Industry Overview

During 2012 and 2013 housing prices have begun to stabilize.Increasingly industry participants and analysts anticipate a continued housing recovery as the overhang in housing supply winds down and unemployment levels stabilize and begin to improve.Increased household formations and a low interest rate environment are having a positive impact on the housing market. Supply and demand is playing a key role in home price appreciation. Lenders have been controlling the supply of homes coming to the market at the time that low home prices and low interest rates have increased demand from first time homebuyers as well as investors. Additionally hedge funds and institutional investors are coming in with billions of dollars buying homes to rent.

Goldman Sachs recently opined that the housing markets have “bottomed”, a view shared by many well-known investors, including Warren Buffet. Longer term they project that significant demand from increasing household formation, combined with rising inflation and construction costs, will provide fundamental support for resumption in the rise of residential real estate values.

We have already seen a dramatic decline in new construction that has moderated the overhang in housing supply. S&P/ Case- Shiller Home Price Indexes in 2012 posted a 7% price increase.

When coupled with the fact that about all metropolitan areas saw price increases in the latest quarter, this growth adds to mounting evidence that real estate markets are showing signs of recovery.

Historically, inflation has correlated positively with real estate prices. If current monetary policy eventually leads to higher levels of inflation, it is likely that it will increase real estate prices as well. As a result, our expectation is that housing price
appreciation will return to a more normalized historic trend line at the end of this correction. It should also be noted that a small but growing number of industry participants believe that the nation’s economic rescue sowed the seeds for a robust-to-hyper inflationary scenario with housing prices significantly above
long term historical trends.