17 February 2009
Resale Market Analysis
In 2009, the foreclosure
market is the housing market
Nishu Sood, CFA
Research Analyst
(1) 212 250 4756
nishu.sood@db.com
Rob Hansen
Research Associate
(1) 212 250 5182
rob.hansen@db.com
A surge in 2H08 REO disposals demonstrates important dynamics for 2009
Distressed home sales rose sharply in 2H08 as banks accelerated disposals and
real demand shriveled. With builders and regular home sellers bruised and
sidelined, the foreclosure market in many senses has become the housing market.
Based on the 2H08 experience, this has some grim implications for 2009. Price
declines are likely to continue unabated, which could render the $8,000 home
credit ineffective. Price drops on REOs will also further soften regular owners'
price expectations, entrenching price cutting as a widespread phenomenon.
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Industry Update
Top picks
Centex (CTX.N),USD8.54 Buy
Ryland Homes (RYL.N),USD17.74 Hold
Companies featured
Centex (CTX.N),USD8.54 Buy
2008A 2009E 2010E
EPS (USD) -21.71 -8.61 -0.53
P/E (x) – – –
EV/EBITDA (x) – – –
D.R. Horton (DHI.N),USD8.96 Hold
2008A 2009E 2010E
EPS (USD) -8.34 -0.36 0.02
P/E (x) – – 365.6
EV/EBITDA (x) – – 54.4
K. Hovnanian (HOV.N),USD1.51 Hold
2008A 2009E 2010E
EPS (USD) -16.04 -3.39 -2.85
P/E (x) – – –
EV/EBITDA (x) – – –
Lennar (LEN.N),USD7.49 Hold
2008A 2009E 2010E
EPS (USD) -7.00 -0.80 -0.48
P/E (x) – – –
EV/EBITDA (x) – – –
Masco (MAS.N),USD6.44 Hold
2008A 2009E 2010E
EPS (USD) 0.35 -0.19 0.24
P/E (x) 47.5 – 26.6
EV/EBITDA (x) 10.1 12.6 7.4
Meritage Homes (MTH.N),USD12.97 Hold
2008A 2009E 2010E
EPS (USD) -10.64 -0.79 -0.40
P/E (x) – – –
EV/EBITDA (x) – – –
Pulte Homes (PHM.N),USD10.77 Hold
2008A 2009E 2010E
EPS (USD) -5.81 -0.34 -0.05
P/E (x) – – –
EV/EBITDA (x) – 67.1 34.5
Ryland Homes (RYL.N),USD17.74 Hold
2008A 2009E 2010E
EPS (USD) -9.32 -0.80 -0.50
P/E (x) – – –
EV/EBITDA (x) – – –
Toll Brothers (TOL.N),USD18.75 Hold
2007A 2008E 2009E
EPS (USD) 0.22 -1.88 0.48
P/E (x) 126.0 – 39.0
EV/EBITDA (x) 25.4 – 13.8
Global Markets Research Company
Half of price declines to date occurred in 2H08 during rising REO sales
Distressed transactions were only a small part of the resale market early in 2008
but then surged in the second half of the year to account for nearly half of all
transactions nationwide by year-end. In some markets as many as three-quarters
of transactions are REOs or short sales. With no effective floor on REO pricing and
motivated sellers in banks/servicers, the surge in distressed transactions has
intensified downward pressure on pricing in spite of notional improvements in
affordability. Based on our analysis, home prices across 41 metros we track have
fallen one-quarter from their peaks, and half of that decline occurred in 2H08.
$8,000 doesn’t buy you much confidence when prices are falling so fast
The recently passed stimulus package includes a non-refundable $8,000 tax credit
for first-time homebuyers; however, when compared with how much prices are
falling on their own the credit isn’t all that impressive. Across 41 major metro
areas (see Figure 8), median home prices have fallen by $58,000 from peak levels,
with $28,000 of that coming in 2H08 alone. There is only one market (Raleigh-Cary,
NC) where price declines in 2H08 were less than $8,000. Another $8,000 incentive
to buy a home certainly doesn’t hurt, but if $58,000 to date hasn’t done the trick to
buoy demand will another $8,000 make that big of a difference?
Widespread price declines may get through to even stubborn homeowners
Existing homeowners are typically stubborn in recognizing market conditions and
reducing their homes’ selling prices accordingly, which is what gives rise to
historically sticky home prices. Rapidly falling REO prices appear to be giving a
strong dose of reality to homeowners, as evidenced by a survey that shows 57%
of homeowners recognized their homes have fallen in value at the end of 2008, up
from just 38% six months earlier. This major change in psychology is an important
one, because it implies that price declines are likely to persist beyond just the
foreclosure saturated markets to places like Texas and the Carolinas as well.
Valuation and risks
Our builder valuations apply a multiple (incorporating liquidity risk as ascribed by
the CDS market) to our worst-case book values. See valuation section (pages
29/30) for details. Chief risks for the builders are a weakening broader economy &
increased foreclosures. On the upside, further government policies more directly
aimed stimulating housing demand could improve the market in the near term.

Table of Contents
Local resale trends ............................................................................ 3
Volumes increase but prices continue to fall ............................................................................3
Foreclosures..................................................................................... 14
Foreclosure filings decline in Jan. as moratoriums mount......................................................14
Shadow inventory continues to lurk........................................................................................15
Analyzing distressed inventory at a local level ........................................................................18
Housing Inventory ........................................................................... 20
Listings buck the historical trend ............................................................................................20
Company impact.............................................................................. 23
Winners/losers ........................................................................................................................23
Valuation / risks .......................................................................................................................29
Top 25 metropolitan areas.............................................................. 31
1) Houston, TX ........................................................................................................................32
2) Dallas-Fort Worth, TX..........................................................................................................34
3) Phoenix, AZ.........................................................................................................................36
4) Washington DC Area ..........................................................................................................38
5) Las Vegas, NV.....................................................................................................................40
6) Inland Empire, CA ...............................................................................................................42
7) Orlando, FL .........................................................................................................................44
8) Austin, TX............................................................................................................................46
9) Chicago, IL ..........................................................................................................................48
10) Denver, CO .......................................................................................................................50
11) Tampa- St. Petersburg, FL ................................................................................................52
12) San Antonio, TX.................................................................................................................54
13) Jacksonville, FL.................................................................................................................56
14) Charlotte, NC.....................................................................................................................58
15) Atlanta, GA........................................................................................................................60
16) Minneapolis-St. Paul, MN..................................................................................................62
17) Raleigh-Cary, NC ...............................................................................................................64
18) Sacramento-Stockton, CA .................................................................................................66
19) Bakersfield, CA..................................................................................................................68
20) Los Angeles-Orange County, CA ......................................................................................70
21) Indianapolis, IN..................................................................................................................72
22) New York Area ..................................................................................................................74
23) Miami-Ft. Lauderdale, FL ..................................................................................................76
24) Oakland, CA ......................................................................................................................78
25) Fort Myers, FL ..................................................................................................................80