August 30, 2007 New York City Tim Sullivan

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Council Member Biography: Tim Sullivan is President of Sullivan Group Real Estate Advisors, a San Diego, California based real estate consulting firm that covers markets across the United States. Over the past 15 years, Tim has become a frequently known speaker at major industry events. From PCBC to ULI’s many venues to his company’s own Sullivan Seminars, Tim shares his breadth of industry knowledge with the nation’s housing market on an ongoing basis. He also writes for industry publications, such as Builder and Developer and Arizona Builder Magazine, directs nationwide housing tours, and is active in numerous industry associations. During his budding career, Tim was senior manager with KPMG Peat Marwick’s National Real Estate Consulting Group before serving as principal of Hanley Wood Market Intelligence’s (formerly The Meyers Group) Real Estate Consulting Practice for a decade. He has an MBA with a concentration in marketing and finance from San Diego State University, and a bachelor’s degree in economics from University of California, San Diego

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Table of Contents National Trends Key Comparisons Among States Demand Factors Consumer and Homebuilder Sentiment Regional Housing Markets Conclusions

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About GLG Institute GLG Institute (GLGiSM) is a professional organization focused on educating business and investment professionals through in-person meetings. It is designed to revolutionize the professional education market by putting the power of programming into the hands of the GLG community. GLGi hosts hundreds of Seminars worldwide each year. GLGi clients receive two seats to all Seminars in all Practice Areas. GLGi’s website enables clients to: Propose Seminar topics, agenda items and locations View and RSVP to scheduled and proposed Seminars Receive a daily briefing with new posts on your favorite tickers, subject areas and from trusted Council Members Share Seminar details with colleagues or friends

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Gerson Lehrman Group Contacts REAL ESTATE (RE) Justin Stein Director Gerson Lehrman Group + 1 212 750 1809 jstein@glgroup.com SALES Aaron Liberman Managing Director, Sales and Marketing Gerson Lehrman Group 212-984-3684 aliberman@glgroup.com Christine Ruane Senior Product Manager Gerson Lehrman Group 850 Third Avenue, 9th Floor New York, NY 10022 + 1 212 984 8505 cruane@glgroup.com

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National Housing Market Perspective: 

National Housing Market Perspective Gerson Lehrman Group August 29, 2007 SULLIVAN GROUP REAL ESTATE ADVISORS Tim Sullivan (858) 523-0946 x277 t.sullivan@sgrea.com

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Sullivan Group Real Estate Advisors Full Service Real Estate Advisory firm with Four Offices and 20 Full time Analysts Feasibility, Urban Development and Strategic Planning Repositioning and Market Opportunity Analysis

Sullivan Group Real Estate AdvisorsWhat have we been up to?: 

Sullivan Group Real Estate Advisors What have we been up to? 310 Studies in 2006 13 States (AZ, CA, CO, CT, FL, HI, NJ, NV, OK, PA, TX, UT, WA) 50 Metro Areas

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National Trends Key Comparisons Among States Demand Factors Consumer and Homebuilder Sentiment Regional Housing Markets Conclusions Agenda

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National Trends

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The News is Confusing

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Good

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Bad

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Good

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Bad

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Sales and permits are down but: Corporate profits are up Job growth is solid Interest rates are stable (historically low) Demographics are solid The Paradox

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The Positive Signs

Gross Domestic Product (GDP) is Healthy: 

81-83 Recession 91-92 Recession 00-02 Recession Source: Bureau of Economic Analysis, released July 27, 2007; Sullivan Group Gross Domestic Product (GDP) is Healthy 2Q07 = 3.4%

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81-83 Recession 91-92 Recession 00-02 Recession 2007* – July 2007 vs. July 2006 Source: Bureau of Labor Statistics; Sullivan Group 2007* = 1.4% 1.87 million new jobs since July 2006 Job Growth is Solid Nationwide

U.S. Unemployment Remains Low : 

81-83 Recession 91-92 Recession 00-02 Recession U.S. Unemployment Remains Low 2007* – July 2007 Source: Bureau of Labor Statistics; Sullivan Group Avg. 1980 to 2006 = 6.2% July 2007 = 4.6%

Initial Jobless Claims Remain in Check: 

91-92 Recession 81-83 Recession Source: Department of Labor; Sullivan Group Initial Jobless Claims Remain in Check Data represents four-week moving average (below 300,000 is a positive) 00-02 Recession July 2007 309,000

30 Year Fixed Rate Mortgages areHistorically Low: 

81-83 Recession 91-92 Recession 00-02 Recession 2007* - August 16, 2007 Source: Freddie Mac; Sullivan Group Real Estate Advisors 30 Year Fixed Rate Mortgages are Historically Low What now? August 2007 = 6.62%

Household Growth in the Next Decade Should Be Even Greater Than in the Last: 

Household Growth in the Next Decade Should Be Even Greater Than in the Last Source: Joint Center for Housing Studies of Harvard University Largest growth in non-white households

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The Reality

New Home Sales Have Declined 36% Since Peaking in 2005 : 

New Home Sales Have Declined 36% Since Peaking in 2005 Source: U.S. Census Bureau; Sullivan Group 2006 = 1.05 Million 2007P= 824,000

New Home Supply “Overhang” Grows:537,000 Unsold Units – June 2007: 

New Home Supply “Overhang” Grows: 537,000 Unsold Units – June 2007 *2007 data is average of January through June Source: Census; Sullivan Group Avg. 6.5 months: 1963-1995 Avg. 4.3 months: 1996-2005 7.8 months – June 2007

Typical Causes of Housing Market Slowdowns (i.e. Price Declines): 

Typical Causes of Housing Market Slowdowns (i.e. Price Declines) *Addresses largest 75 metro areas by population. Source: Joint Center for Housing Studies of Harvard University 1990-1992 2005-? 2001-2003

Mortgage Market Concerns Reversed HMI Gains Made in Early 2007: 

Source: NAHB/Wells Fargo; Sullivan Group Mortgage Market Concerns Reversed HMI Gains Made in Early 2007 8/07 = 22 Above 50 = Positive Sentiment & Below 50 = Negative Sentiment

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Key Comparisons Among States

Residential Construction Levels Surged Between 2000 and 2005…: 

Residential Construction Levels Surged Between 2000 and 2005… Source: Census Bureau; Sullivan Group

But Did Supply Get Ahead of Demand?(Employment to Permit Ratios): 

But Did Supply Get Ahead of Demand? (Employment to Permit Ratios) Source: Census Bureau; BLS; Sullivan Group 2006 = 1.2 Employees Per HH Looming Supply “Overhang”

The Supply “Overhang” is Resulting in Supply-Side Corrections Today: 

The Supply “Overhang” is Resulting in Supply-Side Corrections Today Source: Census Bureau; Sullivan Group

Former “Boom” States Are Seeing Pull Backs in Price Appreciation : 

Former “Boom” States Are Seeing Pull Backs in Price Appreciation Source: OFHEO; Sullivan Group

Tightening Standards in the Subprime Lending Market is a Concern: 

Source: 2005 Data CSFB; Sullivan Group Tightening Standards in the Subprime Lending Market is a Concern

Foreclosure Levels Are Down In 2007: 

Source: RealtyTrac; Sullivan Group Foreclosure Levels Are Down In 2007

Foreclosures Are Up In 2007: 

Source: RealtyTrac; Sullivan Group Foreclosures Are Up In 2007 United States 2006 = 1,259,118 1st Half 2007 = 925,986

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Conclusions Pull back on construction levels should be viewed as a positive factor Avoiding investment buyers and rapid price appreciation is paying dividends today Tighter lending standards could negatively impact the large entry-level market Inventory numbers (both new and existing) are a key trend to watch Some states have more of a history of being cyclical in nature

III. Demand Factors: 

III. Demand Factors

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3Q07 – prelim July 2007 Source: Bureau of Labor Statistics, released August 3, 2007; Sullivan Group Real Estate Advisors 3Q07* = 1.4% 7.74 million jobs since 2003 -1.4% -1.6% 1988-91 downturn reflected fundamental restructuring of economy 2001-03 downturn was a soft landing led by weakness in the technology sector National Job Losses Were Related to Economic Restructuring, Not Corrections

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Source: U.S. Bureau of Labor Statistics: Current Employment Statistics (CES); Sullivan Group Real Estate Advisors Losses in Construction Sector Have Not Damaged Overall Job Growth Construction Industry Job Growth 2004: 242,000 2005: 301,000 2006: 118,000 (-61%)

Demographics are Helping Demand: The Boomer Will Drive Housing For 20 More Years: 

Demographics are Helping Demand: The Boomer Will Drive Housing For 20 More Years Source: US Census: Interim projections consistent with Census 2000; Sullivan Group Real Estate Advisors 102 Million 101 Million 99 Million 93 Million 83 Million 72 Million

And Product Planning Will Be Impacted by the Increase in Single Parent Households: 

And Product Planning Will Be Impacted by the Increase in Single Parent Households Source: US Census; Sullivan Group Real Estate Advisors 1991 – 16 Million 2005 – Almost 21 Million

Demand Was Also Generated by the Decline in Population Per Household: 

Demand Was Also Generated by the Decline in Population Per Household Source: US Census; Sullivan Group Real Estate Advisors Averages 1960s: 3.29 1970s: 2.96 1980s: 2.69 1990s: 2.64 2000+: 2.58

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As Interest Rates Fell, We Tapped Deeply Into the Rental Pool for Qualified Homebuyers Source: U.S. Census Bureau; Sullivan Group Real Estate Advisors Did we add 2 million more homeowners than we should have? 8.5% interest rates in 1999 5.5% interest rates in 2003

IV. Consumer andHomebuilder Sentiment: 

IV. Consumer and Homebuilder Sentiment

Consumer Confidence at Six-Year High: 

Consumer Confidence at Six-Year High 3Q07* = 112.6 Source: The Conference Board, prelim July data, released July 31, 2007; Sullivan Group Real Estate Advisors

But How Does It Differ By Region?: 

But How Does It Differ By Region?

Regional Trends Similar But Numbers Vary Greatly: 

Regional Trends Similar But Numbers Vary Greatly Source: The Conference Board, released July 31, 2007; Sullivan Group Real Estate Advisors 3Q07* Consumer Confidence Mountain Region = 138.0 W. South Central = 131.1 South Atlantic = 122.3 E. South Central = 115.6 Pacific Region = 111.5 Mid-Atlantic Region = 100.1 3Q07* – 112.6

How does consumer perception differ from Homebuilder’s confidence about their own industry?: 

How does consumer perception differ from Homebuilder’s confidence about their own industry?

Builder Confidence Continues to Slide(Last 4 Downturns Ran From 17 to 35 Months): 

Source: NAHB/Wells Fargo, released August 15, 2007; Sullivan Group Real Estate Advisors 8/07 = 22 6/05-9/06 Top to Bottom = 58% 16 Months 12/93-5/95 Top to Bottom = 40% 17 Months 88-91 Top to Bottom = 65% 25 Months Builder Confidence Continues to Slide (Last 4 Downturns Ran From 17 to 35 Months) Above 50 = Positive Sentiment & Below 50 = Negative Sentiment 12/98-10/01 Top to Bottom = 40% 35 Months

Home Price Perspective: The West: 

Home Price Perspective: The West

The Rapid Runup in Median New Home Prices Hammered the West: 

The Rapid Runup in Median New Home Prices Hammered the West 2nd Qtr 2007 Statistics Phoenix $248,990 Las Vegas $334,990 Sacramento $410,105 San Bernardino $439,900 Riverside $449,610 Los Angeles $458,500 San Diego $734,365 SF Bay Area $754,000 Orange County $1,034,000 Source: Hanley Wood; Sullivan Group Real Estate Advisors

New Base Prices in West are Now Flat but Incentives Actually Push Net Prices Further Negative: 

New Base Prices in West are Now Flat but Incentives Actually Push Net Prices Further Negative Source: Hanley Wood; Sullivan Group Real Estate Advisors

Foreclosures: 

Foreclosures

Total U.S. Foreclosures Have Started to Increase Notably: 

Total U.S. Foreclosures Have Started to Increase Notably Source: RealtyTrac, released July 19, 2007; Sullivan Group Real Estate Advisors Quarterly Data Monthly Data

But Foreclosures in California Up 4x in 2 Years: 

But Foreclosures in California Up 4x in 2 Years Source: RealtyTrac, released July 19, 2007; Sullivan Group Real Estate Advisors

…And Nevada Foreclosures Are Up 5x!: 

…And Nevada Foreclosures Are Up 5x! Source: RealtyTrac, released July 19, 2007; Sullivan Group Real Estate Advisors 4,722

Arizona Foreclosures Have More Than Doubled: 

Arizona Foreclosures Have More Than Doubled Source: RealtyTrac, released July 19, 2007; Sullivan Group Real Estate Advisors 5,711

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V. Regional Housing Markets

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Washington D.C.: The “right hand of Caesar” benefits from great job base and incomes but condo market hurting 1.9% of U.S. Permits Demand is Strong E/P Ratios 1.8 Washington D.C. Job Growth 1.7% Washington D.C. Prices in 2Q06 vs 2Q07 +1% Washington D.C. Prices in 1Q07 vs 2Q07 -2% Washington D.C. *Affordability is a problem and listings have skyrocketed. Source: Sullivan Group Real Estate Advisors

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North and Eastern Florida – These economic magnets have been hurt by investors 2.1% of U.S. Permits Demand is Strong E/P Ratios 1.2 Jacksonville 1.9 Miami Job Growth 2.3% Jacksonville 1.5% Miami Prices in 2Q06 vs 2Q07 -5% Jacksonville +1% Miami Prices in 1Q07 vs 2Q07 -4% Jacksonville -2% Miami *Listings up 150% over last year and prices will fall in 2007 Source: Sullivan Group Real Estate Advisors Watch foreclosures Second home haven for Atlantans

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Central & West Florida: Investors also prominent but long-term looks solid 2.2% of U.S. Permits Demand is Strong E/P Ratios 1.3 Orlando 1.1 Tampa/St. Pete Job Growth 2.5% Orlando 1.0% Tampa/St. Pete Prices in 2Q06 vs 2Q07 +11% Orlando +4% Tampa/St. Pete Prices in 1Q07 vs 2Q07 -2% Orlando 0% Tampa/St. Pete *Central Florida starting to morph into Tampa MSA and Orlando Source: Sullivan Group Real Estate Advisors Polk County draws from both Tampa and Orlando

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Texas: The big market bright spot in U.S. is in danger of overheating since investors have invaded 9.4% of U.S. Permits Demand is Strong E/P Ratios 1.9 Austin 2.1 Dallas 1.2 Houston 1.3 San Antonio Job Growth 4.3% Austin 3.2% Dallas 3.3% Houston 2.3% San Antonio Prices 2Q06 vs 2Q07 +6% Austin +10% Dallas +7% Houston +4% San Antonio Prices 1Q07 vs 2Q07 +0% Austin +0% Dallas +0% Houston -1% San Antonio Source: Sullivan Group Real Estate Advisors Strong jobs Least expensive Supply concerns Lifestyle draw

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Las Vegas: Land constraints and BLM controls have helped limit oversupply 1.3% of U.S. Permits Demand is Solid E/P Ratios 1.1 Las Vegas Job Growth 2.4% Las Vegas Prices in 2Q06 vs. 2Q07 -2% Las Vegas Prices in 1Q07 vs. 2Q07 0% Las Vegas Source: Sullivan Group Real Estate Advisors    Sphere of influence now includes Pahrump and Mesquite The rush to build high density detach has been limited by costs.

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Phoenix and Tucson: Great economies and retirement magnets but Phoenix is oversupplied 3.1% of U.S. Permits Demand is Solid E/P Ratios 1.8 Phoenix 2.1 Tucson Job Growth 3.7% Phoenix 3.6% Tucson Net Prices in 2Q06 vs. 2Q07 +13% Phoenix +3% Tucson Net Prices Down in 1Q07 vs. 2Q07 -1% Phoenix 0% Tucson Source: Sullivan Group Real Estate Advisors Retirement replacement for Florida? Major job generator I-19 mini mecca for active adult

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Southern California: Great weather, weak housing market 3.7% of U.S. Permits Solid Demand E/P Ratios 2.0 Los Angeles 2.2 Riv/San Bern 1.0 San Diego Job Growth 1.0% Los Angeles 3.6% Riv/San Bern 0.5% San Diego Prices in 2Q06 vs. 2Q07 +8% Los Angeles +8% Riv/San Bern 0% San Diego Net Prices in 1Q07 vs. 2Q07 +1% Los Angeles +2% Riv/San Bern 0% San Diego Source: Sullivan Group Real Estate Advisors *Incentives still prominent. Urban market Is flooded Limited land Short term supply issues

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VI. Conclusions

Pure Elasticityis back: 

Pure Elasticity is back

Elasticity of Demand is Back New Home Sales in Las Vegas MSA: 

Elasticity of Demand is Back New Home Sales in Las Vegas MSA Source: Hanley Wood; Sullivan Group Real Estate Advisors

In a Downturn, the Dominos Fall: 

In a Downturn, the Dominos Fall Sales & Marketing Land Acquisition/ Project Mgt. Overhead & Corporate 1 2 3 Which segments of homebuilding companies suffer layoffs?

So What Should We Watch For?: 

So What Should We Watch For?

Three Key Indicators: 

Three Key Indicators Home Sale Activity Unsold Inventory Price Leveling

Short Term Happenings(next 12 to 18 months): 

Short Term Happenings (next 12 to 18 months) Restructuring and loss of some smaller builders Publics won’t buy paper lots Vulture funds are prominent but not so active yet Further new home price reductions, particularly by publics Lenders and partners will take back land – repricing will start the recovery

The Good News: 

The Good News Sales activity in “cool” projects, well-priced locations, or the best neighborhoods Strategic Plans for growth being set up The contraction is a healthy adjustment

What Will it Look Like?: 

What Will it Look Like? Consolidation Smaller products, price driven! Sales and marketing matters Excess inventory burned off

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Incentives as a Market Indicator

The Economics LessonHas Been Delivered: 

The Economics Lesson Has Been Delivered Elasticity of Demand S-Curves The Law of Substitutes

What are the Keys to Success?: 

What are the Keys to Success? Study the market Understand the buyer Work for them Build a better place

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Tim Sullivan, President SULLIVAN GROUP REAL ESTATE ADVISORS 11622 El Camino Real, Suite 300 San Diego, CA 92130 (858) 523-0946 x277