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Unlocking The Housing Market Recovery A
Housing Experts View December 15, 2008

jburns_at_realestateconsulting.com [phone]
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We are in the worst economic collapse since the
1930s.
Bank Failures
Home Prices Fall
JobLosses
Banking Losses
Lack of Credit to Businesses
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To stabilize home prices, Congress needs to do 4
things

• Banks Save local businesses by saving the local
  employers bank
• Jobs Bring more jobs to your area with
  short-term stimulus and smart government spending
• Home Buying Stop home price declines by
  stimulating responsible home buying to bring
  demand and supply back in balance
• Loan Mods Stop home price declines by helping
  keep responsible people in their homes

Congressional Districts
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Organization

• Who We Are
• Why We Need to Act Quickly
• Our Recommendations to Stabilize Home Prices

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We are independent advisors to a diverse group of
executives who make multi-million dollar housing
industry decisions every day.
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Our Executive team brings years of real estate
experience.Our team includes

• A leader whose goal is to provide the most
  balanced, accurate, and independent housing
  market analysis and advice available
• A prior head of a 2000-home per year home builder
• A Sales and Marketing executive with 20 years of
  home building and land development experience
• An executive involved in 85 closed housing MA
  transactions
• An industry reporter for more than 18 years
• An industry researcher for more than 12 years,
  including 9 on Wall Street
• A former sales agent who manages our massive data
  collection process
• An experienced leader of highly educated industry
  analysts
• An executive who has achieved the industrys
  highest designation

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We wrote this report for 2 reasons

• 1. To help our clients make wise decisions.
• Every day, our clients make multi-milliondollar
  decisions based on their best estimate of what
  will happen to home prices, sales volumes and
  construction levels.
• 2. To provide facts to decision makers who can
  help solve the crisis.
• We would like to see the economy and
  housingmarket stabilize as soon as possible.

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Organization

• Who We Are
• Why We Need to Act Quickly
• Our Recommendations to Stabilize Home Prices

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The problem is that we have borrowed more than we
can repay.Since 1992, all categories of debt
have grown much faster than incomes (shown in
blue).
Over time, debt and income have to grow at the
same pace.
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Deleveraging (saving to pay off debt) is very
difficult to stop and has devastating effects
when done quickly and worldwide.

• Businesses and consumers will hoard cash and pay
  down debt because it is the smart thing for them
  to do.
• The collective effect of reduced spending will
  cause a Depression
• Our policy responses will determine the extent
  and length of the Depression

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The 5 Death Spirals Will Lead to Government
Insolvency too.
Government Losses
Consumer Net Worth Declines
Sales Taxes Down
Save more, spend less
Business income down
Income Taxes Down
Stock Market Down
Home Prices Fall
Home Prices Fall
JobLosses
JobLosses
Foreclosures
Foreclosures
Bank Dissolutions
Banks Conserve Cash
Loans Lose Value
Banks Conserve Cash

• Downward Spiral
• Legend
• Savings
• Net Worth
• Business
• Banking
• Government

Property Taxes Down
Bank Failures
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The Recession is heading toward a Depression.
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Employment losses are mounting across the country.
Source Bureau of Labor Statistics, Not
Seasonally Adjusted John Burns Real Estate
Consulting Housing Industry Market Monitor,
October 2008
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Every key index is well below average
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The leading indicators are all miserable
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The Baby Boomer wealth destruction has been
enormous.All 401(k) Contributions since 1996
have declined in value if invested in SP 500
stocks.

• Profile of a Responsible Saver
• Put maximum since 1987 in their 401k 231K
• Had 401k value 465K on 12/07
• Worth only 265K today if invested in SP 500
  stocks

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U.S. economic growth will be sluggish at best as
the Boomers end their peak spending years.

• The peak birth year was near the end of the Baby
  Boom (1960). Those people are 48.
• The peak spending year is in your 40s (kids in
  college, etc.)
• The Baby Boomers and the huge population in their
  40s are entering their savings years

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National home prices are falling fast. The first
time since the 1930s
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Housing Production Stands at 50 of Average (over
the last 50 years).
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Banks dont want to lend . . . with good reason

• Lending in a recession is risky
• Their capital needs to be conserved for future
  losses on
• mortgages
• commercial real estate
• credit cards,
• auto loans, and
• business loans.

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Banks Have to Hoard Their Cash Right Now

• Lack of Cash If 10 of the 267 billion in
  deposits want their money back, there isnt
  enough cash in the Bank.
• Lack of Equity If 11 of Loans arent recovered,
  Shareholders Equity is wiped out.

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This crisis is impacting the majority of voters
in every Congressional District.
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Organization

• Who We Are
• Why We Need to Act Quickly
• Our Recommendations to Stabilize Home Prices

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Our Recommendations

• Stabilize the Banking System with loans that will
  be repaid by the banks over time. The Fed and
  Treasury are doing this. Best case 2010
  stability.
• Stimulate Job Growth with short-term stimulus and
  long-term infrastructure projects that employ
  enough people to have positive overall U.S. job
  growth ASAP. Obama is proposing this. Best case
  2010 job growth.
• Stimulate Responsible Home Buying at a cost of
  416 billion through 2010. Recommendations are
  all over the map. Best case 2010 price
  stability.
• Support Responsible Loan Modifications that have
  a low probability of future default. All
  borrowers arenot equal.

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1. Stabilize the banking systemHome prices will
fall until banking stabilizes.

• Insure deposits.
• Close all of the poorly managed and
  undercapitalized banks ASAP.
• Announce government support for the remaining
  banks just as FDR did.
• Closing a few banks every Friday damages consumer
  confidence.
• Keep lending money to stabilize the best and
  largest banks.
• Require distressed banks to eliminate dividends
  until the money is repaid and/or minimum capital
  ratios are obtained.
• Loan money to the FDIC as needed.

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1. Stabilize the banking system (cont.)

• Properly dispose of bad loans, RTC-style
• Sell the loans of insolvent banks quickly to the
  highest bidder.
• Spend the money needed to collect and provide
  excellent property, market and other information
  to the bidders to increase bidder knowledge and
  confidence and maximize taxpayer recovery.
• Provide seller-financing to encourage more
  bidding.
• Finance new banks to create competition for good
  loans
• The recent OCC approval of the first shelf bank
  is a great example.
• Continue the Liquidity Guarantees of New Bank
  Debt
• 1.4 trillion allocated
• Continue Supporting Commercial Paper Liquidity
• 1.8 trillion allocated

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2. Stimulate job growth Concerns about the
Economy is the 1 Impediment to Home Buying
Source December 2008 John Burns Real Estate
Consulting survey of 240 home building industry
executives
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2. Stimulate job growth (cont.)Home prices will
fall until job growth returns.

• Fund infrastructure projects to create jobs
• Fund ready to go projects that can create jobs
  and benefit society over the long term.
• These projects should be in urban areas where
  people live, and need to benefit the majority of
  Congressional districts to receive approval
• 215 billion in spending 2.5 million jobs by
  one metric
• Stimulate short-term spending to maintain
  existing jobs
• Another economic stimulus plan will help support
  spending and job growth while the long-term
  infrastructure spending plans are beginning.
• Allow companies to use current losses to
  recapture cash taxes paid over the last 4 years
  to maintain existing jobs
• The long term cost is primarily the time value of
  money as these tax losses could eventually be
  used to offset future income.
• Healthier corporations means greater employment.

Source American Contractors Association
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2. Stimulate job growth (cont.)

• Create government-backed initiatives to help
  banks lend to qualified companies and people so
  they can employ people
• Well-managed companies and responsible
  individuals are the economic engine that drive
  growth and will create jobs for everyone as long
  as they can access capital.
• Expand the Small Business Administration and
  other loan programs to lend to these companies
• There is a precedent. The Reconstruction Finance
  Corporation was created in 1932 to provide
  emergency financing facilities for financial
  institutions to aid in financing agriculture,
  commerce, and industry to purchase preferred
  stock, capital notes, or debentures of banks and
  trust companies and to make loans and
  allocations of its funds as prescribed by law
  and lent 2 billion to businesses, which helped
  support employment and stave off bankruptcies.
  Most of the loans were repaid.

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3. Stimulate Responsible home buying Historically,
64 - 65 of households achieve homeownership.

• By growing homeownership to 69, we took on the
  risk of lending to less qualified households.
• If there are 6 million total foreclosures, the
  homeownership rate will fall back to its normal
  levels

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3. Stimulate Responsible home buying Only 58 of
households have good credit.
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3. Stimulate Responsible home buying More home
buying is needed to reduce excess supply and to
fill unoccupied homes.
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3. Stimulate Responsible home buying Keep
mortgage rates low. Each point of interest allows
5 million more households to qualify.
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3. Stimulate Responsible home buyingKeep Fannie
and Freddie lending, and FHA insuring The
non-GSE jumbo market was only 7 of all loans
originated in Q3 vs. 15/- in 2006-2007.

• GSEs (Fannie, Freddie and FHA) are likely to
  continue reporting huge problems
• Jumbo loans (non-GSE) currently require 20 down
  payments in most areas, and have 7 interest
  rates.
• Home buying activity would plummet if all loans
  had those terms, resulting in further price
  declines.

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3. Stimulate Responsible home buying

• Provide a Temporary Down Payment Match Costing
  40 billion
• Provide down payment assistance in the form of a
  tax credit to borrowers who are contributing 1
  of down payment for every 1 in government
  assistance, with
• a minimum personal contribution (including gifts
  from relatives) of 5 of the home price
• a maximum government assistance of 20,000
• urgency to act by promising to stop the program
  once housing stability has been achieved,
• Personal recourse (a tax lien) if the Buyer
  defaults within 5 years
• While it is historically prudent to ask buyers to
  put 10 or more of their own money down, helping
  responsible buyers with their down payments will
  help solve the current crisis.
• Offering full Down Payment Assistance creates a
  risky loan as the Borrower made no investment and
  there are opportunities for appraisal fraud.
  Taking this risk, however, will help stabilize
  prices sooner.
• The down payment is a huge financial obstacle for
  responsible renters.
• Down payment assistance should be available to
  all, including current homeowners who may want to
  sell their existing home and move, in order to
  stimulate home buying.
• Allow private capital to participate by buying
  investment homes with minimum 20 down payment
• The cost would be 40 billion, assuming 4 million
  transactions and average government assistance of
  10,000 (5 of a 200,000 home).
• On a 200,000 home, the buyer would need to
  invest at least 10,000 and could invest as much
  as 25,000, with a government match of their
  investment.

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3. Stimulate Responsible home buying

• Double Mortgage Deductions for all homeowners,
  costing 376 billion over 2 years
• Double the mortgage deduction through 2010 for
  the first 15,000 in annual interest on all fully
  amortizing, fixed rate, 40 year or less,
  owner-occupied mortgages . This will
• encourage more people to stay in their homes
• increase disposable income for homeowners, which
  they will use to save and to spend
• Encourage responsible people to own homes rather
  than rent
• Create an urgency to buy a home
• Help qualified renters become homeowners
• Cost about 188 billion per year (50 million
  borrowers times 15,000 deduction times typical
  top Federal tax rate of 25)
• This expensive policy should be extended one
  year at a time until no longer needed. We assume
  2 years will be needed.

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• Support Responsible Loan modifications
• Job losses will result in skyrocketing
  foreclosures

• Investors will lose ownership
• Unqualified borrowers will return to the rental
  market
• But responsible owners should be saved

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Loan modifications help the lowest income areas
the most. The greatest distress is in outlying
areas and in inner-city areas.
Denver
4. Support Responsible Loan modifications
Southern California
Las Vegas
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4. Support Responsible Loan modifications Turn
Bad Loans into Good Loans44 of borrowers who
obtained traditional loan modifications in 4Q07
defaulted within 8 months - American Banker,
11/24/08

• Loan modifications often dont work because
• Empty 18/- of homes are vacant
• No Response 23/- of Borrowers dont respond
• Insufficient Loan Mod 29 dont solve the
  problem
• Payments Future monthly payments are set to
  increase
• Equity The Borrower is left with no equity or
  negative equity
• Responsibility The Borrower has a track record
  of not paying bills on time.

• Columns do not add to the total because some
  borrowers fell into more than one category. For
  example, some borrowers were both investors and
  would not respond to mortgage servicers.
• Source Mortgage Bankers Association, January
  2008

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4. Support Responsible Loan modifications
Create liquidity for loan modifications

• Create a government vehicle to buy good loans
  that have been modified responsibly. The loans
  should be good assets that can be sold in the
  future, and therefore will have minimal taxpayer
  risk.
• Affordable and sustainable
• 35 or less total debt to income including all
  monthly debt obligations
• a 30-year or less fixed rate payment using
  prevailing market interest rates and terms
• Fair to Current Mortgage Owner
• Smart mortgage owners / servicers will opt for
  this program if it recovers more of the principal
  than if there were a foreclosure
• Complex Mortgage ownership can be resolved by
  creating a vehicle for service providers to put
  the mortgage or a group of mortgages in
  bankruptcy
• Government incentives may be needed to finance
  servicer to do loan modification
• Fair to the Borrower,
• a 100 or less LTV and a reasonable percentage of
  income
• Fair to Taxpayers
• only available to borrowers who have, at some
  point in the past, invested their own money
• Have Borrower recourse in the form of an IRS lien
  if there is a future default

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4. Support Responsible Loan modifications

• The Home Owners Loan Corporation Is a Successful
  Precedent
• Established in 1933 to refinance homes to avoid
  foreclosure, with the following goals
• (1) Protect homeowners from foreclosure
• (2) Relieve homeowners of the higher interest and
  principal payments incurred during periods of
  higher property values and higher earning power
• (3) Declare that it was a national policy to
  protect home ownership
• (4) Impose the least possible cost on the federal
  treasury and
• (5) Avoid injustice to the investor.
• It was abolished in 1951, after reportedly
  turning a profit over its lifetime, although some
  argue that not all of HOLCs costs were counted,
  and it was able to borrow at below market rates.
  
• It bought the mortgages from the banks and issued
  new loans. In 2 years, it bought more than 1
  million loans (1.9 million applied), or 20 of
  outstanding mortgages, at a 20 discount from the
  banks.

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Houstons 1983 downturn lasted 13 years.
Houston home prices fell 25 from 1983 1987,
and did not recover full values until 1992.
Construction in Houston fell 88 from 1983 to
1987, and stayed low through 1996.
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Housing recessions often last 8 years.

• So Cal lost 7 of its employment base from 1991
  1994 and didnt recover all the jobs until 1997.

• So Cal construction remained very low for 8
  years.

• So Cal prices fell 22 from 1991 1995 and did
  not recover full values until 1999.

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Conclusion Confidence and Reality CollideThe
lack of confidence is built upon real fears that
cannot be alleviated with rhetoric.

• Banks Major institutions have failed. End the
  failures.
• Jobs People know their employers are struggling,
  so they are worried about their job. They are
  saving to build up cash reserves in the event of
  a problem. Give them confidence by stabilizing
  the job market.
• Spending People know their college savings
  accounts just fell by 30, that the equity in
  their home has declined, and that their pensions
  (both Social Security and now from their
  employer) are in serious jeopardy. To
  compensate, they are saving. Give them a reason
  to buy a home, which will occupy empty homes and
  end price declines.
• Foreclosures Let the private sector deal with
  their bad investments, but provide liquidity
  opportunities for the private sector to be
  rewarded for dealing with the Borrower fairly.

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Trillions of dollars have already been lost and
trillions more will be lost unless we act soon.
jburns_at_realestateconsulting.com [phone]