Houston Housing Market

Houston-Baytown-Sugar Land Area Local Market Report, First Quarter 2010

Today's Market‌ Median Price (Red Line) and One-year Price Growth 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8%

$180,000 $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 2001 Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1

Houston

U.S.

$150,100 8.4% 2 0% 2.0% $2,900 $20,900 $31,800

$166,733 -0.5% -22 1% -22.1% -$47,333 -$467 $22,733

$417,000 $271,050 36%

$729,250 $417,000

Local Trend

Price Activity Current Median Home Price (2010 Q1) 1-year (4-quarter) Appreciation (2010 Q1) 3-year (12-quarter) Appreciation (2010 Q1) 3-year (12-quarter) Housing Equity Gain 7-year (28 quarters) Housing Equity Gain 9-year (36 quarters) Housing Equity Gain

Conforming Loan Limit* FHA Loan Limit

Prices are above the level from 12 months ago and growing This area has held onto a modest improvement in equity despite the national market decline

Most buyers in this market have access to government-backed finacing

Local Median to Conforming Limit Ratio not comparable *Note: the 2009 loan limits for FHA and the GSEs were extended through 2010.

1,000s

State Home Sales (Red Line) and Sales Growth

700

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

600 500 400 300 200 100 0 2001 Q3 2002 Q3 2003 Q3 2004 Q3 2005 Q3 2006 Q3 2007 Q3 2008 Q3 2009 Q3 2010 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1

Home Sales State Existing Home Sales (2010 Q1 vs 2009 Q1)

Texas

U.S.

5.8%

11.4%

Sales growth during the first quarter remains sluggish

Drivers of Local Supply and Demand‌ Houston

Local Economic Outlook 12-month Job Change (Mar)

-60,200

12-month Job Change (Feb)

-77,900

36-month Job Change (Mar)

-19,400

U.S. Not Comparable Not Comparable Not Comparable

Current Unemployment Rate (Mar)

8.5%

9.7%

Year-ago Unemployment Rate

6.8%

8.6%

1-year (12 month) Job Growth Rate

-2.3%

-4.0%

Job losses are a problem and will weigh on demand, but layoffs are declining which could help buyer confidence Unemployment has risen since the same period last year, but Houston's labor market has been more resilient than the national average Weak, but better than most markets

Share of Total Employment by Industry U.S.

Houston-Baytown-Sugar Land Area

Governmen t 16.6% #N/A

#N/A Natural Resour Other

Trade/Trans portation/Uti lities 22.2%

Other Natural Services 13.6% 10.0% Natural 0.5%

3.8%

87.7

Services 7.3% Construction 7 3% 4 0% 4.0% Trade/Transpo 22.2%

168 1 168.1

Constru 4.2% 4 2%

508.3

Trade/T 8.9% Leisure & Hospitality Informa18.8% 15.1%

Information

1.5%

33.2

6.0% Hospitality Prof. & 10.2% Busin 15.2%

137 347.8

Educ. & Heal

13.3%

303.7

Educ. 10.2% & Leisure & Ho Health Services4.0% Other Service 13.3% 16.6% Government

233.1

Financial Act & Leisure

91.2 378.9

Information 1.5%

Governmen t 4.1%

Trade/Tran sportation/U tilities 8.9%

Information 18.8%

Financi 2.1% Financial Activities 6.0%

Financial Activities 2.1%

Profess5.8% Educat 12.8% Leisure15.1% Educational

Prof. & Business Services 15.2%

Other S10.0% Govern4.1%

& Health Services 12.8%

Professiona l& Business Services 5.8%

12-month Employment Change by Industry in the Houston-Baytown-Sugar Land Area Natural Resources/Mining/Construct

NA

Prof. & Business Services

-16,800

Natural Resources and Mining

-1,300

Educ. & Health Services

12,300

Construction

-23,100

Leisure & Hospitality

-1,900

Trade/Transportation/Utilities

-12,700

Other Services

-1,000

Information

-2,000

Government

5,400

Financial Activities

-3,100

State Economic Activity Index

Texas

U.S.

12-month change (2010 - Mar)

-2.1%

-1.2%

36-month change (2010 - Mar)

-5.6%

-4.3%

The economy of Texas is weaker than the rest of the nation, but improved modestly from last month

Construction Local Fundamentals

Houston

U.S.

12-month Sum of 1-unit Building Permits through Mar 2010

24,275

not comparable

Long-term average for 12-month Sum of 1-Unit Building Permits

39,817

Reduced construction will limit new supply to the market, allowing demand to not comparable catch up with current supply and foreclosures more quickly

Single-Family Housing Permits (Mar 2010) 12-month sum vs. a year ago

-0.4%

-6.1%

The current level of construction is 39.0% below the long-term average

Construction is down from last year, but appears to have bottomed.

Construction: 12-month Sum of Local Housing Permits (Historical Average Shown in Red Dashed Line)

60,000 50,000 40,000 30,000 20,000 10,000 0

Affordability Ratio of Local Mortgage Servicing Cost to Income (Local Historical Average Shown in Red, U.S. Average in Green)

30% 25% 20% 15% 10% 5% 0% 1991

1993

Monthly Mortgage Payment to Income Ratio for 2008 Ratio for 2010 Q1 Historical Average

1995

1997

1999

2001

2003

Houston

U.S.

7.9% 7.7% 10.7%

15.3% 14.4% 22.6%

2005

2007

2009

Historically strong, but weaker than the fourth quarter of 2009 More affordable than most markets

Recent Trend - Local Mortgage Servicing Cost to Income (Historical Average Shown in Red Dashed Line)

12% 10% 8% 6% 4% 2% 0% 2008 Q2 2008 Q3 2008 Q4 2009 Q1 2009 Q2 2009 Q3 2009 Q4 2010 Q1

Median Home Price to Income

Houston

U.S.

Ratio for 2009

1.2 1.2 1.3

2.4 2.2 2.7

Ratio for 2010 Q1 Historical Average

Local affordability has improved, but could be better Affordable compared to most markets

Ratio of Local Median Home Price to Local Average Income (Local Historical Average Shown in Red, U.S. Average in Green)

4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

The Mortgage Market 30-year Fixed Mortgage Rate and Treasury Bond Yield (%) 3.0

7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0

2.5 25 2.0 1.5 1.0 0.5 0.0 2005 Q1

Q3

2006 Q1

Spread (left axis)

Q3

2007 Q1

Q3

2008 Q1

30-Year FRM (Right axis)

Q3

2009 Q1

Q3

2010 Q1

10-Year Treasury Bond (Right Axis)

Signs of economic strength during the first quarter pressed up on the 10-year Treasury yield, while Fed purchases of mortgage backed securities helped to keep long-term mortgage rates low. The spread between the 30-year fixed rate mortgage and the 10-year Treasury continued to shrink through the first quarter of 2010 as a result. In the first two months of the second quarter, new concerns about domestic employment growth and international banking issues have sent investors clamoring to long-term Treasuries for safety, easing inflation concerns (temporarily) and sending the yield sliding.

Private demand for mortgage backed securities rose in wake of the Treasury's cessation of its mortgage purchase program, muting upward pressure on long-term mortgage rates. Figures for the second quarter, due out in a few months, will likely show a flat or slightly wider spread between the 10-year Treasury and 30-year FRM. The debt crisis in Greece and fear of a contagion have caused long-term Treasury yields to tumble as nervous investors sought a shelter. The decline in the Treasury yield has not been matched by moderating mortgage rates leading to a increase in the spread.

Looking Deeper….

State Total Foreclosure Rate vs. U.S Average (U.S. Average in Blue Dashed Line)

6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%

Source: Mortgage Bankers' Association

Foreclosures by Type Monthly Market Data February 2010

Market Share: Prime (blue), Alt-A (green), and Subprime (red)

PRIME: Foreclosure + REO Rate

3.2% 85.8%

0.9 % Aug-09

1.3 % Feb-10

1.3%

2.7% 2.7% 2.3%

0.9%

8.2%

Aug-09

18.0 %

7.1%

ALT-A:

4.6%

4.6%

Aug-09

Feb-10

4.2%

Compared to the national average, today's local rate is low

17.9%

There has been a large local increase versus a year ago

Feb-10

17.9 % Feb-10

14.8% 14.8 14.5 %

4.2%

Aug-09

There was a substantial increase versus August of this year

2.3%

18.0% Aug-09

Feb-10

Delinquencies by Type

6.3 The Houston market has a lower share of % 88.5% 5.2% 6.3% subprime loans than the average market, but rising prime foreclosures are 88.5 becoming a problem %

7.1% Aug-09

Foreclosure + REO Rate

5.2 11.0 % % 3.2% 11.0% 85.8 %

8.2%

SUBPRIME: Foreclosure + REO Rate

U.S.

Houston

%

14.5% Feb-10

Locally, today's foreclosure rate is low relative to the national average A large local increase occurred compared to August of last year The February rate for Houston is low compared to the national average

The "foreclosure + REO rate" is the number of mortgages, by metro area, that are either in the foreclosure process or have completed the foreclosure process and are owned by banks divided by the total number of mortgages for that area.

Source: First American CoreLogic, LoanPerformance data

Prime Foreclosures and Delinquencies in Process Monthly Market Data February 2010

5.4%

Prime: 60-day Delinquent

U.S.

Houston

4.0 %

4.5% 4.5 %

4.0%

5.4 %

Prime: 90-day Delinquent

3.0%

3.3% 3.3%

Feb-09

3.0%

3.8%

1.3% 0.7 %

0.9% 0.9 %

4.9%

6.3%

Aug-09

Feb-10

6.5%

4.2%

5.2%

5.2%

3.8%

6.5%

The share of local 60-day delinquencies rose suggesting that the 90-day delinquency rate is likely to rise in the near future

Houston's 90-day delinquency rate climbed faster than the national average suggesting a bulge of foreclosures in the future

Feb-09 Aug-09 Feb-10

Feb-09 Aug-09 Feb-10

Prime: Foreclosure + REO Rate

6.3%

7.6%

4.9%

Feb-09 Aug-09 Feb-10

4.2%

7.6%

0.7%

1.3 %

Feb-09 Aug-09 Feb-10

2.7% 1.7%

2.3%

2.3%

1.7%

2.7%

Rising 60 and 90-day delinquency rates will press up on local prime foreclosures rates in the near future.

Feb-09 Aug-09 Feb-10

Source: First American CoreLogic, CoreLogic LoanPerformance data

Geographic Coverage The Houston area referred to in this report covers the geographic area of the Houston-Baytown-Sugar Land metro area as officially defined by the Office of Management and Budget of the U.S. Government. The official coverage area includes the following counties: Austin County, Brazoria County, Chambers County, Fort Bend County, Galveston County, Harris County, Liberty County, Montgomery County, San Jacinto County, and Waller County

More information on the OMB's geographic definitions can be found at http://www.whitehouse.gov/omb/inforeg_statpolicy/