Modestly Slower Traffic in December; Buying Likely Focused from February-April

■ Slight decline in buyer traffic in December; urgency needed as most wait until Spring. Our December survey of real estate agents showed a slight decrease in traffic with our buyer traffic index falling to 41.1 in December from 43.0 in November. Similar to November, the most significant issue is the lack of urgency among buyers, as buyers recognize that they have until April 30th to take advantage of the tax credit. There are other buyers who are not as tax credit sensitive, but also lack a sense of urgency at this time. However, we expect sales activity to resume with the Spring selling season, with most contracts signed between February and April. Our price index remained below 50 (indicating sequentially lower prices), but increased modestly from November (35.6, up from 34.1) and has been in an improving trend since January 2009.

■ Government incentives shift timing of sales activity. We do not view the slowing in sales activity from mid-October through December as an indication of a change in the underlying demand, but is more a function of a shift in timing based on the homebuyer tax credits. The continued reasonable level of traffic – if not orders – reflects the demand from buyers, but the buyers don’t see the need to make the purchase until the expiration of the extended tax credit. As such, we expect to see contracts condensed over a short period of time this Spring, as the extremely favorably
affordability remains, although rising mortgage rates are a key risk to the recovery.

■ Improvement in Charlotte and the Inland Empire (CA), slowing in Ft Myers and Houston. We saw meaningful improvements in traffic in Charlotte (traffic index moved up to 38 from 25), which is a key market for NVR (although less important than Northern Virginia and Baltimore). The Inland Empire (traffic index rose to 58 from 48) also showed positive momentum and is a key market for KB Home and Lennar. Traffic slowed in Ft Myers to 57 from 74, but remained at a healthy level. We also saw
declining traffic in Houston, as our traffic index fell to 21 from 35. Weakness in Houston, would be problematic, as it will likely lead the country in home construction for 2009, although that isn’t such a boast given the low level of activity overall. We will focus more closely on changes in traffic in January given that December is typically a slow month of traffic.