Homebuilding Industry Survey

Industry Surveys
Homebuilding
Michael Souers, Homebuilders Equity Analyst
JANUARY 2013
Current Environment ............................................................................................ 1

Industry Profile .................................................................................................... 12
Industry Trends ................................................................................................... 13
How the Industry Operates ............................................................................... 21
Key Industry Ratios and Statistics ................................................................... 26
How to Analyze a Homebuilding Company .................................................... 29
Glossary ................................................................................................................ 36
Industry References ........................................................................................... 37
CONTACTS:
Comparative Company Analysis ...................................................................... 38
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CURRENT ENVIRONMENT
Housing on the mend
The US housing market improved sharply in 2012 compared with recent years, although it remains weak
when measured against historical averages. Although demand for multifamily homes (mostly used for rental
properties) remained robust, as it has over the past couple of years, demand for single-family homes
rebounded sharply from a disastrous 2011. Prices also rebounded in 2012, after falling 36% from the June
2006 peak. Contributing to this was a pickup in investment demand for housing, along with a dwindling
amount of supply as foreclosures failed to rise, as we had previously predicted. While we are confident that
the housing market has bottomed, we do expect only a modest improvement in housing starts and sales in
2013. In addition, we think the recovery will be a choppy one.
We think that beyond the normal seasonal pattern for residential sales lie several challenging issues: a tight
lending market; foreclosed homes up for resale; and the hard-to-quantify shadow inventory of both bankowned unsold homes and underwater mortgages (i.e., mortgages that exceed their homes values) that might
lead to foreclosure or short sale. While we believe the publicly traded homebuilders have strong balance sheets
with ample liquidity, many remain cautious about making land acquisitions for new communities without
seeing stronger signs of a sustainable recovery.
Boosted by record affordability levels as a result of the actions taken by the US Federal Reserve to lower
interest rates, the S&P/Case-Shiller US 20-City Composite Home Price Index, which tracks the change in
housing prices of 20 major metropolitan areas, turned positive in May 2012. Through October 2012, the
S&P/Case-Shiller US 20-City Composite Home Price Index was up 4.3% year-over-year. The US Federal
Housing Finance Agency (FHFA), an agency within the US Department of Housing and Urban
Development, tracks only the prices of homes backed by mortgages sold or guaranteed by the Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac), and
MONTHLY HOUSING INDUSTRY STATISTICS
- - - - 2011- 12 RANGE - - - STATISTIC AND SOURCE
HO US ING S TARTS
LOW
READING
METHODOLOGY
PROBLEMS OR LIMITATIONS
888,000
518,000
Nov. '12
861,000
Seasonally adjusted annual rate. Start

of construction is defined as the beginning
of excavation for the foundation of the
building. Based on a sample of the 17,000
permit-issuing places in the United States.
The seasonally adjusted annual rate varies

sharply from month to month, especially in
the w inter, w hen actual starts are few er,
because the multiplication factor is greater.
Excludes mobile homes and conversion
or rehabilitation of existing structures.
900,000
536,000
Nov. '12
900,000
377,000
273,000
Nov. '12
377,000
US Census Bureau
US Dept. of Commerce
Released: Third Tuesday
of follow ing month
BUILDING P ERMITS
US Census Bureau
Released: Third Tuesday
of follow ing month
NEW S ING LE- FAMILY
LATEST
HIGH
HO ME S ALES
Seasonally adjusted annual rate.

Permits are issued in areas covering
approximately
92% of all US housing
Table
B14: MONTHLY
construction.
HOUSING
INDUSTRY
STATISTICS
Seasonally adjusted annual rate. Based on
US Census Bureau
Released: 4-5 w eeks
after end of month
AV G . NEW- HO ME P RICE
O F A NEW HO ME
$250,000
Nov. '12
$299,700
The prices of homes included in the sample

are totaled and divided by the number of
homes to arrive at a simple average.
Indicates not only the direction or actual

level of home prices, but also the mix of
homes sold. When luxury homes are selling
w ell, it rises quickly; and w hen low er-cost
home sales predominate, it falls sharply.
$253,200
$214,300
Nov. '12
$246,200
This statistic is derived from a nationw ide

sample of home prices.
This gives a better indication of the

direction and level of home prices in
general. No real "national" home market
exists, how ever; home prices vary
dramatically from one part of the country to
the next.
Released: 1-month lag
INDUSTRY SURVEYS
Month-to-month changes are sometimes

irregular, but less so than for those of
housing starts and building permits.
Excludes mobile home sales. Sales are
often a leading indicator of future building
permits and housing starts.
$305,500
Fed. Home Loan Bank Bd.

Released: First Tuesday
of follow ing month
MEDIAN P RICE
an estimate of the actual number of new

homes sold during the month. A sale is
assumed to occur w hen a buyer signs a
contract or makes a deposit.
Permits are generally a leading indicator of

housing starts. How ever, not all permits are
used, and a long time may elapse betw een
permit issuance and completion of
construction.
HOMEBUILDING / JANUARY 2013
excludes new-home sales. In the third quarter of 2012, the FHFAs house price index improved 4.0%, yearover-year, marking the third straight quarter of positive changes in home prices after twenty straight
quarterly declines.
MACROECONOMIC CHALLENGES
The US is facing various challenges at the macroeconomic level, including high unemployment, significant
shadow inventory of homes, consumers limited access to capital from mortgage lenders, and psychological
factors.
Unemployment remains high
In December 2012, nonfarm payroll growth decelerated from the previous month, adding only 155,000 new
jobs (versus 161,000 in November), suggesting that employment continues to grow at a stalled speed. For
full-year 2012, payrolls rose by an average of only 153,000 per month, well short of what would be expected
during an economic growth cycle. The private sector added 168,000 new jobs in December 2012, with
continued growth in healthcare, food services and drinking places, construction, and manufacturing sectors.
However, the government sector contracted again in December (13,000, month over month). While the
fiscal cliff concerns and uncertain tax rates might have played a role in the relatively weak employment
growth in late 2012, we see continued challenges in 2013. In our opinion, a sustained recovery in housing
cannot occur without significantly stronger improvement in the labor force.
The unemployment rate was unchanged at 7.8% for December 2012 from the prior month. In our view, the
recent decline in the unemployment rate (from 8.5% in December 2011) has much more to do with people
completely dropping out of the labor force (about 2.2 million over the past year) than it does with any
meaningful improvement in the job market. To better exemplify this, the labor force participation rate fell
to 63.6% in December 2012(from 64.0% in December 2011) and the employment-to-population ratio
stayed at 58.6%. These ratios are at levels not seen since the early 1980s, when single-income families were
far more prevalent. We think these metrics more accurately reflect the health of the labor force than does
the official U-3 unemployment rate. We are also troubled by the fact that average hourly earnings increased
by just 2.1%, year over year, in December 2012, meaning that real wage growth (i.e., after adjustment for
inflation) is essentially flat. We believe that the national unemployment rate will likely remain in the 7%
8% range over the course of 2013. As of December 2012, S&P Economics is projecting a 7.7%
unemployment rate for 2013 after a projected 8.1% average rate in 2012.
Shadow inventory and foreclosure concerns
The inventory of existing homes for sale in November 2012 decreased 3.8% to 2.03 million, which
represented a 4.8-month supply at the existing sales pace, down from a 5.3-month supply in October,
according to the National Association of Realtors (NAR). Moreover, the months of supply has fallen
considerably from the 9.5 months reported in June 2011 and has been declining from a recent peak of 11.0
months in November 2008, a level that hadnt been seen since 1982s all-time record of 11.5 months. The
4.8-month supply in November 2012 was the lowest level since September 2005, when it stood at 4.6
months. In each year from 2000 to 2005, inventories of existing homes for sale averaged less than 5.0
months supply. (The normal level is considered to be about six months of supply.) By this measure, it
would appear that supply is extremely constricted and that further house price appreciation is very likely.
However, that might not be the case.
Despite this decline, the number of months supply does not take into account the shadow inventory that
banks are holding on their books. (Shadow inventory is defined as real estate owned by banks and mortgage
companies as a result of foreclosures and other actions, such as deeds in lieu of foreclosure, as well as real
estate that is at least 90 days delinquent.) According to the latest available data from CoreLogic, a market
and business research company, the shadow inventory stood at 2.3 million homes as of October 2012
(which equals about seven months supply). The 2.3 million figure included 1.04 million seriously
delinquent units and 903,000 in some stage of foreclosure, with the remaining 354,000 units being real
estate owned (REO) by lenders. While the shadow inventory is down 12.3% from the 2.6 million units in
October 2011, it remains about six times the amount at the peak of the housing bubble in mid-2006. The
2
INDUSTRY SURVEYS
firm postulates that shadow inventory of over one months supply remains an obstacle to the improving
housing markets as it exerts downward pressure on prices. In addition, if we count homeowners who are 30
days or more delinquent on their mortgage payment, the numbers get even scarier. In fact, according to
Lender Processing Services, a leading provider of mortgage and consumer loan processing services, there
were 5.35 million mortgages that were 30 or more days delinquent or in foreclosure as of November 2012.
Foreclosures in 2012 continued with the declining trend seen in 2011, according to RealtyTrac, a web-based
firm that tracks and markets foreclosed homes. There were only 2,304,941 foreclosure filings in 2012,
reported on 1,836,634 properties, a 3% decline from filings in 2011, but down 36% from a peak of 2.9
million filings in 2010. However, the foreclosure activity improved for 25 out of the 50 largest metro areas
in 2012 compared with 2011. Despite the slowdown in foreclosures in 2012, we expect them to accelerate
in early 2013, adding some pressure to home prices and new home sales.
Lending standards remain tight
The Federal Reserve has tried to provide stimulus to the US housing market by lowering the federal funds
rate to just over 0%, which in turn has helped reduce the 30-year, fixed-rate mortgage to 3.40% as of
January 10, 2013. This is up slightly from the 3.35% average in December 2012, but down from 3.89%
during the same week in the previous year.
While these low rates have provided a modest boost in demand from prospective homebuyers, continued
tight bank lending practices have mitigated the effort. While it became common practice in the last decade
to purchase a house with a down payment of 5% or less, banks in todays environment are often asking
homebuyers for a 20% down payment. In addition, banks are requiring higher Fair Isaac Credit
Organization (FICO) scores in order for prospective homebuyers to qualify for a mortgage. In fact, a NAR
spokesperson suggested that in the recent past, a credit score of 720 would have all but guaranteed getting a
loan. Nowadays, it is not a complete anomaly when a homebuyer with a score below 755 is denied a loan.
While current lending standards may be tight compared with the recent housing boom years of the 2000s,
when no-money-down home purchases were rampant (with lenders even allowing prospective homebuyers
with lousy credit to do this), we believe credit is still much looser than it was pre-1980, when a 20% down
payment was the standard. We dont expect loosening in bank lending standards in 2013 without some sort
of political intervention.
Psychological factors
Homebuilders often say that an important building block for a housing recovery is buyers confidence. After
improving steadily in 2009 and 2010, consumer confidence reached a temporary high of 72.0 in February
2011, according to the Conference Boards Consumer Confidence Index (CCI). Following that number,
however, conditions deteriorated as weaker labor market conditions and political posturing by both parties
in Congress over the nations debt ceiling resulted in a significant drop in the CCI to 40.9 in October 2011.
Confidence perked up again in early 2012, hitting 71.6 in February, suggesting that consumers were becoming
more positive despite rising gasoline prices. However, the index declined consecutively for the next four
months to reach 62.7 in June 2012, impacted by a weak job market. Though the index improved in July, it
dropped to its yearly low at 61.3 in August 2012. Driven by slight improvement in economic data, the CCI
rose to 73.1 in October 2012, its highest level since February 2008 and a sharp contrast to its year-earlier
level. This improvement didnt last long, however, as the index declined over the last two months of 2012,
ending at 65.1. We note that although the December 2012 reading is significantly higher than the historic low
posted in February 2009 (when it stood at 25.3), it still represents confidence levels synonymous with
recessions: consumer confidence averages 71 during recessions and 102 in economic expansions.
In our view, despite some relief from gas price declines at the end of 2012, worries about federal budget
issues and an uncertain regulatory and tax environment stunted consumer confidence. According to an
NAR release on January 9, 2013, the Housing Affordability Index is expected to reach a record high of 194
in 2012, up from its earlier record of 186 in 2011. Although homes reached record affordability levels in
2012, we believe buyer confidence remains low, as homeowners have been scarred by the breadth and depth
of the housing market decline. We think the psychological outlook is gradually improving, but is still an
impediment to recovery.
INDUSTRY SURVEYS
Further, households are nervous at this time, in our view, and they are having trouble paying their existing
or new mortgage. According to CoreLogic, 10.7 million residential properties with a mortgage (around
22% of the total) were underwater at the end of the third quarter of 2012that is, the total owed on the
mortgage exceeds the homes appraised value. This is lower than the 10.8 million residential properties with
a mortgage (around 22.3% of the total) that were underwater at the end of the second quarter of 2012.
Though the drop in the underwater mortgage numbers are indicative of some progress, Zillow, an online
real estate database, paints an even less sanguine picture: in the third quarter of 2012, it estimated that
28.2% of homesslightly more than 14 million householdswere underwater on their mortgages. Whether
the percentage for underwater mortgages is 22% or 28%, it is still staggeringly high, and exemplifies the
damage that the housing boom (and subsequent bust) created.
FORECLOSURES REMAIN A SIGNIFICANT SHARE OF HOUSING SALES

Foreclosed homes accounted for 19% of all housing sales in the third quarter of 2012 (latest available),
according to RealtyTrac Inc., the leading online marketplace for foreclosed properties. In January 2013, the
firm released its Year-end 2012 U.S. Foreclosure Market Report for default notices, scheduled auctions, and
bank repossessions: there were 1,836,634 properties with foreclosure filings, a 3% decrease from 2011, and
nearly a 36% decline from 2010. We believe increased home prices and improving demand from buyers will
lead to bank lenders unloading more properties from their shadow inventory in 2013.
According to RealtyTrac, foreclosure activity in 2012 increased in 20 states out of the 26 states that use
judicial process for foreclosure, while foreclosure activity dropped in 19 of the remaining 24 states that use
non-judicial foreclosure process. We think this is due to the timeline it takes for foreclosures to be completed
in judicial states, averaging over three years from start to completion in states like New York. As a result,
we think it will be a year or two before much of the backlogged foreclosures clear the market in judicial states,
while non-judicial states may continue to see declines in foreclosure activity. RealtyTrac noted that it also
expects foreclosure activity to pick up in 2013. The firm sees an increase in activity in judicial process states
at the beginning of the year, as lenders attempt to catch up with backlogs, while non-judicial process states
will likely see an increase towards the end of the year as lenders process deferred foreclosures. According to
RealtyTrac, Florida reported the highest foreclosure rate (3.11%) in 2012, followed by Nevada (2.70%),
Arizona (2.69%), Georgia (2.58%), and Illinois (2.58%). Other states ranked among the nations top 10
with the highest foreclosure rates were California (2.33%), Ohio (1.75%), Michigan (1.69%), South
Carolina (1.66%), and Colorado (1.64%).
Foreclosure settlement reached
In February 2012, the nations five largest mortgage servicersBank of America Corp., JP Morgan Chase
& Co., Wells Fargo & Co., Citigroup Inc., and Ally Financial Inc.negotiated a settlement, known as the
Mortgage Foreclosure Settlement, with several federal agencies, including the Justice Department, and 49
state attorneys general. Under the terms of the settlement, the banks will pay approximately $25 billion,
including $20 billion in relief to distressed borrowers, and $5 billion in direct payments to states and the
federal government. Of the $20 billion to borrowers, $17 billion is to be used for mortgage debt forgiveness,
forbearance, and short sales. The other $3 billion is to be used to allow homeowners underwater on their
mortgages to refinance, as long as they were on schedule with their payments (this practice was not
previously an option for underwater homeowners).
We think this settlement resulted in the banks working with homebuyers on principal payment reductions,
and caused a slowdown in foreclosures over the near term. However, with this settlement ending the robosigning litigation risk and the abundant pipeline of homes that are delinquent, we think foreclosures will
accelerate in 2013, putting pressure on new home sales and home prices (foreclosures are typically priced
20%30% below new homes). Our concern is related to government studies that have shown that even
with re-negotiated terms, the majority of delinquent homeowners will default again within 12 months of
their first default. Since many delinquent homeowners defaulted because they lost their jobs, only a
significant improvement in the labor markets (which we do not envision) could curtail this risk.
INDUSTRY SURVEYS
HOMEBUILDERS MORE AGGRESSIVE IN ACQUIRING LAND, BUT REMAIN RELATIVELY CAUTIOUS

Land acquisition activity is picking up strength among homebuilders, though they remain relatively
cautious. Most have raised significant cash to get through the housing downturn. They continue to
recalibrate their operations, products, and pricing to contend with weak buyer demand, changing housing
preferences, and competition from foreclosed homes that are being re-marketed for sale. In our opinion,
many of the largest publicly traded homebuilders are ready to take advantage of potential land acquisitions,
although the all-clear sign of a housing market recovery has yet to occur, in our opinion.
We believe that most of the largest publicly traded companies are strong enough from a liquidity standpoint
to rebound in a housing market recovery and gain market share from the smaller private builders that have
limited access to funds (which come mostly from banks that have tightened their lending practices). Some of
these large builders have cash equivalents and unused bank line-of-credit facilities exceeding $1 billion, with
no major debt outstanding maturing in the next year. In our view, homebuilders have been very smart to
reduce debt and extend debt maturities.
The key industry drivers for a housing recovery include an increase in buyers confidence, strengthening
demand for new homes, a reduction in oversupply of new and existing homes available for sale, shorter time
periods for homebuyers to sell their current homes, and credit availability for those households that qualify
for home mortgages.
THE US HOUSING MARKET
(Year-to-year percent change)
200
175
150
125
100
75
50
Chart H02:
THE US
HOUSING
MARKET
25
0
(25)
(50)
(75)
1992 94
96
98
00
02
04
06
08
10 2012
We think that single-family housing starts and sales

have likely troughed, and that publicly traded
builders are gaining market share, albeit of a much
smaller pie. The US Department of Commerces
New Residential Construction report covers
housing starts, permits, and completions. The
update released in January 2013 showed singlefamily housing starts in December 2012 were 8.1%
above the revised November estimate, mostly due to
an increase in the West and South. In December
2012, single-home building permits were 1.8%
higher from the revised November estimate, which
we believe may give homebuilders some hope that
the housing market will continue to strengthen from
current levels.
We believe the market for existing homes, which

account for well over 90% of housing sales, may
begin to see its inventory levels rise again in 2013
after falling below normalized levels in late 2012.
*Builder confidence levels and the strength of the single-family
market, based on surveys of members of the NAHB. 10-city
We see this resulting from all the foreclosed houses
composite.
expected to come to the market over the next few
Sources: National Association of Home Builders; US Census Bureau;
years. Standard & Poors economists expect home
Standard & Poor's.
prices to show a modest increase in 2013, driven by
improving buyer demand and currently constrained supply. That said, in our opinion, a weak jobs market
and low buyer confidence will not lead to a significant surge in sales for newly constructed homes. We note
that housing market trends do not change rapidly from negative to positive, but require a long time to turn
around. Thus, while many of the housing data points continue to point to modest improvement in 2013, we
think an improved jobs market may be necessary to drive a sustained recovery in the housing market.
NAHB/ Wells Fargo Housing Market Index*
New single- family houses sold
S&P/ Case-Shiller Home Price Index
Owning a home remains an American dream

Some of the potential negatives for a housing recovery are the number of US mortgage borrowers who are
underwater (i.e., with a mortgage that exceeds their homes value) and the likelihood of increasing
foreclosures. An improving housing marketwith stable, then rising priceswould alleviate the high number
INDUSTRY SURVEYS
of households with negative equity relative to their outstanding mortgage debt. Although mortgage rates are
at their historic lowest level, stricter credit guidelines have limited consumer access to funds. Some economists
believe it will take five or more years before lost equity is recovered from a stronger housing market.
With the homeownership rate currently declining (65.5% in the third quarter of 2012, according to the US
Census Bureau, down from 66.3% in Q3-2011 and 66.9% in Q3-2010; at its peak in late 2004/early 2005,
the homeownership rate exceeded 69%), this question comes to mind: are households avoiding home
purchases in favor of renting? We think it depends. Clearly, households evicted from their homes are now
renting, and younger households may be deferring home purchases because of the higher down payments
(up to 20%) now required to qualify for a mortgage.
According to the 2011 National Housing Pulse Survey by the National Association of Realtors (NAR), 72%
of renters surveyed said owning a home is a top priority for their future, up from 63% in 2010. The NAR
survey reported that seven in 10 households also agreed that buying a home is a good financial decision,
while almost two-thirds said now is a good time to purchase a home. The survey also highlighted that 77%
of the respondents would be less likely to buy a home if they were required to have a 20% down payment,
and 71% felt a 20% down payment requirement could have a negative impact on the housing market.
In our opinion, single-family homes are desirable for families that want good schools, safe neighborhoods,
and proximity to mass transportation or downtown markets. Nonetheless, US multifamily housing is
rebounding more strongly than single-family homes at this time. The National Association of Home Builders
(NAHB) quarterly Multifamily Production Index (MPI) provides a composite measure of three key elements
of the multifamily housing market: construction of low-rent units, construction of market-rate-rent units,
and construction of for sale units. The MPI showed its first quarterly drop in the third quarter of 2012
after increasing for eight consecutive quarters. The MPI stood at 52, down from a reading of 54 in the
second quarter of 2012, but up from a reading of 47 in the third quarter of 2011.
Despite the recent increases (other than the drop in the third quarter of 2012), production of multifamily
housing remains low compared with anticipated demand, according to the NAHB, so rents are likely to
continue to rise unless financing for new construction becomes more readily available. The number of
completed apartments averaged about 250,000 units a year during the housing boom leading up to the top
in 2007 and before the collapse starting in 2008. This figure fell to 54,000 units in 2010 and to 27,000
units in 2011, according to CoStar Group, a research firm. (The lag is due to the time it takes to complete
an apartment buildingabout 14 months.) The research firm expected the number of completed apartments
to increase to 60,000 units in 2012 and then cross the 100,000 mark in 2013.
HOMEBUILDER CONFIDENCE INDEX IMPROVES SHARPLY IN 2012

Despite a slight increase in housing prices compared to their recessionary lows, single-family homes became
even more affordable in 2012, aided by lower interest rates. According to the National Association of Home
Builders (NAHB)/Wells Fargo Housing Opportunity Index (HOI), released in mid-November 2012, 74.1%
of all new and existing homes sold were affordable to median-income earners in the third quarter of 2012,
up from 73.8% in the second quarter of 2012. However, the NAHB noted that tight lending conditions
remain a concern for the buyers who want to take advantage of the low rates.
In its December report, according to the National Association of Home Builders (NAHB)/Wells Fargo
Housing Market Index (HMI), US homebuilder sentiment rose two points in December 2012 to 47, which
brought the confidence gauge to its highest level since April 2006. Despite the improvement, the restrictive
lending environment continues to have an adverse impact. The HMI is based on a monthly survey of NAHB
members. The survey asks respondents to rate market conditions for the sale of new homes currently and in
the next six months (on a scale of good, fair, or poor), as well as the traffic of prospective new-home
buyers (on a scale of high to very high, average, or low to very low). The HMI is a diffusion index: a
reading above 50 indicates that more builders view conditions as good than poor; a reading below 50
indicates the reverse. While the HMI has shown continuous improvement throughout 2012, rising from 25
in January to 47 in December, builders still view conditions as below average.
6
INDUSTRY SURVEYS
The NAHB has several other sub-indexes related to sales conditions and prospective buyer traffic. These
indicators have also posted increases, despite a slow-growth US economy. The chief economist at the NAHB
said, Builders across the country are reporting some of the best sales conditions theyve seen in more than
five years, with more serious buyers coming forward and a shrinking number of vacant and foreclosed
properties on the market. However, one thing that is still holding back potential home sales is the difficulty
that many families are encountering in getting qualified for a mortgage due to todays overly stringent
lending standards. He added, While there is still much room for improvement, the consistent upward
trend in builder confidence over the past year is indicative of the gradual recovery that has been taking place
in housing markets nationwide and that we expect to continue in 2013.
EXISTING HOME SALES GREW MODESTLY IN 2012

When assessing the state of the homebuilding industry, its important to understand the sales trends for
existing homes. We believe that existing home sales represented approximately 93% of the total housing
sales in 2012, with new construction housing accounting for less than 7%.
The National Association of Realtors (NAR) reported that sales of existing homesa category that includes
single-family, townhomes, condominiums, and co-opsremained close to its highest level in December
2012, since peaking at 5.44 million in November 2009. The sales of existing homes totaled 4.94 million
(seasonally adjusted annual rate, or SAAR) in December 2012, down 1.0% from 4.99 million in November
2012, but 12.8% above the December 2011 total of 4.38 million. Total housing inventory dropped 8.5% to
1.82 million existing homes for sale at the end of December 2012, which represents a 4.4-month supply,
compared with 4.8 months in November.
The NAR report on existing home sales indicated that first-time buyers accounted for 30% of homes
purchased in December 2012, unchanged from November 2012. Investors accounted for 21% of total
transactions in December, up from 19% in November 2012, but the same as the 21% seen in December
2011. All-cash home sales transactions dropped to 29% in December 2012 from 30% in October 2012 and
31% in December 2011.
The median existing home price in December 2012 was $180,300, up 10.9% from a year earlier. The highest
median price was in the West ($239,900), followed by the Northeast ($231,600), South ($161,100), and
Midwest ($144,800).
Lawrence Yun, chief economist for NAR, stated, Momentum continues to build in the housing market from
growing jobs and a bursting out of household formation. With lower rental vacancy rates and rising rents,
combined with still historically favorable affordability conditions, more people are buying homes. Areas
impacted by Hurricane Sandy show storm-related disruptions but overall activity in the Northeast is up,
offset by gains in unaffected areas. He added, The market share of distressed property sales will fall into
the teens next year based on a diminishing number of seriously delinquent mortgages. While we dont
share Mr. Yuns optimism regarding distressed properties or the labor market, we do see several favorable
drivers leading to continued modest gains in existing
home sales for 2013.
MULTIUNIT VS. SINGLE-FAMILY HOUSING STARTS
(In thousands, seasonally adjusted annual rate)
2,100
1,800
Chart H01-A:
MULTIUNIT VS.
SINGLE-FAMILY
HOUSING STARTS
1,500
1,200
900
600
300
0
2002 03
04
05
06
07
Single-family
Source: US Department of Commerce.
INDUSTRY SURVEYS
08
09
10
Multiunit
11 2012
Multifamily housing starts continue to improve,

outpacing gains for single-family housing starts
Construction of multifamily units has been
increasing. The US Department of Commerces New
Residential Construction report covers housing
starts, permits, and completions. The update
released in January 2013 showed the December
2012 starts for units in buildings with five units or
more was 330,000, up 115.7% from December of
the prior year. For units in buildings with a single
unit, the rate was 616,000 in December 2012, up
18.5% year over year. According to NAHBs
Housing Forecast, dated December 27, 2012, multifamily housing starts are expected to increase over 37%,
year over year, to 243,000 units in 2012, compared with a 22% year-over-year increase to 531,000 units
for single-family units. In 2013, multifamily housing starts will increase 19% year-over-year to 289,000
units, while single-family units will increase 21% to 644,000 units, according to the NAHB forecast.
As consumers face strict credit guidelines to access funds, owning a house remains a dream. In contrast, the
rental market continues to see healthy demand. According to the US Census Bureau, the home ownership
rate stood at 65.5% in the third quarter of 2012, down from the 66.3% level a year ago, clearly indicating a
gradual increase in rented houses. Multifamily housing starts, in particular, are appealing to the rental
market demand, as multifamily units are more suitable to their needs and pocket size.
AVERAGE SELLING PRICES RISING BRISKLY FOR NEW HOMES

The US Commerce Department reported that the average sales price (ASP) of a new home sold in December
2012 was $304,000, up 24% from the 200910 low of $245,200 and a 16% increase from the average sales
price of $262,900 in December 2011. Based on earnings reports from most homebuilders, new residential
ASPs are showing considerable increases from the steep declines in 2008 and 2009, in our view. The
number of unsold new homes in December 2012 was 150,000, which represents 4.6 months of inventory
and is lower than the normalized inventory level (a six-month supply). According to Standard & Poors
economist Beth Ann Bovino, Home sales and construction on new units are still well below historical
averages, and prices appear to have hit bottom only recently, but data indicate that housing will finally
contribute to growth this year, after weighing on the economy for the past six years.
Cancellation rates remain at high levels for homebuilders, but have improved slightly over 2011
For most homebuilders servicing either first-time or first move-up homebuyers, we believe the cancellation
rate (which reduces gross orders) remains a business risk. In our opinion, the sales offices for most new
home communities are seeing a tough business environment. The pace of traffic and writing new contracts
are still well below normalized levels: every prospective buyer who comes in the door to see a new home
model is precious to the salesperson who wants to write a contract and get a sales commission.
Is the situation getting better? The major publicly traded homebuilders reported significantly improved
home sales and closings figures throughout 2012. However, cancellation rates remain high, resulting in a
loss of potential revenues. For example, M.D.C. Holdings Inc.s cancellation rate for 2011 was 37%, up
from 30% in 2010. This means that for every 100 new orders booked by the sales team, only 63 contracts
made it to a contract closing date and home delivery. However, in the quarter ended September 2012,
M.D.C.s cancellation rate fell to 27%, significantly below the 44% in the same quarter a year earlier.
While M.D.C. represents an extreme example of the improvement in cancellation rates, it provides a
tailwind for the builders as it relates to revenues. In our opinion, the lower cancellation rate may reflect
prospective buyers improving ability to qualify for a mortgage or, for move-up buyers, the ability to sell
their current home because demand is rising or because the appraised value of the home is above the
amount owed on the existing mortgage.
Most of the other publicly traded homebuilders that we reviewed had third-quarter cancellation rates in the
mid- to upper teens as a percentage of total gross orders. Other builders with high cancellation rates in the
third quarter of 2012 were KB Home (29%), Beazer Homes USA Inc. (27%), and D.R. Horton Inc. (27%).
Sales incentives remain narrow in most markets
During the booming real estate market in 2005, lot premiums for a woodland site or backyard view of a
golf course or a lake sometimes exceeded $100,000 to $150,000. Subsequently, however, homebuilders
slashed those lot premiums by half or more to move lot inventory. Then, as new home sales weakened in
2006, builders began to offer free upgrades such as granite countertops and fireplaces. In 2007, it was
common in Sunbelt markets for homebuilders to throw in a swimming pool or landscaping package in their
efforts to sell new homes, while expanded rooms or closet upgrades were added to the list of sales incentives
in other parts of the country. Financial incentives such as paying mortgage closing costs and upfront interest
INDUSTRY SURVEYS
payments also proliferated. In 2010, however, these incentives lost their appeal, as buyers focused more on
paying a lower sales price for a smaller new home or a new home with fewer options added, in our opinion.
Depending on the homebuilder, incentives in 2011 often accounted for anywhere from 5% to 7% of home
prices, by our analysis. For a home that sells for $350,000, the sales incentives would normally be in the
$15,000 to $25,000 range, in our opinion. Ultimately, however, homebuilders in some locations were forced
to lower the listed prices of new homes in communities. Damage done to early homebuyers who paid much
higher home prices during the peak period of 2005 through 2007 in these communities may be irreparable.
For homebuilders, the potential impact is that their brand and image may suffer, although there really isnt
a homebuilder community or metropolitan area untouched by the severe housing market downturn. In very
depressed communities, some homebuilders have mothballed their projects or sold them off to another
developer, if possible. However, with demand picking up in 2012, many builders have begun to bring
previously mothballed communities back. In addition, homebuilders are reporting that incentives continue
to decline, which boosts the builders gross margins. We see sales incentives declining even further in 2013.
We also see homebuilders re-designing their products: smaller square footage and fewer amenities in their
standard features of a new home. Many homebuilders are also trying to price their redesigned smaller homes
10%15% above existing homes in places like Arizona, California, and Nevada, where foreclosures were
highest over the past few years. (See the subhead Affordable, more functional homes in the Industry
Trends section of this Survey for our views about the new housing lifestyles and homebuilder products.)
HOMEBUILDERS CONTRACT BACKLOG VALUE GROWING SHARPLY FROM 2011 LEVELS

Contract backlog value is an important measure to gauge the health of the homebuilder industry and the
current outlook for homebuilders. We
CONTRACT BACKLOG VALUE
define backlog as the dollar value for all
existing orders not yet closed, minus
DEC. '11 MAR. '12
JUN. '12
SEP. '12
current period closings.
QUARTER QUARTER
QUARTER
QUARTER
BUILDER
- - - - - - - - - - - - MILLIONS OF DOLLARS - - - - - - - - - - - -
Beazer Homes USA

316
Table
B06: 465
D.R. Horton
975
1,358
CONTRACT
Hovnanian Enterprises*
457
599
BACKLOG
KB Home*
459
460
VALUE
Lennar Corp.*
561
711
MDC Holdings
330
477
Meritage Homes Corp.
249
353
NVR
1,161
1,564
Pulte Homes
1,060
1,586
The Ryland Group
382
518
Standard Pacific Corp.
233
332
Toll Brothers*
1,118
1,499
*Data for closest comparable quarter.
Source: Company reports.
573
1,655
674
693
1,061
657
458
1,673
2,167
615
440
1,619
479
1,668
632
745
1,251
667
490
1,675
2,246
661
499
1,670
Generally, contract backlog takes three to

nine months from new orders to contract
closings. Recently, homebuilders have
talked about the duration from new orders
to closings of less than three months when
the builder has developed land or
speculative houses that are near completion
and available for purchase.
The contract backlog for major companies
showed considerable improvement in
2012, for most top players, signaling a
positive near-term sales outlook, in our
view.
MORTGAGE RATES REMAIN NEAR RECORD LOWS

For the week ending January 18, 2013, supported by declining long-term interest rates, US mortgage
activity increased 7.0% from one week earlier, according to the Mortgage Bankers Association (MBA).
Interest rates for 30-year, fixed-rate mortgages with conforming loan balances ($417,500 or less) increased
from 3.61% to 3.62%, with points increasing from 0.38 to 0.43. Interest rates for 30-year, fixed-rate
mortgages with jumbo loan balances (greater than $417,500) decreased from 3.88% to 3.85%, with points
decreasing from 0.38 to 0.34. In our view, these near-historic low rates create record affordability for those
families that can qualify to get a mortgage. Rates for 15-year, fixed-rate contracts dropped from 2.88% to
2.87%, with points increasing from 0.27 to 0.39.
INDUSTRY SURVEYS
Standard & Poors economist Beth Ann Bovino is forecasting mortgage rates (30-year conventional) to
decline from 4.5% in 2011 to 3.7% in 2012, and then to 3.4% in 2013. Given the US economys weakness,
we believe mortgage rates will continue to remain attractively low for the next year. However, stringent
underwriting and appraisal standards will continue to limit the pool of qualified buyers.
On October 21, 2011, the US Senate passed the Menendez-Isakson Amendment, reinstating higher limits on
mortgage loans for the government-sponsored enterprises (GSEs)the Federal National Mortgage
Association (Fannie Mae), the Federal Home Loan Mortgage Corp. (Freddie Mac), and the Federal Housing
Administration (FHA). (On September 30, 2011,
upon expiration of the higher mortgage loan limits
HOUSING STARTS AND MORTGAGE RATES
for the GSEs, the limit had dropped from 125% of
2,700
9
the areas median home price to 115%.) In a
2,300
8
statement released on the same day, NAHB
1,900
7
chairman Bob Nielsen commended the Senate for
passing the amendment, and appealed to Congress
1,500
6
Chart H01-B: HOUSING
to enact the amendment into law. Nielsen said,
1,100
5
STARTS AND
Restoring the higher loan limits for the housing
700
4
MORTGAGE RATES
government sponsored enterprise and the FHA will
300
3
provide home owners and home buyers with safe
2002 03 04 05 06 07 08 09 10 11 2012
and affordable financing while providing a muchneeded boost to housing markets all around the
Housing starts** (in thousands, left scale)
country. On November 17, Congress approved the
Fixed mortgage rates* (in percent, right scale)
increase in the loan limit only for the FHA.
*National average for all major lenders, effective rate, all loans
closed. **Seasonally adjusted annual rate.
Sources: Federal Housing Finance Board; US Department of
Commerce.
The size of conforming mortgages for the GSEs is

currently limited to $417,000 in general (this base
limit would remain), but that ceiling can rise to as
high as $729,750 using a statutory formula based on local median home prices. Lower limits will place a
constraint on home buying in high-cost housing markets, such as those along the East and West Coasts and
in California.
We believe that these new limits are the last thing needed in a weak housing market. Purchasing homes that
go above the GSE ceiling will require non-conforming loans that currently have been about 60 basis points
higher than conforming loans and about 75 basis points higher than Federal Housing Finance Agency
(FHFA) rates for non-conforming mortgages.
OUR HOMEBUILDING OUTLOOK

We have a negative fundamental outlook for the homebuilding sub-industry for the next 12 months. We
believe most publicly traded builders are in a stable competitive position after cutting costs, retiring debt,
and growing cash positions. However, we expect increased foreclosure activity in 2013 to lead to continued
weakness in home prices and stall improvement in new single-family home sales. We think the housing market
will improve over the next year, but that it will fall shy of consensus views for stronger growth. We also think
it will take time before buyers confidence and the job market improve enough to support a more favorable
view of home ownership. We believe that around 11 million homeowners who are underwater on their
mortgages will create a ceiling on pricesas many of them will sell if prices continue their recent uptrend.
Housing starts rose 12.1% sequentially in December 2012 to a seasonally adjusted annual rate of 954,000.
Single-family starts were up 8.1% in December, with 18.5% year-over-year growth. Multifamily housing
starts were up 23.1% in December, with year-over-year growth showing strong improvement (+115.7%). In
2011, housing starts increased a modest 4.5%, to 612,100 starts (from 585,500 in 2010), but this figure
was near historical lows. Housing permits, another indicator of future home deliveries, showed a 27.3%
year-over-year increase in December 2012 for single-family homes, which was far weaker than the 35.0%
year-over-year increase in multifamily units, suggesting continued strength in rentals. For full-year 2012, we
expect housing starts to show strong gains, with a projected 25.5% increase to 768,100 starts, with
improvement in multifamily outpacing single-family. We see starts rising to 1.05 million in 2013.
10
INDUSTRY SURVEYS
We expect continued tight lending standards to lead to relatively high cancellation rates (consistent with
2012 levels). We do not expect these standards to loosen much in the near term. In addition, we think home
prices are at risk of further declines, as we expect increased foreclosures in early 2013 following a number
of stalled foreclosures in 2011 due to litigation on robo-signings. Through September 2012, the S&P/CaseShiller Index for the 20-City Composite rose 3.0%, year over year, but was down approximately 29% from
its June 2006 peak.
We see existing home inventory coming down to around six months in 2012 and 2013, from record levels
of 10 to 12 months in 2010. Our forecast is in line with normalized levels of around six months, but this
figure does not account for shadow inventory. Standard & Poors Ratings Services (which operates
independently of S&P Capital IQ) estimates shadow inventory to be 46 months, which creates a significant
overhang on the industry, in our view.
In 2012, the S&P Homebuilding Index was up 84.3%, significantly outpacing the 13.7% advance for the
S&P 1500 Composite Index. In 2011, the sub-industry index fell 6.0%, versus a 0.3% decline for the S&P
1500.
INDUSTRY SURVEYS
11
INDUSTRY PROFILE
Homebuilders seeking continued recovery
The US homebuilding industry comprises many local housing markets, each with its own conditions:
demographics and population density; local economies, jobs, and employment; permits and housing starts;
and housing mix (single-family versus multifamily). In many boom/bust Sunbelt markets, speculators and
investors had accounted for a significant percentage of those buying condominiums and starter homes. As
real estate markets weakened, speculators could not flip their new properties before closing. Faced with
owning properties they had no desire to hold onto, many speculators and investors walked away from their
investments; more rarely, the transactions closed, and the new owners offered their properties as rentals.
TOP 100 BUILDERS' MARKET SHARE
YEAR
TOTAL
FOR- SALE
TOTAL
TOP 100
MARKET
UNITS
CLOSINGS
SHARE (%)
2011
318,000
141,618
2010
354,000
153,703
Table B02:
2009
439,000
161,085
Top 100
2008
586,000
226,856
Builders
2007
873,600
359,689
Market Share500,722
2006
1,149,000
2005
1,380,000
504,670
2004
1,256,000
448,851
2003
1,142,000
393,178
2002
1,036,000
344,574
Source: Builder magazine.
44.5
43.4
36.7
38.7
41.2
43.6
36.6
35.7
34.4
33.3
LEADING SINGLE-FAMILY HOMEBUILDERS2011

(Ranked by total US closings)
GROSS
BUILDER
US
REVENUES
CLOSINGS
(MIL.$)
Table B07:
D.R. Horton
17,176
3,768
Leading single
Pulte Homes
15,275
4,137
family
Lennar Corp.
10,845
3,095
homebuilders
NVR
8,487
2,670
KB Home
5,812
1,316
Habitat for Humanity
4,970
1,575
Hovnanian Enterprises
4,216
1,307
The Ryland Group
3,664
943
Beazer Homes USA
3,597
822
Meritage Homes Corp.
3,268
861
MDC Holdings
2,762
844
Toll Brothers
2,611
1,476
Standard Pacific Corp.
2,563
908
Taylor Morrison
2,327
1,400
The Villages of Lake-Sumter
2,307
763
Note: Builder now excludes manufactured home sales
and foreign home sales w hen determining volume and
US market share of the top 100 builders.
Source: Builder magazine.
12
Higher unemployment levels in some of the more overbuilt

real estate markets or weak local economies led to further
increases in existing home inventories. In some distressed
local markets, we think inventories of unsold homes could
rise higher, particularly if foreclosure activity picks up
again after stalling in 2012.
We believe the fallout from the severe credit crunch
beginning in August 2007 has led to a major escalation of
home foreclosures, thus putting more houses into the
market. A foreclosure is the legal process that lenders use
to terminate a borrowers interest in a property after a
loan has defaulted. When the process is completed, the
lender may sell the property and keep the proceeds to
satisfy the mortgage and cover any legal costs. Any excess
proceeds may be used to satisfy other liens or be returned
to the borrower. Generally, lenders do not want to be in
the business of holding and selling foreclosed property.
Homebuilding remains one of the most fragmented
industries in the US, although sales among larger builders
have become more concentrated in recent years. In 2011,
the nations 100 largest builders closed on 141,618 new
single-family homes, down 8.9% from 153,703 in 2010
and a 72% decline from the peak level of 504,670 in 2005,
according to Builder magazines annual study. Although
the top 100 builders closed on 12,085 fewer homes in
2011, their market share of total homes rose to 44.5%
from 43.4% in 2010, above the previous peak of 43.6% in
2006. Put another way, the top 100 homebuilders in 2011
were able to gain market share from the more troubled,
smaller private builders, in our opinion.
Based on the number of homes sold in the US, D.R.
Horton Inc. retained its position as the nations No. 1
homebuilder in 2011, with 17,176 consolidated closings,
down 9.5% from the prior year. PulteGroup Inc. was
ranked second with 15,275 closings, down 10.6% from
the prior year. The timing of its merger with Centex Corp.
in September 2009 was unattractive, in our view, given the
prolonged weakness in the housing market. Subsequently,
INDUSTRY SURVEYS
Pulte has written off over 80% of the estimated purchase price for Centex. Lennar Corp. was in third place
in 2011, with 10,845 closings, down 1% from the prior year. NVR Inc., ranked No. 4, posted 8,487
closings in 2011, down 15.4% from the previous year.
Nine of the top 10 homebuilders are publicly traded companies, with Habitat for Humanity International
the No. 6 builder by total 2011 closings. Of the top 20 builders, there are six private builders. Besides
Habitat for Humanity, the other five private builders are Taylor Morrison, The Villages of Lake-Sumter,
David Weekley Homes, Highland Homes, and The Related Group.
Thus far in 2012, new home sales are posting relatively strong increases, exemplified by November 2012s
new home sales of 377,000 (15.3% above November 2011s 327,000 homes sold). While still low on a
historical basis, new home sales exemplify the recent improvement weve seen in the housing market.
Nevertheless, we believe the mix of new homes to existing homes will remain near the low end of the historical
range for several years to come. Foreclosures and repossessed homes owned by the banks are rapidly adding to
existing homes inventory, which puts downward pressure on new home sales.
Very often, homebuilders will seek to develop land in the outlying locations of metropolitan markets, where
land costs are lower and more abundant for master-planned communities. Location is everything in real
estate, and we believe that during housing downturns, new home communities sometimes suffer more from
declining pricing than existing homes, unless the properties are scarce or strategically located in prime real
estate locations. A larger newly-built house with a two-hour drive each way to work may be less attractive
due to high commuting costs compared with more affordable resale homes that are closer to work. We
believe there is evidence that the largest publicly traded homebuilders are more interested in purchasing
available developed land closer to downtown markets instead of exurban locations.
INDUSTRY TRENDS
When looking at the homebuilding industry, there are many factors to consider. As always, interest rates
and employment levels are key drivers. Indeed, the record low interest rates of recent years and aggressive
new mortgage financing options had been the source of much of the industrys strength and, perhaps,
speculation. However, with home sales having declined sharply since peaking in mid-2005, land sales and
land option contract cancellations picked up significantly from 2007 through 2009 before stabilizing in
2010. On the demand side, customer contract cancellations remained high in 2011 at levels in the mid-teens
to 20% for most players, while crossing 30% for a few top players. In 2012, cancellation rates remained at
high levels for most homebuilders, but improved slightly over 2011. For 2013, we see cancellation rates
remaining at rates consistent with 2012 levels.
MODEST HOUSING RECOVERY IN 2013

In our opinion, the housing market registered strong growth in 2012, and we see continued gains in 2013,
albeit at a more modest pace. While economist Beth Ann Bovino of Standard & Poors Economics (which
operates separately from S&P Capital IQ) is forecasting housing starts to rise to a projected 991,500 in
2013 from 778,300 in 2012, a 27.1% annual increase, single-family housing starts are expected to grow
more modestly, with much of the improvement expected to come from multifamily starts. We would also
underscore that annual housing starts of fewer than 1 million units are below the levels needed to support a
healthy US economy.
By our analysis, the top 12 publicly traded US homebuilders have ample liquidity, reduced debt outstanding
with longer debt maturity dates, and improved operating leverage with cost-control initiatives. Most of the top
12 builders have significant cash on hand for new acquisitions of developed land or purchases of attractive
unfinished new home communities left by private builders that went bankrupt. However, with tepid demand
in the housing market, the majority of builders have restrained from making significant land acquisitions in
recent months.
INDUSTRY SURVEYS
13
In November 2012, the National Association of Realtors (NAR) reported that the Pending Home Sales
Index, a measure of the number of homebuyers who signed contracts for existing homes, reached its highest
point in the past two and half years. The index rose to 106.4 in November, up 1.7% from October 2012
and 9.8% above the 96.9 reading in November 2011. This metric represents contracts and not actual
closings, which normally occur after a one- or two-month time lag.
Over the past twelve months, we have witnessed an industry trend of large homebuilders increasing their
efforts to build new home communities in existing or new markets where the housing downturn has created
opportunities for them to gain share in attractive markets. Given the increased demand, homebuilders have
been pressed to acquire enough land in order to develop new communities. However, with home prices
rising and a decreasing need for sales incentives to boost sales, homebuilders have been able to significantly
boost their gross margins. Across the board, gross margins are now in the mid- to high teens, and we see
margins widening further in 2013.
BUSINESS DYNAMICSNEW LAND ACQUISITIONS

Land acquisition is the most important day-to-day decision made by a homebuilder, with a companys
success (or failure) tied more closely to how well it buys land than to any other realm of its business. As
always, location and price are the most important considerations. The way that land is obtained, including
its method of financing, can enhance or mitigate a builders success in this endeavor.
Past practices in land procurement and management
We view the accumulation of land and subsequent write-downs, which have exceeded $35 billion since the
beginning of 2006 for the top 12 publicly traded homebuilders, as among the most important industry
effects resulting from the recession. That said, given the improvement in housing in 2012, we do not see
further write-downs being significant over the next 12 months. In addition, homebuilders have worked
down their speculative home inventories over the past few years.
Homebuilders ramped up their investments in land and land development, mainly to drive further market
share gains as part of the large builders business models and to maintain earnings momentum during the
past boom. It has become increasingly clear to us, however, that most builders overshot the fundamentals of
the housing market, and were stuck with larger land pipelines than they would have liked.
An increased use of options, which allow builders to control a considerable amount of land with relatively
little capital using cash deposits, may have helped to mitigate risks that were traditionally associated with a
builders land bank when sales rates were robust. However, there is a cost associated with these options that
sometimes means walking away from your cash deposits to cancel land option contracts.
As builders have scaled down their inventories in response to the downturn in the housing market
(following its peak in 2005), write-offs of deposits for option contracts and pre-acquisition costs, as well as
asset impairment charges, significantly eased in 2011 and 2012.
New land acquisition strategy
Many homebuilders have transitioned to a strategy that emphasizes the purchase of finished lots on more of
a just-in-time basis and away from a strategy where they acquired raw land and handled all development
work. NVR Inc. has practiced a just-in-time strategy for many years while other builders have moved in
this direction only more recently.
We believe land acquisitions are needed to support a growing level of new home communities to spur future
growth, and we expect homebuilders to more aggressively pursue land acquisitions when the housing
market shows more signs of recovery.
TRADEOFF BETWEEN PRICE AND UNIT VOLUMES

Data on prices across the nation, along with the average selling price for some builders, indicate that sales
prices showed some improvement in 2012 after several poor years. Prices fell in most regions of the US from
14
INDUSTRY SURVEYS
2008 through 2011, as homebuilders competed with the increasing number of foreclosed homes up for sale.
This marked a significant contrast to the heady pace of price increases from 2000 to 2005, when a number
of homebuilders saw their average home prices more than double. Because the sales price of a home is
critical to a companys profit margins, homebuilders will remain highly sensitive to this factor.
When buyers cancel orders, however, homebuilders number of speculative units (homes in which the
builder has not received a firm order) rises, which adds to inventory woes. Nonetheless, in the two years,
builders have done a good job of paring off speculative units, in our view, although contract cancellation
rates remained elevated in 2012.
When the housing market recovers, some homebuilders catering to first-time and move-up buyers will add
speculative units for sale, under the assumption that the potential upside benefits more than offset the risks
of a weaker housing market. The availability of speculative finished houses enables these homebuilders to
achieve a shorter time to complete a sale. The risk, of course, is that the spec homes require more time to
sell, which happened during the housing downturn and results in many more asset write-offs.
We believe the level of buyer incentives on new homes has tapered off from the high levels experienced in
the past two years, because the incentives are not stimulating more traffic to their home communities.
Homebuilder advertising is shifting to educating the market on new home communities or the economics of
home ownership versus renting.
AFFORDABLE, MORE FUNCTIONAL HOMES

When looking at homes, many prospective buyers are no longer aspiring for a luxurious lifestyle funded
mostly by debt. Reflecting this trend, the average square footage of new homes is now significantly smaller
than those built a few years ago. Qualified borrowers also often have to put down 10% to 20% cash on
new purchases. Safe and quiet neighborhoods close to work are desirable, where there are few adjacent
homes rented or scarce evidence of foreclosed properties.
Trophy homes with grand foyers, media rooms, first-floor office studies, and grand master bedrooms are no
longer the norm. Some of the must have features in demand during the housing bubble resulted in houses
that were not only more expensive to build and maintain, but also less functional and comfortable. For
example, cathedral-height great rooms and two-story foyers are impressive on first sight, but they often
resulted in heating and air conditioning inefficiencies as well as wasted space inside the structure. Fireplaces
are now included only in cold weather climates, and are no longer desired status items in Sunbelt markets.
In our opinion, success for homebuilders over the next two years will be determined in part by their ability to
create smaller, less custom homes that can appeal to a broader range of customers. Its about building new
homes that are practical, but personal, so that buyers of new homes believe they are getting something tailored
to their living needs. One homebuilder said that economies of scale come from cutting out all the corners and
angles of a new home and putting up something like a saltbox that has other features to make these smaller
homes attractive.
Generally, square or rectangular houses are less complicated and thus are easier, faster, and cheaper to
build, particularly from a framing and foundation standpoint. Some homebuilders say that minimizing
structural complexities allows them to spend more on other features (e.g., a deeper porch that doubles as an
outdoor living space). By incorporating features like higher front lot elevation or large windows and trim
detail, builders have opportunities to offer low-cost four-sided architecture that is pleasing to the eye.
Another adjustment by homebuilders to enhance the appeal of smaller homes has been to change the layout
of rooms whereby communal spaces like kitchens and family rooms have proportionately more square
footage than bedrooms and bathrooms because these areas get the most use and the most traffic. In some
cases, homebuilders are eliminating living and dining rooms, as lifestyles and economics show young
families do not view these rooms as must-haves.
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15
Other ways homebuilders can reduce costs but keep homes attractive are to reduce hallways that eat up
square footage. A straight staircase reduces hallways and open rails, baluster and other items that cost more
money. An open plan design can use stairs and kitchen islands for organizing storage. Wet areas (kitchen
and bathrooms) are stacked and form a spine to allow shorter plumbing runs. Front rooms of the house can
be converted from formal living and dining rooms to an office study or first-floor bedroom.
With smaller bedrooms, how do you get around the noise coming from teenage and younger children, and
multiple electronics such as televisions, stereos, mobile phones, video games, and computers? We think
homebuilders have figured out how to build smaller bedrooms with noise control by using a little extra
insulation between the bedroom walls and closets. Another way to create serenity is by using light through
window frames or skylights in bedrooms or bathrooms.
Kitchens remain the prize of most homes, in our opinion, and granite countertops are still popular.
Generally, homebuilders have listened to prospective buyers and have emphasized kitchen layouts that show
less clutter and plenty of cabinets for storage. A two-level island counter can provide a casual eating bar, as
well as hide the sink or dirty dishes in a kitchen with a layout that flows into a family room. With standard
room sizes, some buyers can upgrade premium fixtures for appliances and countertops.
Most families still like foyers as a transitional space that creates a sense of arrival and still gives a sense of
privacy to other rooms. In warmer climates in the Sunbelt states, covered outdoor space has become
popular with fire pits, outdoor grills, and bar areas installed.
While small may be beautiful in todays economy, we believe differentiation is still the key to selling new
homes. In our view, homebuilders should focus on giving prospective homebuyers a reason to buy a new
home over a resale or an available distressed property. Here are some examples of the most desired home
design features, according to Builder magazine survey of 11,335 homeowners, which was published in its
November 2010 issue. The top 10 most desired home design features (in order of importance) were walk-in
closets, energy-efficient appliances, an overall energy-efficient home, linen closets, a large kitchen, highefficiency insulation, high window efficiency, and kitchen island, large windows, and ceiling fans. While
Builder magazine hasnt updated these results, we think they would be quite similar today.
Housing affordability is key growth driver
One has to question whether families are making concerted efforts to save more and spend less, and
whether this affects housing lifestyles. Up until now, consumers have been spending money while still
cutting down on debt, according to Standard & Poors Economics.
We do know that banks are no longer offering new mortgages with little or no down payments on a
purchased home. Banks credit guidelines are now much more conservative in determining whether a family
qualifies for a mortgage. Perhaps the only way for American families to return to their historical levels of
wealth is to save 5% or more of their future income over the next decade, in our opinion. In addition, risk
tolerance levels are now much lower, as families college or retirement nest eggs have declined significantly
over the last several years.
As of December 2012, Standard & Poors Economics was forecasting that the US savings rate would ease to
3.7% in 2012 from 4.7% in 2011. It expects the savings rate to be 3.3% in 2013. Further, it sees savings
settling in at the 3.5%4.5% area through 2015, far below the 8.9% average from 1960 to 1990. Theres
still a chance that the savings rate could increase more than Standard & Poors economists expect, but they
think that consumer spending will lag GDP growth over the coming years. Again, Standard & Poors
believes that families spend more out of income than out of wealth, and their largest problem remains the
lack of jobs.
DEMOGRAPHIC TRENDS
Demographics are a key input to executive decision making at homebuilders. Even though these trends are
constantly changing, they can reveal much about the potential markets for new homes.
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INDUSTRY SURVEYS
Echo boomers will be a big factor

In 2012, the Joint Center for Housing Studies (JCHS) at Harvard University released a report on the state of
the housing market. This report provides a current assessment of the housing market; housings role in the
economy; housing affordability challenges, and the demographic trends driving long-run housing demand.
US RESIDENT POPULATION PROJECTIONS
(In thousands)
- - - - % CHANGE - - - AGE GROUP
2013
2020
2030
Under 5 yrs.
20,428
% of total
6.5
5 to 14 yrs.
41,145
% of total
13.0
15 to 19 yrs.
21,108
% of total
6.7
20 to 24 yrs.
22,766
% of total
7.2
Table 42,820
25 to 34 yrs.
USPOP 13.5
% of total
35 to 44 yrs.
40,430
% of total
12.8
45 to 64 yrs.
83,052
% of total
26.2
65 yrs. & over
44,689
% of total
14.1
Total population
316,439
21,808
6.5
41,923
12.6
20,806
6.2
21,651
6.5
46,271
13.9
42,230
12.6
83,238
24.9
55,969
16.8
333,896
22,252
6.2
44,815
12.5
21,946
6.1
21,940
6.1
46,052
12.8
47,826
13.3
80,865
22.6
72,774
20.3
358,471
2013- 20 2013- 30
6.8
8.9
1.9
8.9
(1.4)
4.0
(4.9)
(3.6)
8.1
7.5
The 2012 housing outlook study forecasts

that housing demand will largely be shaped
by the aging of the echo boomers into
adulthood and that the baby boomers who
reached 65 in 2012 will contribute only a
small share to housing demand over the
coming years.
Immigration continues to show signs of a
slowdown and the foreign-born population
has also slowed in the last decade.
Lower household formation by younger

adults is not likely to help spark housing
4.5
18.3
demand. The study points to 1.95 million
young adults (18-34 years old) who are
0.2
(2.6)
currently living at home. We concur with
the study that high unemployment levels
25.2
62.8
among young adults have kept young
households from living independently.
5.5
13.3
Although job growth has picked up since
Racial composition (%):
the trough in employment in December
White
77.8
76.5
74.7
2009, the jobs have largely gone to older
Black
13.2
13.4
13.7
workers. In fact, according to the Bureau of
Asian
5.1
5.7
6.4
Labor Statistics, of the 5.28 million jobs
Other
3.9
4.4
5.2
created from December 2009 to December
Hispanic (any race)
17.2
19.1
21.9
2012, 3.87 million jobs went to workers
Note: Totals may not add due to rounding.
aged 55 or older. On the flip side, only
Source: US Department of Commerce.
334,000 jobs went to workers aged 25-54,
the group that best represents workers in their peak earning years as well as those most likely to drive
household formation.
The JCHS noted that there are two drivers of household growth that were headwinds: headship trends (the
rate at which people form independent households), and immigration, both of which are weak. The third
driver, the growth of adult population, is contributing favorably to household growth.
SUSTAINABILITY MAY SPARK NEW HOUSING DEMAND

In its 2013 Dodge Construction Green Outlook report, McGraw-Hill Construction (which is a unit of the
McGraw-Hill Companies Inc.) says that government actions (such as legislation policies, voluntary
programs, and financial incentives) are encouraging green building practices. The report claims that the
value of green building (including both residential and non-residential construction) has shot up from a
paltry $10 billion in 2005 to a projected $85 billion in 2012. In 2013, green building is projected to rise to
between $98 billion and $106 billion, and by 2016, it should range between $204 billion and $248 billion.
According to the report, residential green construction is expected to comprise 20% of the market, with a
22%25% share expected by the end of 2013. Following this trend, one-third of all homebuilders in the US
expect to be fully dedicated to building green in 2016.
One homebuilder that stands out in its green efforts is KB Home, which has made sustainability a key
component of its corporate character. Environmental sustainability, in the housing sense, means a new way
of driving cost savings with energy conservation and appealing to the eco-friendly lifestyles of younger
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17
homebuyers or those going green. For the moment, KB Home is the only publicly traded builder to publish
a comprehensive sustainability report and has done so annually since 2007.
We see sustainability as a way of differentiating new homes from existing homes and distressed properties
that are for sale. In June 2011, KB Home said that it has built over 60,000 ENERGY STAR qualified homes
since joining the program in 2000. KB is the first homebuilder to meet the ENERGY STAR guidelines of the
US Environmental Protection Agency (EPA), and it was the winner of the EPAs 2011 ENERGY STAR
Sustained Excellence Award, which is the EPAs highest award.
The company has identified three key areas of focus: water efficiency and conservation, building sciences
innovation, and job-site waste reduction. For water efficiency, KB Home ensures all toilet, faucet, and
showerhead products are WaterSense labeled. The target has been to reduce water consumption in the
bathroom by at least 20%. Inclusion of these standards should reduce household water costs and, in many
cases, reduce the need for added infrastructure for water treatment and transportation for the companys new
communities. The company has said that, for every 5,000 of its homes that are outfitted with WaterSense
products and other green products, the projected annual savings are 100 million gallons of water, 10 million
cubic feet of natural gas, and $800,000 in water and natural gas bills. For its sustained efforts toward water
conservation, KB Home was honored by the EPA as a 2011 WaterSense Partner of the Year.
Building sciences innovation involves a wide range of energy improvements, both inside and outside of the
home. For instance, all the companys homes are built with radiant barrier roofing, which can save
households up to 17% on monthly air conditioning bills. The roofing material helps block the suns radiant
heat from entering the attic through the roof and can lower attic temperatures by up to 30 degrees in the
summer. Solar panels are another option that can reduce energy costs. KB Home, in partnership with a
Chinese green technology supplier, is offering a solar photovoltaic (PV) system and an energy storage
battery system, as well as LED energy-efficient lights. KB Home has also installed pre-wired outlets in the
garage to charge an electric vehicle.
Finally, homebuilder communities are construction sites with job site wastes. KB Home has devised a Waste
Tracker system to report waste diverted by category. The company intends to find new ways to reduce
waste in its new home communities and offices. Management has initiated 100% division participation to
complete quarterly waste reduction action plans and comply with companywide job site waste reduction
standards.
KB Homes is showing leadership in sustainability for its homes through the creation of the KB Home
Energy Performance Guide (EPG). Similar to the miles-per-gallon rating for cars, it looks like the sticker you
see on a new washer, dryer, or refrigerator, which shows how much the machine will cost to run at varying
energy cost assumptions. In large bold letters, the EPG shows the estimated dollar amounts for monthly
electric and gas costs for the new home. While we are uncertain if other homebuilders have embraced such a
useful tool for consumers, we think it provides prospective homebuyers with an excellent visual way of
seeing what a home may cost on a monthly basis, especially for electric and gas.
In conclusion, we believe sustainability is one way to differentiate a homebuilders community from existing
homes for sale, especially distressed properties. We believe KB Home has a first-mover advantage over many
other homebuilders that will have to play catch-up regarding sustainability programs.
SOME HOMEBUILDERS LOOK TO DIVERSIFICATION FOR GROWTH

What are homebuilders to do now in an environment of weak housing demand? For US publicly traded
homebuilders that wrote off more than $35 billion during the housing bust of 2007 through 2011, some
have found their opportunity in diversification. In our view, the D word does not always sit well with
investors. For instance, the action to diversify into new businesses can be taken as a sign that things are not
going well in a companys core business, which was the case for homebuilders during the recent downturn.
Near term, demand for, and traffic to, new home communities remains weak by historical standards, and
cancellation rates remain high, which erode gross new contracts that eventually net out to home deliveries.
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INDUSTRY SURVEYS
Longer term, the dozen or so publicly traded homebuilders will gain market share from private builders that
can only get financing from local banks, but the bigger question beyond market share gain is whether the
homebuilding market will get back to pre-recession or normalized size.
The good news is that most homebuilders have strong balance sheets and ample liquidity for new land
acquisitions and investing in new businesses. So, the question remains, where can these companies get a
higher return on investment for their capital? Most of the homebuilders are sitting on cash, which, in some
cases, exceeds $1 billion, but a few are looking to make money in diversified businesses.
For instance, Lennar Corp. has experience in investing in distressed government mortgage securities. The
company founded Rialto Investments in 2007 to take advantage of the turmoil in the real estate market. In
2010, in partnership with the US Treasury, the two companies closed on $4.6 billion in securities to invest
in and manage commercial and residential mortgage-backed securities. In 2010, Lennar also purchased
equity interests in two partnerships containing $3.1 billion of distressed loans alongside the Federal Deposit
Insurance Corp. (FDIC) as part of the government program of clearing distressed assets from failed financial
institutions.
In April 2011, Beazer Homes USA Inc., another top 10 homebuilder, introduced its Pre-Owned Homes
Division. Starting with the Phoenix market, the new division will be acquiring, improving, and renting
recently built, previously owned homes within select communities in which the company currently operates.
In our view, Beazer is trying to maintain the overall quality of its home communities by fixing up distressed
or foreclosed homes.
Beazer intends to acquire these homes at a discount to their replacement cost and then rent them. The
Phoenix rental market, like the rest of the country, is very strong, as households have opted to rent instead
of pursuing home ownership. Beazer may expand its Pre-Owned Homes properties to Nevada and
California, areas that are rife with distressed and foreclosed homes.
Toll Brothers Inc., the market leader in the luxury home segment, provides another example of
diversification. In March 2011, a venture between its wholly owned subsidiary, Gibraltar Capital and Asset
Management LLC, and Deutsche Bank announced the closing of a transaction to buy 83 non-performing
loans with outstanding balances totaling about $200 million. The assets are located in nine states and
Washington, D.C., and comprise construction loans secured by properties at various stages of completion.
The Gibraltar subsidiary has a total of nearly $2 billion in its real estate portfolio.
Should the housing market fail in its recovery efforts, we believe other homebuilders will look to diversify
investments away from building new homes. Absent signs of a continued housing market recovery, we think
builders will be reluctant to spend too much on raw or improved land acquisitions, as long as demand is not
there. We think most homebuilders will increase land spending once they are confident that a housing
recovery is firmly in place. Although we are confident that the bottom has been reached, we think several
more quarters of solid growth need to be put in before builders can claim that the recovery is firmly in
place.
US GOVERNMENT SUPPORTS HOME MORTGAGES

A common complaint among large homebuilders was a lack of available attractive home lots, increasingly
blamed on slow-moving regulatory bodies. However, the US housing recession has created an extraordinary
supply of undeveloped lots. With the economy beginning to stabilize (although it has not strengthened by
any large measure), we believe transactions for undeveloped lots and communities for sale will continue to
pick up between buyers (homebuilders) and sellers (landowners, including banks).
Permitting, regulatory approval increasingly rigorous
We think that relatively tame permit activity is partly reflective of a higher level of regulatory scrutiny, as
communities try to balance the need for new housing with the greater good of their existing citizenry. The
regulatory environment has been especially challenging by a growing scarcity of developable land and rising
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concerns over home affordability and sprawl, as well as increased political fervor and a wider regulatory
framework.
Additional development costs (e.g., rezoning), along with delays in development, building, and eventual
sales, have resulted from a growing number of constituencies exercising their voices. Input from these
constituencies, however costly, shapes the homebuilding landscape by helping to determine numerous
factorsfrom where builders choose to buy land to average lot sizes on that landand can even directly
influence home prices.
Hobbled GSEs still play central role in mortgage market
In addition to the temporary tax credit for new homebuyers that expired on April 30, 2010, another major
act by the federal governmentthe takeover of the government sponsored enterprises (GSEs) Federal
National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mae) as a
conservatorhappened in September 2008. We believe this action also had a great impact on the availability
of credit and the lowering of the cost of credit in the conforming mortgage market. Even with these
initiatives by the US government, we believe credit guidelines will become more conservative than they were
in the building boom period that lasted into the first half of 2006.
Since October 2008, the GSEs have been the primary source of issuing new mortgages; we believe that
banks have not been very active in the new mortgage markets as they are still distracted with their own
liquidity and balance sheet risks, although there has been some pick-up of activity by banks starting in the
summer of 2010. As of January 2013, the residential mortgage bank credit environment remained
restrictive, in our opinion. In addition, we think that many applicants believe their credit worthiness is much
stronger than it really is, as calculated by the FICO standardized scores.
Historically low mortgage rates helped stimulate demand for housing and contributed to rapid home price
appreciation. Following the bursting of the technology stock bubble in 2000 and the recession in 2001,
more homeowners began to treat their homes as investments out of which equity could be withdrawn,
aiding consumption growth for the nations economy. Meanwhile, a growing number of investors began
buying and selling homes. Both trends resulted in a boom for national home prices, which in turn spurred
the growth of affordable mortgage products, along with looser lending standards and the extension of credit
to borrowers who may not have qualified for mortgages in prior years.
Innovations in mortgage origination compound poor credit guidelines
Among the innovations that contributed to mortgage origination growth were product features tied to
adjustable rate mortgages (ARMs), such as an interest-only component in which borrowers paid only the
interest on the loan for an introductory period. Other mortgages, such as payment-option ARMs, gave
borrowers the ability to make minimum payments that might have been less than the monthly interest.
These products primarily addressed the lack of affordable homes in many of the nations housing markets.
Borrowers also benefited from lower down payment requirements and the availability of second lien (or
piggyback) loans to help with down payments for more expensive homes. Many investors that already had
mortgages on other properties were avid users of second lien products as part of speculative strategies.
These new sources of financing also brought about a large level of first-time homebuyers and investors.
However, the current housing downturn is resulting in more housing inventory coming back on the market
through foreclosures, and homebuyers are encountering difficulty in keeping up with mortgage payments.
Among the concerns with subprime and other non-conventional mortgages is the possibility that a
borrowers payments can rise sharply after the interest-only period, or when the adjustable portion of the
mortgage resets to a higher rate. With a payment-option ARM, the borrower likely experienced negative
amortization, because any unpaid interest is added to the balance of the mortgage loan. The borrowers
balance then became higher than the amount originally borrowed.
Many ARMs were extended to subprime borrowers. The poor performance of a large percentage of
subprime loans, particularly those originated in 2005 and 2006, contributed to the high delinquency rate for
subprime loans during 2007 through 2009.
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INDUSTRY SURVEYS
GSEs still at risk

Freddie Mac and Fannie Mae were both placed into conservatorship by their regulator, the Federal Housing
Finance Agency (FHFA) in September 2008. This step was taken to help restore confidence in both companies,
to enhance their lending capacity to fulfill their mission, and to mitigate the systemic risk that contributed
directly to instability in the mortgage markets.
The FHFAs stated objectives during conservatorship include restoring the GSEs to a sound and solvent
financial condition and enhancing their capacity to fulfill their mission. In the short term, the FHFAs
emphasis is on ensuring Freddie Mac and Fannie Mae provide critically needed support to the mortgage
market through both growing their guarantee business and increasing their purchases of mortgage-backed
securities for the mortgage-related investments portfolio.
During conservatorship, the FHFA has suspended the GSEs regulatory capital requirements. In addition,
the US Treasury is prepared to provide as much capital to Fannie Mae and Freddie Mac as needed to maintain
a positive net worth. To date, there has been no proposed federal legislation on what to do about the capital
requirements of either Fannie or Freddie to support the bad mortgages in their trillion-dollar portfolios.
Obama Administration proposes reforming the housing finance market
In February 2011, the Obama Administration delivered a report to Congress that recommended some form
of privatization, with federal support, for replacing Fannie Mae and Freddie Mac. In the report, called
Reforming Americas Housing Finance Market, the administration saw three potential options for fixing
the mortgage problem.
The first is a largely privatized system of housing finance, with the federal government only supporting
mortgage availability for low-income households through the Federal Housing Administration (FHA), the
US Department of Veterans Affairs (VA), and the US Department of Agriculture (USDA). The second option
is a hybrid public/private system in which the government would backstop the private sector in an emergency
with federal mortgage insurance facilities. The third option places the government in a more complex role as
a full-time federal catastrophic reinsurer for private guarantors of mortgage-backed securities. Currently,
the residential mortgage-backed securities market remains dormant, in contrast to its active role leading up
to the financial meltdown in 2008.
On October 1, 2011, the US government rolled back the temporary raise in loan limits, which were
originally put in place through the Economic Stimulus Act of 2008, from $729,750 to $625,500. However,
on November 17, Congress approved the bill to raise the FHA-conforming loan limit up to $729,750
through 2013. The move was seen as sign of lawmakers concern over the still-depressed state of the
housing sector. However, the loan limit for Fannie Mae and Freddie Mac was left untouched at $625,500.
HOW THE INDUSTRY OPERATES

The homebuilding industry can be divided into two main categories: conventional site-built homes and
manufactured housing. Site-built homes are erected permanently on land that is sold along with the house.
Types of conventional dwellings include single-family and multifamily units, which can be attached or
detached homes.
Manufactured homes, as their name implies, are produced in an assembly-line format at a typical factory.
Once built, they are shipped (usually in sections) to a lot, where they are installed. Although there is a
market for large, higher-end manufactured homes, the average price of manufactured homes is substantially
lower than for site-built homes. The growth characteristics and underlying economics of factory-built homes
are very different from traditional in the ground homes, although the past recession made this home
category more attractive to households with lower incomes or intentions to reduce mortgage debt levels.
The homebuilding industry is highly fragmented, with builders ranging in size from small businesses that
construct a handful of homes to so-called velocity buildersthe largest companies that sell homes in
hundreds of communities at any one time. Until the mid-1990s, even the largest builders tended to focus on
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a single market or region. Over the past 10 or 15 years, however, the largest publicly traded builders
expanded to such an extent that they are national rather than regional in scope. To facilitate this change,
divisional management teams typically oversee the day-to-day operations of entire regions, which is
analogous to operating segments within traditional corporations. As with large corporations, these separate
units operate with relative autonomy but remain accountable to the home office, which, along with
divisional oversight, concerns itself largely with strategic decisions.
Given the considerable amount of money that an average buyer must borrow to purchase a homeloan-tovalue ratios range from 70% to 90% among our coverage universethe homebuilding industry experiences
cyclical moves based primarily on the level and direction of interest rates (generally) and mortgage rates
(specifically).
CONVENTIONAL HOMES: FROM THE GROUND UP

The on-site homebuilders first steps are to determine the geographic areas in which it wants to build homes,
and to acquire raw land or lots (lands that have been developed for building). In most cases, the builder will
buy at least enough land to support a community of no fewer than 50 homes. Homebuilders try to tailor
their land purchases to the corresponding markets characteristics, based on characteristics of the selling
community, comprised primarily of developers or landowners, as they also keep in mind what might best
serve their ultimate home consumer. Typically, in any given market, most participants are aware (or are
made aware) of large land parcels when they become availableeither through negotiated sale or by
competitive auction. More often than not, the sale is negotiated between the lands owner and/or developer
and the homebuilder. However, in some casesespecially for unusually large tracts of landthe sale is
made through a bidding process.
Most land acquired by the average builder in our universe is purchased through option contracts, and
payment is predominantly made at the options expiration. Especially in areas where available land is
relatively scarce or where the entitlement process is comparatively long, option-based purchases can make a
lot of sense, based partly on the financial flexibility they provide to the homebuilder. Such contracts require
builders to pay only a small fraction of the total lot costs up front, and they tend to have few (if any)
performance requirements. These kinds of contracts are often renewable, generally expire on a rolling basis,
and have a specified exercise price. During the housing downturn that began in 2006, many large
homebuilders terminated their land option contracts, thereby losing their cash deposits. Their assumption
was that demand in the housing market would not rebound for some time and that they would be able to
repurchase land at much lower prices as the economy emerges from recession.
Because the decision whether or not to acquire land is the single most important decision a builder makes,
considerable effort is made in this endeavor. The large, publicly traded builders have land acquisition teams,
each with its own geographic expertise; however, key executives, including the chief executive officer, often
play an integral role in land-acquisition decisions due to the potential size and scope of the deals.
Land acquisition experts typically scout the market for recent sales of new homes in search of comparable
properties. These comparable properties provide the basis for a detailed analysis aimed at determining an
estimate of the selling price for homes being considered for construction. Based on a list of no fewer than 20
items, the company contrasts the comparable homes features to the typical home that it would build,
assigning dollar values to the units differences. These differences, which try to approximate the value that
buyers place on certain features (for example, lot lines and design), are summed and netted against the sales
price of the comparable home, in order to arrive at a hypothetical sales price for the builders proposed units.
From the hypothetical sales price generated by this exercise, the builder imputes a minimum rate of return
(at least 15% to 20%, after tax and overhead) on its total potential investment to arrive at the amount it
might be willing to pay for the related home site. With all costs (other than land) relatively predictable, the
cost of land becomes a plug figure in the internal rate of return calculation. The purchase decision is usually
contingent upon satisfying this minimum return (or hurdle) rate, which usually makes no assumption for
home price inflation. Again, as homebuilders try to be opportunistic coming out of recession, their proposed
offers to banks for land holdings from bankruptcies may not be attractive at certain prices. We believe low
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INDUSTRY SURVEYS
bids by homebuilders are tied to driving rate of returns above the 20% level. In 2013, we believe that banks
will be more willing sellers as they begin to reduce their exposure to repossessed homes that sit in shadow
inventory for the housing market. In 2012, banks sold down some of their REO inventory (Real Estate
Owned, which is simply repossessed foreclosed homes), but higher home prices should accelerate this
process in 2013. However, homebuilders are more inclined to buy unfinished communities or undeveloped
land, while homeowners or investors tend to purchase repossessed homes from banks.
In our view, homebuilders are willing buyers of improved land at the right price. The time it takes for
housing construction to get to market with acquired improved land ranges from weeks to a few months,
versus the years it takes to gain municipal and environmental licenses and approvals for raw land.
After land is obtained, the builder must then oversee a range of duties leading up to home construction: land
and site planning; procurement of environmental and other regulatory approvals; and construction of roads,
sewers, and water and drainage facilities. This tends to be an iterative process, with numerous constituencies
working under the builders direction throughout. Given its time-consuming nature, this work, although
necessary, tends to add relatively little value to the homes it supports. As a result, builders subcontract most
development-related work to local professionals.
Navigating the entitlement process
The entitlement process, although costly and time-consuming, helps ensure a healthier environment and
better-built homes. From land purchase to home construction and sale, the builder and its subcontractors
must comply with extensive, complex, and increasingly unwieldy regulations. Before breaking ground on a
single home, a builder might have to answer to dozens (if not hundreds) of different constituencies. Those
included are at the federal, state, and local levels, where laws pertain to worker health and safety, along
with rules guiding zoning, building design, advertising, and consumer credit. Their complexity tends to vary
by state, with affluent coastal states being the most restrictive.
Homebuilding operations are also subject to environmental laws and regulations, including those concerned
with water availability, municipal sewer treatment capacity, land use, population density, protection of
endangered species, and preservation of natural terrain and coastlines. In addition, there are rules and
regulations affecting construction activities, some of which pertain to the building materials that may be
used and those that must be avoided.
Design and marketing
After readying a site, the builder moves on to the next step: designing the homes. Design work can be
approached in various ways. Builders that focus on a particular geographic region, and believe that they
understand the type of home favored there, will undertake the design process themselves. However, most
high-volume builders are likely to hire local architects, interior designers, and the like, either as consultants
to help select designs or to create the design. Working in this manner strengthens their knowledge of home
styles favored in the various markets and helps diversify their risks.
Of course, home designers must pay close attention to standards established by diverse regulatory entities,
lest they add delays and unnecessary costs to the process. However, the overriding objective is to appeal to
the tastes and income levels of a diverse customer base, because missteps here affect sales.
The prospective homebuyer, with the help of the Internet, is far more knowledgeable today than in the past,
and often demands much greater say in the homes design, beginning with the selection of a floor plan and
model. Toll Brothers Inc.s Design Center is an easy-to-navigate virtual tour that allows its buyers to
search and select from hundreds of design combinations. This helps to alleviate much of the fear a buyer
might have in purchasing that builders typical home. For builders, the Internet not only facilitates sales
efforts at a minimal technology cost, but also leads to increased sales of highly profitable upgrades.
In any single community, the typical production builder can offer buyers a number of different floor plans,
each with its own set of options or upgrades. Design must go hand-in-hand with the way a home is
marketed. In an attempt to capture more than one market segment, some builders employ more than a
single design and marketing program to match a broader base of potential buyers. For example, Lennar
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Corp. offers several approaches, depending on the neighborhood. Homes in the Everythings Included
group have comparatively fewer options and are marketed as a better value, while homes in the Design
Studio line are more customized (with design consultants available) and are pitched to those who want
their new home to be a reflection of their personal taste and lifestyle. Although providing a limited choice to
some home-buying segments can simplify and enhance the process, sales of options and upgrades can
meaningfully boost a homes profitability.
Buying materials and procuring labor
In our opinion, homebuilding can be viewed as a variable cost business. Most builders purchase their own
materials and work alongside their subcontractors to coordinate purchases. For site-built homes, the
predominant raw materials are typically wood products and concrete; sheetrock and windows are important
as well. Fixtures needed for bathrooms, kitchens, heating systems, and so on also must be obtained.
Big builders typically purchase their materials through a centralized purchasing organization or department.
The purchasing department oversees the ordering of all of a builders materials, which lets it take advantage
of discounts on large orders. Builders generally use a competitive bidding format to obtain favorable pricing
and high-quality materials from their suppliers. They also seek to streamline operations by using standardized
materials that are commercially available from a number of suppliers. Although some builders, such as Toll
Brothers, are becoming increasingly vertically integrated, this is not a trend for the industry, and it remains
the exception rather than the rule.
Most major builders hire independent subcontractors to do everything from framing through finish work.
Construction crews are generally selected based on competitive bids and are paid a fixed sum for their
services. In general, subcontractors either own or lease the equipment they use; they also take care of their
hiring and payroll expenses. This arrangement helps builders to avoid the large capital outlays necessary for
the purchase of construction equipment and holds down direct employee labor costs.
The builders primary responsibility during the construction process is to provide on-site superintendents or
project managers who supervise and coordinate the building process. These employees make certain that
subcontractors meet the quality and cost-control standards established by the two parties.
The construction process
For a homebuilder, the construction process is all-important. Customers and mortgage lenders rely on
builders to erect a structure that is not only highly durable but also attractive. As large builders have
expanded, essentially becoming national brands, establishing quality standards across all of their operations
has taken on greater importance. A builder with a reputation for substandard work will obviously have
trouble selling its homes and may even face legal trouble. For example, in the wake of Hurricane Andrew in
1992, certain Florida builders were sued for faulty work and for using substandard materials.
Builders have different approaches to timing the start of construction. The more aggressive ones like to have
inventory on hand to satisfy customers who want a home immediately; this allows them to make sales that
otherwise might be lost. When the housing market slows, however, builders holding high levels of inventory
may find themselves in a precarious situation: those extra homes become difficult to unload, and builders
often incur high carrying costs.
Risk-averse builders take steps to minimize the possibility of having excess inventory levels. In the most
conservative case, a builder will not begin construction of a home until it receives an executed purchase
contract, a deposit from the customer, and notification of preliminary mortgage approval for that customer.
In either case, construction and the simultaneous sale of homes usually are carried out in phases, with each
phase comprising a block of homes. A typical builder will begin construction of a community only after
exceeding some predetermined threshold of signed new contracts. Once begun, that builder usually will wait
until a certain number of homes within a section are sold before beginning the next phase. By methodically
moving from phase to phase, a builder can exert greater control over many critical stages of the overall
process, including pricing. From inventory-friendly material procurement, to maximizing labors efficiency,
to a timely ultimate home sale, the builders jobs are made far more manageable as a result.
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Finding homebuyers
Builders deploy a variety of sales personnel and methods to make sales. Nearly all conduct sales through
their own in-house brokers; most also encourage sales by independent real estate brokers. They draw
prospective customers through newspaper and magazine advertising, billboards, and direct mail, as well as
through customer referrals and real estate representative contacts. Nearly all large builders have established
websites, which feature comprehensive information on their home offerings, including pictures, floor plans,
and various other items of interest.
Most large builders construct, furnish, and landscape a series of model homes in order to show prospective
buyers what the final products look like and to demonstrate some of the available options. Models often
display features popular among area residents, which can include vaulted ceilings, kitchen islands, kitchens
that open onto family rooms, wall-to-wall carpeting, and front-yard landscaping. Some contain upscale
features such as swimming pools, fireplaces, and decksluxuries typically available at further cost. The
sales staff provides additional information about floor plans, elevations, decorating, and financing options,
to prospective customers who visit a builders model homes.
Customer financing
If the companys sales efforts succeed in persuading a customer to place an order for a home, the builders
next important step is often to help the customer obtain a mortgage. Many large builders operate mortgage
banking units in the belief that, in addition to supplementing profits from the sale of a home, it gives them
the ability to offer customers financing on competitive terms, an important factor in completing that sale.
Fees earned from mortgage servicing provide a steady stream of income.
Many builders follow procedures necessary for some of their homes to qualify under US Department of
Veterans Affairs (VA) and Federal Housing Administration (FHA) mortgage financing programs, which let
customers choose from a large number of financing sources. In general, builders with mortgage banking
arms tend to offer conventional, FHA-insured, and VA-guaranteed mortgage loans to buyers of their homes,
as well as to other buyers. Conventional loans originated by these firms typically qualify for loan guarantee
programs sponsored by the Federal National Mortgage Association (Fannie Mae) or the Federal Home
Loan Mortgage Corp. (Freddie Mac).
To gain the favor of prospective buyers, some builders financing units used to offer a maximum limit on a
mortgage interest rate at the time of the home sale. However, tighter credit guidelines during the housing
downturn have eliminated that marketing tool. Finally, as the last steps in the sales process, many builders
arrange title insurance and provide closing services for buyers of their homes. Some provide these services
for buyers of other builders homes, as well.
COMPUTER TECHNOLOGY: EXPANDING APPLICATIONS

The use of computers is already helping builders and customers in both the design and business processes.
Builders are increasingly adapting their businesses to use computer technology to help them meet the desires
of prospective customers.
According to Builder magazine, contractors first began using computer-aided design (CAD) in the mid1980s, when programs were available to produce two-dimensional drawings. Shortly afterward, programs
were able to generate three-dimensional views, along with materials lists. Today, highly advanced programs
make it possible for a contractor to give clients a virtual tour before their prospective home is built. Builders
also rely on computer applications to show buyers available options, draw up sales contracts, and promote
communication with clients and subcontractors.
Websites aid sales efforts
Many builders are using the Internet extensively as a sales tool, maintaining websites to make themselves
and their offerings known to the public. A well-designed and easy-to-navigate website can reach many
potential buyers and be very advantageous to a builder. Many builders have online design studios,
interactive maps and 360-degree web videos of select rooms in their sales model houses.
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Builder Homesite Inc., which was launched in the fall of 2001, is a consortium of 32 of the nations largest
homebuilders. Its flagship product is NewHomeSource.com, a consumer website that features new home
brands and resources from many participating builders and manufacturers. NewHomeSource allows visitors
to search for a new homebased on home type, price, location or neighborhood, commuting distance, and
school districtand to receive a complete listing of all new homes meeting their criteria. Photos and floor
plans are also available.
For US homebuilders, NewHomeSource is the first national home marketplace focused specifically on the
new home market. A newly constructed home offers consumers a wide selection of styles, locations, options,
and features that arent available in existing homes. NewHomeSource provides prospective homebuyers
with the most comprehensive information and selection of new homes available on the Internet.
KEY INDUSTRY RATIOS AND STATISTICS

We consider the level of long-term interest rates to be the most important factor by far in the purchase of a
home. Interest rates, job growth, and consumer confidence are the three primary leading indicators of
housing demand.
Numerous other variables statistically correlate with home sales, and a comprehensive discussion of home
sales demands some brief discussion of them, even though they may not be causal. Trends for some of these
macroeconomic factors, such as population growth and household formations, are both relatively static and
highly predictable. However, even if one could perfectly anticipate the countrys population growth through
2015, the value of that predictionat least in terms of forecasting home saleswould be negligible, in our
view. Nonetheless, long-term forecasts of population growth do help in determining secular demand.
Certain other measures, such as gross domestic product (GDP), while important, are not especially
predictive. In fact, GDP is a trailing indicator, rather than a leading one, for homebuilding. GDP is generally
viewed as a dependent variable, not an independent variable; therefore, it is better used to confirm past
trends in housing than to predict future trends. Below, we discuss the leading indicators of home-buying
demand, in order of their importance.
Interest rates. In assessing the overall industry outlook for homebuilders, the level and direction of interest
rates are typically the most important factors in determining future housing market trends. For example, the
most recent highly favorable building cycle, which peaked in the second quarter of 2005, included a multiyear
period of historically low job growth, as well as consumer confidence that had witnessed a precipitous decline.
Additional factorsincluding a recession at the beginning of the decade and global unrest following the
terrorist attacks of September 11, 2001failed to materially dampen demand for new homes.
New home sales trends have long been known to move in the opposite direction of long-term interest rates;
as rates rise, so does the interest component, which is typically the largest part of the monthly payment in
the early years of an adjustable rate mortgage. Conversely, a drop in interest rates makes home payments
lower for adjustable rate mortgagesall else being equaland home purchases more attractive to
prospective buyers.
Interest rate predictions are unreliable and difficult to make. Nevertheless, in evaluating the likely direction
of interest rates, it helps to examine the level of domestic economic growth, inflation, and unemployment
levelskey variables in helping to determine the Federal Reserves rate policy. Market factors tend to make
interest rates rise in response to overheated economic or pricing conditions; conversely, rates tend to fall
when the economy is in need of stimulus.
Rates for 10-year Treasury notes (the proxy for long-term mortgage rates), which stood at 4.6% in 2007,
dropped to 3.2% in 2010 and then to 2.8% in 2011. As of December 2012, Standard & Poors Economics
(which operates separately from S&P Capital IQ) was expecting the 10-year rate to drop to 1.8% in 2012,
but to rise to 2.0% in 2013. The main reason for the recent decline in yields has been intervention from the
Federal Reserve, which began a bond-buying program intended to lower yields and spur economic growth.
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As of January 2013, the Federal Reserve began buying approximately $85 billion in bonds each month,
comprised primarily of long-dated Treasury bonds and mortgage-backed securities. Standard & Poors
Economics expects this program to continue throughout 2013.
Often, it takes some time before a change in interest rates is reflected in a homebuilders operating
performance. Once interest rates begin to move upward, demand may remain the sameor even increase,
initiallyas previously undecided buyers rush to purchase before rates rise. Conversely, when rates begin to
decline, demand may not increase immediately, as buyers wait for rates to drop further before striking a deal.
After peaking at a monthly average of 8.52% in May 2000, interest rates on conventional 30-year fixed-rate
mortgages followed a mostly downward path, bottoming in late June 2003 at 5.23%a 46-year low. They
subsequently rose, averaging as high as 6.7% in July 2006, according to Freddie Mac. In 2007 and 2008,
30-year mortgage rates averaged 6.3% and 6% before dipping to 4.5% in the summer of 2010, according
to Freddie Macs weekly primary mortgage market survey. As of mid-January 2013, mortgage rates hovered
slightly below 3.40%, after averaging 3.66% in 2012 and 4.45 in 2011, and Standard & Poors Economics
expects them to stay around 3.4% in 2013 largely due to Federal Reserve intervention in the mortgagebacked securities market. Standard & Poors projects that the 30-year mortgage rate will rise to 3.9% in
2014. Longer-term forecasts show fixed conventional mortgage rates increasing to 5.2% in 2015.
Employment and job growth. The national employment picture, if healthy, can boost home sales by
giving more people the means to pay a mortgage. Even in a rising interest rate environment, full
employment can soften the declines in home sales as financing costs rise. Employment figures are available
from the Bureau of Labor Statistics, a division of the US Department of Labor, on a monthly basis.
The level of worker job securityan anecdotal and hard-to-quantify factorcan also have an impact.
Uneasiness about the general employment scene can make many people hesitate about home purchases.
Conversely, a robust employment environment may spur prospective homebuyers to act.
The unemployment rate reached a cycle peak of 6.3% in June 2003its highest level in almost 10 years. It
averaged 4.6% in both 2006 and 2007. With the recession under way, the unemployment rate surged from
5.8% in 2008 to 9.3% in 2009. In 2010, it rose to 9.6%, but then dropped to 9.0% in 2011. As of
December 2012, Standard & Poors Economics was forecasting that the US unemployment rate would
average 8.1% in 2012 and 7.7% in 2013.
Consumer confidence. One widely followed measure of consumer sentiment is the consumer confidence
index, compiled monthly by the Conference Board, a private research organization. This index reflects
consumers views of current and future business as well as economic trends, and how those trends are likely
to affect them.
The Conference Board Consumer Confidence Index declined to 65.1 as of December 2012 (1985=100),
from 71.5 in November. According to Lynn Franco, Director of The Conference Board Consumer Research
Center, Consumers expectations retreated sharply in December resulting in a decline in the overall Index.
The sudden turnaround in expectations was most likely caused by uncertainty surrounding the oncoming
fiscal cliff. A similar decline in expectations was experienced in August of 2011 during the debt ceiling
discussions. While consumers are quite negative about the short-term outlook, they are more upbeat than
last month about current business and labor market conditions.
GDP and the economic cycle. Compiled quarterly by the Bureau of Economic Analysis (BEA), part of the
US Department of Commerce, gross domestic product (GDP) is a measure of the total value of all goods and
services produced by labor and property located in the United States. The BEA issues advance and
preliminary estimates of GDP prior to reporting the final GDP figure for the quarter.
The growth of GDP is an important macroeconomic indicator of the economys general health, which, in
turn, strongly affects the homebuilding industry. Excessive economic growth can be a precursor to inflation;
therefore, the Federal Reserve pays strict attention to GDP. The Fed is apt to raise the federal funds rate if
the economy shows signs of overheating.
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Homebuilders performance tends to highly correlate with the timing of economic cycles. In fact, housing
starts are an important leading indicator for the economy. Emergence from a recession usually supports an
extended upturn for homebuilders, as demand tends to build up during slow periods. If the economy has
been growing for a long period, however, housing may be one of the first areas to weaken.
As of December 2012, Standard & Poors Economics was forecasting US real GDP growth of 2.2% in 2012
and again in 2013. This compares with a decline of 3.5% in 2009, a 3.0% increase in 2010, and a 1.8%
increase in 2011.
Household formations. The number of new households being formed affects prospects for home sales, in
that those new households likely will become part of the home-buying population. This figure helps the
analyst determine upcoming numbers of prospective homebuyers. If research shows that many people are in
the process of establishing new residences, either individually, in couples, or in groups, then it serves as a
positive indicator for future home sales.
Forecasting the number of prospective first-time homebuyers is tricky. Because many such buyers are
between 25 and 34 years old, one might expect that birth and population projections from the US Census
Bureau would help predict the size of that group with some reliability. Yet these data alone would prove
misleading because of the growing level of immigration to the United Statesindividuals born on foreign
soil are not accounted for in US birth-rate tables. One could try to correct for this by researching
immigration data and incorporating them into the analysis.
Housing affordability. Related to interest rate and employment factors is housing affordabilitythe
extent to which the general population can afford to purchase a home. Not surprisingly, this issue is
important in evaluating prospects for the homebuilding industry.
The National Association of Realtors (NAR), a real estate industry organization, publishes an affordability
index based on existing homes, which provides a gauge of the overall housing market. (We do not currently
know of a home affordability study that includes new homes.) The association determines the ratio of
median family income to the income needed to purchase the median-priced home, based on current interest
rates and underwriting standards. It calculates the index for purchases financed by fixed-rate mortgages,
adjustable-rate mortgages, and a composite of both. An index reading of 100 shows that families earning
the median income have just enough income to qualify for a mortgage on a median-priced home, according
to the NAR. The index is published in the US Department of Housing and Urban Developments US
Housing Market Conditions report and on the NAR website.
Even though fixed-rate mortgages remained at historical lows in 2006, the interest-rate tightening cycle by
the Federal Reserve, combined with higher home prices, began to affect affordability that year. According to
the NAR composite affordability index, families earning the nations median income in 2006 had 106.1%
of the income needed to purchase a median-priced existing home at that time (106.1 in index terms), down
from 111.8 in 2005. The affordability index gained a bit in 2007, to 115.4, then rose to 137.8 in 2008,
169.4 in 2009, and finished 2010 at 174.0. In 2011, the affordability index rose to 184.5 and, in the first
quarter of 2012, it reached a record high of 207.3. The affordability index was at 187.3 in the second
quarter of 2012 and at 187.2 in the third quarter of 2012. By region, affordability continues to be the
highest in the Midwest (250.7 in November 2012) and the lowest in the Northeast and West (180.1 and
145.8, respectively); the South was in between, at 204.8 in November 2012.
Pricing. An examination of price trends can help in predicting the direction of home sales, although there
are conflicting forces at work in the marketplace. If home prices start to rise beyond the level of domestic
inflation, the idea of housing as an investment may gain favor, assuming prices remain affordable. Some
individuals may be spurred to purchase several homes, intending to use some of them as rentals. Conversely,
when home prices stagnate or fall, buying a house for investment purposes can lose its appeal, in which case
it might be purchased strictly as shelter.
Information on pricing trends is provided each month by the US Department of Commerce. The median price
for a new home of $246,900 in 2007 was roughly flat with 2006; it rose 2.3% in 2006, after increasing 9.0%
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in 2005. In its New Residential Sales November 2012 report published on December 27, the average home
sales price was $299,700 and the median sales price of new houses sold in November 2012 was $246,200.
Inventories. In good times and bad, the level of inventories held by industry participants can influence
industry pricing and margins. The number of homes available for salethe supply side of the homebuilders
supply/demand equationaffects price relative to consumer demand.
The total US inventory of new homes for sale dropped to an average of 4.8-months worth of unsold homes
in November 2012, below the normalized levels of six months on average, albeit at higher sales volumes.
According to the US Census Bureau, a record number of these homes for sale are vacancies. To record a
strong operating margin, the industry typically likes to keep the home supply at or below a six-month level.
When they do not have to worry about carrying hefty inventories of expensive finished products, builders
feel much more comfortable about their pricing power, and they are much less apt to feel the need to offer
reduced prices or free add-ons to their homes.
Housing starts. Released monthly by the US Department of Commerce and reported as a seasonally
adjusted annualized rate, housing starts indicate the number of residences on which construction has begun
in a given period. This statistic is an excellent measure of how strong housing activity has been in recent
periods, because many units are built to satisfy previous orders. In addition, housing starts can serve as a
gauge of builders expectations about upcoming prospects; for that reason, they are considered a leading
economic indicator. If the outlook has dimmed, builders will be unlikely to undertake substantial levels of
new construction activity.
Total housing starts (single-family and multifamily combined) were 1.81 million in 2006, down 12.6%
from 2.07 million in 2005. In a sign of the housing markets weakness and builders desire to trim
inventory, single-family starts fell 14.6% in 2006 from a year earlier, while multifamily units declined
4.5%. The 2006 single-family numbers also faced difficult comparisons. The 1.71 million single-family
starts in 2005, for example, marked the highest annual level recorded since 1966, when the Commerce
Department started tracking this measure.
New housing starts continued to plummet in subsequent years: to 1.34 million in 2007, 903,400 in 2008,
550,000 in 2009, and 580,000 in 2010. In 2011, starts rose to 610,100. As of December 2012, Standard &
Poors Economics was forecasting that total starts would increase 27.1% in 2012 to 778,300, and then rise
27.4% to 991,500 in 2013. According to the US Census Bureaus January 17, 2013, new residential
construction report, privately owned housing starts totaled 954,000 (seasonally adjusted annual rate) in
December 2012, a 12.1% increase over the prior months figure and 36.9% above December 2011.
HOW TO ANALYZE A HOMEBUILDING COMPANY

Homebuilding is a highly cyclical industry, as evidenced by the valuation multiples for publicly held
homebuilders; in the aggregate, these have ranked among the lowest of any industry for many years. Even
during cyclical troughs, when homebuilding earnings multiples typically peak, their valuations usually
represent significant discounts to virtually every other industry. During the boom years of 20022005, the
valuations for homebuilders rose closer to levels typical of other industries, but the deep industry recession
that began in mid-2006 and continued through 2009 produced improving but still weak earnings or losses
for many homebuilders in 2010 and 2011. While the majority of homebuilders are expected to be profitable
in 2012 and 2013, earnings should still be well below normalized levels, in our view. This has made it
challenging to use traditional valuation measures such as the P/E ratio, and confirmed the notion that the
homebuilding industrys volatility warrants a discount, in our opinion. In housing downturns or at the
beginning of an upturn, price to book may be one of the few valuation metrics that can be applied,
sometimes at discounts to eroding book values. A modest housing recovery, which we see continuing in
2013, often reflects rising premiums to book values.
For single-family homebuilders, general economic trends usually (and almost unavoidably) greatly affect
both current performance and the industrys outlook. But despite homebuildings inherent cyclicalityand
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because the time between land investment and home sale can take several yearsan analyst must have an
idea about the long-term trends for home demand. However, this can be a tricky endeavor for many
reasons, including the difficulty in trying to predict the strength of the economy and consumer buying
sentiment over a period of years.
Therefore, in assessing a homebuilders future prospects, one must place considerable weight on the existing
economic backdropas well as the opportunities and challenges that it poseswithout relying too heavily
on long-term forecasts for the economy. Our three-step approach begins with a top-down, macro evaluation
and concludes with a bottom-up, company-specific analysis.
First, the analyst should anticipate changes in the overall industrys dynamics and examine key underlying
assumptions. In our view, the most important top-down assumption is for long-term interest rates, since
home prices (and related monthly mortgage payments) and unit volumes have empirically proven most
sensitive to this single variable. After interest rates, we consider employment growth and consumer confidence
to rank second and third in importance, respectively, when trying to forecast demand for new home sales.
However, we note that there is some causal relationship between prevailing rates and the two factors of job
growth and consumer confidence. In other words, periods of rising rates historically have been associated
with increases in job growth and rising consumer confidence. Conversely, periods of falling rates historically
have been associated with declines in job growth and in consumer confidence. This self-correlation makes
the analysts job difficult when isolating cause and effect between the assumed inputs of interest rates and
employment, and the ultimate demand for homes (the dependent variable).
To account for any skewing or double-counting that might arise from using these variables in combination,
we advise building in a margin for error when integrating them into a long-term forecast of overall homebuying demand (that is, in addition to the considerable margin for error mandated by trying to predict any
one of these critical inputs.)
Second, in light of the views the analyst has of macroeconomic and industry growth, he or she must then try
to gauge how sensitive a specific builder (based on its unique characteristics) is to other leading indicators,
such as population growth and household formations, as well as permits, mortgage applications, and
housing starts, to name just a few.
Finally, by applying both qualitative and quantitative analytical tools, the analyst must judge the overall
strength and weakness of any single builders fundamentals versus those for the industry. In our opinion,
this fundamental approach is the most important part of analyzing builders. Its relevance has only increased
as national home sales data have diverged from the results generated by our universe of public builders since
the mid-1990s.
Although the stocks of homebuilding companies tend to move in tandem, it is the analysts job to determine
which homebuilders, based on their balance sheet strengths and operating position, are most likely to
outperform the group. Company-specific factors that we consider to be the best indicators of future success
include demographics, product demand by type, quality of management, geographic diversity (or
concentration) of operations, and financial strength. In general, the best shareholder returns throughout the
homebuilding cycle should accrue to builders best attuned to home-buying trends.
DEMOGRAPHY AND GEOGRAPHY

Demographicsthe age, income, and socioeconomic characteristics of a populationare likely the most
significant company-specific factors to bear in mind when analyzing a homebuilder. Age is not only highly
predictablewhich bolsters the validity of forecasts using it as an independent variableit also strongly
correlates with income levels and other socioeconomic data that are extremely relevant to builders.
We believe that the economics of supply and demand in served markets help dictate a builders success.
Thus, we compare a builders demographics and aggregate job growth profile (the best proxy for local
demand) with related permit data by locale, a good estimator of corresponding home supply. A builder
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concentrated in markets with positive overall job and population growth characteristics should expect to
enjoy favorable demand for its homes.
Generally, we tend to favor builders with long land positions in markets where overall supply relative to
demand is constrained, rather than those that operate in markets where supply is expected to exceed
corresponding demand. However, where the demand for homes is great, the need for land tends to be
similarly strong; home prices tend to move in lockstep with land costs. As a result, we try to be sensitive to
the land and development costs of a particular area, since these items, which comprise a builders largest
expense, can neutralize the benefits accruing to a builder operating in a vibrant market.
In severe housing market downturns, builders cannot get rid of land-owned lots inventory and lot option
contracts quick enough. As housing continues its recovery in 2013, in our opinion, publicly traded builders
have ample cash to purchase improved land lots at attractive purchase prices that may begin to rise, but are
far from peak prices during housing boom periods.
PRODUCT LINES AND TARGET MARKETS

A homebuilding company should be analyzed based on the type of homes it sellsincluding entry-level,
move-up, and luxury homessince each is accompanied by a different set of dynamics. This provides the
analyst with a better understanding of builders target markets and the products aimed at them. Only with
this information at hand can an analyst have a sense of the impact from important economic/environmental
changes affecting the decisions of each home-buying group.
Essentially, a builders product mix should match its customer base, which has its own distinct set of
characteristics. For example, compared with purchasers of entry-level homes, luxury homebuyers are
commonly understood to be less sensitive to changes in interest rates or local employment characteristics.
However, changes in mortgage credit availability may affect all types of homes sold.
Depending on price and other factors, the different homes may have varying degrees of success based on
population, economic trends, and the recent history of home prices. For example, starter homes generally
appeal to individuals aged 25 to 34. All else being equal, an analysis of a company offering entry-level
homes should consider whether the firm is appropriately positioned in areas with younger population bases;
similarly, luxury and empty nest builders should seek a more affluent and older population.
THE STATE OF REAL ESTATE

An analyst also should examine whether the kinds of homes sold by builders are typically in demand in a
given real estate environment. If emerging from a challenging market, where modest pricing power is the
norm, those stressing start-up homes would tend to experience the strongest performance. Trade-up markets
tend to strengthen later in the cycle; they often maintain relatively solid levels of growth past the cyclical
peak. We caution analysts that these relationships have been established through past cycles, but that
homebuilders will sometimes argue that it is different this time around. Coming out of the current
housing downturn, we see builders offering smaller homes in general.
In a favorable marketone in which home values are trending upward at a healthy clipmost buyers are
willing to spend more. When homebuyers are secure about their employment, they tend to have a greater
appetite for mortgage debt, assuming interest rates are borrower-friendly. A builder can exploit this kind of
environment by emphasizing the higher-priced homes in its mix and by highlighting options and upgrades,
which have a direct benefit on profit margins.
In examining the pace of demand for homes, signs of an imminent downturn typically include a significant
jump in inventory levels (particularly for existing homes), reduced traffic levels (i.e., homebuyer interest) at
available homes and communities, relatively low aggregate affordability, and speculative buying and
financing methods that, although they continue, have begun to appear excessive. The most concrete
evidence that demand has softened, however, is found in the pace of new home orders, which can drop
sharply, on a net basis (i.e., including cancellations). For instance, in 2007 through 2009, orders declined
INDUSTRY SURVEYS
31
30% to 50%, year over year. The analyst must make the determination whether changes in order patterns
are temporary, or whether they are the beginning of either a sustained slowdown or upturn.
RISK MANAGEMENT
Builders place a great emphasis on providing their companies with a measure of security against an
unfavorable turn in the homebuilding cycle. Likewise, an analyst must constantly strike a balance between
risk and reward. Especially near cyclical peaks or in periods of abnormally high uncertainty, we believe that
the better operators exhibit an increasingly conservative bias. In the past, accumulating cash balances
rather than reinvesting in landprovided perhaps the best protection against downturns. Today, the
builders that we cover have a more comprehensive set of tools to ensure against sustained weakness, with
joint ventures and option-based land purchase contracts the most extensively used.
Most builders try to sell as many homes as they can in a community before beginning construction, in an
effort to reduce their inventory of built but unsold (spec) homes. Perhaps the biggest advocate of this
practice is KB Home, which notably stepped up its pre-selling practice several years ago with its
comprehensive KBN exit strategic initiative.
At year-end 2011, the US builders in our coverage universe accounted for about 44.5% of all new homes
sold in the United States, according to a Builder magazine survey of the Top 100 builders. In the markets
these builders serve, concentrations tend to be even greater: it is not uncommon for a single builder to enjoy
a third or more of a markets new home sales. However, this has not always been the case. As such, the
advantages accruing to builders with large shares in served markets have yet to be tested through a complete
market cycle, or on anything broader than a regional basis. However, we are seeing builders with small
shares exit selected markets. In addition, private builders that make up most of the Top 100 US homebuilders
are highly dependent on banks for financing their operations, if they do not have ample liquidity.
Until 10 or 15 years ago, few builders had any meaningful presence in more than a handful of states.
Market shares have categorically risen within our universe since then, as we have seen a full homebuilding
cycle. The previous cycle ended in the early- to mid-1990s: the market bottomed for several years at the
beginning of that decade, after the boom that occurred through most of the 1980s. Therefore, we believe
publicly traded homebuilders with access to commercial banks, as well as the capital markets, have a
competitive advantage over private builders with access only to the banks that have tightened credit
guidelines.
The outstanding profit growth exhibited by the largest builders in the last boom should not lead an analyst
to infer that all companies in the industry profit equally, nor does it mean that all or even most construction
companies are successful. In fact, we view competition between large builders and their small counterparts
as nearly a zero-sum game, whereby the benefits accruing to some builders (generally the largest) are mostly
at the expense of others (usually the small builders). We believe that market share closely correlates with
financial strength, but not necessarily profitability, when markets sharply weaken.
In any sizable market where large builders have significant share, these dominant builders have the means to
significantly influence the choices available to homebuyers. In such an environment, the biggest builders are
still exposed to sharp declines in pricing during a housing downturn like the one that we are in now.
Home prices declined over 35% for most housing markets from peak to trough (from June 2006 through
March 2012), based on the S&P/Case-Shiller Home Price Indicesthe leading measure of US home prices
reaching a record low in March 2012. Through October 2012, home prices are down 30% from their
June/July 2006 peaks.
In the costly process of buying land, the markets largest builders can offer numerous advantages over other
competitorsto the extent that meaningful competition exists. To begin with, we expect any markets most
attractive real estate to be shopped to its largest, most credible builders. In fact, we believe that, when
negotiating a multimillion-dollar land deal, a seller might be more inclined to make concessions on its
asking price than on a buyers credit quality.
32
INDUSTRY SURVEYS
COMPANY MANAGEMENT
We judge management teams largely based on how well they adapt to changes in the housing market. In our
opinion, during the downturn in the housing market that began in mid-2006 and bottomed in the first
quarter of 2009, several of the homebuilders we cover have been more proactive in curtailing land inventory
and land option contracts, moving quickly to eliminate available spec homes, and turning their attention to
boosting funds from operations and cash on hand. Proactive managements have reduced their available lines
of credit that are no longer needed due to weakening demand, have called in outstanding public debt with
high interest costs, and have taken advantage of tax provisions to realize cash refunds.
Because a strong market can hide a companys missteps, it is important to judge management over at least
one entire cycle. However, some missteps are simply too significant to hide. Where losses lead to writedowns of the companys investment, analysts should observe over time whether the dominant factor in the
failure was market circumstances or managements decision-making. Those with stronger balance sheets
and liquidity can take advantage of attractive land deals during a housing recovery.
LOOKING AT FINANCIAL STATEMENTS

Changes in factors outside the industrys controlsuch as the impact of interest rate shifts, discussed
earliercan bring about major changes in operations for homebuilders. Consequently, a homebuilding
companys financial statements typically do not provide a clear window on its longer-term prospects.
Nonetheless, it is important to review a companys historical profit performance (on the income statement)
and its current financial position (on the balance sheet).
In addition, data on new orders and backlog that are supplemental to the financial statements can offer a
good indication of the firms sales and earnings outlook for several subsequent quarters.
The income statement
Items to look at on the income statement include sales, revenues, new orders, and backlog. Important ratios
include gross and operating margins.
Sales and revenues. By itself, a builders level of sales is of limited predictive value. The typical builder
classifies sales into three different categories: new contracts or orders, backlog, and closings or settlements.
Upon closing, a builder books the proceeds as revenues, and related costs are amortized. The analyst can
compare the relative changes in each of these measures to evaluate the flow of business.
Because most builders provide data for price and unit volumesthe two components of revenueson a
regional or market basis, the analyst can determine where and how changes in revenues arise. At the same
time, relating sales (whether based on orders or closings) to community counts gives some sense of likecommunity sales. By disaggregating and manipulating the sales data provided, one is better able to
distinguish between organic growth and acquired growth.
New orders. The number and dollar value of new home contracts (those that generally settle within the
preceding year) are released with quarterly earnings reports; they are probably the best available indicators
of the strength of demand for a companys products. This measure is not foolproof, however: an order may
lead to closing an actual sale or may be cancelled. The difference from gross and net new orders is contract
cancellations, which ranged mostly from 15% to 25% levels of total contracts outstanding during 2010. In
2011, cancellation rates were even more elevated (above 25% for many homebuilders). While cancellation
rates remained at high levels in 2012, they improved slightly over 2011, with cancellation rates averaging
around 20% for the group.
Backlog. Backlog is simply a plug figure derived by subtracting current-period closings from the sum of
all existing orders that have not yet been closed. Because home sales can take very long to go from order to
closing, a review of the order backlog helps the analyst to predict a companys likely sales and earnings for
the next several quarters.
INDUSTRY SURVEYS
33
Gross margin. Expressed as a percentage, the gross margin is computed by subtracting the cost of sales
from net sales and dividing that amount by sales. By far, the largest share of a builders cost structure is
aggregated into the cost of sales, which also accounts for most of the variability of a builders costs. As a
rule of thumb, each of three factors (land, labor, and materials) accounts for about one-third of the overall
cost of sales. Excluding asset impairment write-downs, the US homebuilders gross margins among the
builders in our universe typically range from about 15% to around 30% in a normalized period, but moved
down to 5% to 10% for some builders with negative gross margins during the severe housing downturn
from late 2006 to 2010. In 2011, gross margins for most homebuilders were in the mid-teens. In 2012,
gross margins among the builders in our universe improved to the mid- to high teens.
Because the cost of sales tends to vary more than other costs, both on a percentage basis and on an absolute
basis, forecasting this item with any degree of accuracy should be a high priority. However, we note that
predicting trends in the gross margin can be a challenge, for two reasons. First, transparency into the
various components of cost of sales is minimal. For example, the cost of the land itself (before any
development or other additional expenses) is very important. However, it may be difficult or impossible to
gather this information across a companys entire operation. Second, projecting average sales prices and
determining the gross margins sensitivity to these expected price changes requires an analyst to correctly
forecast numerous independent variables comprising both sales volumes and cost trends.
If one compares cost of sales with other available information, then broader conclusions can be drawn. For
example, dividing the cost of sales by inventory, we arrive at inventory turnoveran important measure
because it relates directly to return on invested capital.
Operating margin. Operating margins (revenues minus the cost of sales minus selling, general, and
administrative expenses, with depreciation and amortization expenses added back) are also a valuable
indicator of the strength of a companys business model and its management team. Of course, one typically
would favor a builder with margins in excess of the industry average. Better margins can indicate that the
builders choice of products or markets makes its selling effort easier than its peers or that the builder has
fashioned better ways of holding down operating costs, including those involved in land procurement.
Balance sheet data
Two of the more important items on a builders balance sheet, inventories and long-term debt, are typically
related. The large outlays required to purchase land and materials make the industry very capital intensive,
underscoring the importance of its investments. Analyzing the balance sheet gives an indication of how
capital is strategically deployed, as well as the cash flows expected to result. For example, a large increase in
inventories might portend a like increase in revenuesor it might suggest that a builder is having difficulty
obtaining entitlements, or that it may be entering a difficult sales environment.
Builders frequently share information related to inventory levels in other sections of their financial filings.
We think the most useful data in evaluating inventory dollars are the number of lots or home sites, and in
what manner they are controlledeither through direct ownership option contracts or investments in joint
ventures. When options account for a large portion of the lots, then it is likely that inventories are
understated, since only deposits on these contracts are reflected.
SHAREHOLDERS EQUITY
We think that shareholders equity, which is simply a builders net worth, is an important measure for three
reasons. First, by definition, sustainable future earnings growth is partly a function of existing owners
equity: earnings growth cannot exceed returns on equity for any sustained period, statistically speaking. In
the boom year of 2005, the median return on equity (ROE) for the US companies in our coverage universe
was about 31%. In 2006, ROE for the group began to turn down, and in 2007 through 2010, it was
negative. In 2011, most companies reported another year of net operating losses to modest profits, and
negligible ROEs. We expect profitability and ROE improved notably in 2012, and we see continued
improvement in 2013. Second, as a practical matter, changes in market value tend to track changes in book
value, as is the case with many financially oriented industries.
34
INDUSTRY SURVEYS
Excluding outliers, price-to-book ratios in our homebuilding group typically range from about 1.5X to 2.5X
during normal periods. During hard times for the industry, large participants may trade at 0.5X to 1X,
while smaller homebuilders may trade even well below 0.5X book value; price-to-book ratios had risen up
to near 1.5X at the end of March 2011, but then subsided to 1.0X to 1.5X at the end of September 2011.
Price-to-book ratios for the homebuilders averaged about 2.0X to 2.5X in January 2013, following recent
stock price gains. Third, equity and expected cash returns on equity help determine a builders borrowing
rates because they are among the factors that credit-rating firms use to determine a companys credit rating.
HOMEBUILDER VALUATIONS
BOOK
STOCK MARKET
CAP
1/9/2013
(MIL.$)
PRICE/EARNINGS
SALES
PRICE/SALES
PER SHARE ($) - - - RATIO (%) - - -
- - - - (MIL.$)- - - -
- - RATIO (%) - -
E2012
E2012
E2013
E2012
Beazer Homes
18.75
455
(8.18) (3.84)
Table NA
B09: NA 1,072
DR Horton
21.15
6,789
0.81
1.09
26.1
19.4 4,629
HOMEBUILDER
6.54
880
(0.32) (0.10)
NA
NA 1,573
Hovnanian Enterp.
KB Homes
16.48
1,271
(0.76) 0.10VALUATION
NA
164.8 1,560
Lennar
41.71
7,962
1.14
1.71
36.6
24.4 3,996
MDC Holdings
38.94
1,895
1.09
1.46
35.7
26.7 1,161
Meritage Homes
42.12
1,499
0.79
1.99
53.3
21.2 1,184
NVR
981.63
4,800 34.51 48.77
28.4
20.1 3,147
Pulte Home
19.49
7,529
0.67
0.86
29.1
22.7 4,698
Ryland Group
38.55
1,741
0.80
1.94
48.2
19.9 1,269
Standard Pacific
7.88
1,670
0.20
0.27
39.4
29.2 1,212
Toll Brothers
34.41
5,817
0.85
1.11
40.5
31.0 2,041
E-Estimated. NA-Not available.
Sources: Company reports; S&P Capital IQ estimates.
1,258
5,688
1,879
1,999
5,239
1,516
1,586
3,898
5,455
1,710
1,595
2,502
0.4
1.5
0.6
0.8
2.0
1.6
1.3
1.5
1.6
1.4
1.4
2.8
BUILDER
PRICE
EARNINGS
INDUSTRY SURVEYS
E2013
E2012
E2013
SHARES
VALUE/ PRICE/
OUT-
SHARE BOOK STANDING

E2013
($)
(%)
(MIL.)
0.4
10.80
1.2 11.19
0.5
NA
0.6
4.89
1.5 17.15
1.2 18.63
0.9 16.75
1.2 282.95
1.4
5.49
1.0 10.49
1.0
3.53
2.3 18.51
1.7
1.9
NA
3.4
2.4
2.1
2.5
3.5
3.6
3.7
2.2
1.9
24.3
321.0
134.5
77.1
190.9
48.7
35.6
4.9
386.3
45.2
211.9
169.0
35
GLOSSARY
Asset impairment chargeAn accounting line item that goes relatively unnoticed, but receives more attention as a weak
economy and faltering stock market force more write-downs or write-offs of goodwill, inventory, land deposits, and investments
in joint ventures, and create increased concerns about corporate balance sheets.
Construction loanFunds loaned to a builder to complete a construction project. The money is often loaned before a buyer is
found for the proposed property.
Distressed home salesUsually homes that will sell for less than the amount owed (including tax liens). This includes
properties in foreclosure and short sales. Sometimes includes must sell properties (divorce) or seriously damaged properties.
Existing home salesThe number of previously owned homes that are sold in a given period.
Fannie MaeFormally called the Federal National Mortgage Association, it was created by the US government in 1938 to
establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). Fannie Mae buys mortgages on
the secondary market, pools them, and sells them as mortgage-backed securities to investors on the open market. The secondary
mortgage market helps replenish the supply of lendable money for mortgages and ensures that money continues to be available
for new home purchases.
ForeclosureWhen a homeowner defaults by failing to make payments on his or her mortgage, the bank or financial
institution that holds the mortgage note may foreclose on the property. Foreclosure gives the legal ownership of a property to the
bank to allow the bank to recoup its investment.
Freddie MacFormally called the Federal Home Loan Mortgage Corporation, this stockholder-owned, publicly traded company
was chartered by the US government in 1970 to purchase mortgages and related securities, and then issue securities and bonds
backed by those mortgages in secondary financial markets. Freddie Mac, like its competitor Fannie Mae, is regulated by the
Office of Federal Housing Enterprise Oversight (OFHEO) in the US Department of Housing and Urban Development.
Government-sponsored entities (GSEs)A group of financial services corporations created by the US Congress, whose function
is to reduce interest rates for specific borrowing sectors of the economy (students, farmers, and homeowners). The mortgage
segment, which includes Fannie Mae and Freddie Mac, is by far the largest of the borrowing segments in which GSEs operate.
Home equityThe part of the home that is owned outright, or net of any mortgage debt. It is the difference between the
homes appraised value and the balance of all related mortgage loans.
Household formationsThe number of new households formed in a population during a given period, usually a calendar year.
Housing startsThe number of housing units on which construction has begun during a given time period. Construction is
considered to start when excavation begins on a buildings foundation. Reported monthly, housing starts are usually expressed at
a seasonally adjusted annual rate (SAAR).
Land optionA right to purchase property or require another to perform agreed-upon terms. An option is paid for as part of a
contract. The amount paid for the option itself is not refundable since the funds bought the option whether exercised or not.
Manufactured housingHousing built to federal standards in a factory, then shipped to a lot where it is placed on a
foundation; also known as factory-built housing. A single-section home is built in one section and ready to be occupied; a multisection home is built of two or more sections that are put together at the site of occupancy.
Modular homeHousing sections built in a factory, sent to a home site for assembly, and lowered into place with a crane.
Unlike manufactured housing, which is built to federal standards, modular housing is built to state and local codes.
MortgageA temporary, conditional pledge of real property represented to a creditor as security for a loan.
Multifamily homeA residential structure containing more than one housing unit.
Single-family homeResidential structure containing one housing unit (i.e., a traditional home).
Site-built housingA home built mainly from raw materials at the site of occupancy.
36
INDUSTRY SURVEYS
INDUSTRY REFERENCES
PERIODICALS
Builder
http://www.builderonline.com
Published 12 times per year; flagship publication of the
National Association of Home Builders.
New Residential Construction Reports
New Residential Sales Reports
http://www.census.gov/construction/nrc
http://www.census.gov/construction/nrs
Monthly; the first provides statistics on housing starts and
building permit authorizations, and the second provides
statistics on new one-family houses sold, inventories, and
pricing trends.
The State of the Nations Housing
http://www.jchs.harvard.edu
Annual study; examines housing market trends.
US Housing Market Conditions
http://www.huduser.org
Quarterly; covers current trends and statistics in the
industry, and features historical data.
National Association of Realtors (NAR)

http://www.realtor.org
Represents more than one million members involved in all
aspects of the residential and commercial real estate
industries. Publishes the Housing Affordability Index, a
measure of the extent to which a typical family (one
earning the median family income) can afford to purchase a
typical home (the national median-priced, existing singlefamily home).
GOVERNMENT AGENCIES
US Department of Housing and Urban Development
(HUD)
http://www.hud.gov
Federal agency organized to help Americans create
cohesive, economically healthy communities. Activities are
focused on increasing homeownership, supporting
community development, and increasing access to
affordable housing free from discrimination.
TRADE ASSOCIATIONS
Manufactured Housing Institute
http://www.manufacturedhousing.org
It represents all segments of the factory-built housing
industry nationwide. Provides industry research, promotion,
education, and government relations; website provides
statistics and general information on manufactured homes.
Mortgage Bankers Association (MBA)
http://www.mbaa.org
A national association representing the real estate finance
industry, with over 2,400 member companies. Provides
information on refinancing and mortgage applications,
along with interest rates.
National Association of Home Builders (NAHB)
http://www.nahb.org
A national association that works in partnership with more
than 800 state and local builders groups. Open to all
members of the light construction industry. Advocate for
homebuilding industry; provides members with news,
information, advice, and analysis.
INDUSTRY SURVEYS
37
COMPARATIVE COMPANY ANALYSIS

Operating Revenues
Million $
Ticker
Com pany
Yr. End
2011
2010
2009
2008
HOMEBUILDING
DHI
[] D R HORTON INC
KBH
KB HOME
LEN
[] LENNAR CORP
MDC
MDC HOLDINGS INC
MHO
M/I HOMES INC
SEP
NOV
NOV
DEC
DEC
3,646.4 F
1,315.9
3,095.4
844.2 F
566.4 F
4,410.2 F
1,590.0
3,074.0
958.7 F
616.1
3,668.0 F
1,824.8
3,119.4
898.3 F
570.0
6,657.5 F
3,033.9
4,575.4
1,458.1 F
608.1
MTH
NVR
PHM
RYL
SPF
[]
DEC
DEC
DEC
DEC
DEC
861.2 F
2,669.6 F
4,136.7
890.7 D
893.9
941.7 F
3,057.4 F
4,569.3
1,063.9
924.9
970.3 F
2,756.2 F
4,084.4 A
1,283.6
1,179.5
TOL
TOLL BROTHERS INC
OCT
1,499.3 F
1,529.6 F
DEC
# FEB
DEC
DEC
SEP
266.2
662.5
3,328.6
766.6 D
1,830.8
MERITAGE HOMES CORP

NVR INC
PULTEGROUP INC
RYLAND GROUP INC
STANDARD PACIFIC CORP
BUILDING PRODUCTS
AAON AAON INC
APOG APOGEE ENTERPRISES INC
FBHS FORTUNE BRANDS HOME & SECUR
ROCK GIBRALTAR INDUSTRIES INC
GFF
GRIFFON CORP
CAGR (%)
2007
11,335.0
6,416.5
10,186.8
2,922.9
1,017.4
2006
F
D
2001
Index Basis (2001 = 100)

1-Yr.
2011
2010
2009
2008
2007
F
D
15,108.2 F
11,003.8
16,266.7
4,801.7 F
1,359.3
4,455.5 C
4,574.2
6,002.3 F
2,124.9
976.8 F
(2.0)
(11.7)
(6.4)
(8.8)
(5.3)
(24.7) (17.3)
(34.6) (17.2)
(28.2)
0.7
(29.4) (11.9)
(16.1) (8.1)
82
29
52
40
58
99
35
51
45
63
82
40
52
42
58
149
66
76
69
62
254
140
170
138
104
1,523.1 F
3,714.1 F
6,263.1
1,976.1
1,549.2
2,343.6 F
5,156.4 F
9,256.5
3,032.6
2,905.5 D
3,461.3 F
6,156.8 F
14,269.8
4,757.2
3,964.0
744.2 A,F
2,623.8 F
5,379.7 A
2,741.8
1,384.5
1.5
0.2
(2.6)
(10.6)
(4.3)
(24.3) (8.5)
(15.4) (12.7)
(21.9) (9.5)
(28.5) (16.3)
(25.8) (3.3)
116
102
77
32
65
127
117
85
39
67
130
105
76
47
85
205
142
116
72
112
315
197
172
111
210
1,797.2 F
3,238.2 F
4,762.1 F
6,176.1 F
2,222.8 F
(3.9) (24.7)
(2.0)
67
69
81
146
214
244.6
582.8 A
3,233.5
685.1 D
1,294.0 A
245.3
696.7
3,006.8
834.2
1,194.1
279.7
925.5
NA
1,232.3 D
1,269.3 D
262.5
881.8 A
NA
1,311.8 D
1,616.6
231.5
778.8 D
NA
1,303.4 A,C
1,636.6
157.3
802.3
NA
616.0 A
1,160.1
5.4
2.8
(1.9) (3.2)
NA
NA
2.2 (10.1)
4.7
2.3
8.9
13.7
2.9
11.9
41.5
169
83
**
124
158
156
73
**
111
112
156
87
**
135
103
178
115
**
200
109
167
110
NA
213
139
3,749.7
11,770.0 A,C
1,624.3
964.0
817.0
3,671.1
12,778.0 A,C
1,570.5 A
1,043.8
863.2
3,119.7
8,358.0 A
954.9
NA
415.9
0.6
(2.1)
(1.1) (10.2)
0.0
(9.4)
NA (4.1)
3.8
(6.9)
6.7
(1.6)
10.2
6.3
8.6
106
89
100
**
145
99
91
91
**
134
91
93
101
**
141
112
115
185
**
182
120
141
170
NA
196
14.9
(3.6)
149
119
129
124
173
109
200
146
201
164
(8.5) (32.9) (26.5)

(4.2) (28.7) (17.3)
41
65
56
79
56
92
115
190
193
274
LII
MAS
NCS
NX
SSD
[]
LENNOX INTERNATIONAL INC

MASCO CORP
NCI BUILDING SYSTEMS INC
QUANEX BUILDING PRODUCTS
SIMPSON MANUFACTURING INC
DEC
DEC
OCT
OCT
DEC
3,303.6
7,467.0 D
959.6
848.3 A
603.4
3,096.4
7,592.0
870.5
798.3 D
555.5 D
2,847.5 D
7,792.0 A,C
967.9
585.0
585.1
3,481.4 D
9,600.0 A,C
1,764.2
868.9 D
756.5
AOS
UFPI
SMITH (A O) CORP
UNIVERSAL FOREST PRODS INC
DEC
DEC
1,710.5 A,C
1,822.3
1,489.3 D
1,890.9
1,991.5 A
1,673.0
2,304.9
2,232.4
2,312.1
2,513.2 A
2,161.3 A,C
2,664.6
1,151.2 A
1,530.4
SEP
OCT
742.4 D
1,134.9 F
1,009.8 D
1,371.8 F
1,005.2 D
1,596.3 F
2,074.3 D
3,308.1 C,F
3,490.8
4,779.8 F
5,462.0
6,148.2 A,F
1,805.2 A
1,742.0 A,F
OTHER HOMEBUILDING COMPANIES

BZH
BEAZER HOMES USA INC
HOV
HOVNANIAN ENTRPRS INC -CL A
10-Yr. 5-Yr.
4.0
1.8
(4.6)
(7.3)
Note: Data as originally reported. CAGR-Compound annual grow th rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the follow ing calendar year.
**Not calculated; data for base year or end year not available. A - This year's data reflect an acquisition or merger. B - This year's data reflect a major merger resulting in the formation of a new company. C - This year's data reflect an accounting change.
D - Data exclude discontinued operations. E - Includes excise taxes. F - Includes other (nonoperating) income. G - Includes sale of leased depts. H - Some or all data are not available, due to a fiscal year change.
38
INDUSTRY SURVEYS
Net Income
Million $
Ticker
Com pany
CAGR (%)
Yr. End
2011
2010
2009
2008
2007
HOMEBUILDING
DHI
[] D R HORTON INC
KBH
KB HOME
LEN
[] LENNAR CORP
MDC
MDC HOLDINGS INC
MHO
M/I HOMES INC
SEP
NOV
NOV
DEC
DEC
71.8
(178.8)
92.2
(98.4)
(33.9)
245.1
(69.4)
95.3
(64.8)
(26.3)
(545.3)
(101.8)
(417.1)
24.7
(62.1)
(2,633.6)
(976.1)
(1,109.1)
(380.5)
(245.4)
(712.5)
(1,414.8)
(1,941.1)
(636.9)
(92.5)
1,233.3
482.4
593.9
214.3
38.9
MTH
NVR
PHM
RYL
SPF
[]
DEC
DEC
DEC
DEC
DEC
(21.1)
129.4
(210.4)
(29.9)
(16.4)
7.2
206.0
(1,096.7)
(85.1)
(11.7)
(66.5)
192.2
(1,182.6)
(162.5)
(13.2)
(291.9)
100.9
(1,473.1)
(396.6)
(1,227.8)
(288.9)
334.0
(2,274.4)
(333.5)
(695.2)
TOL
TOLL BROTHERS INC
OCT
39.8
(3.4)
(755.8)
(297.8)
DEC
# FEB
DEC
DEC
SEP
14.0
4.7
(35.6)
9.2
(7.4)
21.9
(14.2)
57.2
(73.4)
9.5
27.7
31.2
(41.9)
(51.9)
22.0
117.1
(1,043.0)
(26.9)
24.2
44.8
MERITAGE HOMES CORP

NVR INC
PULTEGROUP INC
RYLAND GROUP INC
BUILDING PRODUCTS
AAON AAON INC
GFF
GRIFFON CORP
5-Yr.
1-Yr.
2011
2010
2009
2008
2007
254.9
214.2
417.8
155.7
52.6
(11.9)
NM
(14.0)
NM
NM
(43.4)
NM
(31.1)
NM
NM
(70.7)
NM
(3.2)
NM
NM
28
(83)
22
(63)
(64)
96
(32)
23
(42)
(50)
(214)
(48)
(100)
16
(118)
(1,033)
(456)
(265)
(244)
(467)
(280)
(660)
(465)
(409)
(176)
225.4
587.4
689.6
359.9
123.7
50.9
236.8
302.4
136.5
111.1
NM
(5.9)
NM
NM
NM
NM
(26.1)
NM
NM
NM
NM
(37.2)
NM
NM
NM
(41)
55
(70)
(22)
(15)
14
87
(363)
(62)
(11)
(131)
81
(391)
(119)
(12)
(574)
43
(487)
(291)
(1,105)
(568)
141
(752)
(244)
(626)
35.7
687.2
213.7
(15.5)
(43.4)
NM
(2)
(354)
(139)
17
28.6
51.2
NA
33.4
0.1
23.2
43.2
NA
31.1
22.1
17.1
31.7
NA
49.9
51.8
14.2
26.1
NA
12.5
30.6
(0.1)
(15.8)
NA
(3.0)
NM
(4.0)
(31.7)
NA
(28.7)
NM
(36.1)
NM
NM
NM
NM
99
18
**
74
(24)
155
(54)
**
(586)
31
196
119
**
(414)
72
202
196
**
267
0
164
165
NA
248
72
61.8
(140.0)
(747.0)
(137.1)
12.2
125.1
(382.0)
78.9
15.9
53.9
169.0
397.0
63.7
57.4
68.7
166.0
461.0
73.8
64.3
102.5
(42.4)
198.5
16.5
NA
40.5
NM
NM
NM
NA
2.3
(11.9)
NM
NM
(32.4)
(13.1)
(24.6)
NM
NM
(62.5)
13.6
NM
(234)
(60)
**
126
NM
(525)
(163)
**
111
NM
(71)
(4,517)
**
30
NM
(192)
477
**
133
NM
200
385
NA
170
81.9
4.3
88.2
21.0
76.2
70.1
14.5
33.1
22.6
(18.0)
7.9
(42.1)
94.1
(73.9)
767
14
395
53
565
13
608
63
(411.1)
(627.1)
388.8
149.5
75.6
63.7
NM
NM
NM
NM
NM
NM
(265)
(449)
(40)
4
[]

MASCO CORP
DEC
DEC
OCT
OCT
DEC
88.3
(465.0)
(9.9)
9.1
50.9
AOS
UFPI
SMITH (A O) CORP
DEC
DEC
111.2
4.5
57.3
17.4
81.3
24.3
SEP
OCT
(200.2)
(286.1)
(29.9)
2.6
(178.0)
(716.7)

BZH
HOV
(951.2)
(1,124.6)
2001
Index Basis (2001 = 100)
10-Yr.
LII
MAS
NCS
NX
SSD
2006
19
561
73
(235)
(1,125)
(1,258)
(1,766)
(544)
(985)
Note: Data as originally reported. CAGR-Compound annual grow th rate. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600.
#Of the follow ing calendar year. **Not calculated; data for base year or end year not available.
INDUSTRY SURVEYS
39
Return on Revenues (%)

Ticker
Com pany
Return on Assets (%)
Return on Equity (%)
Yr. End
2011
2010
2009
2008
2007
2011
2010
2009
2008
2007
2011
2010
2009
2008
2007
HOMEBUILDING
DHI
[] D R HORTON INC
KBH
KB HOME
LEN
[] LENNAR CORP
MDC
MDC HOLDINGS INC
MHO
M/I HOMES INC
SEP
NOV
NOV
DEC
DEC
2.0
NM
3.0
NM
NM
5.6
NM
3.1
NM
NM
NM
NM
NM
2.7
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
1.3
NM
1.0
NM
NM
3.9
NM
1.2
NM
NM
NM
NM
NM
1.0
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
2.7
NM
3.5
NM
NM
10.1
NM
3.8
NM
NM
NM
NM
NM
2.3
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
MTH
NVR
PHM
RYL
SPF
[]
DEC
DEC
DEC
DEC
DEC
NM
4.8
NM
NM
NM
0.8
6.7
NM
NM
NM
NM
7.0
NM
NM
NM
NM
2.7
NM
NM
NM
NM
6.5
NM
NM
NM
NM
6.4
NM
NM
NM
0.6
8.8
NM
NM
NM
NM
8.5
NM
NM
NM
NM
4.7
NM
NM
NM
NM
14.3
NM
NM
NM
NM
8.3
NM
NM
NM
1.5
11.8
NM
NM
NM
NM
12.3
NM
NM
NM
NM
8.1
NM
NM
NM
NM
29.3
NM
NM
NM
TOL
TOLL BROTHERS INC
OCT
2.7
NM
NM
NM
0.7
0.8
NM
NM
NM
0.5
1.5
NM
NM
NM
1.0
DEC
# FEB
DEC
DEC
SEP
5.3
0.7
NM
1.2
NM
9.0
NM
1.8
NM
0.7
11.3
4.5
NM
NM
1.8
10.2
5.5
NA
2.7
0.0
8.8
4.9
NA
2.4
1.4
8.2
0.9
NM
1.1
NM
13.8
NM
1.4
NM
0.7
18.7
5.9
NA
NM
1.9
20.6
9.4
NA
2.8
0.0
17.3
8.5
NA
2.6
2.3
11.7
1.4
NM
2.0
NM
18.7
NM
NA
NM
1.4
25.8
9.5
NA
NM
3.3
29.8
17.0
NA
5.9
0.0
24.8
16.6
NA
5.6
5.0
MERITAGE HOMES CORP

NVR INC
PULTEGROUP INC
RYLAND GROUP INC
BUILDING PRODUCTS
AAON AAON INC
GFF
GRIFFON CORP
LII
MAS
NCS
NX
SSD
[]

MASCO CORP
DEC
DEC
OCT
OCT
DEC
2.7
NM
NM
1.1
8.4
3.8
NM
NM
3.0
8.1
2.2
NM
NM
NM
2.1
3.6
NM
4.5
1.8
7.1
4.5
3.4
3.9
6.0
8.4
5.2
NM
NM
1.5
6.0
7.2
NM
NM
4.3
5.2
3.9
NM
NM
NM
1.5
7.2
NM
5.8
1.6
6.5
9.6
3.4
4.8
NA
8.9
16.7
NM
NA
2.1
6.6
19.6
NM
NM
5.6
5.8
11.6
NM
NM
NM
1.6
19.7
NM
13.6
2.2
7.3
21.0
9.3
12.3
NA
10.0
AOS
UFPI
SMITH (A O) CORP
DEC
DEC
6.5
0.2
3.8
0.9
4.1
1.5
3.6
0.2
3.8
0.8
5.0
0.6
2.9
2.2
4.3
3.0
4.4
0.5
4.8
2.3
11.3
0.8
6.9
3.1
11.5
4.4
11.7
0.8
12.2
4.0
SEP
OCT
NM
NM
NM
0.2
NM
NM
NM
NM
NM
NM
NM
NM
NM
0.1
NM
NM
NM
NM
NM
NM
NM
NA
NM
NA
NM
NA
NM
NM
NM
NM

BZH
HOV
Note: Data as originally reported. S&P 1500 index group. []Company included in the S&P 500. Company included in the S&P MidCap 400. Company included in the S&P SmallCap 600. #Of the follow ing calendar year.
40
INDUSTRY SURVEYS
Current Ratio
Ticker
Com pany
Debt as a % of
Net Working Capital
Debt / Capital Ratio (%)
Yr. End
2011
2010
2009
2008
2007
2011
2010
2009
2008
2007
2011
2010
2009
2008
2007
HOMEBUILDING
DHI
[] D R HORTON INC
KBH
KB HOME
LEN
[] LENNAR CORP
MDC
MDC HOLDINGS INC
MHO
M/I HOMES INC
SEP
NOV
NOV
DEC
DEC
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
37.6
77.9
58.3
46.1
47.2
41.8
71.3
58.5
55.8
44.6
56.7
71.8
48.5
48.2
38.6
50.9
66.7
43.2
48.0
40.9
39.8
53.9
36.4
40.3
35.6
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
MTH
NVR
PHM
RYL
SPF
[]
DEC
DEC
DEC
DEC
DEC
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
55.4
0.4
60.7
64.6
67.1
54.8
0.5
61.3
63.5
68.0
55.5
0.1
57.0
59.5
71.6
54.4
10.8
52.6
50.6
77.6
49.8
15.2
44.6
39.0
61.4
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
TOL
TOLL BROTHERS INC
OCT
NA
NA
NA
NA
NA
37.7
38.6
43.8
38.6
37.1
NA
NA
NA
NA
NA
DEC
# FEB
DEC
DEC
SEP
2.2
2.2
1.6
2.1
2.9
2.5
1.9
2.5
2.4
2.4
3.1
1.9
2.5
2.3
2.7
2.0
1.5
NA
2.8
3.7
2.0
1.5
NA
3.3
2.7
0.0
6.1
14.3
28.6
49.0
0.0
6.0
93.9
30.1
39.4
0.0
2.4
97.1
30.3
12.3
0.0
2.6
NA
35.3
25.9
0.0
17.0
NA
42.9
32.5
0.0
16.9
109.4
147.2
117.7
0.0
21.4
362.5
145.4
106.0
0.0
7.1
397.9
180.7
21.0
0.0
11.8
NA
158.6
41.1
0.0
71.1
NA
158.4
66.9
MERITAGE HOMES CORP

NVR INC
PULTEGROUP INC
RYLAND GROUP INC
BUILDING PRODUCTS
AAON AAON INC
GFF
GRIFFON CORP
LII
MAS
NCS
NX
SSD
[]

MASCO CORP
DEC
DEC
OCT
OCT
DEC
1.6
1.5
1.8
2.3
7.0
1.5
2.3
2.0
2.9
7.4
1.4
1.9
1.8
2.8
7.4
1.6
2.1
2.0
2.1
7.3
1.6
2.0
1.5
1.7
6.2
49.6
80.6
34.7
0.3
0.0
35.0
69.4
33.7
0.4
0.0
24.3
54.5
31.9
0.5
0.0
47.4
53.5
41.5
0.4
0.0
17.1
46.0
44.9
0.3
0.0
139.1
302.3
95.0
0.9
0.0
95.7
203.9
92.3
0.7
0.0
80.7
215.8
96.8
1.1
0.0
115.2
223.3
205.2
1.7
0.0
43.1
208.7
366.2
1.1
0.0
AOS
UFPI
SMITH (A O) CORP
DEC
DEC
2.3
2.7
1.7
3.2
1.5
2.8
1.5
2.5
1.6
3.1
28.9
2.0
21.6
8.4
23.1
8.3
33.1
13.2
32.4
26.4
64.3
5.4
67.5
20.8
93.3
21.4
114.8
37.2
128.7
60.7
SEP
OCT
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
88.2
144.3
75.2
126.1
88.3
121.9
82.1
87.6
56.6
58.2
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA

BZH
HOV
INDUSTRY SURVEYS
41
Price / Earnings Ratio (High-Low)

Ticker
Com pany
Yr. End
2011
2010
2009
2008
Dividend Payout Ratio (%)

2007
Dividend Yield (High-Low, %)
2011
2010
2009
2008
2007
2011
2010
2009
2008
2007
HOMEBUILDING
DHI
[] D R HORTON INC
KBH
KB HOME
LEN
[] LENNAR CORP
MDC
MDC HOLDINGS INC
MHO
M/I HOMES INC
SEP
NOV
NOV
DEC
DEC
59 NM44 NMNM-
35
NM
25
NM
NM
20 NM43 NMNM-
12
NM
23
NM
NM
NMNMNM75 NM-
NM
NM
NM
44
NM
NMNMNMNMNM-
NM
NM
NM
NM
NM
NMNMNMNMNM-
NM
NM
NM
NM
NM
65
NM
33
NM
NM
19
NM
31
NM
NM
NM
NM
NM
192
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
1.9 5.0 1.3 6.8 0.0 -
1.1
1.6
0.7
3.1
0.0
1.6 2.7 1.3 4.1 0.0 -
1.0
1.2
0.7
2.5
0.0
2.6 3.2 2.9 4.4 0.0 -
1.1
1.2
0.9
2.6
0.0
11.9 11.8 15.2 4.8 1.0 -
2.5
2.8
2.3
2.1
0.2
5.9 5.4 4.6 3.1 1.1 -
1.9
1.8
1.1
1.7
0.3
MTH
NVR
PHM
RYL
SPF
[]
DEC
DEC
DEC
DEC
DEC
NM34 NMNMNM-
NM
23
NM
NM
NM
NM22 NMNMNM-
69
17
NM
NM
NM
NM22 NMNMNM-
NM
9
NM
NM
NM
NM36 NMNMNM-
NM
17
NM
NM
NM
NM14 NMNMNM-
NM
6
NM
NM
NM
NM
0
NM
NM
NM
0
0
NM
NM
NM
NM
0
NM
NM
NM
NM
0
NM
NM
NM
NM
0
NM
NM
NM
0.0 0.0 0.0 1.3 0.0 -
0.0
0.0
0.0
0.6
0.0
0.0 0.0 0.0 0.8 0.0 -
0.0
0.0
0.0
0.5
0.0
0.0 0.0 0.0 1.0 0.0 -
0.0
0.0
0.0
0.5
0.0
0.0 0.0 2.5 4.8 0.0 -
0.0
0.0
0.9
1.3
0.0
0.0 0.0 1.8 2.5 5.7 -
0.0
0.0
0.4
0.8
0.4
TOL
TOLL BROTHERS INC
OCT
93 - 55
NM- NM
NM- NM
NM- NM
NM- 78
NM
NM
NM
0.0 -
0.0
0.0 -
0.0
0.0 -
0.0
0.0 -
0.0
0.0 -
0.0
DEC
# FEB
DEC
DEC
SEP
43 87 NM49 NM-
26
46
NM
24
NM
23 NMNA NM95 -
14
NM
NA
NM
64
14 - 9
14 - 7
NA - NA
NM- NM
34 - 16
14 - 8
14 - 3
NA - NA
22 - 8
NM- NM
19 20 NA 25 35 -
13
11
NA
13
16
42
192
NM
0
NM
28
NM
NA
NM
0
22
29
NA
NM
0
20
17
NA
18
NM
24
19
NA
24
0
1.6 4.2 0.0 0.0 0.0 -
1.0
2.2
0.0
0.0
0.0
1.9 3.7 NA 0.0 0.0 -
1.2
1.9
NA
0.0
0.0
2.5 4.0 NA 0.0 0.0 -
1.6
2.0
NA
0.0
0.0
2.5 5.8 NA 2.4 0.0 -
1.4
1.2
NA
0.8
0.0
1.8 1.7 NA 1.9 0.0 -
1.3
0.9
NA
1.0
0.0
15
NM
NM
42
23
24 NMNM33 39 -
18
NM
NM
22
23
37 NMNMNMNM-
21
NM
NM
NM
55
19 - 9
NM- NM
10 - 3
43 - 15
29 - 17
16 32 19 NA 26 -
11
19
8
NA
18
43
NM
NM
67
46
28
NM
NM
22
44
50
NM
NM
NM
160
25
NM
0
14
36
21
84
0
NA
27
3.0 4.5 0.0 1.6 2.0 -
1.3
2.0
0.0
0.7
1.3
1.6 3.0 0.0 1.0 1.9 -
1.2
1.6
0.0
0.7
1.1
2.4 12.6 0.0 2.3 2.9 -
1.4
3.0
0.0
0.7
1.3
2.8 13.6 0.0 0.9 2.1 -
1.3
3.9
0.0
0.3
1.3
1.8 4.4 0.0 NA 1.5 -
1.3
2.6
0.0
NA
1.0
MERITAGE HOMES CORP

NVR INC
PULTEGROUP INC
RYLAND GROUP INC
BUILDING PRODUCTS
AAON AAON INC
GFF
GRIFFON CORP
LII
MAS
NCS
NX
SSD
[]

MASCO CORP
DEC
DEC
OCT
OCT
DEC
32 NMNM90 34 -
AOS
UFPI
SMITH (A O) CORP
DEC
DEC
19 - 12
NM- NM
37 - 22
51 - 28
13 - 6
38 - 15
19 - 8
NM- 64
18 - 11
50 - 25
25
174
43
66
23
21
27
52
24
10
2.0 1.7 -
1.3
1.0
2.0 2.3 -
1.2
1.3
3.7 1.4 -
1.7
0.5
3.2 0.8 -
1.4
0.3
2.2 0.4 -
1.3
0.2
SEP
OCT
NM- NM
NM- NM
NM- NM
NM- NM
NM- NM
NM- NM
NM- NM
NM- NM
NM- NM
NM- NM
NM
NM
NM
0
NM
NM
NM
NM
NM
NM
0.0 0.0 -
0.0
0.0
0.0 0.0 -
0.0
0.0
0.0 0.0 -
0.0
0.0
0.0 0.0 -
0.0
0.0
5.7 0.0 -
0.8
0.0

BZH
HOV
42
INDUSTRY SURVEYS
Earnings per Share ($)

Ticker
Com pany
2011
2010
2009
HOMEBUILDING
DHI
[] D R HORTON INC
KBH
KB HOME
LEN
[] LENNAR CORP
MDC
MDC HOLDINGS INC
MHO
M/I HOMES INC
SEP
NOV
NOV
DEC
DEC
0.23
(2.32)
0.49
(2.12)
(1.81)
0.77
(0.90)
0.51
(1.40)
(1.42)
(1.72)
(1.33)
(2.45)
0.52
(3.71)
(8.34) (2.27)
(12.59) (18.33)
(7.00) (12.31)
(8.24) (13.94)
(17.86) (7.14)
8.24
5.74
14.13
17.98
9.45
8.15
8.21
13.80
20.87
11.18
MTH
NVR
PHM
RYL
SPF
[]
DEC (0.65)
DEC 23.66
DEC (0.55)
DEC (0.67)
DEC (0.05)
0.22
34.96
(2.90)
(1.93)
(0.05)
(2.12)
33.10
(3.94)
(3.74)
(0.06)
(9.95) (11.01)
18.76 61.61
(5.81) (9.02)
(9.33) (7.92)
(9.10) (10.74)
15.00
266.40
4.64
10.12
3.14
15.49
298.63
4.50
11.31
3.16
15.14
287.12
5.54
13.27
4.14
17.01
239.45
10.59
16.97
3.77
27.50
207.99
16.35
26.62
13.20
TOL
TOLL BROTHERS INC
MERITAGE HOMES CORP

NVR INC
PULTEGROUP INC
RYLAND GROUP INC
2008
Tangible Book Value per Share ($)
Yr. End
2007
2011
2010
2009
2008
2007
7.07
8.90
17.44
9.20
10.69
23.06
13.03
16.12
23.52
22.82 J 23.16 J 32.05 J
12.44
16.88
34.63
Share Price (High-Low, $)

2011
13.50 16.11 21.54 32.40 17.50 -
2010
8.03
5.02
12.14
14.79
5.08
27.42 - 13.68
804.32 - 554.71
8.69 3.29
19.28 9.15
4.98 2.08
15.44 20.13 21.79 39.28 18.00 -
2009
9.41
9.43
11.93
24.50
8.85
25.44 - 15.19
769.50 - 595.00
13.91 6.13
26.03 - 14.16
7.10 2.95
13.90 20.70 17.66 39.20 18.55 -
2008
5.72
7.85
5.54
22.91
4.92
24.35 8.40
742.00 - 310.69
13.59 7.71
24.94 - 11.95
4.59 0.65
17.95 28.99 22.73 48.62 26.00 -
2007
3.79
6.90
3.42
20.89
5.13
29.49 5.10
679.37 - 316.82
17.32 6.49
37.85 9.95
6.85 1.22
31.13 56.08 56.54 60.34 38.25 -
10.15
18.44
14.00
31.82
8.91
47.73 - 12.00
851.96 - 398.96
35.56 8.78
60.13 - 19.51
30.52 2.09
OCT
0.24
(0.02)
(4.68)
(1.88)
0.23
15.61
15.36
15.26
20.19
22.44
22.42 -
13.16
23.67 -
15.57
23.62 -
13.72
28.00 -
13.55
35.64 -
18.00
BUILDING PRODUCTS
AAON AAON INC
#
GFF
GRIFFON CORP
DEC
FEB
DEC
DEC
SEP
0.57
0.17
(0.23)
0.30
(0.13)
0.87
(0.51)
0.37
(2.42)
0.16
1.07
1.14
(0.27)
(1.72)
0.37
1.09
1.85
NA
1.11
0.00
0.83
1.52
NA
1.04
0.74
4.98
8.71
0.36
0.54
1.16
4.72
8.65
NA
1.61
2.01
4.57
9.72
NA
1.77
9.32
3.74
8.72
NA
1.24
9.05
3.52
7.10
NA
0.59
10.31
24.23 14.82 17.09 14.77 13.43 -
14.64
7.79
11.00
7.35
6.66
19.76 16.89 NA 18.28 15.13 -
12.43
8.76
NA
7.36
10.26
14.88 16.48 NA 16.74 12.55 -
9.69
8.12
NA
3.41
5.85
15.33 26.00 NA 24.63 12.70 -
8.53
5.32
NA
8.40
5.34
15.58 30.30 NA 25.59 26.10 -
10.67
16.81
NA
13.01
11.97
LII
MAS
NCS
NX
SSD
[]

MASCO CORP
DEC
DEC
OCT
OCT
DEC
1.68
2.14
1.11
(1.34) (3.00)
(0.41)
(2.58) (17.07) (170.30)
0.24
0.65
(3.67)
1.04
0.91
0.25
2.44
(4.48)
(3.29)
7.60
13.09
5.75
(3.64)
(1.57)
9.91
13.86
6.02
(2.19)
0.89
9.30
13.23
3.97
(2.34)
(8.73)
7.67
13.42
8.67
(0.66)
(30.83)
16.63
13.24
54.10 15.03 15.15 21.62 35.23 -
24.37
6.60
6.80
10.01
23.43
51.09 18.77 15.95 21.19 35.59 -
38.06
9.94
8.09
14.50
21.24
41.11 15.50 90.75 18.10 30.24 -
23.47
3.64
8.00
5.13
13.64
42.22 23.50 204.75 18.40 32.00 -
19.72
6.82
58.25
6.40
19.07
AOS
UFPI
SMITH (A O) CORP
DEC
DEC
6.53
20.83
9.84
20.77
1.83
20.20
1.27
18.85
3.51
19.17
44.82 39.84 -
29.81
22.91
45.80 46.63 -
27.39
25.76
30.29 47.78 -
13.97
19.01
34.06 38.39 -
15.39
14.61
34.99 54.61 -
21.39
27.93
13.12
(6.65)
26.24
(6.10)
24.70
(6.28)
45.67
2.54
159.84
18.48
31.15 5.00 -
6.73
0.89
35.40 8.05 -
15.50
3.40
34.65 5.75 -
1.20
0.51
62.00 13.50 -
5.65
1.56
235.35 37.58 -
35.00
6.60

BZH
HOV
2.41
0.23
SEP (13.55)
OCT (2.85)
1.25
0.91
(2.50)
0.03
2.27
1.26
2.21
2.55
(1.08) 1.08
20.40 16.25
0.43
1.55
1.11
1.42
1.81
0.23
1.93
1.10
(23.00) (123.40) (53.50)

(9.16) (16.04) (10.11)
41.96 - 29.06
34.72 - 20.89
303.05 - 122.30
NA NA
37.45 - 25.52
J-This amount includes intangibles that cannot be identified.
The analysis and opinion set forth in this publication are provided by Standard & Poors Equity Research Services and are prepared separately from any other analytic activity of Standard & Poors.
In this regard, Standard & Poors Equity Research Services has no access to nonpublic information received by other units of Standard & Poors.
The accuracy and completeness of information obtained from third-party sources, and the opinions based on such information, are not guaranteed.
INDUSTRY SURVEYS
43

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Industry Surveys

Current Environment ............................................................................................ 1

Comparative Company Analysis ...................................................................... 38

INQUIRIES & CLIENT RELATIONS

This issue updates the one dated July 5, 2012.

Topics Covered by Industry Surveys

Environmental & Waste Management

Natural Gas Distribution

Financial Services: Diversified

Oil & Gas: Equipment & Services

Alcoholic Beverages & Tobacco

Foods & Nonalcoholic Beverages

Oil & Gas: Production & Marketing

Apparel & Footwear:

Paper & Forest Products

Autos & Auto Parts

Healthcare: Products & Supplies

Publishing & Advertising

Heavy Equipment & Trucks

Real Estate Investment Trusts

Broadcasting, Cable & Satellite

Computers: Commercial Services

Insurance: Life & Health

Lodging & Gaming

Movies & Entertainment

Foods & Beverages: Europe

Autos & Auto Parts: Europe

Oil & Gas: Europe

Global Industry Surveys

S&P Capital IQ Industry Surveys

A SSOCIATE E DITOR : C HARLES M AC V EIGH

S TATISTICIAN : S ALLY K ATHRYN N UTTALL

C LIENT S UPPORT : 1-800-523-4534. ISSN 0196-4666. USPS N O . 517-780.

Seasonally adjusted annual rate. Start

The seasonally adjusted annual rate varies

Seasonally adjusted annual rate.

The prices of homes included in the sample

Indicates not only the direction or actual

This statistic is derived from a nationw ide

This gives a better indication of the

Month-to-month changes are sometimes

Fed. Home Loan Bank Bd.

an estimate of the actual number of new

Permits are generally a leading indicator of

HOMEBUILDING / JANUARY 2013

HOMEBUILDING / JANUARY 2013

HOMEBUILDING / JANUARY 2013

FORECLOSURES REMAIN A SIGNIFICANT SHARE OF HOUSING SALES

HOMEBUILDING / JANUARY 2013

HOMEBUILDERS MORE AGGRESSIVE IN ACQUIRING LAND, BUT REMAIN RELATIVELY CAUTIOUS

We think that single-family housing starts and sales

We believe the market for existing homes, which

Owning a home remains an American dream

HOMEBUILDING / JANUARY 2013

HOMEBUILDER CONFIDENCE INDEX IMPROVES SHARPLY IN 2012

HOMEBUILDING / JANUARY 2013

EXISTING HOME SALES GREW MODESTLY IN 2012

Source: US Department of Commerce.

Multifamily housing starts continue to improve,

HOMEBUILDING / JANUARY 2013

AVERAGE SELLING PRICES RISING BRISKLY FOR NEW HOMES

HOMEBUILDING / JANUARY 2013

HOMEBUILDERS CONTRACT BACKLOG VALUE GROWING SHARPLY FROM 2011 LEVELS

Beazer Homes USA