Conclusion. Below are the key takeaways as I see them. 1) The Stimulus-Driven, Thin and Volatile Dash-to-Trash in SoCal

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1 Conclusion After reviewing the DataQuick Feb SoCal house sales internals I have never been more confident that this megaregion is not in a "recovery"; rather benefiting from a sudden, unprecedented interest rate stimulus shock and a convergence of positive "transitory" and calendar-related events. Many more of these "perfect storm" type of markets would be needed over a number of years to ultimately "clear" this housing "market". There is nothing in the Feb DataQuick SoCal numbers that tells me I am off base with respect to the durability of this years' consensus housing market recovery theme. There is nothinghere that isn't virtually identical to the months leading up to the 2010 tax-credit sunset (other than prices continue to fall this time around, which flies in the face of all the billions spent to prevent foreclosures). There has been nothing that has occurred since the crash that changes any of the "fundamental" reasons that I weigh the most in my thesis that housing is in a generational downturn; Foreclosures are key to an ultimate bottom and subsequent recovery; and by kicking the can to such an extent over the past four years the gov't and banks extended the duration of this housing downturn by several years. Thus, the bottom line is that this type of stimulus-driven buy pressure; weather (driest & warmest since crisis began) and calendar anomalies (extra days); and fear by investors that distressed supply is going away forever will leave the market as quickly as it came on the smallest of catalysts. In fact, no negative catalysts at all are needed for house sales volume to come in lower YoY by the end of Q2. Trade the "better" data all you want into April. Just realize housing data such as what the Feb SoCal DataQuick report revealed can turn negative hard and fast and a consensus "continuation of double dip" is a long way from the consensus "recovery" priced into the market right now. Below are the key takeaways as I see them. 1) The Stimulus-Driven, Thin and Volatile Dash-to-Trash in SoCal The dash-to-trash by 1st timers and investors (on unsustainable and artificially low rates; record low prices; weather; a plethora of new and improved gov't mod, refi and REO to rental schemes designed to put smaller investors out of business; artificially low Foreclosure completions, REO resales, and short sales; and record low prices despite all the aforementioned) is on in SoCal. However, it is highly targeted demand created incrementally when rate plunged over 100bps in a single month last year and pulled out of spring and summer due to an incredibly mild winter. Bottom Line, when looking at higher price bands, the type of activity that indicates a housing "market" recovery is just not there. In fact, if not for one more business day last month, YoY house sales volume over $300k in CA would have been very red with the high-end falling off a cliff. Sales did not rise across the price spectrum last month. Transactions below $300,000 rose 9.5 percent from a year earlier, while the number of $300,000-$800,000 deals dipped 0.8 percent year-over-year and sales above $800,000 fell 12.6 percent. 2) House Price Compression Demand only in the low price bands presents a huge problem for CA house prices. That's because it's obvious there are far too many houses "priced" far too high. Bottom Line, too many big houses that people can't afford without exotic financing were built in CA over the last decade. Therefore, the path of least resistance is for mid-to-high end sellers to hit lower end buyers bids..the only difference between a traditional organic seller and a distressed short seller is a lower asking price. The data presented in Feb by DataQuick is exactly how I envisioned our 'house price compression' theme playing out. 3) Foreclosures as % of Total Sales Near Lows...Prices Near Lows. Square that one! Foreclosures as a percentage of total sales are within 1% of cycle lows. And house prices continue to fall. I have read volumes of research for years claiming that of Foreclosures go away house prices will rise. Hundreds of billions has been spent preventing foreclosures. Bottom Line, these type of data continue to throw cold water on all the years of programs and hundreds of billions of dollars wasted preventing Foreclosures thinking they are protecting the housing market. In the end they will discover that all that they did was take away the supply that was most in demand, in turn hurdling the housing

2 market back into a severe double-dip. Foreclosure resales properties foreclosed on in the prior 12 months accounted for 32.5 percent of the resale market last month, down from a revised 32.6 percent in January and down from 37.0 percent a year earlier. Foreclosure resales hit a high for the current cycle of 56.7 percent in February 2009 and a low of 31.6 percent last November. The median price paid for a Southland home last month was $264,750, up 1.8 percent from $260,000 in January but down 3.7 percent from $275,000 in February Last month s median was 7.2 percent above the low point for the current real estate cycle $247,000 in April 2009 and 47.6 percent below the $505,000 peak in mid The peak-to-trough drop was due to a decline in home values as well as a shift in sales toward lower-cost homes, especially inland foreclosures 4) Investors with fists full of cash driving this market is a myth... It's not about investors piling into the market with fists full of cash. Of course they are there but all-cash purchases are relatively flat YoY. The driving forces in this market are the thin and volatile 1) first-timer cohort using low-down sub 4% FHA and GSE 30-year fixed mortgage money 2) and smaller investors reacting out of fear to the recent plethora of headlines of new HAMP mods, HARP refis and bulk REO-to-rental schemes designed to put them out of business. Note, that at least half of investors will rehab and list the properties for sale within 9 months. This is not quality, durable demand. Woe if rise 100bps to 'nosebleed' levels of 4.75%. Cash purchasers accounted for a record 32.8 percent of February home sales, up from 32.2 percent in January and up from 32.3 percent a year earlier. Cash buyers paid a median $200,000 last month, the same as in January and down from $205,000 a year earlier. Southland Home Sales Jump in February, Prices Still Down Yr/Yr March 14, 2012 La Jolla, CA---The Southland housing market posted the highest number of February home sales in five years as record levels of investor and cash buyers helped spur robust activity under $300,000. The median price paid for homes across the six-county region inched up from January but dropped below the year-earlier level for the 12th consecutive month, a real estate information service reported. A total of 15,573 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties last month. That was up 7.2 percent from 14,523 in January, and up 8.4 percent from 14,369 in February 2011, according to San Diego-based DataQuick. The increase in sales between January and February was larger than usual. On average, sales have risen 1.1 percent between those two months since 1988, when DataQuick s statistics begin. Southland sales have increased year-over-year for two consecutive months and for six out of the last seven months. However, last month s sales tally was 12.3 percent below the average for all the months of February since Sales did not rise across the price spectrum last month. Transactions below $300,000 rose 9.5 percent from a year earlier, while the number of $300,000-$800,000 deals dipped 0.8 percent year-over-year and sales above $800,000 fell 12.6 percent. February sales got a big boost from investors and others paying cash for relatively

3 affordable homes, as well as from an extra day s worth of sales thanks to the leap year. Without the latter, sales might have been up a bit, but not to a five-year high. It s just one more reason for us to remind everyone that January and February usually aren t good months to use for forecasting purposes. The big picture remains one where the bottom of the housing market continues to see much of the action, while move-up activity remains sluggish. Financing is still difficult for many and lots of potential move-up buyers and sellers are stuck because they owe more than their homes are worth, said John Walsh, DataQuick president. The median price paid for a Southland home last month was $264,750, up 1.8 percent from $260,000 in January but down 3.7 percent from $275,000 in February Last month s median was 7.2 percent above the low point for the current real estate cycle $247,000 in April 2009 and 47.6 percent below the $505,000 peak in mid The peak-totrough drop was due to a decline in home values as well as a shift in sales toward lower-cost homes, especially inland foreclosures. Distressed sales continued to make up more than half of the resale market. Foreclosure resales properties foreclosed on in the prior 12 months accounted for 32.5 percent of the resale market last month, down from a revised 32.6 percent in January and down from 37.0 percent a year earlier. Foreclosure resales hit a high for the current cycle of 56.7 percent in February 2009 and a low of 31.6 percent last November. Short sales transactions where the sale price fell short of what was owed on the property made up an estimated 20.5 percent of Southland resales last month. That compares with 21.1 percent in January, which was a high point for the current real estate cycle, and 19.7 percent in February Credit conditions remained tight. Adjustable-rate mortgages (ARMs) accounted for 5.7 percent of last month s Southland home purchase loans, down from 6.0 percent in January and 7.7 percent a year ago. Since 2000, a monthly average of about 37 percent of purchase loans were ARMs. Jumbo loans, mortgages above the old conforming limit of $417,000, accounted for 14.4 percent of last month s purchase lending, down from 15.2 percent in January and down from 15.6 percent a year earlier. In the months leading up to the credit crisis that struck in August 2007, jumbos accounted for 40 percent of the market. Absentee buyers mostly investors and some second-home purchasers bought a record 29.7 percent of the Southland homes sold in February, up from a revised 28.0 percent in January and 26.4 percent a year earlier. Last month s absentee buyers paid a median $192,750, down from $195,000 in February and $202,000 a year earlier. The Inland Empire saw absentee purchases rise to a record 37.2 percent of all sales. Since 2000, the Southland s absentee buyers have purchased a monthly average of 17.0 percent of all homes sold. Cash purchasers accounted for a record 32.8 percent of February home sales, up from 32.2 percent in January and up from 32.3 percent a year earlier. Cash buyers paid a median $200,000 last month, the same as in January and down from $205,000 a year earlier. Since 2000, the monthly average for Southland homes purchased with cash is 15.2 percent. Cash purchases are where there was no indication in the public record that a corresponding purchase loan was recorded.

4 Government-insured FHA loans, a popular low-down-payment choice among first-time buyers, accounted for 31.2 percent of all purchase mortgages in February. Last month s FHA level was up from 31.1 percent in January and down from 32.2 percent a year earlier. Two years ago FHA loans made up 36.8 percent of the purchase loan market, while three years ago it was 36.9 percent. Last month 16.5 percent of all sales were for $500,000 or more, up a hair from a revised 16.4 percent in January but down from 18.7 percent a year earlier. The low point for $500,000-plus sales was in January 2009, when only 13.8 percent of sales were above that threshold. Over the past decade, a monthly average of 28.1 percent of homes sold for $500,000 or more. DataQuick monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts. The typical monthly mortgage payment that Southland buyers committed themselves to paying was $998 last month, compared with $983 in January, which when adjusted for inflation was the lowest in DataQuick s records back to Last month s figure was down from $1,174 for the same month last year. Adjusted for inflation, current payments are 56.9 percent below typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 64.7 percent below the current cycle s peak in July Indicators of market distress continue to move in different directions. Foreclosure activity remains high by historical standards but is lower than peak levels reached over the last few years. Financing with multiple mortgages is very low, and down payment sizes are stable, DataQuick reported. Sales Volume Median Price All homes Jan-11 Jan-12 %Chng Jan-11 Jan-12 %Chng Los Angeles 4,736 5, % $315,000 $299, % Orange 1,903 1, % $410,000 $388, % Riverside 2,842 3, % $195,000 $193, % San Bernardino 1,974 2, % $150,000 $148, % San Diego 2,330 2, % $308,000 $305, % Ventura % $345,000 $325, % SoCal 14,369 15, % $275,000 $264, % Best Regards, Mark Hanson DISCLAIMER: This message and attachments are for the sole use of the addressee and are privileged, confidential and exempt from disclosure. If you are not the addressee, copying, dissemination, or distribution of this communication is strictly prohibited. You must delete the e mail and destroy any copies. In publishing research,

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