September 24, 2009 September 24, 2009

Americas: Building - Homebuilders

Americas: Building - Homebuilders

Upgrading Homebuilders to Attractive; DR Horton and Meritage on Conviction Buy List
Raising Homebuilder view to Attractive
We upgrade our Homebuilders coverage view to Attractive as stable home prices, low mortgage rates, and strength in sales activity (which was evident at our California field trip in midSeptember) should lead to higher equity values. Additionally, we give a greater than 50% probability of a federal tax credit extension which should allay fears of a “double dip” in housing. We see 30% growth in new home sales in 2010 to 525K-550K and expect the strong correlation between sales and housing stocks to hold. We are updating our estimates and target prices and see 10%-15% upside in the group near term and could see in excess of 50% upside longer term.

Adding Meritage to Conviction Buy List
We upgrade Meritage (MTH) to Conviction Buy (from Neutral) as the company’s early-2009 land purchases, strong SG&A control, and low levels of antiquated land make Meritage the most likely homebuilder to return to profitability. Our $28 six month target (from $22) implies about 39% upside consistent with our Street-high earnings forecasts.

Reiterating Conviction Buy on DR Horton

We reiterate our Conviction Buy on DR Horton (DHI) and raise our target to $17 (from $16). The 37% implied upside reflects DR Horton’s industrylow prices and 2,300 ready-for-sale homes which support strong sales and cash flow this quarter.

Raising targets: See 15% near-term upside

Our new 6-month targets reflect the more stable balance sheet of homebuilders as sales improve, inventory writedowns fade, and profitability is on the horizon. In our proprietary distressed book value analysis we now assume a 5% incremental reduction in home prices (was 15%) and a 10% cut to land prices (was 30%). The key risk is lower home prices from higher mortgage rates.
Joshua Pollard (212) 902-6716 | joshua.pollard@gs.com Goldman, Sachs & Co. Usha Chundru (212) 934-5057 | usha.chundru@gs.com Goldman Sachs India SPL

The Goldman Sachs Group, Inc.

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Maintain Buys on Toll and MDC and Sells on KB Home and Lennar
We reiterate our Buy ratings on Toll Brothers (TOL) and MDC Holdings (MDC) as we think the companies’ balance sheets, management teams and margins will lead to strong profits. We maintain our Sell ratings on KB Home(KBH) as valuation is stretched and Lennar (LEN) given that recent 2010 profit guidance seems out of reach

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OUR NEW 6-MONTH TARGET PRICES Price Targets Company New Old Upside Buy DR Horton (Conviction) $ 17.00 $ 16.00 37% Meritage (Conviction) $ 28.00 $ 22.00 39% Toll Brothers $ 28.00 $ 25.00 35% MDC $ 41.00 $ 38.00 12%
Neutral NVR Inc. Ryland Hovnanian Sell KB Home Lennar

.c r

m o
$ 555.00 $ 21.00 $ 2.15 17% 15% -11% $ 12.00 $ 7.00 -4% -10%

$ 760.00 $ 26.00 $ 4.00

$ 18.00 $ 14.00

Source: Goldman Sachs Research KEY REPORTS
“California trip reinforces long term positive bias; Buy DR Horton”, 09/14/2009 “Strong home sales driven by lower-priced homes; Buy DR Horton”, 08/26/2009 “Home price stability continues as recovery gains strength; Buy DHI”, 08/25/2009

The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

Goldman Sachs Global Investment Research

Global Investment Research

1

September 24, 2009

Americas: Building - Homebuilders

Upgrading Homebuilders to Attractive
We have been constructive on the long-term fundamentals of the homebuilders since February 2009. We now upgrade to Attractive as we believe the mismatch between our and Street expectations for a federal tax credit extension will provide near-term upside of 10%-15%, while longer-term fundamentals could drive further upside in excess of 50%. Ultimately the group has a very close correlation with new home sales. As new home sales continue to rise toward our 2010 forecast of 525,000-550,000, we expect share appreciation for homebuilders. Our proprietary distressed book value analysis and normalized earnings driven targets imply 10%15% upside over six months. As we look further out, normalized earnings and tax adjusted book support in excess of 50% upside.

Homebuilder stocks follow new home sales

We believe the key to having the right view on the homebuilder stocks is having the right view on new home sales. A regression analysis of the level of new home sales to the level of our homebuilder index shows an R2 of 67% and we see no reason for this strong relationship to break down going forward. We estimate that new home sales will grow 50% over the next two years as the US economy continues to recover and home prices remain stable. We note that the expected growth is off of very depressed levels and remains 25% below our normalized levels of 800,000-850,000 new home sales. Exhibit 1: We expect new home sales to rise 30% in 2010 off of their halfcentury low levels in 2009
New home sales 1999-2011E
1,400
1,279 1,201 1,091

1,200

We see 30% growth in new home sales next year
1,049

879

880

907

800

600

400

200

0 1999 2000 2001

Source: US Census Bureau, Goldman Sachs Research estimates.

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2002 2003 2004

m a f
769 481 412

Normalized = 800-850

New Home Sales

25%

20%

645 538

0% -25%

-20%

-75%

There is a strong relationship (R2 = 67%) between new home sales and our stocks
1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

-40%

-60%

-125%

-80%

2005

2006

2007

2008 2009E 2010E 2011E

1985

HB Index
Source: Facstet, US Census Bureau.

NHS

Goldman Sachs Global Investment Research

Index of our homebuilder stocks

1,000

976

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125% 75%

Exhibit 2: New home sales are a unique predictor of movement in homebuilder stocks
New home sales vs. our homebuilder stocks
80%

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60% 40%

2

September 24, 2009

Americas: Building - Homebuilders

Economic recovery works in the favor of homebuilders
There has never been an economic recovery in the US without a recovery in new home sales and we expect this cycle to be no different. Historically, new home sales have begun to rise either coincident with or as a leading indicator to the US economy. Some believe that as long as unemployment is rising, investors should stay on the sidelines with homebuilder stocks but we disagree. Below we highlight that the troughs in non farm payroll losses are a better gauge for a return to growth in new home sales than waiting for the peak in unemployment. Historically, you are 7-8 months and 60% too late by the time unemployment peaks.

Exhibit 3: There is a closer relationship between the trough in new home sales and the troughs in non farm payrolls…
New home sales vs. economic data
600 1,6

Exhibit 4: …than the troughs in new home sales and the unemployment rate
New home sales vs. unemployment rate (inverted scale)
1,600

500
1,400

1,4 400

300 1,2 200
1,200

100

1,0

0

-100

-200

-300

-400

-500

-600

'60

'62

'64

'66 '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 (DIFF 1M) Employment Overall Nonfarm payroll, total, Persons, SA - United States (Left) New Home Sales Total, Number of, Annual Rate, SA - United States (Right)

Source: US Bureau of Labor Statistics; US Census Bureau.

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The bottom in new home sales has been consistent with a bottom in payroll losses

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800 600 400 '06 '08 200

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1,000 800 600 400 200

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3%

4%

5%

6%

7%

8%

Investors are generally 7-8 months and 60% too late when waiting for unemployment to peak

9%

10%

11% '63 '64 '65 '66 '67 '68 '69 '70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09
Unemployment Rate Total, Percent, SA - United States (Right) New Residential Sales, New Houses Sold, Total, SA - United States (Left) Recession Periods - United States

'94 '96 '98 '00 '02 '04 Recession Periods - United States

Source: US Bureau of Labor Statistics; US Census Bureau.

Goldman Sachs Global Investment Research

3

September 24, 2009

Americas: Building - Homebuilders

Recent CA trip supports our Attractive view
In mid-September we hosted two days of meetings with homebuilders, community banks, and distressed real estate fund managers in California and we came away more encouraged with the residential landscape in the state. Phrases like “the worst is well behind us” and “things remain encouraging” capture the mood of the many constituents we met with on residential real estate (the mood was much more negative on commercial real estate). The continued recovery in California housing, in the face of expired state stimulus, is encouraging for the entire US. California’s $10,000 tax credits for new homes exhausted in early July but there has not been a significant fall off in housing activity in the state. The cause for continued strong sales is affordability as prices remain at multi-year lows and interest rates hover near 5.25%. While we now expect an extension of the federal tax credit, it has been encouraging to the see the California sales resilience without it in the unlikely chance that an extension does not occur or the credit is allowed to lapse before being reinstated. The positive tone on the residential side of this trip bodes well for KB Home given its 25% exposure to the state of California. That said, we still maintain our Sell rating given: (1) KB Home’s exposure to Las Vegas, which remains a very soft market, and (2) the stretched relative valuation. Exhibit 5: The continued strength in California activity post the expiration of the state tax credit is encouraging for the entire US; While we expect a federal tax credit extension the lack of a “hangover effect” in California where the stimulus was more direct and stimulative bodes well for the nation
Comparison of CA stimulus vs. the federal stimulus

California tax credit Type of buyer Only owner-occupants

Value of credit

$10,000

Use of other credits

Income Limits

M

u

Expiration

Source: Goldman Sachs Research estimates.

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Could use both CA credit and federal credit No income limits

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$8,000 None

Federal Tax credit

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First-time buyers and owner-ocuupant

Less than $95,000

Only 10,000 available Exhausted in early-July

12/1/2009

Goldman Sachs Global Investment Research

4

September 24, 2009

Americas: Building - Homebuilders

Valuation
While homebuilder stocks have more than doubled from the November 2008 lows (S&P 500 up 80% from its lows), the stocks remain 73% below their 2005 peaks (S&P is 33% below its peak). We do not expect to see 2005 levels at any point in the near future but we do believe that there is an excess of 50% long-term value in this group as shares are trading at about 1.1X tax adjusted book value versus the long-term average of 1.6-1.7X. We primarily look at three criteria to judge valuation for the group: •

Price to book. We look at our proprietary distressed book value analysis and current book value (after adjusting
for deferred tax assets). The group is trading near 1.5X on distressed book, suggesting 10%-15% near-term upside, and under 1.1X on tax adjusted book, suggesting in excess of 50% upside longer-term.

Normalized earnings. In our normalized earnings estimates we assume 800,000-850,000 new home sales, prebubble, pre-tax profit margins, and 35% tax rates. The group is trading near 9X our normalized earnings estimates. When we put a 0% tax rate into our normalized models the group is trading near 6X, providing plenty of upside for the group as profitability return in aggregate.

Default scenarios. We think default scenarios are quite low given that credit markets are open to builders.

Price to Book
Exhibit 6: Our distressed book value suggests near term upside of 10%-15%
Price to distressed book value vs. long-term price to book multiples

3.50

3.00

2.83

2.50

2.00
1.51

1.50

1.49

1.45

1.42

1.00

0.50

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

NVR

MDC

KBH

TOL

DHI

RYL

HOV

MTH

LEN

Source: FactSet; Goldman Sachs Research.

M

Source: FactSet, Goldman Sachs Research.

Goldman Sachs Global Investment Research

2009

0.00

ti l u

m a f
1.42 1.36 1.28

Price to Book Value

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1.24

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5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00

Exhibit 7: Tax adjusted book values suggest further excess of 50% upside for the group longer-term
Price to book value (adjusted for deferred tax assets since 2007)

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Average: 1.6X

1.1X

5

September 24, 2009

Americas: Building - Homebuilders

Normalized Earnings
In our view, homebuilders that will exist on the other side of the current downturn should be valued on normalized earnings, at least in part. Today the group trades at 9X our normalized earnings forecasts, but at only 6X our normalized earnings forecast if we input 0% tax rates instead of the 35% tax rates we currently use. Employing 0% tax rate makes some sense because homebuilders will not pay cash or GAAP taxes over the next cycle. As a result of the $25 bn in losses from 2007-09 the group has built up nearly $10 bn in deferred tax assets that will offset profits for an average of 10 years. From a multiple standpoint we think the 12-15X range will likely prevail as builders return to strong profitability.

We view Housing turnover as one of the best ways to detect the relative health of the US housing market. By our calculation, homes should transfer hands once every 21 years (4.7% turnover) vs. today’s transaction pace of 24 years and the unsustainable 2005 pace of 15 years. To determine our normalized level of new homes sales we expect a 21-year turnover pace with new home sales capturing 15%-16% share of total homes sales; this is 800,000-850,000 new home sales per year. Our gross margin estimates are consistent with 1997-2003 profitability, as we believe that 2004-2006 profitability was inflated. For operating expenses we take an arithmetic ten-year average which generally includes one overly cost efficient year during the bubble (2005) and one overly harsh year as cost cutting did not keep up with sales declines (2007). Exhibit 8: Homebuilders trade at 9X normalized earning which is favorable…
Price to normalized earnings (35% tax rates)
16.00

14.00

Group is trading at 9X normalized earnings we utilize 35% tax rates

12.2 X

12.00

10.00

9.1 X 7.8 X 6.4 X

9.4 X

8.00

6.00

4.00

3.6 X

2.00

0.00 HOV MTH

Source: FactSet; Goldman Sachs Research.

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KBH

PHM

ti l
TOL

m a f
9.3 X 9.4 X 9.8 X

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14.1 X

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10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00

Exhibit 9: …however, the group is trading at 6X earnings if the we bake in 0% tax rates
Price to normalized earnings (0% tax rates)

e v
4.1 X 2.4 X

o t s
5.9 X 6.0 X

.c r
6.0 X 6.1 X

m o
9.1 X 8.2 X

Group is trading at 6X normalized earnings if we incorporate 0% tax rates

6.4 X

5.1 X

LEN

NVR

DHI

RYL

MDC

HOV

MTH

KBH

PHM

TOL

LEN

NVR

DHI

RYL

MDC

Source: Goldman Sachs Research.

Goldman Sachs Global Investment Research

6

September 24, 2009

Americas: Building - Homebuilders

Exhibit 10: Homebuilders have traded between 5X and 20X earnings depending on the cycle
Price to FY1 earnings (1988-2005)

70.0

60.0

50.0

40.0

The stocks traded in the range 8- 20X from 1992 - 1998 on the back of the early 1990s housing crisis

30.0

20.0

10.0

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0.0 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Goldman Sachs Research estimates.

m a f

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The stocks traded in the range 5-10X from 1999 to 2005 as investors assumed that earnings were peaking each year given the high growth in the industry

Goldman Sachs Global Investment Research

7

September 24, 2009

Americas: Building - Homebuilders

Credit markets are open to homebuilders, limiting default risk for now
Ultimately we take a probabilistic view of homebuilder valuations and put little weight on default scenarios across our group. So long as the credit markets remain open to homebuilders, we think the risk of zeros across the group is limited. Since April we have seen 9 successful debt placements. Additionally, credit spreads continue to grind tighter, reflecting both signs of housing stabilization and a broader credit market rally.

Exhibit 11: Credit spreads continue to shrink, suggesting the credit markets are favorable for homebuilders
Credit spreads, bp
1,400

Exhibit 12: Nine new debt deals have successfully been placed, helping to alleviate balance sheet stress for homebuilders
New debt issuances for homebuilders

1,200

1,000

800

600

400

200

0 Sep-08

Dec-08
CTX LEN PHM

Mar-09
DHI

Source: Goldman Sachs.

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Jun-09
RYL MDC TOL KBH

MTH

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Sep-09

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Issuer TOL LEN RYL DHI HOV KBH BZH TOL SPF

e v

Announcement Date 4/13/2009 4/23/2009 4/30/2009 5/7/2009 5/27/2009 7/23/2009 9/3/2009 9/15/2009 9/10/2009

Spreads, bp

o t s

Maturity 10/15/2017 6/1/2017 5/15/2017 5/15/2014 5/1/2017 9/15/2017 10/15/2017 11/1/2019 9/15/2016

.c r

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Amount Rating issued ($, mn) Ba1/BBB400 B3/BB400 Ba3/BB230 Ba3/BB500 CC/B+ 29 B1/BB265 B1/CCC+ 250 Ba1/BBB250 Caa1/CCC 280

Source: Bloomberg.

Goldman Sachs Global Investment Research

8

September 24, 2009

Americas: Building - Homebuilders

Homebuilder tax credit likely to get extended
We are raising our estimates as we gain more confidence in the housing recovery and now see a greater than 50% probability that the federal housing tax credit is extended. We are encouraged by recent conversations with our Washington DC analysts and mid-2009 Congress actions (i.e. cash for clunkers extension) that suggest a halt to housing stimulus is unlikely given its importance to the economic recovery. A recent special poll by Blue Chips Economic Indicators (Aspen Publishers) highlighted that less than 50% of polled economists expect an extension. In fact, we believe very few investors (roughly ¼ of investors we speak to) are currently discounting a tax credit extension into housing stocks, creating an opportunity for new investors.

Raising our estimates

We are raising our sales and EPS estimates across the group for 2009-11 to reflect continued strength in sales activity through midSeptember, a greater than 50% probability that the tax credit gets extended, and the likelihood of homebuilders to open new communities in 2010 and beyond. While we had previously expected growth in 2010 revenues of 8%, we now see 10% as more likely given that the tax credit is likely to be available to first time homebuyers through the 2010 spring selling season. We have made no changes to prices, which assumed 2%-5% 2010 declines given the smaller homes being sold, nor have we adjusted our margin assumptions which bake in modest improvements in 2010 and a bigger margin recovery in 2011 as newer land is purchased.

Exhibit 13: We are raising our 2010 revenues by 5% and see smaller losses across the group; With the exception on HOV, we see profits in 2011
New vs. old sales and EPS estimates for our coverage universe
Sales ($ Mn) Old New FY2010 FY2011 FY2009 FY2010 FY2011 4,022.1 4,625.4 3,883.8 4,262.9 4,902.3 1,643.0 1,917.8 1,626.5 1,688.2 1,970.5 1,976.2 2,272.7 1,740.4 2,059.6 2,368.6 2,990.9 3,439.5 3,028.5 3,116.4 3,462.3 848.0 1,108.2 791.0 866.0 1,131.6 1,053.8 1,297.1 1,027.2 1,122.2 1,381.2 2,973.9 3,419.9 2,673.4 3,028.3 3,482.6 1,313.1 1,616.3 1,319.1 1,392.9 1,649.9 1,782.5 2,090.9 1,685.9 1,835.9 2,153.5 EPS FY2009 $ (1.40) $ (13.27) $ (3.75) $ (3.05) $ (2.48) $ (3.72) $ 25.50 $ (6.25) $ (4.38) Old FY2010 $ 0.12 $ (3.09) $ (0.29) $ (0.74) $ (0.04) $ 0.36 $ 40.19 $ (0.63) $ 0.71 FY2011 $ 0.82 $ (1.55) $ 0.95 $ 0.47 $ 1.31 $ 1.34 $ 51.79 $ 0.93 $ 1.57 FY2009 $ (1.36) $ (13.26) $ (3.67) $ (3.43) $ (2.42) $ (3.49) $ 26.33 $ (6.04) $ (4.33) New FY2010 $ 0.23 $ (3.04) $ (0.11) $ (0.56) $ 0.04 $ 0.67 $ 41.33 $ (0.35) $ 0.79 FY2011 $ 0.97 $ (1.45) $ 1.18 $ 0.38 $ 1.41 $ 1.75 $ 53.17 $ 1.07 $ 1.66

Company DHI HOV KBH LEN MDC MTH NVR RYL TOL FY2009 3,800.2 1,613.2 1,697.8 2,918.0 774.6 968.8 2,632.0 1,243.5 1,636.8

Source: Company filings, Goldman Sachs Research estimates.

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Change

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FY2009 FY2010 FY2011 2% 6% 6% 1% 3% 3% 3% 4% 4% 4% 4% 1% 2% 2% 2% 6% 6% 6% 2% 2% 2% 6% 6% 2% 3% 3% 3%

Goldman Sachs Global Investment Research

9

September 24, 2009

Americas: Building - Homebuilders

Raising homebuilder target prices as we revise our Distressed Book Value analysis
We are raising the median six-month target by about 25% and see 10%-15% upside to the group from current levels. Our new target prices reflect higher distressed book value estimates as sales have picked up, prices remain stable, lower writedowns are ahead, and now we see a discrepancy between our and consensus expectations for housing tax credit extension. Previously we had assumed that trough book for homebuilders could reflect a 15% reduction in home prices and a 30% cut to land prices – these estimates reflected a 2008-2010 home pricing environment similar to what had happened predominately in 2008. We have now decreased our distressed assumptions for inventory to an incremental 5% reduction in home prices and a 10% cut to land prices.

Exhibit 14: Our new target prices suggest 10%-15% upside to the group over the next six months
Overview of six-month target price. Closing price as of September 22, 2009.
Six Month Target Price
New Up/down side 37% 39% 35% 12% 17% 15% -11% -10% -4%

Implied Price to Book for New Targets
Tax-adjusted Book Distressed Book 1.51 1.87 1.40 1.65 1.54 1.89 1.47 1.65 2.92 3.24 1.28 1.56 0.41 1.17 0.70 1.10 0.86 1.35

DHI MTH TOL MDC NVR RYL HOV LEN KBH Average Median

New Target $17.00 $28.00 $28.00 $41.00 $760.00 $26.00 $4.00 $14.00 $18.00

Old Target $16.00 $22.00 $25.00 $38.00 $555.00 $21.00 $2.15 $7.00 $12.00

Current Price $12.45 $20.15 $20.68 $36.58 $648.58 $22.59 $4.47 $15.51 $18.83

Old vs. New 6% 27% 12% 8% 37% 24% 86% 100% 50%

15% 15%

39% 27%

We see another 10-15% upside to the group over the next six months

Methodology: Our targets are based on distressed book value and normalized earnings Risks: Downside is lower home prices or higher mortgage rates while upside is continued boost to confidence
Source: Goldman Sachs Research.

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Rating Conviction Buy Conviction Buy Buy Buy Neutral Neutral Neutral Sell Sell

n I
1.15 1.34

e v
1.53 1.60

LT Average 1.93 1.19 2.27 1.42 3.15 2.01 1.69 1.29 1.67

o t s
1.63 1.56

.c r

m o
Current Price 9.39 5.94 8.89 13.73 9.13 11.62 3.97 9.04 7.41

Implied Normalized P/E

New Target Premium to LT Average -22% 18% -32% 4% -7% -36% -76% -46% -48%

Target 12.82 8.25 12.03 15.38 10.70 13.38 3.55 8.16 7.08

-25% -32%

10.2

8.8

We expect the group to trade to ~1.2X taxadjusted book

At our targets stocks remain at ~30% below historic multiples

We expect the group to trade at 10X normailzed earnings

Goldman Sachs Global Investment Research

10

September 24, 2009

Americas: Building - Homebuilders

Exhibit 15: Target Price Methodology
$ millions except per share figures, multiples, and percentages. Closing price as of September 22, 2009.
DHI Scenario 1: Distressed Book Unadjusted Book Value Deferred Tax writeoffs Tax-adjusted Book Value Distressed Book value Distressed BV/share (A) Adjusted BV/share Current Shares LT Average P/BV Premium/(Discount) Target P/BV multiple (B) Implied Valuation (C) = (A) x (B) Scenario 2: Normalized P/E Normalized Earnings (D) Sector P/E Premium/(Discount) Target P/E multiple (E) Implied Valuation (F) = (D) x (E) Scenario 3: M&A Potential Fundamental Value Potential takeout premium (departmental guideline) M&A Implied Valuation (G) Weighting (H) M&A Premium Value (I) = (J) x (K) Implied Valuation = (I) +(G) Probability New Target Price Current Price $ $ 17.00 12.45 $ $ 4.00 $ 4.47 $ $ $ 2,497.7 1,068.5 3,566.2 2,874.4 9.07 11.25 316.9 1.93 0% 1.93 17.48 $ HOV (73.9) 873.9 800.0 276.7 3.41 $ 9.85 $ 81.2 1.00 0% 1.00 3.41 $ KBH 683.1 910.5 1,593.6 1,017.9 13.34 20.89 76.3 1.60 0% 1.60 21.35 $ LEN 2,482.0 832.9 3,314.9 2,103.5 12.78 20.14 164.6 1.29 0% 1.29 16.44 $ MDC 994.2 327.2 1,321.4 1,178.8 24.86 27.87 47.4 1.60 0% 1.60 39.77 $ MTH 454.5 162.1 616.6 521.5 16.93 20.01 30.8 1.35 0% 1.35 22.85 $ NVR 1,548.6 1,548.6 1,398.4 234.71 259.92 6.0 3.15 0% 3.15 RYL 595.2 276.0 871.2 714.5 16.67 20.33 42.9 2.01 0% 2.01 TOL 2,612.8 467.8 3,080.6 2,511.5 14.78 18.13 170.0 Average

$ $

$ $

$ $

$ $

$ $

$ $

$ $

$ $

739.85

$

1.33 10.00 30% 13.00 17.23

$

1.13 10.00 -60% 4.00

$

2.54 10.00 -40% 6.00

$

1.72 10.00 -30% 7.00

$

2.66 10.00 60% 16.00

$

$

4.51

$

15.26

$

12.01

$

Upside/Downside: To Target Price Price to Book Value Target Price (on Tax-adjusted Book) Target Price (on Distressed Book) Current Price (on Tax-adjusted Book) Implied Normalized P/E Target Price P/E Current Price P/E Rating (Blank = Neutral)

All targets are six-months Key upside risk: A slowdown in post-moratoria foreclosures and further momentum in the group. Key downside risk: Another leg down in housing activity.
Source: Goldman Sachs Research estimates.

M

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m a f
37% -11% 151% 187% 111% 40% 116% 45% 12.8 9.4 3.5 4.0 CL Buy

18.00 $ 18.83 $

ly i
-4% -10% 70% 110% 77% 7.1 7.4 Sell 8.2 9.0 Sell

n I
42.64 $ 41.00 $ 36.58 $ 12% 147% 165% 131% 15.4 13.7 Buy

e v
3.39 $ 10.00 0% 10.00 33.94 $ $ $ $ 28.00 $ 20.15 $ 39% 140% 165% 101% 8.2 5.9 CL Buy

o t s
$ 33.48 $ 71.01 $ 1.94 $ 10.00 0% 10.00 $ 19.44 $ 26.00 $ 22.59 $ 17% 15% 292% 323% 250% 128% 156% 111%

.c r
2.27 0% 2.27 33.49 2.33 10.00 0% 10.00 23.27 28.00 20.68 35%

m o
1.60 0% 1.60 10.0 -4% 9.6

739.85 20% 890.00 10% 89.00 759.00 100%

14.00 $ 15.51 $

760.00 $ 648.58 $

15%

86% 135% 90%

154% 189% 114%

114%

10.7 9.1

13.4 11.6

12.0 8.9 Buy

10.2 8.7 Attractive

Goldman Sachs Global Investment Research

11

September 24, 2009

Americas: Building - Homebuilders

We are raising our target prices as we believe that our new distressed book value analysis better reflects the economic reality of the homebuilders. Previously we had assumed that trough book for homebuilders would reflect a 15% reduction in home prices and a 30% cut to land prices. We have now decreased our assumptions to assume a 5% reduction in home prices and a 10% cut to land prices. As home prices have stabilized nationally, writedowns are currently less than 2% of inventory – their lowest level since impairments began in late 2006. Summary of distressed book value adjustments: • • • • • Trim value of homes by 5% and land by 10% (was 15% and 30% previously).

Add back fair value of FAS 109 deferred tax valuation allowances assuming 10 year recovery period. Value intangible assets at zero. Value unconsolidated investments at zero. Value un-owned inventory at zero.

Exhibit 16: Under our new assumptions the group has 10%-15% upside
Price to distressed book value vs. long-term average price to book value
3.50

3.00

2.83

2.50

2.00

1.50

M

ti l u
1.00 0.50 0.00

m a f
1.51 1.49

ly i
1.45

n I
1.42

e v
1.36

o t s
1.28 1.24

.c r

m o

1.42

NVR

MDC

KBH

TOL

DHI

RYL

HOV

MTH

LEN

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

12

September 24, 2009

Americas: Building - Homebuilders

We are Attractive on the group as valuation is still well below historical levels. The group currently trades at about 1.1X of book, versus its long-term average of 1.6-1.7X. The current discount reflects the tenuousness of book values in a declining home price environment which many investors fear will return. Today, however, we raise our target prices as we have gained more confidence in book values following the more muted inventory writedowns homebuilders are taking today and the stability we see in home prices. That said, we still employ our distressed book value analysis because builders will not turn profitable for 2-6 quarters, suggesting modest downside to current book value.

Exhibit 17: Homebuilders have traded at 1.6-1.7X book over the last 35 years but trade at 1.1X of tax adjusted book today
Price to book value (adjusted for FAS 109 deferred tax assets from 2006-present)
5.00 4.50 4.00 3.50

Exhibit 18: We are gaining more confidence in book value as inventory writedowns are tracking at their lowest levels since they began in late 2006
Inventory writedowns as a % of beginning inventory
14%

12%

10%

3.00 2.50 2.00 1.50 1.00 0.50 0.00 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991

Source: FactSet, Goldman Sachs Research.

M

ti l u

m a f
1995 1997 1999 2001 2003 2005

ly i
Average: 1.6X 1.1X
2007 2009

n I
8% 6% 4% 2% 0% Jun-06

e v
2.7% 2.2%

Price to Book Value

o t s
11.6% 7.6%

.c r
7.4% 3.8%

m o
6.2% 5.6% 3.7%

8.5%

6.1%

2.3%

0.6%

1993

Mar-07

Mar-08

Jun-07

Jun-08

Mar-09

Sep-06

Sep-07

Sep-08

Dec-06

Dec-07

Source: Company reports, Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

Dec-08

Jun-09

13

September 24, 2009

Americas: Building - Homebuilders

Framework: Biased toward homebuilders that have a higher chance of profitability
The homebuilders trade very closely together over a long period of time. Over the last 3 years, though, the correlation has slipped as some public builders have gone bankrupt and others still face balance sheet pressures. As we look forward we are looking to homebuilders that have a greater chance of returning to profitability as the better investment vehicle as housing recovers. We measure four criteria to determine the ability of a homebuilder to turn a profit soon: • • • •

Strong balance sheet – We prefer homebuilders with low net debt to capital ratios, less short-term debt maturities
and/or strong cash flow potential such that they can finance growth.

Strong cost control – Homebuilders with low SG&A as a percent of revenue have a stronger potential for profit Low potential for further writedowns – Higher gross margins (in the double digits) or low inventories are favorable. Low risk of negative surprise – Off-balance sheet joint ventures are likely to weigh on profits even as sales recover.

Exhibit 19: There are 4 keys to a return to profitability that we measure – Our 4 Buy ratings are in the top fundamental group

Criteria Assessed (1) Strong Balance Sheet Low net debt/capital, extended maturities, strong cash flow potential - all providing ability to finance growth

Higher scoring homebuilders DR Horton (DHI) MDC Holdings (MDC) Meritage (MTH) Toll Brothers (TOL)

(2) Strong Cost Control Gross margins that are already high or SG&A that is reasonable given current sales pace (3) Low potential for further writedowns Limited inventory or current margins that are well into double digits

(4) Low risk of surprise Limited joint ventures and other off-balance sheet financing

Note: We broadly group the homebuilders into 3 groups. These are not meant to replicate our ratings as valuation is not considered here. Within each group we are not differentiating here – company names are merely in alphabetical orders
Source: Goldman Sachs Research.

M

ti l u

m a f

Middle of the pack Ryland Group (RYL) Pulte Home (PHM) KB Home (KBH)

ly i

n I

(1) Strong Balance Sheet

e v

o t s
X X X X X X

.c r
X X X

m o
(4) Low risk of surprise

Profile Scoring (3) Low potential for further writedowns

(2) Strong Cost Control

X X X X

X X X

X X

X X

Low scoring homebuilders Hovnanian (HOV) Lennar (LEN)

X

Goldman Sachs Global Investment Research

14

September 24, 2009

Americas: Building - Homebuilders

Meritage has the strongest likelihood of profitability; Buy shares to $28
We are upgrading Meritage to Conviction Buy from Neutral as we believe that the company has one of the highest chances of returning to profitability quickly. Across our group we are biased toward homebuilders that have higher near-term profit potential and we look at four criteria in particular to judge this: (1) balance sheet strength, (2) variable and fixed cost control to date, (3) low potential for further writedowns, and (4) limited risk in the form of joint ventures. Ultimately Meritage screens well on three of the four and we think that our street-high estimates reflect the profit potential for Meritage going forward. Our $28 target implies about 39% upside and is somewhat conservative given that we still see shares trading at a discount to peers on normalized earnings.
Our $28 six-month target price implies Meritage will trade at 1.6X distressed book value (in line with the group), but still at a 25% discount to the group on normalized earnings. Historically Meritage has traded at a discount to the group for two reasons: (1) the company has been a very small builder, and (2) Meritage has generally had less attractive balance sheet than the rest of the group. Today, though, both of those issues have been essentially resolved and Meritage deserves an average multiple in our opinion. On the size issue Meritage is on pace to be the 8th largest US homebuilder by year end vs. building at 1/10th the run rate of the average homebuilder 10 years ago. On the balance sheet, the company’s cash flow generation through the downturn has put them in a more favorable position than the average homebuilders. At about 30% net debt to cap we think Meritage’s balance sheet should be rewarded with at least a group-average multiple. Exhibit 20: Meritage will have an appreciably better balance sheet than the rest of the group by YE2009 and into 2010 (for the first time in a decade)
Meritage net debt to capital vs. the group average, highs and low
2001 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Company filings, Goldman Sachs Research estimates.

M

ti l u
Group Average

m a f
Meritage

Net Debt to Capital Ratio (Inverted Scale)

ly i

n I
16.00 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00

Exhibit 21: Meritage looks very attractive on normalized earnings
Price to normalized earnings for our coverage universe

e v
6.4 X

o t s
9.1 X 9.3 X

.c r
9.4 X 9.8 X

m o
14.1 X 12.2 X

9.4 X

7.8 X

3.6 X

HOV

MTH

KBH

PHM

LEN

TOL

NVR

DHI

RYL

MDC

Source: Goldman Sachs Research estimates.

Goldman Sachs Global Investment Research

15

The Goldman Sachs Group, Inc. September 24, 2009

Global Investment Research Americas: Building - Homebuilders

Exhibit 22: Meritage has strong cash flow potential relative to its balance sheet size
Percent of total debt that could be paid down with spec homes
14%
Percent of debt that could be paydown with selling finished spec units

Exhibit 23: Meritage has no debt maturing until 2014 and $400 mn of cash Meritage is in a solid balance sheet position
Debt maturity schedule ($ mn)

13.0%

350 300
10.5%

12%

10%

250
6.9%

8%

200
5.6% 4.3% 4.0% 2.9%

6%

150 100
2.0% 1.6% 1.1%

4%

2%

0% DHI MTH TOL RYL LEN CTX PHM MDC KBH

Source: Company filings, Goldman Sachs Research.

M

ti l u

m a f

ly i

HOV

n I
0

50

9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 + p 200 201 201 201 201 201 201 201 201 201 201 202 202 202 202 202 202 202 202 2022029 Per

e v

o t s

.c r

Very favorable maturity schedule

m o

Source: FactSet.

Goldman Sachs Global Investment Research

16

September 24, 2009

Americas: Building - Homebuilders

DR Horton to generate strong sales and cash flow; Buy shares to $17
We reiterate our Conviction Buy on shares of DR Horton as we believe the company’s focus on the first time homebuyer is a competitive advantage at this point in the housing cycle. For example, in the two most recent new home sales reports from the US Census Bureau homes priced at $150-$200K have had the strongest growth, highlighting the improvements at this first time homebuyer price point. Much of the outperformance that DR Horton shares have experienced versus the market, and the group, this year is the result of this first time homebuyer focus and it should propel shares further from here. DR Horton is the premier first-time homebuilder with more than 50% of its business geared toward the first-time homebuyer and nearly 90% exposure to the first-time plus first-time move-up segment. Because the first-time homebuyer tax credit has not yet been extended we still expect increased urgency from undecided homebuyers to benefit DR Horton more than any other public builder. In addition, if the tax credit is extended as we expect DR Horton stands to benefit the most within our group.

DR Horton has a calculated strategy of keeping finished and almost-finished homes in its communities, which we believe benefits the company heading into the yet-to-be extended fiscal stimulus deadline. As of 6/30/2009 DHI had 5,600 homes without current buyers, of which 2,300 homes were finished and the remaining 3,300 were yet to be completed. By our estimate, the company could generate nearly $450 mn of cash from operations by liquidating only the finished portion of these speculative homes. Exhibit 24: DR Horton’s industry-low price point is a strategic advantage, given the pending expiration of the $8,000 tax credit for first-time homebuyers
Month-over-month change in new home sales in various price ranges in June

4.0%

3.8%

3.7% 3.4% 3.3%

3.5%

3.2%

3.2%

3.1% 2.9% 2.9% 2.7%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%
211 216 237

0.0% DHI KBH

CTX

Source: Company filings, Goldman Sachs Research.

M

ti l u
240 248 251

m a f
261 275 279 299

ly i
1.3%
615

n I
0% -10% -20% -30% -40% -50%

Exhibit 25: New home sales in the lower priced range will see the best improvements
Average year-over-year change in new home sales in various price ranges since January 2009

e v
-17.1%
$150k - <200K

o t s
-36.0%

.c r

m o

-13.2%

-27.9% -32.6%

-47.5%
< $150K $200K- <300K $300K- <400K $400K- <500K Total

RYL

MTH

LEN

PHM

HOV

MDC

NVR

TOL

Source: US Census Bureau.

Goldman Sachs Global Investment Research

17

September 24, 2009

Americas: Building - Homebuilders

Exhibit 26: DHI is poised to generate strong cash flow from the sale of its sufficiently large inventory of finished, unsold homes (specs)
Cash flow potential from finished, unsold homes ($ in millions)

Exhibit 27: DHI could pay off 13% of the face value of it debt by simply converting spec homes to cash
Cash flow potential from finished, unsold homes (as % of debt balance)
14%
Percent of debt that could be paydown with selling finished spec units

500 450 400 350 300 250 200 150 100 50 0 DHI PHM TOL LEN CTX NVR MTH RYL KBH HOV MDC
187.9 154.3 141.4 437.7

13.0%

12%
10.5%

10%

8%

6.3%

6%

4%

127.2

69.1

63.3

2%

48.4 27.6 22.1 20.6

Source: Company filings, Goldman Sachs Research.

M

ti l u

m a f

ly i

n I
0%

e v
DHI MTH

o t s
6.3% 5.6%

.c r
4.8% 4.0%

m o
2.0% 1.6% 1.0%

TOL

PHM

RYL

LEN

CTX

MDC

KBH

HOV

Source: Company filings, Goldman Sachs Research.

Goldman Sachs Global Investment Research

18

September 24, 2009

Americas: Building - Homebuilders

Appendix
Exhibit 28: Mortgage spreads over the 10-year treasury are in-line with history; without a disruptive lift in treasury yields we believe that mortgage rates will remain low
Mortgage Rates and Spreads
20.0%

18.0%

2000s 2000s 1990s 1990s 1980s 1980s 1970s 1970s

16.0%

14.0%

12.0%

10.0%

8.0%

M

ti l u
6.0% 4.0%

'70 '71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09

m a f

ly i

n I

e v

Current Average Average

o t s
Current

Mortgage 10 yr Mortgage 10 yr Rates Spreads Rates Spreads 6.14 182.75 6.14 182.75 7.91 150.07 7.91 150.07 12.35 203.64 12.35 203.64 9.39 143.86 9.39 143.86 5.20 8.95 8.95
5.35 166.00 179.41 170.08

.c r
170.08

m o
600bps 500bps 400bps 300bps 200bps

Spreads (RHS)

100bps

Mort. Rates (LHS)

0bps

Conventional mortgage rate, NSA - United States (Left) (Conventional mortgage rate, NSA - United States - Yield on 10-year Treasury bonds, NSA (pct.)) * 100 (Right)

Source: FactSet, Goldman Sachs Research.

Goldman Sachs Global Investment Research

19

September 24, 2009

Americas: Building - Homebuilders

Exhibit 29: New home sales are at levels that historically signal a great time to invest in the homebuilders New homes sales (1963-present)
1,600

Exhibit 30: On a population adjusted basis new home sales remain well below previous cyclical troughs New home sales/total households
1.4%

1,400

New home sale are still at very low levels despite the 40% pickup YTD
(6-Peak) 11/1998 995 homes

(7-Peak) 7/2005 1367 homes

1.2%

1,200

1.0%

1,000
Thousands of New Homes Sold (2-Peak) 10/1972 843 homes

(3-Peak) 10/1978 872 homes

(4-Peak) 3/1986 880 homes

(5-Peak) 12/1993 812 homes

0.8%
(6-Trough) 9/2001 853 homes 14% decline over 2+yrs

800
(1-Peak) 11/1965 616 homes

0.6%

600

400
(1-Trough) 2/1970 373 homes 39% decline over 4+ yrs (2-Trough) 1/1975 416 homes 51% decline over 2+ yrs (4-Trough) 1/1991 401 homes 54% decline over 4+yrs

(5-Trough) 2/1995 559 homes 31% decline over 1+yr (3-Trough) 4/1982 339 homes 61% decline over 3+ yrs

July 2009: 433K

0.4%

0.2%

200

Population adjusted new home sales are still below previous troughs
1966 1968 1970 1972 1974 1976 1978 1980 1982

0.0%
0 '63 '65 '67 '69 '71 '73 '75 '77 '79 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 '05 '07 '09 New Home Sales - United States Recession Periods - United States

Source: US Census Bureau.

Exhibit 31: More homes are being sold than started - inventory is improving New home sales minus housing starts for sale
40

30

20

10

Over-Building
0

-10

Under-Building

-20

-30

'71 '72 '73 '74 '75 '76 '77 '78 '79 '80 '81 '82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 (MOV 1Y) Housing Starts By Purpose and Des ign, 1 unit, built for sale, total, Num ber of - United States - New Hom e Sales Total, Number of - United States Recess ion Periods - United States

Source: US Census Bureau.

M

u

ti l

m a f

Price to Book Value

ly i

n I
5.00 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 1973

Source: US Census Bureau.

Exhibit 32: Valuation is very attractive for the group

Price to book (adjusted for deferred tax assets since 2007)

e v
1977 1979 1981

o t s
0.41% 0.43%

.c r
1994 1996 1998 2000 2002 2004

m o
July 09: 0.36% 0.29%

1984

1986

1988

1990

1992

2006

Valuation remains attractive

2008

Average: 1.6X

1.1X

1975

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Source: FactSet; Goldman Sachs Research.

Goldman Sachs Global Investment Research

2009

20

September 24, 2009

Americas: Building - Homebuilders

Reg AC
I, Joshua Pollard, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Investment Profile

The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows:

Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month

volatility adjusted for dividends.

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Disclosures
Coverage group(s) of stocks by primary analyst(s)

Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research.

Company-specific regulatory disclosures

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Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution

Buy

Global 30% 51% 19% 54% 52% 44% As of July 1, 2009, Goldman Sachs Global Investment Research had investment ratings on 2,709 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

M

ti l u
Hold

m a f
Buy

ly i
Hold

n I
Sell

e v

o t s

.c r

m o

Investment Banking Relationships

Sell

Goldman Sachs Global Investment Research

21

September 24, 2009

Americas: Building - Homebuilders

Price target and rating history chart(s)
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Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a

stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return.
Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The

M

ti l u

m a f

ly i

n I

e v

o t s

.c r

m o

Goldman Sachs Global Investment Research

22

September 24, 2009

Americas: Building - Homebuilders

investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation.
Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because

there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs, and pursuant to certain contractual arrangements, on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs JBWere Pty Ltd (ABN 21 006 797 897) on behalf of Goldman Sachs; in Canada by Goldman Sachs Canada Inc. regarding Canadian equities and by Goldman Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs JBWere (NZ) Limited on behalf of Goldman Sachs; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.
European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research in connection with its distribution in the European Union and

United Kingdom; Goldman, Sachs & Co. oHG, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany.

General disclosures

This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. SIPC: Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/publications/risks/riskchap1.jsp. Transactions cost may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. Our research is disseminated primarily electronically, and, in some cases, in printed form. Electronic research is simultaneously available to all clients. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, One New York Plaza, New York, NY 10004. Copyright 2009 The Goldman Sachs Group, Inc. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

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