Where Are We In The Business Cycle

1
Where Are We In The Business Cycle What Are
The Implications For U.S. Economy Home
Builders?
Mark Vitner Director and Senior
Economist Wachovia Corporation May 22, 2007
2
Will The Next Ten Years Be As Good For
Homebuilders As The Last Ten Years Have Been?

• No! Home Sales During The Past Ten Years Were
  Fueled By A Tidal Wave Of Liquidity That
  Probably Will Not Be Present For The Next Ten
  Years.
• Ten Years Ago Housing Was A Bargain, Today
  Affordability Is Still Stretched In Many Major
  Markets.
• While Home Sales New Construction Will Not
  Likely Match The Last Ten Years, Demographics Are
  Still Extremely Positive.
• The U.S. Is Still Adding 3 Million People A Year,
  Mostly In The South West
• A Larger Share Of Home Sales In The Coming Decade
  Will Come From Minorities And Immigrants

3
There Is No Monster In The Closet Or Under The
Bed. The Next Recession Is Still Years Away
Subprime Worries Are Overblown

• We Are In The Midst Of A Mid-Cycle Adjustment.
  This Expansion Is Now 5 1/2 Years Old And The
  Drivers Are Changing.
• Home Sales Peaked About 20 Months Are Now A
  Little More Than Half Way Through A Major
  Correction
• Consumer Spending Is Growing More Modestly Due To
  Slower Home Price Appreciation Higher Fuel
  Prices
• Two Thirds Of The Adjustable Rate Mortgages That
  Were Scheduled To Price Up In 2007 Have Already
  Been Refinanced
• Auto Plant Shutdowns Are Decimating The Midwest
  Making Capex Appear Weaker Than It Actually Is.

4
The Bulk Of The Problem With Subprime Mortgages
Are In Loans Made After Home Sales Peaked
5
The Brief Late Fall Pick Up In Home Sales Likely
Pulled Sales Forward From This Spring
6
The Sharpest Correction Has Occurred In Markets
Where Investor Activity Was Highest When Sales
Peaked
7
There Are Plenty Of Existing Homes On The
Market, Including Investor Homes
8
The Inventory Of Unsold Homes Remains High But Is
No Longer Rising
9
The Historic Run-Up In Home Prices Has Ended, But
Fears Of Price Collapse Are Way Overdone
10
Housing Starts Have Not Bottomed Out Yet But The
Bottom Is Not Too Far Off
11
Where Will Housing Settle In, With 7 Mortgage
Rates, Or An 8 Rate?
12
Housing Affordability Is Still Reasonably High
But Not Where It Was Earlier
13
Mortgage Payments Still Take A Larger Proportion
Of Income Than They Did A Few Years Ago
14
Homeownership Has Stalled As Home Prices Have
Surged Mortgage Rates Stopped Falling
15
Soaring Housing Prices Are Causing Businesses To
Reevaluate Location Decisions

• Population Growth Has Slowed Significantly In
  California, Florida, New Jersey Northern
  Virginia
• The Big Winners Are Arizona, Texas, Georgia The
  Carolinas
• Foreign-owned Automobile Producers Are Setting Up
  Shop In The Deep South Growth Will Now Be
  Driven By Suppliers
• East Coast Ports Are Bumping Up Against Capacity
  Constraints, Leading To Major Expansions (FL, GA,
  SC, NC, VA, NY/NJ)
• Output In The High Tech Sector Is Strengthening
  But More Of The Growth Will Occur Away From
  California, Boston DC
• Biotech Development Is Just Getting Up To Speed
  And Will Go Way Beyond Medicine and Disease
  Detection.

16
Income Drives Consumer Spending, The Wealth
Effect Will Likely Produce Only A Modest Drag On
Sales
17
Growth Has Moderated And Will Likely Remain
Between 2 and 2 ½ For The Next Few Quarters
18
Hiring Has Moderated Recently But Hiring Still
Remains Reasonably Strong
19
The Unemployment Rate Is Showing Signs Of
Bottoming Out, We Expect A Modest Rise In Coming
Months
20
Business Fixed Investment Has Been Depressed In
Areas Tied To Housing, Autos, Heavy Trucks
21
Factory Orders Suggest That Investment Will
Remain Weak, The Trend May Be Overstated
22
The Fed Is On Hold For The Next Few Months.
Monetary Policy Is A Bit Tight.
23
All Of That Extra Liquidity Is Helping Hold Down
Long-Term Interest Rates
24
Economic Forecast