Peak

June 16, 2010 Theories

Abigail F. Doolittle Research
abigail@peaktheories.com LLC
518-391-9313

www.peaktheories.com

Pointed Commentary on the Primary Financial Market Trend

A Peak Point
The Bets Still On
Back in February, I wrote about a $2 bet Ive had with a colleague since last spring on the state of the housing market. My side:
residential housing had further to fall. His side: the worst was behind us.

We spoke the other day and I told him to start saving: the housing market is about to take another tumble.

Pricing
The highly esteemed S&P/Case-Shiller National Price Index fell 3.2% in Q1:10 from Q4:09 for the second quarterly decline in a row,
perhaps a near-term inflection point worth noting, and it remains 31% below its peak in Q2:06. To the positive, the index did show a
2% improvement on a year-over-year basis.

As is always the case, the chart shows us the story and, in this case, it is not a very good story.

Source: Standard & Poors and Fiserv

The official comments to accompany the May 25 release were subdued at best.

The housing market may be in better shape than this time last year; but, when you look at recent trends there are signs of some
renewed weakening in home prices, says David M. Blitzer, Chairman of the Index Committee at Standard & Poors. Now that the tax
incentive ended on April 30th, we dont expect to see a boost in relative demand.

In addition, data out of the Federal Housing Finance Agency (FHFA) and Zillow.com support the March CSI data. Specifically, the
FHFAs seasonally-adjusted purchase only index declined 1.9% in Q1:10 from Q4:09 while also showing a 3% decline year-over-year
while the Zillow Home Value Index showed that home prices were down 1% and 3.8% on a quarterly and year-over-year basis,
respectively.

Overall, recent pricing trends point to weakness in the housing market and this is troubling given that those trends reflect the
governments stimulus programs. What will happen without that price propping?

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on
the financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 16, 2010
Theories
A Peak Point Research
LLC
www.peaktheories.com

Foreclosures
th
Last week, RealtyTrac reported that overall foreclosure activity surpassed 300k for the 15 straight month. While defaults and auctions
were down, bank repossessions hit a record monthly high for the second month in a row in May with a total of 93,777 U.S. properties
repossessed by lenders during the month. This represents an increase of 1% from April and an increase of 44% from May 2009.

Were nowhere near out of the woods, Rick Sharga, RealtyTracs senior vice president for marketing, told Bloomberg. Were likely
to set a quarterly record for home seizures if June is anything like May.

Sharga recently predicted that another 5 million delinquent mortgages will end in foreclosure in addition to the 3.1 million properties
that have been seized by banks already.

The second quarter wont be the peak, Sharga said. Im not even sure 2010 will be.

At the very least, foreclosure activity will keep a cap on home prices but could act as a downward pressure on home prices as cheap
homes hit the market with banks eager to unload the merchandise.

Existing Home Inventory

For the third consecutive month, existing home inventory increased in April by 11.5% for the highest level of inventory on the market
since July 2009. This represents the first annual increase in inventory levels since July 2008 after recording many months of year-over-
year declines.

One can certainly argue that Aprils inventory increase reflects the surge of sellers who rushed to list their homes before the expiration
of the federal homebuyer tax credit, but irrespective of its cause, it is a potentially negative trend for housing.

Housing Starts and New Homes

Well have an update on this figure today, but this annual chart is highly unusual. After having put in a multi-decade bottom of sorts,
support has been broken. In fact, the long-term trend is clearly down.

Source: U.S. Census Bureau

In addition, it appears that homebuilders are less confident about their prospects with the expiration of the tax credit based on Junes
decline in the National Association of Home Builders Index to 17 from 22, sinking five points after two straight months of gains.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on
the financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 16, 2010
Theories
A Peak Point Research
LLC
www.peaktheories.com

Current Activity
In an attempt to piece together what residential housing activity may look like without the effect of the governments MBS purchase
program or its tax credit buying incentives, I have collected an assortment of possible indicators.

For the fifth straight week in a row, U.S. home buying applications dropped by 5.7% to the lowest level since February 1997,
according to the Mortgage Bankers Association, while the MBA refinance index fell 14.3%, driving total mortgage applications
down 12.2% for the week of June 4. This may be the key figure to watch for the next several weeks since it does not reflect the
governments intervention.

NARs Pending Home Sales Index, a forward-looking indicator, rose 6% based on contracts signed in April, following gains of 7.1%
and 8.3% in March and February, respectively. While these figures do reflect the governments intervention, the declining trend
may point to a coming cool-off.

Building Permits, another forward-looking indicator, fell in April by the most since December 2008 according to Commerce
Department figures to 606k and about 11.5% percent below the revised March rate of 685,000. In all fairness and to the positive,
April 2010s figure is 15.9% above the revised April 2009 estimate of 523,000.

Trulia.com reported that a greater number of offering prices were being cut in May.

Unemployment
Lastly, and perhaps the biggest danger of all: the worst unemployment picture in nearly thirty years.

More than 8 million jobs have been lost since December of 2007. The unemployment rate stands at 9.7% while a broader measure
used to include those who have stopped looking for jobs is slightly below 17%.

Perhaps one of the frightening statistics is that in May, 46% of the unemployed had been without a job for more than 6 months or
more than any other time since 1946. If this trend carries forward, it means, essentially, should you lose your job, there is a nearly 50%
chance that you will be without a job for at least half a year.

It is the fear that accompanies the realty of this statistic that is likely to keep housing market activity subdued. How many people will
look to buy homes if they are afraid of the job market?

And, more obviously, within the millions of jobless, there are and will be many who are unable to make their mortgage payments,
whether adjusted up or fixed, and let their homes go to foreclosure, depressing housing prices further.

The Sum of the Parts

Recent trends in pricing, foreclosures, and inventory seem to support the case for a double dip in housing as does the long-term trend
in housing starts. A challenging employment picture provides reason to believe that these trends are likely to remain in place and
especially with the removal of the governments glue. All of this leads me to believe that the last year was one of respite for the
housing market and not recovery.

And until the asset class at the center of the financial crisis heals housing we can be assured that the crisis itself is not over.

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on
the financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 16, 2010
Theories
A Peak Point Research
LLC
www.peaktheories.com

Sources:

www.standardandpoors.com

www.fhfa.gov

www.realtytrac.com

http://www.businessweek.com/news/2010-06-10/u-s-home-foreclosures-climb-44-to-record-in-may-update1-.html

www.realtor.org

www.hwmarketintelligence.com

www.nahb.org

www.mbaa.org

www.census.gov

Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on
the financial markets and the economy. Please see important disclosure statements at the end of this document.
 Peak
June 16, 2010
Theories
A Peak Point Research
LLC
www.peaktheories.com

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Peak Theories Research LLC is an on-line research firm dedicated to providing investors with a macro long-term view on
the financial markets and the economy. Please see important disclosure statements at the end of this document.