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New Home Sales Increase; Seasonality Should Drive Improvement into Spring

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Commentary by Keefe, Bruyette & Woods Inc.

RISMEDIA, January 31, 2011—New home sales increased 17.5% month-over-month in December 2010 to 329,000 units, after being flat month-over-month in November. On an annual basis, new home sales fell 7.6% year-over-year in December after falling 23.9% year-over-year in November. This data is annualized based on seasonal adjustment factors for typical seasonal patterns.

The absolute number of sales came in at 22,000, up 10.0% from November and above the December seasonal norm. The supply of new homes declined 2.6% to 190,000 units (equivalent to 6.9 months of supply). We view this data as modestly positive to the homebuilders. We continue to expect a modest seasonal increase in most housing data in the Spring.

New home sales improve sequentially. New home sales decreased 7.6% year-over-year in December to 329,000 units, after declining 23.9% year-over-year from a revised 280,000 units in November. Sequentially, new home sales improved 17.5% from a flat November.

Unadjusted monthly sales pace of 20-26k since July. The headline sales data is annualized based on seasonal adjustment factors for typical seasonality. In unadjusted absolute terms, new home sales were 22,000 in December, down 8.3% year-over-year and up 10.0% month-over-month. Using a seasonal adjustment factor of 15.0 for the month of December gets to the annualized headline number of 329,000. Importantly, sales have been running at a monthly pace of approximately 20,000 to 26,000 since July, following the expiration of the housing tax credit. Assuming the absolute level of monthly sales remains near current levels in the near term, the annualized new homes sales numbers should continue to improve on seasonal factors in coming months.

New-home sales reflect orders. Recall that new-home sales are based on contract signings, while existing home sales are based on actual closings. So the new home sales numbers reflect the fall-off in demand following the April 30 housing tax credit expiration and subsequent monthly range of orders.

Inventory improves. The inventory of new homes decreased in December by 5,000 units to 190,000 units, equivalent to 6.9 months of supply (in line with the historical average) based on the current level of home sales (from 8.4 months in November).

We view this data as modestly positive to homebuilders. Most measures of housing activity remain subdued and we continue to expect a modest seasonal increase in housing data in the Spring.

Keefe, Bruyette & Woods (KBW) is a global, full-service investment bank that specializes exclusively in the financial services sector. Their focus includes banking and insurance companies, real estate companies and REITs, broker-dealers, mortgage banks, asset management companies, and specialty finance companies.

For more information, visit www.kbw.com.

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