Housing Starts for November 2008

1. Housing Startsfor November 2008 December 16, 2008

2. The Housing Market Housing permits and starts were already headed lower when the September credit crunch hit. Starts are now at record lows. Lawmakers are beginning to talk about programs that could lift home sales and stem the decline of home prices. Homes are now more affordable – prices are lower and so are mortgage rates and this could set the stage for a home sales rally. Unfortunately, banks continue to be stingy and there is a continuing lack of credit for first time buyers in particular. Many buyers have no sense of urgency in spite of lower interest rates and lower prices. The Federal Reserve recently announced plans to buy $600 billion in mortgage-related securities from Fannie and Freddie—the Government Sponsored Entities Purchase Program. This should begin by February of 2009. The Treasury is considering aiming for a 4.5% interest rate on 30-year mortgages by buying mortgage-backed securities, similar to the plan by the Federal Reserve. If the Treasury goes through with this plan, contract rates may fall further. This could reduce the rising tide of foreclosures and keep more people in their homes. In addition, the new administration could spend a significant amount of remaining $350 billion TARP fund on a large mortgage rescue plan to stem foreclosures. All of this is adding up to lots of help for housing in the second half of 2009. Lawrence Yun, NAR chief economist: “We have favorable affordability conditions, but we need more than that to give buyers with jobs the confidence they need. This is why a housing stimulus is so critical now to encourage more buyers to draw down the inventory and stabilize home prices. Without home price stabilization, there will not be an economic recovery.”

3. More Comments Economy: The National Bureau of Economic Research has declared that the U.S. economy has been in recession since December, 2007. Recessions typically last about ten months and it looks like this one could be unusually long. Economy.com is predicting an end to the recession and turnaround in September, 2009—a 21 month recession. In the short term, we expect the U.S. economy to deteriorate across most industries and geographies. Financial panic and a credit crunch have dampened consumer and business confidence. The outcome will most likely be higher unemployment and weaker consumer spending. Home prices may continue to fall, perpetuating the cycle. The U.S. economy is expected to rebound in the second half of 2009. Government stimulus programs usually take six months to a year to work and some of the 2008 financial stimulus should begin to pay off in the first half of 2009. The low price of gasoline should provide consumers with billions in spending power. A middle class tax cut is expected in 2009 and this will also help consumer spending. In addition, the government will most likely launch a new stimulus package in 2009 in an attempt to jump-start the economy. With these assumptions, the low point for both housing and the overall economy is expected to be the fourth quarter of 2008 and the first quarter of 2009. Nonresidential Construction: The new administration is talking about public works on a vast scale. While the projects have not been defined, the following have been mentioned: streets and highways, building retrofits, expansion of mass transit and rail, improving the electrical grid as well as wind and solar power. These projects may help wood products directly in the areas of concrete form and glulam power poles.

4. U.S. Housing StartsNovember Annual Rate: 625,000. • Starts: • The annualized rate of starts declined rapidly from 824,000 in September to 771,000 units in October to 625,000 in November. • Single-family starts declined 16.9% from the prior month and multifamily declined 23.3%. • The annualized rate of single-family starts declined in all regions. • If we forecast a weak December, single-family could come in at 618,000 and multifamily at 285,000-- a total of 903,000 for the year. 2004 2005 2006 2007 2008 Source: census.gov/const/. Next report January 22.

5. Single Family Housing PermitsNovember Annual Rate: 412,000 Single-family permits are a key indicator of future wood product demand. Single-family construction uses far more wood per unit than multifamily. 3 Month moving average. • Continuing decline. • The credit freeze in September has hit permits hard in October and November. • Permits declined from an annualized rate of 538,000in September to 470,000 in October to 412,000 in November. • Permits declined in all regions from the prior month and from a year ago. • Through 11 months, single- family permits were 41.4% below 2007. 2004 2005 2006 2007 2008 Source: census.gov/const/. Next report January 22.

6. Quarterly Housing Starts &Quarterly Structural Panel Production U.S. housing starts are expected to be very weak in December and end the year at about 903,000 units. North American structural panel production is expected to be about 6.1 BSF in the fourth quarter and end the year at 30.5 billion. ProductionBillion Sq. Ft. Starts (000) In 2001, the last recession and housing dip, new homes accounted for 48% of demand. The current housing slump is very severe and housing is now only 39% of demand. 48% of demand from housing2001 56% of demand from housing2005 39% of demand from housing2008 Q-4

7. Structural Panel DemandFrom U.S. Single-family & Multifamily Housing starts in October and November of each year generated the demand shown below. Million Square Feet 3/8” Residential construction is our largest wood product market and it’s entering what may be the deepest portion of the current recession. Starts in October 2008 generated 730 million square feet of demand, 506 million less than last year. Starts in November generated only 484 million square feet, 463 million less demand than last year. 1,236MMSF 947MMSF 730MMSF 484MMSF Source: APA.

8. New and Existing Home SalesSeasonally Adjusted Annual Rate New 1,000 Existing 1,000 • October, 2008: • Existing Homes: Sales plod along at a rate of five million per year. Sales are being propped up by distressed home sales and prices are falling faster than in recent weeks. • New Homes: Sales declined 5% from September. Sales declined 6% in the South and 18% in the West. Sales increased 23% in the Northeast and 6% in the Midwest. 2005 2006 2007 2008 Source: National Association of Realtors (existing) and census.gov/const/c25 (new). Next release December 23 (existing), December 23 (new).

9. New Home InventoryUnder Construction + Completed (000) Homes For Sale at month-end* • October, 2008: • The inventory of new single-family homes (under construction and completed) declined from 363,000 in September to 334,000 in October. • The inventory is now the same as in July of 2004 when housing starts were booming. • Inventories are on a pace to reach “normal” pre-boom levels by February of next year. *Does not include the inventory of unsold new condominium units because this information isnot captured. Source: census.gov/newhomesales, Table 3. Next report December 23.

10. Home Inventory Millions of Homes For Sale New home inventories are still high by historical standards. Lower interest rates and a better economy will help reduce inventories. 334,000 4,234,220 October

11. Months Supply New & Existing Homes for Sale • October, 2008: • New homes appear to have a resistance level of about 11 months supply. • Existing homes reached a peak of 11.2 months in April. Four to 4 ½ months was common 2000-2005. Source: U.S. Census Bureau, New Residential Sales, CB06, Table 1. Next report, December 23.

12. Home Prices – U.S.Median Prices for New and Existing Homes Median (000) October new home prices were 7.0% below a year ago. October existing home prices were 11.3% below a year ago. $218,000October $183,300October Source: census.gov/const/. Series C-25 (Dec. 23) and National Association of Realtors (Dec. 23).

13. 30-Year Weekly Average Mortgage Rate • Coming Down: • "Following the release of the November employment report, which showed the largest monthly decline in jobs since December 1974, bond yields fell slightly this week allowing fixed-rate mortgage rates room to ease back a little further," said Frank Nothaft, Freddie Mac vice president and chief economist. • A The monthly payment on a $200,000 loan is now $119 less than one month ago. Source: http://www.freddiemac.com/news/finance/.

14. Housing Affordability Payment as a % of income needed to purchase a median priced existing single-family home* • More Affordable: • The median family income has increased 1.9% since October, 2007. • The median priced home has declined 11.2% in the past year. • Income needed to qualify has declined from $50,016 to $42,912 in the past year. Based on a 25% qualifying ratio for monthly housing expenses to gross monthly income with a 20% down payment. Source: National Association of Realtors

15. NAHB/Wells Fargo Housing Market Index The index remained at its record low in December. NAHB produces the Housing Market Index (HMI), a weighted, seasonally adjusted statistic derived from ratings for present single-family sales, single-family sales in the next six months and buyers traffic. A rating of 50 indicates that the number of positive or good responses received from the builders is about the same as the number of negative or poor responses. Ratings higher than 50 indicate more positive or good responses.

16. U.S. Housing ForecastSingle Family & Multifamily Only* 200820092010 Single Family 610,000 540,000 675,000 Multifamily 300,000240,000 250,000 Total 910,000 780,000 925,000 Million U.S. Starts Other Forecasts (000) 20092010 NAHB 694 909 NAR* 731 772 Freddie Mac 830 1,200 RISI 870 1,430 *NAR=National Assoc. of Realtors. Revised November 3, 2008 *Add about 100,000 to 115,000 manufactured homes to get total housing production in the U.S.

17. NAHB Remodeling Market Index* The index declined in the third quarter. All components, including major and minor additions and alterations declined. The index of future expectations, including work committed for the next three months also declined. Q-3 *A number over 50 indicates that more remodelers view remodeling conditions higher than the previous quarter.

18. U.S. Nonresidential ConstructionOctober Annual Rate: $643.8 Billion Note: Highway & Street construction excluded. • Plateau: • The seasonally adjusted annual rate of spending held its own in October. August and September data were revised upward. • Eleven categories increased and only four declined. • Lodging, Office Buildings and Commercial, the categories which traditionally have a lot of low-rise construction, increased in October. • Many projects are going forward and construction of some buildings may take a couple of years. Nonresidential construction is often one of the last areas of the economy to turn. • We still expect weaker nonresidential construction in the months ahead as the economy slows and financing continues to be a problem. Seasonally Adjusted Annual Rate - $ Billion 2006 2007 2008 Source: census.gov/const/. Next release, January 5.

19. U.S. Nonresidential ConstructionYear-Over-Year % Change Note: Highway & Street construction excluded. • October: • Nonresidential construction has grown at an annual rate of well over 10% since mid-2005. • At times, growth was close to 18% from mid 2006 to mid 2008. • Growth peaked in June of this year and the October growth rate fell to 11.0% year-over-year. 2005 2006 2007 2008 Source: census.gov/const/. Next release, January 5.

20. Lodging, Office & CommercialMany structures are low-rise wood buildings. Seasonally Adjusted Annual Rate - $ Billion • Strong Segments: • The annual rate of construction in these three categories has been steady and strong for the past two years. • The October annual rate was $197.6 billion. • These three categories were 31% of total nonresidential construction (highways and streets taken out) in October. • In October, 41% was Commercial, 39% was Office Buildings and 20% was Lodging. 2008 2007 Source: census.gov/const/. Next release, January 5.

21. Lodging, Office & Commercial ConstructionYear-Over-Year % Change • October: • When we look at change from the prior year, we see that the Lodging, Office and Commercial rate of growth is fading. • The level of construction is now about the same as last year and will probably be less in the months ahead. 2005 2006 2007 2008 Source: census.gov/const/. Next release, January 5.

22. ManufacturingIndustrial Production Index Less Mining & Utilities • November: • 7.3% below November of last year. • Manufacturing has been negative on a year-over-year basis since April. • Construction supplies, business supplies and consumer goods were down from October. • Continued weakness is expected as consumers pull back. • Capacity utilization has not been this low since mid-2002. • A recovery is expected mid-2009. Monthly Year-Over-Year % Change 2004 2005 2006 2007 2008 Factory capacity utilization was 72.3% in November compared to 79.3% one year ago. Source: Federal Reserve G.17, Table 12. Next release January 16.

23. Number of U.S. Jobs Created/LostSeasonally Adjusted Thousands of Jobs Gained or Lost • November: • Seasonally adjusted: 533,000 jobs were lost in November. Data for September and October were revised significantly lower. • The U.S. has lost 1.9 million jobs this year and most of this has occurred in the past three months. • The unemployment rate is now 6.7%. 2006 2007 2008 Source: www.bls.gov/cps/ Table B. Next report January 8, 2008.

24. U.S. Consumer PricesTotal Inflation and Core (less food and energy) • November: • Total CPI increased 1.1% from a year ago and declined 1.9% from October. The special index for all energy items declined 13.3% and was the main reason for the decline from October. • Core inflation was up 2.0% from last year and was down .2% from last month. • The U.S. recession and slower times abroad are expected to keep inflation low in 2009. • Large declines in total inflation may be over as the price of gasoline and heating oil settle in near current levels. 12 Month Change - % Core CPI-U, Table 1. Unadjusted. Dept. of Labor-Bureau of Labor Stats. www.bls.gov.cpiNext release January 16.

25. Consumer Sentiment 1966 = 100 • Sentiment often precedes consumer action and consumer spending is 70% of GDP. • December 12 report. • Improvement in confidence about the current situation lifted the overall sentiment indicator. This could have been due to lower gas prices or a brief stock market surge. • Expectations for the future headed lower—back toward the low in June. Very weak confidence-near a 3 decade low. 2008 2005 2006 2007 2004 Source: University of Michigan Consumer Sentiment Survey. Next report December 23.

26. Consumer Spending Change from prior quarter Third Quarter. The pattern of consumer spending is now similar to past recessions of 1991 and 2001. Source: U.S. Dept. of Commerce, Bureau of Economic Analysis. Next update December 22.

27. U.S. GDP Real Annualized Percentage Change Many economists are predicting a contracting economy for three or four more quarters.It will take a while for stimulus plans and financial market repairs to take hold. Housing downturn, credit crunch, financial turmoil. Low interest rates, housing leads the economy! High interest rates, slow growth & weak housing. -.51%Third Quarter Recession. Source: Dept. of Commerce, Bureau of Economic Analysis. Next report December 22.

28. Canada GDPReal Annualized Q/Q Percentage Change • Third Quarter 2008: • The Canadian economy grew 1.3% (annualized Q/Q change) in the third quarter. • Declining imports provided much of the boost. • Consumer spending and residential construction continued to weaken. • Exports declined due to the weak U.S. economy and world-wide weakness. 2003 2004 2005 2006 2007 2008 Source: Economy.com. Next release March 2, 2008.

29. The U.S. has been in recession since December of 2007 The informal definition of a recession is two consecutive quarters of decline in real (inflation adjusted) GDP. The official definition of recession, as recognized by the U.S. government, is provided by the National Bureau of Economic Research (NBER). It’s a private organization in Washington, D.C. that started in 1920. The U.S. Department of Commerce’s Bureau of Economic Analysis publishes NBER’s business cycle turning points and considers their dates “official”. The NBER’s Business Cycle Dating Committee defines recession as, “…a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. A recession begins just after the economy reaches a peak of activity and ends as the economy reaches its trough. Between trough and peak, the economy is in expansion. Expansion is the normal state of the economy; most recessions are brief and they have been rare in recent decades.” NBER says it “waits until sufficient data are available to avoid the need for major revisions. As a result, we tend to wait to identify a peak until many months after it occurs.” According to NBER data, the last expansion started in November of 2001 and peaked in December of 2007—when the current recession began. The last recession was from March through November, 2001. For more information: www.nber.org

30. Information from Dowell MyersAPA’s 2008 Annual Meeting Speaker Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says. "It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump. To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000. Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says. In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts. Source: Wall Street Journal. December 2, 2008