The Demand Enigma: A Builders Use of Analytics

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The Demand Enigma A Builders Use of Analytics

• Tom Eggleston
• Presidential Seminar April
  1, 2008

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Private Builders Road to Recovery
Private Builder brick pavers on the Road to
Recovery 1. Land 2. FHA Lenders
3. Brand 4. Architecture
5. Communities 6. Advocacy Foreclosure are a
major competitors to New and Super Private
Builders may emerge both alter market share and
competitive cost advantage.

Build schedule considered Best-In-Class
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New Factors Layer Complexity to Analysis

• Private Builders liquidity, constrict
• Banks Builder Book in review. Appraisals mark
  to market on base
• Buyers credit qualification consumer
  confidence
• Mortgage Lenders Brokers gone, FHA returns,
  consolidation absent secondary
• House, Lot Land discounting
• Tax-driven transactions.

On average, traffic is converted at a
industry-leading 40
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Private Builder Choice to Zig or Zag

• Zig to the fox hole hunker down, strip to
• basic floor plans, cut marketing drastically,
• stop strategy, hope Banks dont want
• the keys. Fear rules.
• Zag to the next hill to reinvent,
• with niche architecture, refresh the Brand,
• deeper focus on under-served segments and
• analytics to forecast future Demand.

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Zag Step1 Land
CP Morganbecame Charlottes number 1
Homebuilder in just 18 months.

• Move land OBS with deal terms holdback
  provisions up to 20 and carry cost to 15 to
  monetize.
• Market land lots
• through China retail investment brokerage
  network.
• Centex Land sale sets new bottom for CA, NV.

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Mortgage Insurers, Brokers Exit

• 25 of zip codes blackballed including all of CA,
  FL, AZ, MI, OH, NV are blackballed. Associated
  Press 3.21.08
• 9,600 zip codes in 34 States blackballed Highest
  foreclosure rates and steepest price declines
  characterize zip codes where mortgage insurance
  is not available.
• 4300 mortgage brokers gone 5 Capital
  requirement eliminate the rest. Poor results from
  wholesale 78 of FHA delinquencies from broker
  originations

On average, traffic is converted at a
industry-leading 40
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Zag Step 2 Get FHA right

• Shift mortgage lending to FHA.
• CPM Start 2007 FHA 4 of Closings today over
  90.
• Trend in Mortgage Lenders consolidation in 18
  months perhaps to few major sources
• BofA/Cwide NatCity Chase
  FifthThird WellsFargo Regions.
• Align with FHA manual underwriting process
  experts as Lenders.

Build schedule considered Best-In-Class
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House Negative Equity Anchor

• 2006 3.5 M homeowners (-)
• 2007 5.6 M homeowners (-)
• 2008 10.7 M homeowners (-) 10 price lt
• 15 price lt returns to late 2004 prices
• 30 price lt returns to mid-2003 prices
• HUD estimate 2 M Foreclosures by 2009 appears
  conservative

On average, traffic is converted at a
industry-leading 40
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Zag Step 3 Refresh Brand
Centrally managed architecture, planning,
estimating and construction ensures maximum
operational efficiency.

• Earn the right to Realtor and Buyer second look
  v. Resale competition in better locations by
  refresh to Brand.
• Old 24-44 yr old broad target
• New precise niches with each appeal to Hip and
  Affordable.
• Keep Brand economical by focus on web, Realtor
  campaigns, on-site and collateral. Energizes
  staff by investment for future.

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House Price Adjustment -20
CP Morganbecame Charlottes number 1
Homebuilder in just 18 months.

• We saw a once in 100 years run up in housing
  prices, and now were seeing a once in 100 years
  collapse. Its very, very difficult to do much
  about it. Harvard Economist Kenneth Rogoff
• SP/Case-Shiller Index Home prices increased
  nationally 12 (04), 17 (05) 16 (06) 0 (07)

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US Household Net Worth Shifts
Winner of NAHB Silver Quality Award

• 2.5 T shift from Oil importing to Oil exporting
  nations by price increases since 2002.
• Home prices fall by 25 loss of 5 T of wealth.
  Twice the impact of Oil prices.
• Home mortgages 44 of private non-financial
  debt, main pillar of our financial system.
  increase from 35 in 2000. Long-term best bet
  for Household Net Worth recovery.

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Zag Step 4 Architecture Niches

• Develop Buyer niches by new Architecture
  elevation materials, colors, and floor plans
  defined as unique truly not available in the
  market at the same price point.
• Match new Architecture with target MSAs divided
  into submarkets by data and analysis. Each MSA
  divides into 20-30 submarkets. Price curves for
  competition, of specs, foreclosures. Barrier is
  current, actionable segmentation data

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Zag Step 5Communities
Winner of NAHB Silver Quality Award

• Shift from single Builder communities to proper
  mix of Builders, price points, Product variety in
  multi-builder communities where Buyer gets
  control choice.
• Evaluate traditional and informal MPCs by
  neighborhood.
• New definition of the Builder-Developer
  relationship.

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Construction Loans Delinquincy Q4 07
Centrally managed architecture, planning,
estimating and construction ensures maximum
operational efficiency.

• Michigan 14 Ohio 13.7
• Arkansas 11.1 Arizona 10.3
• Minnesota 10.0 Florida 9.9
• Georgia 9.6
• Many examples of industries where recovery from
  bankruptcy is a more profitable, lean operation
  i.e. airlines. Restructuring in advance can
  preserve cash.

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Wrong ZIG! Restructuring Options
SEALED BID DEADLINE MAY 28,2008
On average, traffic is converted at a
industry-leading 40
Levitt Sons Bankruptcy Sale
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Banks Reduce Builder Exposure
CP Morganbecame Charlottes number 1
Homebuilder in just 18 months.

• Banks lending at 1.75 over Libor reconsidered
  with Builder risk increase. Many Privates require
  additional equity from outside sources
• OCC auditors to examine Lenders Balance Sheet
  values to market massive re-appraisal process
  underway.
• Watch Q1 reporting on Bank for the impact of
  subprime. Banks in same place as Builders in 06.
• Banks adopting different approaches to Builders.

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Down Payment?
Centrally managed architecture, planning,
estimating and construction ensures maximum
operational efficiency.

• Already drawn down savings
• Already tapped out credit card limits
• Already borrowed on home equity
• Household net worth dropped 1 T in Q4
• Household net worth down 2 T in Q1 largest drop
  since the Tech bubble
• Major barrier of affordability decline in funds
  for down payments

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Zag Step 6 Political Advocacy
CP Morganbecame Charlottes number 1
Homebuilder in just 18 months.

• Upfront, highly public and behind-the-scenes
  advocate for Down Payment Assistance FHA
  Modernization.
• Aggressive leadership role in congressional
  testimony, political donations, lobbying, forming
  advocacy positions. Not asked to volunteer.
• Broaden advocacy.

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New Competitor Foreclosures Daunting

• One-owner foreclosures under 5 yrs divert Buyers
  who prefer New.
• 225,000 foreclosures per month
• Nevada (6.7 households)
• California (4.1 households)
• Florida (3.6 households)

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Winner of NAHB Silver Quality Award
Foreclosures Compete With New

• 2007 added 870,000 units of supply
• 2008 add 1.3 M units of supply
• Trailing 3-months foreclosures increased 69
  nationally from 2007.
• CPM Buyer survey 42 of Buyers in the market
  looked at a foreclosure before they bought New or
  Resale.

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New Builder Category

• Best-in-class Private Builders potential to
  re-capitalized diluted ownership tradeoff for
  certain Capital. Terms somewhat harsh.
• Private Builder profile mgt processes that
  scale to leverage cost structure.
• Defensive to preserve liquidity and offensive to
  acquire distressed A locations.

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New Super Private Builder

• Appeal to Investor capitalized Private Builder
  and JV a Newco for well-informed distressed land
  acquisitions. Returns on the Operations and Land.
  
• Scenario Land supply OBS so entity requires
  Working Capital only.
• Super Private pays down Revolver and secures
  Capital to be opportunistic with distressed land
  in A locations.

On average, traffic is converted at a
industry-leading 40
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Super Private Builder Cost Advantage
Centrally managed architecture, planning,
estimating and construction ensures maximum
operational efficiency.

• Lot to House _at_ 30 of sale price reduced 50
  savings of 15 off House price.
• House _at_ 70 of sale price efficient Build
  Schedule reduces construction cost 20 savings
  of 14 off House price. Lean Build.
• Cost advantage of 29 (1514) split with
  Investor plus profit margins.

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MSAs Rank by Flyer Status
Centrally managed architecture, planning,
estimating and construction ensures maximum
operational efficiency.

• No fly zone liquidate land position, no entry.
  All locations distressed.
• Standby two years to stabilize evaluate
  demand recovery tricky. B C locations
  distressed.
• Coach niche segments underserved but critical
  mass uncertain, C locations distressed.
• First-class competitors contracting, job growth
  with critical mass. No distress.

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Headlines are in Arial Black
Graphs or charts to go here
Wake Forest University Babcock MBA
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CP Morganbecame Charlottes number 1
Homebuilder in just 18 months.
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Triad Submarket Northeast Forsyth County
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The Road to Recovery

• Consolidation across the Industry places a
  premium on aggressive re-invention pre-recovery
  to reposition the Private Builder to well exceed
  Capital return expectations.
• Demand exists and will rebound for the
  data-driven Builder who matches Product, Price
  and Location with niche segments.
• Inspiration at Aspen Institute Conference Center.