HB 12 02 10 Industry Update

North America Equity Research
14 December 2010
Homebuilding
2011: The Long Road Back, Part II; Compelling Risk /
Reward Persists; Adj. PTs; Initiating on NVR, MTH
Please join us on a conference call today at 10AM EST to discuss this report. Dial-in: Homebuilding and Building
888-566-1383 (U.S.), 773-799-3383 (outside U.S.), Passcode: HOMEBUILDING. Products
Replay through 12/21: Dial-in: 800-327-0518 (U.S.), 402-220-0185 (outside U.S.), Michael Rehaut, CFA
AC
Passcode: 4143. This call is not open to members of the press. (1-212) 622-6696
michael.rehaut@jpmorgan.com
Following a 2010 that featured a striking amount of volatility due to the expiration of
the federal housing tax credit, but overall reinforced our view when we upgraded the Jason A Marcus
sector to positive in September 2009 that the recovery would emerge slowly and over (1-212) 622-4906
jason.a.marcus@jpmorgan.com
the next 24 months, we believe 2011 will mark stabilization and modest improvement
in the housing market. Critically, however, we believe our outlook for stable to William Wong
(1-212) 622-1442
modestly improving trends, as well as for home prices to be flat to down only 3% in
william.w.wong@jpmorgan.com
2011, is materially more positive than our view of the current buyside consensus,
which we believe expects home prices to decline at least another 5-10%, resulting in a J.P. Morgan Securities LLC
resurgence in land-related charges, margin compression, and book value erosion. By

Table 1: J.P. Morgan Coverage Universe
contrast, we believe land-related charges should continue to be minimal in 2011, while
margins should expand modestly and book values should largely hold. Moreover, we Homebuilders Ticker Rating
estimate order growth to resume and more builders to generate positive Operating EPS Larger-Cap
D.R. Horton DHI N
in the upcoming year. Trading at 1.05x current P/B (ex-adj. FAS 109, ex-NVR), at the KB Home KBH OW
low end of their historical range, we believe the stocks fully reflect the more Lennar LEN OW
pessimistic buyside consensus. Hence, we view the sector as representing a NVR, Inc. NVR OW
PulteGroup PHM N
compelling risk/reward dynamic, as we expect improving fundamentals in 2011 to Toll Brothers TOL OW
result in investors anticipating a return to normalized EPS and book value growth,
which in turn should drive P/B multiple expansion over the next 12 months. Using an Smaller-Cap
Beazer Homes BZH UW
average targeted 10% discount to the group’s 10-year P/B multiples against our 2011- Hovnanian HOV N
end book value estimates, we slightly adjust our price targets, which now represent an MDC Holdings MDC UW
average 28% return potential (previously 31%). Lastly, we round out our coverage Meritage Homes MTH N
Ryland RYL N
universe by initiating on NVR (OW) and MTH (N), the former of which we add to our
Standard Pacific SPF UW
favored OW-rated names of LEN, KBH, and TOL.
Price Target
• Demand, having largely stabilized post-tax credit, should improve moderately Old New
in 2011, coincident with macroeconomic trends. While highly depressed, Larger-Cap
D.R. Horton $14.50 $14.50
importantly, we note that housing demand – i.e., housing starts and new and
KB Home $17.50 $17.50
existing home sales – has largely stabilized over the last four months, following Lennar $24.00 $24.50
the expiration of the federal housing tax credit. We see this recent stability as NVR, Inc. - $915.00
critical in terms of our outlook for only modest downside for home prices, in PulteGroup $9.50 $8.50
Toll Brothers $26.00 $25.50
contrast to 2006-2008, when consistently falling demand trends played a key role
in declining home prices, in our view. More importantly, coincident with JP Smaller-Cap
Morgan’s Economics Team's outlook for moderate macroeconomic improvement, Beazer Homes - -
Hovnanian - -
we believe housing starts and home sales should improve 15-20% in 2011 off of MDC Holdings $31.50 $29.50
current six month moving averages. We also point to the recent stability in credit Meritage Homes - $26.50
standards for mortgages, which should support stable to improving demand over Ryland $21.00 $20.00
Standard Pacific - -
the next 12 months. Lastly, while we believe a more material improvement in
demand is more dependent on a more aggressive absorption of excess, which we
Please see our separate initiation
do not expect to begin until 2012-2013, we note housing demand remains roughly reports on NVR and MTH also
60% below its 30-year averages and 30% below its last major trough in 1991. published today.
See page 42 for analyst certification and important disclosures.

J.P. Morgan 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.
Michael Rehaut, CFA North America Equity Research
(1-212) 622-6696 14 December 2010
• Perhaps more importantly, supply, while elevated, is down solidly from peak levels
and should continue to be more manageable, in our view. As a result, we note that
both current demand and supply trends are different than 2006-2008, when demand
consistently fell and supply consistently rose, the combination of which we believe
resulted in declining home prices. Specifically, existing homes for sale are down 16%
from peak levels in 2008, while the top 23 markets tracked in our Bi-Weekly Inventory
Watch are down 27% on average, and have recently exhibited above average seasonal
declines over the last two months, down 3% each in October and November vs.
historically rising 1% in October and being flat in November. Lastly, but perhaps most
importantly, in our view, we believe shadow inventory will continue to be liquidated at a
moderate pace, with REO sales persisting at roughly 50K/month, and annual liquidations
of distressed units continuing at a 2.0-2.5 million pace through 2012, in-line with 2009’s
2.2 million.
• As a result, we expect home prices to be flat to down only 3% in 2011, in contrast to

our view of the buyside consensus of at least down 5-10%. Importantly, not only is
housing affordability at near-record levels following a roughly 30% decline in home
prices since late 2006/early 2007, but also, the cost of owning a new home versus renting
is only at a 4% premium, the lowest on record, versus a historical premium of 35%.
Moreover, existing home ownership is at a 10% discount to renting, versus a historical
16% premium and only slightly above the record low of the 12% discount seen in 1Q09.
We believe this favorable cost of owning versus renting should only improve in 2011, as
rents are expected to increase further due to a continued decline in apartment vacancy
rates. Lastly, we believe builder cancellation rates returning to normal levels, and total
specs per community being at their lowest level in four years, should result in far greater
control over pricing trends for homebuilders, compared to 2006-2008 when elevated can
rates resulted in the aggressive discounting of large amounts of unwanted spec inventory.
• Builders should demonstrate stronger fundamentals in 2011. We believe our outlook

for a reemergence of order growth, core operating margin expansion, continued minimal
land-related charges, and more builders generating positive Operating EPS in 2011 all
represent positive catalysts for the sector over the next 12 months. Specifically, regarding
order growth, we note that after 1Q11’s tough year-ago comp which includes the benefit
from the tax credit, we estimate that community growth and a modestly better sales pace
should drive order growth of 14% for the year, following a 10% decline in 2010E.
Moreover, we estimate closings growth of 7% should drive SG&A leverage of 50 bps in
2011, resulting in core operating margin expansion of 60 bps. Also, we estimate the
builders will continue to experience a minimal level of land-related charges, based on our
outlook for home prices to be flat to down only 3% in 2011. Finally, we estimate two
more builders will become profitable on an Operating EPS basis in 2011, bringing the
total to 7 out of the 12 builders in our universe.
• Risks to our positive sector stance include greater than expected price competition
during the Spring selling season and tighter credit standards. We believe three
potential scenarios represent the leading risks to our positive sector stance. First, while
we believe more normal can rates and the lowest total spec levels in four years should
support pricing discipline, nonetheless, if builders become more aggressive with spec
building amid a high level of new community roll-outs, incentives and discounts could
rise at a greater than expected rate in the Spring and lead to gross margin compression for
the year, versus our outlook for flat gross margins. Second, while we believe the banks
are near the end of a sharp credit tightening cycle that has occurred over the last 3 years, if
home prices weaken more than expected, and other macroeconomic indicators show
weaker than expected trends, banks may even further tighten credit standards for
2
(1-212) 622-6696 14 December 2010
mortgages, which could result in lower housing demand and higher incentives and
discounts. Finally, we believe that the current health of the housing market is highly
sensitive to the overall economy, and in particular, employment growth and consumer
confidence, which, if these trends soften, could result in weaker housing demand,
declining home prices and higher incentives and discounts.
• Valuation compelling; we highlight Overweight-rated LEN, KBH, NVR, and TOL.

Trading at 1.05x P/B (ex-adj. FAS 109, ex-NVR), at the low-end of its historical range
and reflecting at least a 5-10% decline in home prices in 2011, in our view, we believe our
homebuilding universe is attractively valued. Moreover, given our outlook for home
prices to be flat to down only 3%, resulting in continued minimal land charges and stable
book values, as well as for order growth, margin expansion, and more builders generating
positive Operating EPS in 2011, we believe investors should begin to anticipate a return to
normalized earnings and book value growth over the next 2-3 years, which should result
in P/B multiple expansion. We highlight OW-rated LEN, which currently trades at only a
modest premium to its peers despite our outlook for near-industry-leading margins and
profitability in 2011, as well as increased accretion from its Rialto subsidiary; KBH,
which trades at a 23% discount to its peers, an attractive entry point, in our view, as we
estimate industry leading order growth in 2011 and strong improvement in its SG&A
ratio; NVR, which trades at a P/B peer premium below its historical average despite our
outlook for industry leading OMs, solid EPS growth, and the restart of its share buyback
program in 2011; and TOL, which trades at a P/B peer premium below its historical
average, while we believe our outlook for above average order growth in 2011, and the
company's below average exposure to the more credit sensitive first-time homebuyer,
represent relative positives.
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(1-212) 622-6696 14 December 2010
Equity Ratings and Price Targets

Mkt Cap Rating Price Target
Company Symbol ($ mn) Price($) Cur Prev Cur Prev
Beazer Homes BZH 354.31 4.80 UW n/c – n/c
D.R. Horton DHI 4,045.30 11.36 N n/c 14.50 n/c
Hovnanian Enterprises HOV 341.42 4.34 N n/c – n/c
KB Home KBH 970.59 12.62 OW n/c 17.50 n/c
Lennar LEN 3,234.91 17.71 OW n/c 24.50 24.00
MDC Holdings MDC 1,249.81 26.82 UW n/c 29.50 31.50
PulteGroup Inc. PHM 2,663.26 7.03 N n/c 8.50 9.50
Ryland Group RYL 716.99 16.26 N n/c 20.00 21.00
Standard Pacific SPF 974.04 3.88 UW n/c – n/c
Toll Brothers TOL 3,094.76 18.71 OW n/c 25.50 26.00
Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 13 Dec 10.
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(1-212) 622-6696 14 December 2010
Table of Contents
Stock Performance: A Tale of Two Cities...............................6
Demand: We Expect Moderate Improvement in 2011............7
Housing Demand Trends Have Largely Stabilized Over Last 4 Months . . . ...............7
…But Remain Highly Depressed, Well Below the 1991 Trough ................................7
2011 Demand Should Improve Moderately, Coincident With Macro Trends . . . .......8
. . . As We Note Credit Tightening Appears To Be At Its End ....................................8
Supply: Elevated, But More Manageable..............................11
Nationally, Supply Down Solidly From Peak Levels ................................................11
Regional Declines From Peak Are Even More Striking ............................................11
Lastly, Shadow Inventory Should Continue to Be Liquidated at a More Moderate
Pace............................................................................................................................12
Pricing: Minimal Downside Exists, In Our View...................15
Material Pricing Correction Largely Over, Driving Affordability to Record Levels.15
Additionally, Cost to Own Versus Rent Also Near Record Lows . . . .......................18
. . . Which Should Be Further Helped By Declining Apartment Vacancies And
Rising Rents...............................................................................................................18
Lastly, Can Rates and Total Specs Levels Help Builders’ Control of Pricing...........20
Builders Should Demonstrate Stronger Fundamentals in
2011 .........................................................................................22
Order Growth Should Resume in 2Q11, and Drive Solid Gains for the Year ...........22
Moreover, Longer-Term, Share Gain Opportunity Appears Greater Vs. Last Cycle.23
Operating Margin Expansion Should Occur Over Next Two Years..........................24
Impairment Charges Should Remain Minimal ..........................................................25
Positive Operating EPS Should Increase Among Builders in 2011 ...........................26
Risks to Our Positive Sector Stance.....................................27
Valuation Compelling; We Favor LEN, KBH, NVR and TOL28
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(1-212) 622-6696 14 December 2010
Stock Performance: A Tale of Two Cities

The homebuilders have experienced two dramatically different periods of
performance in 2010, with strong outperformance through early May, and subsequent
strong underperformance since then that has left the group nearly flat year-to-date,
versus the S&P 500 up 12%. Specifically, from the beginning of 2010 through May
3rd, in large part spurred by stronger housing trends which were in turn driven by the
federal housing tax credit, our homebuilder universe gained 42%, strongly above the
S&P’s 8% rise. However, due to the stronger than expected decline in demand
trends following the expiration of the tax credit on April 30th, our universe has fallen
29% since May 3, versus the S&P's 4% rise, effectively negating the group’s gains
from the earlier period. On an individual basis, we note LEN (OW) has led the
group, up 38% YTD, followed by HOV (N), MTH (N), and SPF (UW), up 12%,
10%, and 4%, respectively. Conversely, PHM (N) has lagged the group the most,
down 30% YTD, followed by RYL (N) and MDC (UW), down 18% and 14%,
respectively.
Figure 1: Homebuilder Price Performance

Ticker Rating 12/31/09 - 5/3/10 Since 5/3/10 YTD
DHI N 37.7% (24.8%) 3.5%
KBH OW 39.5% (33.4%) (7.1%)
LEN OW 62.2% (14.7%) 38.3%
NVR OW 2.8% (7.9%) (5.3%)
PHM N 33.9% (47.6%) (29.8%)
TOL OW 23.1% (19.4%) (0.8%)
Larger-Cap Average 33.2% (24.6%) (0.2%)
BZH UW 42.1% (29.8%) (0.2%)

HOV N 108.1% (46.2%) 12.0%
MDC UW 25.4% (31.2%) (13.8%)
MTH N 29.8% (15.3%) 10.0%
RYL N 18.8% (31.0%) (18.1%)
SPF UW 84.0% (43.5%) 4.0%
Smaller-Cap Average 51.4% (32.8%) (1.0%)
Universe Average 42.3% (28.7%) (0.6%)
S&P 500 7.8% 3.5% 11.6%

Source: Bloomberg.
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(1-212) 622-6696 14 December 2010
Demand: We Expect Moderate

Improvement in 2011
While highly depressed, importantly, we note that housing demand has largely
stabilized over the last four months, following the expiration of the federal housing
tax credit. We see this recent stability as critical in terms of our outlook for only
modest downside for home prices, in contrast to 2006-2008, when consistently
falling demand trends played a key role in declining home prices, in our view. More
importantly, coincident with our Economics Team's outlook for moderate
macroeconomic improvement, we believe housing starts and home sales should
improve 15-20% in 2011 off of current six month moving averages. Specifically, we
believe total starts should range between 625K and 650K, versus a 566K average
over the last six months, while new home sales should range between 320K and
350K, versus a 290K average over the last six months. Lastly, we believe the recent
stability in credit standards, as we note only 5-10% of bank loan officers have
indicated tightening credit standards for mortgage loans over the last six months,
should continue and help support a stable to modestly improving demand backdrop
for housing in 2011.
Housing Demand Trends Have Largely Stabilized Over Last

4 Months . . .
Following the first 2-3 months after the expiration of the housing tax credit on April
30th, several housing demand indicators have largely stabilized, albeit at highly
depressed levels. We note this is in contrast to 2006-2008, when total starts fell
13%, 26%, and 33% in 2006, 2007, and 2008, respectively. Specifically, we note
that from July to October of this year, single-family starts have remained in a fairly
tight range of 427-441K, while new homes sales have ranged from 275K to 308K
(total starts have been in a wider range, due to the volatility of multi-family starts).
Moreover, we note total existing home sales, while not materially declining until
July, has largely stabilized and has ranged from 4.1 to 4.5 million over the last three
months. Lastly, we note that the MBA Purchase Applications Index has also shown
stability, and even recently has shown a modest degree of improvement.
Specifically, we note that following its averages of 229.7 and 250.2 in March and
April, respectively, the Index’s monthly average has ranged between 170 and 205
from May to November. While we note the last two weeks have been solidly above
the prior range, at 207.2 and 210.9 for the weeks ending 11/26 and 12/3, respectively,
we overall view this as only modestly encouraging, as we note most housing
indicators still remain largely range-bound.
…But Remain Highly Depressed, Well Below the 1991

Trough
Importantly, we note that housing demand not only remains materially below its 30-
year averages, but are also solidly below trough levels achieved during the last major
housing downturn in 1991. Specifically, we note that single-family and total housing
starts’ current levels are 60% and 64% below their 30-year averages of 1.10 and 1.45
million, respectively, as well as 28% and 35% below 1991 troughs of 604K and
798K, respectively. Similarly, we note that new home sales are 61% below its 30-
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(1-212) 622-6696 14 December 2010
year average and 29% below its 1991 trough level, and existing home sales are 22%
below its 11-year average.
2011 Demand Should Improve Moderately, Coincident With

Macro Trends . . .
We expect housing demand to improve moderately in 2011, consistent with J.P.
Morgan’s Economics Team’s outlook for moderate macroeconomic improvement for
the year. Specifically, JPM’s Economics Team forecasts real GDP growth of 3.1%
in 2011, led by moderately stronger consumer spending, expected to rise 3.2%, while
the unemployment rate is expected to decline to 9.0% by year-end 2011, from
currently 9.8%. Consumer sentiment is also expected to improve moderately during
the year. Additionally, the Economics Teams forecasts 656K total housing starts for
2011, which is consistent with our belief that starts and home sales should improve
off of the range seen over the last 6 months, although we are slightly more
conservative at a 625-650K range for the year, the midpoint of which is 13% above
the 566K average of the last 6 months. Assuming 110K in multi-family starts (last
twelve months’ average), this equates to a single-family starts range of 515-540K,
whose midpoint is roughly 20% above SF starts’ 441K average over the last 6
months. Lastly, we expect new home sales to improve to a range of 320-350K, the
midpoint of which is 16% above the last 6 months' average of 290K, while we
believe existing home sales will range between 4.6 and 5.1 million, the midpoint of
which is 15% above the last 4 months average of 4.23 million.
. . . As We Note Credit Tightening Appears To Be At Its End

Importantly, as the tightening of mortgage credit standards over the 3-4 years appears
to be at its end, we believe a more steady environment in this area should help allow
housing demand to continue to stabilize and modestly improve over the next 1-2
years. Specifically, during 1Q08-2Q09, the net percentage of senior loan officers
who indicated tightening credit standards for mortgage loans ranged from 50-75%
for prime mortgages and 50-90% for non-traditional mortgages. Since 4Q08,
however, this percentage has declined nearly every quarter at a fairly consistent pace,
and since 2Q10, only 2-10% of respondents indicated tightening for prime mortgages
(with 3Q10 being a slight net easing of standards), and 5-10% indicated tightening
for non-traditional mortgages. As a result, we believe a more stable environment of
mortgage credit standards should help allow homebuyers to enter the mortgage
application process with proper, more accurate expectations of what is required,
which in turn should allow for better financial preparation entering into the
homebuying process.
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(1-212) 622-6696 14 December 2010
Figure 2: Housing Demand Statistics Have Effectively Stabilized Over the Last Four Months . . .
in thousands
800 7,000
700 6,000
Housing Starts and New Home Sales
600
5,000
Existing Home Sales

500
4,000
400
3,000
300
2,000
200
100 1,000
0 0
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct-
09 09 09 09 09 09 09 09 09 09 09 09 10 10 10 10 10 10 10 10 10 10
Total Starts Single Family Starts New Home Sales Ex isting Home Sales
Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

Total Starts 679 588 539 550 614 588 519
Single Family Starts 563 459 450 427 432 441 436
New Home Sales 414 282 310 283 275 308 283
Existing Home Sales 5,790 5,660 5,260 3,840 4,120 4,530 4,430
Source: National Association of Realtors and U.S. Census
Table 2: . . . But Remain Strongly Below 30-Year Averages and Even the 1991 Trough
Moving Averages 1H09 2H09 2010 30 Year
October 2010 3-Month 6-Month 12-Month Average Average YTD Rate Average* 1991 Trough 2005 Peak
New Home Sales 283 287 308 335 361 387 324 731 401 1,389
Existing Home Sales 4,430 4,360 4,640 5,082 4,970 5,595 4,905 5,716 NA 7,250
Total Housing Starts 519 574 566 591 550 583 593 1,452 798 2,207
Single-Family Housing Starts 436 436 441 481 436 502 478 1,097 604 1,823
* Existing home sales for total sales only begins in Jan-99, hence, the average is from this date to the present.
Source: National Association of Realtors, U.S. Bureau of the Census.
Table 3: Macroeconomic and Housing Forecasts

JPM Econ JPM Building
2010YTD Team 2011E Last 6 Mos Avg. Research 2011E
Real GDP Growth 2.60% 3.10% - -
Consumer Spending 2.30% 3.20% - -
Unemployment 9.80%* 9.00%**
Total Housing Starts 593K 656K 566K 625-650K

SF Starts 478K - 441K 515-540K
New Home Sales 324K - 290K 320-350K
Existing Home Sales 4.9 mil. - 4.6 mil. 4.6-5.1 mil.
Source: J.P. Morgan estimates and Bloomberg. *Current; **2011-end
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(1-212) 622-6696 14 December 2010
Figure 3: Net Percentage of Domestic Respondents Tightening Standards for Residential

Mortgage Loans
100%
80%
60%
40%
20%
0%
-20%
2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10
Prime Nontraditional
Source: Federal Reserve Board Senior Loan Officer Survey.
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Supply: Elevated, But More Manageable

Critically, in addition to demand demonstrating more stable trends over the last
several months, supply, while elevated, is down solidly from peak levels and has
become more manageable, in our view, over the last 18 months. As a result, we note
that both current demand and supply trends are different than 2006-2008, when
demand consistently fell and supply consistently rose, the combination of which we
believe resulted in declining home prices. Specifically, existing homes for sale are
down 16% from peak levels in 2008, while the top 23 markets tracked in our Bi-
Weekly Inventory Watch are down 27% on average, and have recently exhibited
above average seasonal declines over the last two months. Lastly, but perhaps most
importantly, in our view, we believe shadow inventory will continue to be liquidated
at a moderate pace, with REO sales persisting at roughly 50K/month, and annual
liquidations of distressed units continuing at a 2.0-2.5 million pace through 2012, in-
line with 2009’s 2.2 million.
Nationally, Supply Down Solidly From Peak Levels

While new home inventory remains near record lows, we note that existing home
inventory, despite remaining elevated and solidly above normal levels, at the same
time is down solidly from 2008 peak levels. Specifically, new homes available for
sale were 202K in October, well below the normal historical range of 300-400K and
at the lowest level in 42 years. More importantly, however, existing homes available
for sale in October were 3.9 million, solidly above a normal 2.0-2.5 million range,
but critically, 16% below the July 2008 peak of 4.6 million. Similarly, while we
view months supply as a more volatile and less reliable metric, we note months
supply of existing homes in October were 10.5, below the July 2010 peak of 12.5,
but above normal levels of 4-5 months, while new home months supply of 8.6, below
the January 2009 peak of 12.1, is above normal levels of 4-6 months. By contrast,
existing homes for sale rose 35% in 2006, 18% in 2007 and 2% in 2008, while
months supply rose from 4.4 in 2005 to 6.5 in 2006, 8.9 in 2007, and 10.4 in 2008.
Regional Declines From Peak Are Even More Striking

More encouraging, in our view, we note that the top 23 markets tracked in our Bi-
Weekly Inventory Watch are down an average 27% from peak levels, and are
exhibiting above average seasonal declines over the last two months. Importantly,
we note that key markets in CA and FL have led this decline, down on average 32%
and 38% from peak levels; we note our universe’s average exposure to these markets
was roughly 15% and 11% of 2009 closings, respectively. Moreover, while Vegas
inventory has become elevated again, increasing strongly in 2010 and retesting
earlier peak levels, homes for sale are at four-year trough levels in AZ despite
demand remaining highly depressed. Lastly, and also encouraging, in our view,
inventory levels across the 23 markets have declined by roughly 3% each month in
October and November, vs. historically rising 1% in October and being flat in
November. As a result, we believe that while elevated, regional inventory trends,
being down solidly from earlier peak levels and exhibiting above average seasonal
declines, are manageable.
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(1-212) 622-6696 14 December 2010
Lastly, Shadow Inventory Should Continue to Be Liquidated

at a More Moderate Pace
Critically, we believe two key factors which have emerged over the last 18 months –
government intervention and the economic and political incentives for banks and
servicers – should remain in place over at least the next 1-2 years, and hence, result
in the continued more moderate liquidation pace of shadow inventory. Specifically,
we note the government continues to direct and implement loan modifications of the
HAMP program, as well as other ancillary efforts designed to benefit troubled
homeowners, such as the emerging deed for lease program and efforts surrounding
mortgage refinancing and second liens. Moreover, we believe banks and servicers
benefit both economically from a lengthier foreclosure process, which improves
pricing on REO sales and defers a larger negative impact on balance sheets, while
politically, a more deliberate, drawn-out process shows compliance with federal
programs. As a result, while monthly foreclosure notices of default and auction
notices have remained at fairly elevated ranges of 100-140K and 120-160K,
respectively, over the last 18 months, and REOs have moderately increased from
roughly 80K/month in 3Q09 to nearly 100K/month currently, we note REO sales
have remained at a fairly consistent 50K over the last 12 months since 2Q09 versus a
100K/month rate in 4Q08 (we view the recent decline to slightly under 20K/month,
due to the robo-signer induced moratoriums, as temporary). Moreover, we note
while that our MBS research team points to a potential shadow inventory of roughly
eight million, which we note includes REO inventory of 500K, foreclosure inventory
of 2.5 million and all other homes 30 days or more delinquent at 5.0 million, the
liquidation of this inventory is expected to remain at 2-2.5 million annual pace
through 2012, which we note is roughly in-line with 2009's 2.2 million level.
Figure 4: New Home Inventory: 1963 - present Figure 5: Existing Home Inventory: 1999 - present
600 13 4.8 12
12 Months Supply 11
550 Absolute Inventory Months Supply 4.4 Units Available
11 10
500 4.0
10 9
In T h o us a nd s
450 3.6
9 8
400 3.2
8 7
350 2.8
7 6
300 2.4
6 5
250 2.0
5 4
200 4 1.6 3
150 3 1.2 2
1963
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2006
2007
2008
2009
2010
Source: U.S. Census Bureau, National Association of Realtors Source: U.S. Census Bureau, National Association of Realtors
12
(1-212) 622-6696 14 December 2010
Figure 6: Sacramento Inventory Figure 7: San Francisco Inventory

28,000 34,000
26,000
24,000 29,000
22,000
24,000
20,000
18,000
19,000
16,000
14,000 14,000
12,000
10,000 9,000
4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10 4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10
Figure 8: Los Angeles Inventory Figure 9: San Diego Inventory

56,000 22,000
51,000 20,000
46,000 18,000
41,000 16,000
36,000 14,000
31,000 12,000
26,000 10,000
4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10 4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10
Figure 10: Riverside Inventory Figure 11: Orlando Inventory

65,000 30,000
60,000
25,000
55,000
50,000 20,000
45,000
15,000
40,000
10,000
35,000
30,000 5,000
25,000
0
20,000
1/95 1/96 1/97 1/98 1/99 1/00 1/01 1/02 1/03 1/04 1/05 1/06 1/07 1/08 1/09 1/10
4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10
Figure 12: Tampa Inventory Figure 13: Jacksonville Inventory

55,000 26,000
50,000 24,000
22,000
45,000
20,000
40,000
18,000
35,000
16,000
30,000 14,000
25,000 12,000
4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10 4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10
Figure 14: Phoenix Inventory Figure 15: Las Vegas Inventory

50,000 31,000
30,000
29,000
45,000
28,000
27,000
40,000 26,000
25,000
24,000
35,000 23,000
22,000
21,000
30,000
20,000
19,000
25,000 18,000
4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10 4/06 8/06 12/06 4/07 8/07 12/07 4/08 8/08 12/08 4/09 8/09 12/09 4/10 8/10
Source: Housing Tracker
13
(1-212) 622-6696 14 December 2010
Figure 16: Moreover, While Foreclosure Default Notices and Auction Figure 17: . . . REO Sales Remain Materially Lower Over the Last 18
Notices Remain Elevated . . . Months
180,000 120,000
160,000 100,000
140,000 80,000
120,000 60,000
100,000 40,000
80,000 20,000
60,000 0
Oct-08
Oct-09
Oct-10
Jan-08
Apr-08
Jul-08
Jan-09
Apr-09
Jul-09
Jan-10
Apr-10
Jul-10
Oct-08
Oct-09
Oct-10
Jan-08
Apr-08
Jul-08
Jan-09
Apr-09
Jul-09
Jan-10
Apr-10
Jul-10
Foreclosure Default Notices Auction Notices Bank Repossessions (REOs) REO Sales
Source: RealtyTrac. Source: RealtyTrac, J.P. Morgan estimates.
Figure 18: In Addition, Shadow Inventory Remains Large . . . Figure 19: . . . But Liquidations Should Remain in a 2.0-2.5 Million
Range Over the Next 3 Years
9,000,000
REO Inv entory projected Annual Defaults (mm, left)
8,000,000
F/C Inv entory 3.0 6.0%
7,000,000 % of Loans Outstanding (right)
30/60/90 DLQ
6,000,000 2.5 5.0%
historical projected
5,000,000 2.0 historical 4.0%
4,000,000
1.5 3.0%
3,000,000
2,000,000 1.0 2.0%
1,000,000
0.5 1.0%
0
'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 0.0 0.0%
'06 '07 '08 '09 '10 '11 '12 '13 '14 '15
Source: J.P. Morgan MBS Research Team. Source: J.P. Morgan MBS Research Team.
14
(1-212) 622-6696 14 December 2010
Pricing: Minimal Downside Exists, In Our

View
Driven by our outlook for stable to modestly improving demand in 2011, supply
remaining elevated but manageable and below peak levels, and current home prices
already resulting in near-record levels of affordability as well as attractiveness
relative to renting, we believe home prices should be flat to only down 3% in 2011.
We note our outlook is materially more optimistic than our view of the buyside
consensus of down 5-10%, as well as moderately more sanguine than our MBS
Research team’s outlook for a 6% decline in home prices through 1H11. Not only do
we base our outlook for home prices to be flat to down 3% in 2011 on a more
favorable demand/supply dynamic than 2006-2008, when demand consistently fell
and supply consistently rose, but we also note that due to an approximate 30%
decline in home prices from late 2006/early 2007, housing affordability is at near-
record levels. Moreover, the cost of owning a new home versus renting is only at a
4% premium, the lowest on record, versus a historical premium of 35%, while
existing home ownership is at a 10% discount to renting, versus a historical 16%
premium and only slightly above the record low of the 12% discount seen in 1Q09.
We believe this favorable cost of owning versus renting should only improve in
2011, as rents are expected to increase further due to a continued decline in
apartment vacancy rates. Lastly, we believe builder cancellation rates returning to
normal levels, and total specs per community being at their lowest level in four years,
should result in far greater control over pricing trends for homebuilders, as opposed
to 2006-08 when elevated can rates resulted in the aggressive discounting of large
amounts of unwanted spec inventory.
Material Pricing Correction Largely Over, Driving

Affordability to Record Levels
Since late 2006/early 2007, home prices have undergone a material correction, in our
view, which, along with a decline in mortgage rates, has resulted in record levels of
affordability. Specifically, the NAR's Housing Affordability Composite Index in
3Q10 is near its recent peak level reached in 1Q10, at 172.4 vs. 176.3, 30% above the
133 average from 1995-2004, while the First-Time Buyer Index is also only slightly
below its peak level, at 113.9 in 3Q10 vs. 116.5 in 1Q10, 42% above its average of
80.1 from 1995-2004. This has largely been driven by a sharp decline in home prices
since 2006. In particular, we note the S&P/Case-Shiller Index has undergone a peak-
to-trough drop from July 2006 to April 2009 of 33%, only improving modestly off of
its April 2009 trough by 6% to 147.5 currently, although largely staying within a
range. Additionally, the Loan Performance Housing Price Index declined 32%
during the downturn and is only 4% above its April 2009 trough. Moreover, new and
existing median home prices have undergone a 26% and 29% peak-to-trough decline,
respectively, with new home prices reaching a recent cycle low of $195K in October,
and existing home prices higher by only a modest 4% off recent troughs seen in
February 2010. Lastly, we note that 30-year fixed mortgage rates have fallen solidly
since 2Q06’s 6.38% (source: Bankrate.com), averaging 5.79% in 2007, 5.26% in
2008, 5.33% in 2009 and reaching a low of 4.47% in 3Q10. While rates have
increased roughly 60 bps since early November, from 4.3% during the week of 11/5
to 4.9% the week of 12/10, we believe overall levels remain extremely low, which,
15
(1-212) 622-6696 14 December 2010
combined with the still low absolute levels of home prices, is sufficient to still result
in near-record levels of affordability, and hence, is not a material threat to demand, in
our view. Moreover, we believe that Fed policy, combined with only modest
positive economic trends in 2011, should result in mortgage rates remaining
relatively low and accommodative over the next 12-18 months.
Figure 20: NAR Affordability Index

180
170
160
150
140
130
120
110
100
90
80
70
60
1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08 1Q09 1Q10
Composite Index First-Time Buy er Index
Source: National Association of Realtors
16
100
125
150
175
200
225
250
J a n -0 0
50.0
70.0
90.0
110.0
130.0
150.0
170.0
190.0
210.0
J u l-0 0 Jan-00
J a n -0 1 Jul-00
Source: Bloomberg
J u l-0 1 Jan-01
(1-212) 622-6696
J a n -0 2 Jul-01
Michael Rehaut, CFA
J u l-0 2 Jan-02
J a n -0 3 Jul-02
Jan-03
J u l-0 3
Jul-03
Source: National Association of Realtors

J a n -0 4
Jan-04
J u l-0 4
Jul-04
J a n -0 5
Jan-05
J u l-0 5
Jul-05
Figure 23: Existing Home Median Pricing

J a n -0 6
Jan-06
J u l-0 6
Jul-06
J a n -0 7
Figure 21: Loan Performance Home Price Index
Jan-07
J u l-0 7 Jul-07
J a n -0 8 Jan-08
J u l-0 8 Jul-08
J a n -0 9 Jan-09
J u l-0 9
14 December 2010
Jul-09
J a n -1 0 Jan-10
J u l-1 0 Jul-10
100
120
140
160
180
200
220
North America Equity Research
100
125
150
175
200
225
250
275
J a n -0 0
J a n -0 0
J u l-0 0
J u l-0 0
J a n -0 1
J a n -0 1
J u l-0 1
J u l-0 1
J a n -0 2
J a n -0 2
Source: S&P/Case-Shiller
J u l-0 2
Source: U.S. Census Bureau

J u l-0 2
J a n -0 3
J a n -0 3
J u l-0 3
J u l-0 3
J a n -0 4
J a n -0 4
J u l-0 4
J u l-0 4
J a n -0 5
J a n -0 5
Figure 24: New Home Median Pricing
J u l-0 5
J u l-0 5
J a n -0 6
J a n -0 6
J u l-0 6
J u l-0 6
Figure 22: S&P/Case-Shiller Home Price Index
J a n -0 7
J a n -0 7
J u l-0 7
J u l-0 7
J a n -0 8
J a n -0 8
J u l-0 8
J u l-0 8
J a n -0 9
J a n -0 9
J u l-0 9
J u l-0 9
J a n -1 0
J a n -1 0
J u l-1 0
J u l-1 0
17
(1-212) 622-6696 14 December 2010
Additionally, Cost to Own Versus Rent Also Near Record

Lows . . .
Critically, in our view, not only have home prices dropped materially, resulting in
record affordability levels, but also, we note that compared to renting, the cost of
new home ownership is also at the most attractive levels on record, while the cost of
buying an existing home is only slightly below record levels. Specifically, the cost
of owning a new home versus renting, on a national level, is only at a 3.5% premium,
the lowest on record, versus a historical premium of 35%, while existing home
ownership is at a 10% discount to renting, versus a historical 16% premium and only
slightly above the record low of the 12% discount seen in 1Q09. As a result, we
believe this near negligible premium for new homes, and solid 10% discount for
existing homes, strongly positions ownership as a highly competitive option among
housing alternatives when consumer confidence and employment jobs turn more
demonstrably positive. On a regional basis, using existing home prices, we note that
several highly depressed markets are at strong discounts to renting, including Tampa,
Orlando, Las Vegas, and Jacksonville, at 17%, 13%, 12%, and 10% discounts,
respectively. Moreover, markets at the largest discounts to their historical averages
include Las Vegas, Sacramento, Riverside, and San Diego, at 67%, 54%, 53%, and
47% discounts, respectively, followed by Los Angeles, Phoenix, Orlando, and
Washington D.C., at 42%, 39%, 33%, and 24% discounts, respectively.
Table 4: Cost of Ownership Spread Over Rents

Current Average Difference From Avg. High Date Low Date
U.S., New 3.5% 34.7% (31.2%) 68.1% 4Q87 3.5% 3Q10
U.S., Existing (10.2%) 15.9% (26.1%) 43.7% 2Q06 (12.0%) 1Q09
Existing Home Regional Analysis

Las Vegas (12.2%) 54.3% (66.5%) 137.0% 2Q06 (12.2%) 3Q10
Sacramento 5.2% 59.1% (54.0%) 160.2% 2Q06 (1.2%) 1Q09
Riverside (5.0%) 47.7% (52.7%) 136.5% 3Q06 (16.3%) 2Q09
San Diego 48.8% 96.1% (47.2%) 199.7% 2Q06 33.2% 1Q09
Los Angeles 28.9% 71.0% (42.1%) 161.3% 2Q06 13.2% 1Q09
Phoenix 0.5% 39.8% (39.4%) 133.3% 2Q06 (5.3%) 1Q09
Orlando (13.4%) 19.5% (33.0%) 97.1% 2Q06 (16.2%) 1Q10
Chicago (1.7%) 27.8% (29.5%) 75.5% 2Q06 (7.0%) 1Q10
San Francisco 66.3% 91.9% (25.6%) 194.6% 2Q06 16.5% 1Q09
Wash D.C. 21.4% 44.9% (23.5%) 118.7% 2Q06 0.2% 1Q99
Minneapolis (5.5%) 17.9% (23.3%) 59.7% 2Q06 (6.7%) 1Q10
Dallas 14.0% 16.9% (2.9%) 58.7% 2Q90 (8.0%) 2Q09
Tampa (17.1%) 10.9% (28.0%) 76.4% 2Q06 (17.1%) 3Q10
Edison 51.5% 66.2% (14.7%) 128.3% 3Q06 17.1% 1Q99
Jacksonville (10.0%) 9.2% (19.2%) 54.5% 2Q06 (14.4%) 1Q99
New York (15.6%) (4.0%) (11.6%) 29.2% 2Q90 (31.9%) 2Q99
Philly 14.6% 19.1% (4.5%) 51.2% 3Q90 (10.1%) 1Q01
Houston 8.8% 14.9% (6.1%) 34.7% 2Q06 (2.5%) 1Q96
Denver 46.5% 52.3% (5.8%) 96.7% 2Q06 17.1% 1Q93
Austin 27.4% 22.1% 5.2% 46.4% 2Q06 3.7% 1Q94
Charlotte 38.5% 37.5% 1.0% 82.8% 3Q07 14.5% 1Q96
San Antonio 15.0% 11.3% 3.6% 40.6% 3Q07 (7.7%) 1Q98
Raleigh 41.2% 40.4% 0.8% 86.9% 3Q07 8.1% 1Q93
We assume a 10% down payment, 2% property tax, and a 25% marginal tax rate; Source: U.S. Census Bureau, National Association
of Realtors, REIS.
. . . Which Should Be Further Helped By Declining

Apartment Vacancies And Rising Rents
Importantly, we believe the record low levels of new home ownership versus renting
should only improve in 2011 in favor of ownership, as apartment rents are expected
18
(1-212) 622-6696 14 December 2010
to continue to rise due to a further decline in apartment vacancy rates. Specifically,

JP Morgan Apartment REIT analyst Anthony Paolone believes apartment rents have
risen 5% in 2010, and expects another 3-5% increase in 2011, with more upside risk
than downside, driven by potentially higher household formation and employment
growth. Critical to this outlook for higher rents is the decline in vacancy rates,
which, as measured by the US Census, have declined from 11.1% in 3Q09 to
currently 10.3% in 3Q10, while as measured by REIS, national apartment vacancy
rates have declined from 8.0% in 4Q09 to currently 7.1% in 3Q10. Furthermore, as
according to our REIT team, virtually zero supply is coming on-line until 2012, REIS
projects vacancy rates declining further in 2011 and 2012 to 6.6% and 6.1%,
respectively.
Figure 25: U.S. National Multi-Family Vacancy Rate
12.0
11.0
10.0
Vacancy Rate (%)
9.0
8.0
7.0
6.0
5.0
4.0
2011E
2012E
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
REIS Census Bureau
Source: REIS and U.S. Census Bureau.
19
(1-212) 622-6696 14 December 2010
Figure 26: Cost of Ownership: New Homes Figure 27: Cost of Ownership: Existing Homes
$1,500 80.0% $1,400 50.0%
$1,400 70.0% $1,300
40.0%
$1,300
60.0% $1,200
$1,200 30.0%
$1,100
$1,100 50.0%
$1,000 20.0%
$1,000 40.0%
$900 10.0%
$900 30.0%
$800 $800
20.0% 0.0%
$700 $700
10.0% (10.0%)
$600 $600
$500 0.0% $500 (20.0%)
1Q 87
1Q 88
1Q 89
1Q 90
1Q 91
1Q 92
1Q 93
1Q 94
1Q 95
1Q 96
1Q 97
1Q 98
1Q 99
1Q 00
1Q 01
1Q 02
1Q 03
1Q 04
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
1Q 87
1Q 88
1Q 89
1Q 90
1Q 91
1Q 92
1Q 93
1Q 94
1Q 95
1Q 96
1Q 97
1Q 98
1Q 99
1Q 00
1Q 01
1Q 02
1Q 03
1Q 04
1Q 05
1Q 06
1Q 07
1Q 08
1Q 09
1Q 10
Effective Ow n Cost Effectiv e Rent Spread Effectiv e Ow n Cost Effectiv e Rent Spread
Source: U.S. Census Bureau, National Association of Realtors, REIS Source: U.S. Census Bureau, National Association of Realtors, REIS
Lastly, Can Rates and Total Specs Levels Help Builders’

Control of Pricing
Finally, we believe cancellation (can) rates returning to normal levels, combined with
total speculative inventory (specs) per community at their lowest levels in four years,
have resulted in far greater control over pricing trends for homebuilders as compared
to 2006-2008. While we believe that a combination of falling demand and rising
supply were the primary driver of declining home prices during the 2006-2008
period, nonetheless, we believe cancellation rates ranging from 30-45% during that
time (i.e., roughly double normal levels), which in turn resulted in highly elevated
spec levels, further forced the builders' collective "hand" as unwanted inventory was
created and had to be liquidated through aggressive price discounting. By contrast,
since 2Q09, cancellation rates have remained in a fairly tight range of 19-23%,
consistent with the ranges seen from 2003-2005, while total specs per community
have fallen materially since 2006, from 8.7 in 2Q06 to 2.8 in 3Q10. As a result, as
total spec levels remain in check and fairly restrained, which should continue as can
rates remain at normal levels, we believe builders currently have a significantly
higher degree of control over pricing trends than in 2006-2008. Accordingly, aside
from selective price reductions in certain lagging communities, we believe the
builders should be able to more effectively hold current pricing, particularly as most
view demand as fairly inelastic, given the already near-record levels of affordability
as well as attractiveness relative to renting.
20
(1-212) 622-6696 14 December 2010
Figure 28: Historical Industry Cancellation Rate

50.0%
40.0%
Cancellation Rate
30.0%
20.0%
10.0%
0.0%
03
03
04
04
05
05
06
06
07
07
08
08
09
09
10
10
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
Source: Company reports. Includes DHI, KBH, LEN, NVR, PHM, TOL, BZH, HOV, MDC, RYL and SPF
Figure 29: Speculative Inventory (Specs) Per Community

10.0
9.0
8.0
Specs Per Community
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
06
06
07
07
08
08
09
09
10
10
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
1Q
3Q
Total Specs Per Community Finished Specs Per Community
Source: Company reports and J.P. Morgan estimates. Includes KBH, PHM, HOV, MDC, RYL and SPF.
21
(1-212) 622-6696 14 December 2010
Builders Should Demonstrate Stronger

Fundamentals in 2011
We believe our outlook for a reemergence of order growth, as well as core operating
margin expansion, continued minimal land-related charges, and more builders
generating positive Operating EPS in 2011 all represent positive catalysts for the
sector over the next 12 months. Specifically, regarding order growth, we note that
after 1Q11’s tough year-ago comp which includes the benefit from the tax credit, we
estimate that community growth and a modestly better sales pace should drive order
growth of 14% for the year, following a 10% decline in 2010E. Moreover, we
estimate closings growth of 7% should drive SG&A leverage of 50 bps in 2011,
resulting in core operating margin expansion of 60 bps. Also, we estimate the
builders will continue to experience a minimal level of land-related charges, based on
our outlook for home prices to be flat to down only 3% in 2011. Finally, we estimate
two more builders will become profitable on an Operating EPS basis in 2011, which
should result in investors becoming more confident in a return to normalized EPS
and book value growth over the next several years, and drive P/B multiple expansion.
Order Growth Should Resume in 2Q11, and Drive Solid

Gains for the Year
Importantly, we note that 1Q11 represents the last quarter of facing a more difficult
year-ago comp benefiting from the housing tax credit. Hence, as we believe most
builders will demonstrate community count growth in 2011 ranging from 5% to 25%,
we estimate 2011 average order growth for our universe of 14%, a material
improvement, in our view, over our 2010E of -10%. Furthermore, we believe this
order growth momentum should continue and estimate 18% growth in 2012. We
base our order growth estimates for both 2011 and 2012 on a combination of
community growth and a modest improvement in sales pace (absorption rates).
Critically, we believe this growth can occur even amid only modest improvement in
the broader housing market, as we believe the public builders are well positioned to
gain market share over the next several years.
Figure 30: Industry Order Growth 2001-2012E

30.0%
20.0%
10.0%
Order Growth
0.0%
-10.0%
-20.0%
-30.0%
-40.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
Source: Company reports and J.P. Morgan estimates.
22
(1-212) 622-6696 14 December 2010
Moreover, Longer-Term, Share Gain Opportunity Appears

Greater Vs. Last Cycle
On a longer-term basis, we believe the public homebuilders are extremely well
positioned to gain market share over the next several years, largely due to their
stronger capital positions relative to their private competitors, as well as compared to
their own positions exiting the last major recession of 1990-1991. Currently, we note
that our homebuilding universe’s 5 largest homebuilders range between $1.0-$2.7
billion of cash on hand, which can cover their debt maturities through 2013 by 2.0x-
10.4x; we note the five smaller builders have coverage ratios of 3.2x-9.3x.
Moreover, we believe the builders also have little need for short-term financing, as
their revolver balances are zero, and several facilities have been reduced dramatically
or eliminated altogether. Critically, we point out that this is in contrast to private
builders, which, aside from the hundreds that have entered bankruptcy over the last
3-4 years, the remaining face minimal, at best, financial support from the banking
sector, given the latter's capital constraints and lingering aversion to real estate risk
given the still consensus outlook for further home price erosion. Therefore, we
believe the public builders have a significant competitive advantage in terms of credit
availability and financing, whereas surviving private builders are largely capital
constrained and limited regarding growth plans.
By contrast, we note that upon exiting the 1990-1991 recession, the top 5 and 10
largest homebuilders did not begin growing their market share (as a percent of total
housing starts) until 1995. We believe this was largely due to the fact that the
builders then had fairly low cash positions, equivalent to an average 25% of their
outstanding debt in 1991; today’s top builders' cash positions average 62% of their
outstanding debt, ranging between 35% and 78%. We believe it was due to the
builders' low cash positions, as well as a couple of bankruptcies in 1992/1993 and
strained financial positions, that banks preferred to witness 2-3 years of more
consistent performance before committing financing to fuel the companies’ growth
strategies. Once this occurred, the builders began to more consistently outpace
industry growth, resulting in the top 10 builders roughly tripling of their market
share, from 5% in 1995 to 16% in 2006.
Figure 31: Top 5 and Top 10 Builder Market Share (Closings as a % of Total Starts)
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
Top 5 Builders Top 10 Builders
23
(1-212) 622-6696 14 December 2010
Source: U.S. Census Bureau, Builder Magazine, J.P. Morgan estimates.
Figure 32: Homebuilder Balance Sheets and Liquidity Positions as of 3Q10

Liquidity / Debt Maturity Schedule
Total Next 3Q10 Cash / 2010-2013
Cash Total Debt HB Net Debt HB Net Debt/Cap 2010 2011 2012 2013 4 Years Debt 2014 2015+
DHI $1,634 $2,085 $451 14.7% $0 $189 $147 $174 $510 3.2x $685 $891
KBH $1,036 $1,801 $765 55.5% 0 100 0 0 100 10.4x 249 1,308
LEN $997 $2,843 $1,846 42.5% 0 113 0 266 379 2.6x 249 1,668
NVR $1,053 $10 ($1,043) (162.2%) 0 0 0 0 0 NM 0 0
PHM $2,656 $4,286 $1,630 44.2% 47 321 481 487 1,336 2.0x 992 3,331
TOL $1,298 $1,711 $413 13.9% 0 0 195 142 337 3.9x 278 950
Larger-Cap Average 1.4% 4.4x
BZH $537 $1,212 $674 62.9% $0 $0 $0 $58 58 9.3x $0 $940

HOV $509 $1,675 $1,167 121.7% 0 0 103 55 158 3.2x 85 1,548
MDC $1,611 $1,242 ($369) (56.7%) 0 0 150 350 499 3.2x 249 494
MTH $420 $606 $186 27.1% 0 0 0 0 0 NM 0 611
RYL $807 $877 $70 11.8% 0 0 0 186 186 4.3x 0 689
SPF $546 $1,217 $671 59.7% 0 0 50 0 50 NM 7 1,286
Smaller-Cap Average 37.8% 5.0x
Total Universe Average 19.6% 4.7x
Source: Company reports.
Figure 33: Homebuilder Cash and Debt Balances, 3Q10 vs. 1991 and 1992
As of 3Q10 1991 1992
Cash Debt Cash as % of Total Debt Cash Debt Cash as % of Total Debt Cash Debt Cash as % of Total Debt
DHI $1,634 $2,085 78.4% $14 $34 42.1% $9 $32 27.1%
KBH $1,036 $1,801 57.5% $47 $231 20.2% $61 $258 23.6%
LEN $997 $2,843 35.1% $3 $130 2.5% $5 $178 2.8%
NVR $1,053 $10 NM NA NA NA NA NA NA
PHM $2,656 $4,286 62.0% $63 $213 29.7% $67 $142 47.1%
TOL $1,298 $1,711 75.9% $31 $105 29.6% $33 $155 21.4%
Larger-Cap Average 61.8% 24.8% 24.4%
BZH $537 $1,212 44.3%

HOV $509 $1,675 30.4%
MDC $1,611 $1,242 129.7%
MTH $420 $606 69.3%
RYL $807 $877 92.1%
SPF $546 $1,217 44.9%
Smaller-Cap Average 68.4%
Universe Average 65.4%
Source: Company reports.
Operating Margin Expansion Should Occur Over Next Two

Years
Critically, we estimate 2011 operating margins will benefit almost entirely from
SG&A leverage due to volume growth, while 2012 should benefit from both SG&A
leverage as well as some moderate margin expansion. Specifically, we estimate
closings growth for our universe will average 7% in 2011, driving homebuilding
revenue growth of 8% and in turn SG&A leverage of 50 bps to 14.3%. As a result,
despite our outlook for gross margins (ex-charges) to remain flat at 18.6%, as we
expect some incremental margin pressure from 2H10 lingering in 1H11 to be offset
by the positive impact from a greater mix of newer communities. Accordingly, we
estimate core operating margins (ex-charges) to improve to 4.4% from 3.8%.
Looking towards 2012, we estimate incremental closings and homebuilding revenue
24
(1-212) 622-6696 14 December 2010
growth of 14% driving incremental SG&A leverage of 80 bps. In addition we

estimate gross margin expansion of 70 bps, driven by a modestly stronger macro
environment driving stronger demand, which in turn should allow for a modest
reduction in incentives, as well as greater efficiencies and cost leverage. This in turn
should drive core operating margin expansion of 150 bps to 5.8%.
Figure 34: Homebuilder Universe Gross Margins, SG&A, and Operating Margin, 1987 - 2012E
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
(5.0%)
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010E
2011E
2012E
Gross Margins (ex -charges) SG&A Core Op. Margins
Source: Company reports and J.P. Morgan estimates. This chart includes our entire universe for the period 1997-2012E. For the period 1987-1989, data includes KBH, LEN, PHM and TOL. DHI
included in averages beginning in 1990, CTX beginning in 1992, BZH, HOV, MDC, RYL and SPF beginning in 1994, NVR beginning in 1995, and MTH beginning in 1997.
Impairment Charges Should Remain Minimal

Given our outlook for home prices to be flat to down 3% in 2011, we believe land-
related charges (mostly land impairment charges, along with a small amount of
option writeoff charges) will remain minimal in the upcoming year and end in 2012.
Specifically, we estimate charges of $185 million in 2011, down from $537 million
in 2010. As a percent of prior year-end’s equity, the charges decline to 0.7% from
3.4%. Importantly, we believe this outlook is in contrast to investor expectations for
land-related charges to resurge, driven by an outlook for home price deflation of at
least 5-10%. By contrast, we expect minimal home price deflation, which, combined
with a greater mix of recently purchased lower cost basis land, and a strong degree of
impairment charges in 2008 and 2009 of $12.2 and $5.0 billion, respectively, should
result in a continued minimal level of charges, and represent a positive catalyst for
the group, in our view.
25
(1-212) 622-6696 14 December 2010
Figure 35: Total Industry Land-Related Charges

$ in millions
$16,000 30%
$14,158
Percent of Prior Year's Equity (after-tax)

$14,000
$12,196 25%
Total Land Related Charges

$12,000
20%
$10,000
$8,000 15%
$6,000 $4,952
10%
$3,187
$4,000
5%
$2,000
$537 $185 $0
$0 0%
2006 2007 2008 2009 2010 2011 2012
Positive Operating EPS Should Increase Among Builders in

2011
Lastly, we estimate the number of builders in our universe with positive Operating
EPS (excluding land-related charges) should increase from five in 2010 to seven in
2011, with nearly all generating positive EPS in 2012. Specifically, we estimate that
in 2010, only five builders will generate positive EPS: NVR, LEN, DHI, TOL, and
MTH (we exclude a roughly breakeven SPF). However, due to some revenue growth
and margin expansion, PHM and SPF join these ranks in 2011, while in 2012, the
only builders we estimate will still have negative EPS are BZH and HOV. We view
this trend as an important positive catalyst for the group in 2011, as investors begin
to anticipate a return to normalized earnings and book value growth, which should
result in P/B multiple expansion.
26
(1-212) 622-6696 14 December 2010
Risks to Our Positive Sector Stance

We believe the following three potential scenarios represent the leading risks to our
positive sector stance: 1) a more competitive Spring selling season; 2) tighter credit
standards for mortgage loans; and 3) weaker than expected macroeconomic trends.
1) Greater than expected price competition during the Spring selling season,
which could lead to gross margin compression in 2011. Currently, due to
roughly normal can rates and total specs per community more than 65% below
peak levels in 2006, we believe builders will largely hold pricing, aside from
selected discounting in lagging communities where spec inventory is at
undesirable levels. However, while already at highly depressed levels, if
demand is even weaker than expected, and builders become more aggressive
with spec building amid a high level of new community roll-outs, incentives and
discounts could rise at a greater than expected rate in the Spring and lead to
gross margin compression for the year, versus our outlook for flat gross margins.
2) Tighter credit standards for mortgage loans. We believe the banks are near
the end of a sharp credit tightening cycle that has occurred over the last 3 years,
as indicated by the Fed's Loan Officer Survey showing 10% or less of
respondents indicating tightening standards for mortgage loans over the last two
quarters. However, if home prices weaken more than expected, and other
macroeconomic indicators show weaker than expected trends, banks may even
further tighten credit standards for mortgages, which could result in lower
housing demand, and in turn could drive even lower home prices or higher
incentives and discounts.
3) Weaker than expected macroeconomic trends, namely, employment growth

and consumer confidence. We believe that the current health of the housing
market is highly sensitive to the overall economy, and in particular, employment
growth and consumer confidence. First, we believe employment growth
represents a solid driver of incremental housing demand. Second, we view
improving consumer confidence as perhaps even more important than
employment growth, given that still roughly 90% of people in the U.S. are
employed, and believe many potential homebuyers are "sitting on the sidelines"
due to either or both of the following two concerns: 1) job security; 2) investing
in a potentially depreciating asset. As a result, if employment trends soften, or
consumer confidence weakens, we believe this could negatively impact housing
demand and result in potentially lower home prices or higher incentives and
discounts.
27
(1-212) 622-6696 14 December 2010
Valuation Compelling; We Favor LEN,

KBH, NVR and TOL
While the group is trading at 1.38x current stated tangible book value, adding back
the builders' FAS 109 charges to equity on a discounted basis, we note the builders
are trading at only 1.05x. We believe this valuation, at the low end of the group's
historical 1.0x-2.0x range, reflects a very low confidence by investors in book value,
in our view, due to the current buyside consensus for at least a 5-10% decline in
home prices, which in turn should result in a resurgence in land-related impairment
charges and deteriorating margins. We add back the homebuilders' FAS 109 charges
– which are valuation allowances against deferred tax assets – to equity, given our
outlook that these charges will be reversed once, from an accounting/GAAP
perspective, the builders become consistently profitable on an ongoing basis
(critically, on a tax basis, we note the builders' DTAs are realizable for 20 years and
have not been impaired in any way). We estimate the builders' FAS 109 charges will
be reversed over the next 2-4 years (most larger-cap names over the next 2 years),
and discount the charges appropriately using a 10% discount rate.
In contrast to the buyside consensus for at least a 5-10% decline in home prices, we
believe home prices will be flat to down only 3% in 2011, which in turn drives our
outlook for a continued minimal level of land-related charges, more stable gross
margins, and operating margin expansion from volume growth and SG&A leverage.
As a result, we believe more builders should turn profitable in 2011, which, as
investors recognize and look forward to an even stronger 2012, should result in
material P/B multiple expansion over the next 12 months. Accordingly, our Dec.
2011 price targets are based on using an average 10% discount to our builders' 10-
year average P/B multiple against our 2011-end book value estimate (ex-adjusted
FAS 109 charges). This in turn represents an average 28% return potential and hence
supports our positive sector stance.
Regarding stock selection, our favorite names are Overweight-rated LEN, KBH,
NVR and TOL. We believe LEN’s current modest premium to its larger-cap peers
(ex-NVR) of only 8% on a P/B (ex-adj. FAS 109) is attractive, given our outlook for
the builder to continue to demonstrate near industry leading operating margins in
2011, as well as solidly positive Operating EPS. Moreover, we believe the
company's Rialto subsidiary, which purchases and manages underperforming real
estate loan portfolios (mostly residential), will become increasingly accretive over
the next 2-3 years. Our Dec. 2011 price target of $24.50 is based on a 1.52x P/B
multiple against 2011-end book value estimate (ex-adj. FAS 109), which is a 5%
premium to its historical 10-year average, and represents a 38% return potential,
above the universe's 28% average. We note this premium is solidly above our
targeted 10% average discount for the group, based on our outlook for LEN's above
average margins, solid profitability, and Rialto accretion to drive a higher premium
relative to its peers.
Trading at a 23% discount to the group (current P/B, ex-adj, FAS 109), we view
KBH as attractive, based on our outlook for improving order growth and SG&A
trends in 2011, in contrast to inconsistency in these areas in 2010, which resulted in
the stock’s current valuation discount, in our view. In particular, we estimate order
growth of 29% in 2011, which should lead the industry, as well as 160 bps of SG&A
28
(1-212) 622-6696 14 December 2010
leverage. Our Dec. 2011 price target of $17.50 is based on a 1.14 P/B multiple
against our 2011-end book value estimate (ex-adj. FAS 109), which represents a 15%
discount to its 10-year P/B average. We note our Dec. 2011 P/B multiple is lower
than our targeted 10% discount for the group, as we estimate KBH will still generate
modestly negative Operating EPS in 2011. Our price target for KBH represents a
39% return potential, above the universe's 28% average.
While NVR trades at a 130% premium to its peers on current P/B, we believe this is
attractive relative to its historical discount of 215%. Moreover, we estimate NVR
will continue to lead the industry in operating margins in 2011 and 2012, at 9.5% and
10.3% vs. our universe average of 4.3% and 5.7%, respectively, while we believe the
recent restart of its share buyback program should continue in 2011 and represents an
incremental positive catalyst relative to its peers. Our Dec. 2011 price target of $915
is based on a 3.64x P/B on our 2011E BV, which is conservatively 15% below its 10-
year average, versus our targeted 10% discount for the group, and represents a 36%
return potential, above our universe's 28% average.
Lastly, trading at 1.07x current P/B (ex-adj. FAS 109), or only a 2% premium to its
peers versus a historical 10% premium, we view TOL as attractive as well.
Importantly, we believe our estimate for above average order growth in 2011 for
TOL will be a positive relative catalyst for the stock over the next 12 months, as our
2011E and 2012E of 23% and 22% are above our universe averages of 14% and
18%, respectively. Moreover, we point to the company's strong balance sheet, at
14% net debt/capital versus the group's 40% average, and a below average exposure
to the more credit sensitive first-time homebuyer segment. Our Dec. 2011 price
target of $25.50 is based on a 1.45x P/B against our 2011-end book value estimate
(ex-adj. FAS 109), which represents a 3% discount to its 10-year average. We note
this is moderately better than our targeted 10% discount for the group, as we believe
TOL's peer premium should return closer to its historical average. Our Dec. 2011
price target represents a 36% return potential, above our universe’s 28% average.
Figure 36: Homebuilder Historical P/B Valuation

4.0x
We add back undiscounted
3.5x FAS 109 charges starting
3.0x from 4Q07 for most
i
2.5x
2.0x
1.5x
1.0x
0.5x
0.0x
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
29
(1-212) 622-6696 14 December 2010
Figure 37: Homebuilder Price Targets

(ex-Adj. FAS 109) Price Target Framework
Stock Price/Book 5-Year 10-Year 2011E BV P/B Disc./Prem. New PT New PT
Company Symbol Rating Price Current 2011E Avg. P/B Avg. P/B (ex-Adj. FAS 109) 2011E to Adj. 10-Yr Avg (unrounded) (rounded) Upside %
Larger-Caps
D.R. Horton DHI N $11.36 1.08x 1.06x 1.07x 1.43x $10.76 1.36x (5%) $14.63 $14.50 27.6%
KB Home KBH OW $12.62 0.81x 0.81x 0.96x 1.34x $15.59 1.14x (15%) $17.77 $17.50 38.7%
Lennar Corp. LEN OW $17.71 1.13x 1.09x 0.95x 1.45x $16.24 1.52x 5% $24.74 $24.50 38.3%
NVR NVR OW $674.86 2.41x 2.69x 0.58x 4.29x $250.56 3.64x (15%) $913.02 $915.00 35.6%
PulteGroup PHM N $7.03 0.93x 0.98x 0.95x 1.24x $7.19 1.17x (5%) $8.44 $8.50 20.9%
Toll Brothers TOL OW $18.71 1.07x 1.06x 1.09x 1.50x $17.61 1.45x (3%) $25.58 $25.50 36.3%
Larger-Cap Average (ex-NVR) 1.00x 1.00x 1.00x 1.39x 1.33x (6%) 32.9%
Smaller-Caps
Beazer Homes BZH UW $4.80 0.88x 1.01x 0.59x 0.99x $4.75 -
Hovnanian HOV N $4.34 1.13x 1.47x 0.73x 1.35x $2.96 -
MDC Holdings MDC UW $26.82 1.05x 1.12x 1.15x 1.44x $23.94 1.22x (15%) $29.29 $29.50 10.0%
Meritage Homes MTH N $21.69 1.22x 1.20x 1.05x 1.55x $18.12 1.47x (5%) $26.61 $26.50 22.2%
Ryland Group RYL N $16.26 1.02x 1.06x 1.20x 1.63x $15.40 1.30x (20%) $20.06 $20.00 23.0%
Standard Pacific SPF UW $3.88 1.19x 1.19x 0.58x 1.02x $3.25 -
Smaller-Cap Average 1.08x 1.17x 0.88x 1.33x 1.33x (13%) 18.4%
JPM Builder Universe Average (ex-NVR) 1.05x 1.09x 0.94x 1.36x 1.33x (9%) 28.1%
Source: Company reports and J.P. Morgan estimates
Figure 38: J.P. Morgan Homebuilder Universe

Fiscal Stock Market Earnings Per Share Avg. P/E (6/02-6/07) Avg. P/E (6/97-6/07) Price/Book 5-Year 10-Year EV / Book EV /
Company Symbol Yr-End Rating Price Cap 2010E 2011E Current Forward Current Forward Current (ex-FAS 109) 2010E Avg. P/B Avg. P/B (ex-FAS 109) Inventory
Larger-Caps
D.R. Horton DHI Sept N 11.36 3,618 $0.23 $0.13 8.6x 7.7x 8.6x 7.8x 1.38x 1.08x 1.10x 1.07x 1.43x 1.21x 1.18x
KB Home KBH Nov OW 12.62 971 ($0.76) ($0.31) 8.9x 7.3x 8.9x 7.3x 1.58x 0.81x 0.82x 0.96x 1.34x 1.44x 1.01x
Lennar Corp. LEN Nov OW 17.71 3,420 $0.36 $0.35 9.4x 8.5x 9.4x 8.9x 1.33x 1.13x 1.12x 0.95x 1.45x 1.74x 1.46x
NVR NVR Dec OW 674.86 4,057 $29.45 $36.82 8.9x 8.3x 8.9x 9.3x 2.41x 2.41x 2.72x 2.82x 4.29x 1.79x 5.36x
PulteGroup PHM Dec N 7.03 2,663 ($1.99) ($0.01) NM 8.5x 9.1x 9.1x 1.42x 0.93x 0.95x 0.95x 1.24x 1.50x 0.87x
Toll Brothers TOL Oct OW 18.71 3,139 $0.11 ($0.04) 10.0x 8.5x 10.0x 9.2x 1.23x 1.07x 1.06x 1.09x 1.50x 1.21x 1.10x
Larger-Cap Average 9.2x 8.1x 9.2x 8.6x 1.39x 1.00x 1.01x 1.00x 1.39x 1.42x 1.12x
Smaller-Caps
Beazer Homes BZH Sept UW 4.80 485 ($2.35) ($1.21) 6.8x 6.7x 6.8x 7.0x 0.89x 0.88x 0.85x 0.59x 0.99x 2.09x 0.99x
Hovnanian HOV Oct N 4.34 342 ($1.88) ($1.09) 8.2x NM 8.2x 8.8x NM 1.13x 1.07x 0.73x 1.35x 4.99x 1.51x
MDC Holdings MDC Dec UW 26.82 1,250 ($0.55) ($0.18) 7.5x 8.4x 7.5x 10.0x 1.21x 1.05x 1.08x 1.15x 1.44x 0.74x 1.13x
Meritage Homes MTH Dec N 21.69 696 $0.23 $0.26 8.6x 6.7x 8.6x 7.8x 1.39x 1.22x 1.08x 1.05x 1.55x 1.54x 1.18x
Ryland Group RYL Dec N 16.26 717 ($0.93) ($0.19) 8.6x 7.9x 8.6x 8.1x 1.38x 1.02x 1.05x 1.20x 1.63x 1.12x 1.02x
Standard Pacific SPF Dec UW 3.88 974 $0.01 $0.07 7.6x 7.8x 7.6x 8.1x 2.15x 1.19x 1.16x 0.58x 1.02x 2.01x 1.43x
Smaller-Cap Average 7.9x 7.5x 7.9x 8.3x 1.40x 1.08x 1.05x 0.88x 1.33x 2.08x 1.21x
JPM Builder Universe Average* 8.5x 7.8x 8.5x 8.4x 1.40x 1.05x 1.03x 0.94x 1.36x 1.78x 1.17x
Source: Company reports and J.P. Morgan estimates. Prices as of December 13, 2010. P/B averages exclude NVR.
30
(1-212) 622-6696 14 December 2010
Table 5: Key Builder Statistics for 2010E-2012E

Old Estimates New Estimates
1Q10 2Q10 3Q10 4Q10E 2010E 2011E 4Q10E 2010E 2011E 2012E
Order Growth
DHI 54.8% (3.3%) (20.5%) (35.0%) 13.7% (17.4%) (35.0%) 13.7% (17.4%) 21.9%
KBH 4.7% (22.9%) (39.1%) (1.5%) (17.3%) 29.1% (1.5%) (17.3%) 29.1% 19.1%
LEN 17.7% (10.5%) (15.6%) (18.0%) (8.2%) 15.0% (18.0%) (8.2%) 15.0% 20.0%
NVR 21.2% (6.2%) (4.6%) (8.0%) 0.9% 10.0% 13.0%
PHM (26.0%) (32.0%) (31.0%) (18.0%) (28.0%) 5.4% (18.0%) (28.0%) 5.4% 15.6%
TOL 40.9% (16.2%) (27.1%) 8.0% 6.3% 22.8% 8.0% 6.3% 22.8% 21.9%
Larger-Cap Average 18.9% (15.2%) (23.0%) (12.9%) (6.7%) 11.0% (12.1%) (5.4%) 10.8% 18.6%
BZH 48.8% (32.5%) (20.0%) (23.0%) 1.0% 8.3% (23.0%) 1.0% 8.3% 15.2%
HOV (17.2%) (37.4%) (20.0%) N/A (19.8%) 22.8% N/A (21.2%) 25.0% 16.5%
MDC 37.7% 3.9% (21.7%) 11.5% 4.4% 17.3% 11.5% 4.4% 17.3% 16.0%
MTH 7.8% (21.5%) (35.7%) 0.0% (14.6%) 13.0% 17.0%
RYL (13.4%) (44.2%) (37.1%) (7.0%) (27.9%) 24.2% (7.0%) (27.9%) 24.2% 15.8%
SPF (6.7%) 19.2% (33.9%) (39.2%) (25.8%) 20.0% (39.2%) (25.8%) 20.0% 17.6%
Smaller-Cap Average 9.5% (18.8%) (28.1%) (14.4%) (13.6%) 18.5% (11.5%) (14.0%) 18.0% 16.4%
Universe Average 14.2% (17.0%) (25.5%) (13.6%) (10.1%) 14.7% (11.8%) (9.7%) 14.4% 17.5%
Gross Margins (ex-charges)

DHI 18.0% 17.2% 17.0% 16.5% 17.3% 16.8% 16.5% 17.3% 16.8% 17.5%
KBH 18.8% 17.7% 18.2% 16.7% 18.2% 18.2% 16.7% 18.2% 18.2% 18.8%
LEN 19.2% 21.4% 20.3% 19.0% 21.1% 20.5% 19.0% 21.1% 19.5% 20.3%
NVR 18.1% 18.6% 18.3% 18.3% 18.4% 18.5% 19.0%
PHM 16.3% 17.2% 16.7% 16.9% 16.6% 17.1% 16.9% 16.6% 17.1% 17.6%
TOL 20.2% 21.4% 20.6% 20.5% 20.3% 20.7% 20.5% 20.3% 20.7% 21.3%
Larger-Cap Average 18.4% 18.9% 18.5% 17.9% 18.7% 18.7% 18.0% 18.6% 18.5% 19.1%
BZH 22.5% 17.9% 16.2% 15.8% 18.8% 18.5% 15.8% 18.8% 18.5% 19.2%
HOV 17.3% 17.1% 17.3% N/A 16.9% 18.5% N/A 16.9% 18.5% 19.3%
MDC 22.4% 18.1% 20.9% 18.5% 19.5% 18.5% 18.5% 19.5% 18.5% 19.2%
MTH 19.2% 18.3% 18.5% 18.2% 18.5% 18.5% 19.1%
RYL 13.9% 15.9% 14.2% 14.7% 14.8% 16.2% 14.7% 14.8% 16.2% 17.0%
SPF 22.7% 20.9% 23.6% 22.5% 22.2% 22.5% 22.5% 22.2% 22.5% 23.2%
Smaller-Cap Average 19.7% 18.0% 18.5% 17.9% 18.4% 18.8% 17.9% 18.5% 18.8% 19.5%
Universe Average 19.0% 18.5% 18.5% 17.9% 18.6% 18.8% 18.0% 18.6% 18.6% 19.3%
Operating Margins (ex-charges)

DHI 3.6% 6.8% 3.8% 2.5% 5.2% 3.7% 2.5% 5.2% 3.7% 5.5%
KBH (8.7%) (4.7%) 2.4% 1.4% (0.9%) 0.7% 1.4% (0.9%) 0.7% 2.5%
LEN 3.4% 7.5% 6.4% 5.7% 7.0% 6.7% 5.7% 7.0% 5.8% 7.1%
NVR 0.9% 5.5% 2.6% 8.1% 9.2% 9.5% 10.3%
PHM 0.9% 5.5% 2.6% 6.7% (3.2%) 5.6% 6.7% 2.1% 5.6% 6.8%
TOL 1.1% 6.6% 3.4% 2.5% 2.6% 3.0% 2.5% 2.6% 3.0% 4.4%
Larger-Cap Average 0.2% 4.6% 3.5% 3.8% 2.1% 3.9% 4.5% 4.2% 4.7% 6.1%
BZH (1.5%) 0.8% (1.4%) (9.2%) (1.1%) (1.3%) (9.2%) (1.1%) (1.3%) 0.4%
HOV 3.6% 5.7% 4.8% N/A 4.1% 6.1% N/A 4.1% 6.1% 7.3%
MDC 1.2% 4.1% 4.6% 4.0% 3.8% 3.9% 4.0% 3.8% 3.9% 5.8%
MTH 3.3% 5.1% 3.4% 2.6% 18.5% 3.8% 4.7%
RYL 0.5% 5.4% (2.2%) 0.2% 1.5% 3.7% 0.2% 1.5% 3.7% 6.0%
SPF 4.0% 7.2% 6.1% 6.3% 6.1% 6.7% 6.3% 6.1% 6.7% 8.0%
Smaller-Cap Average 1.8% 4.7% 2.5% 0.3% 2.9% 3.8% 0.8% 5.5% 3.8% 5.4%
Universe Average 1.0% 4.6% 3.0% 2.2% 2.5% 3.9% 2.8% 4.8% 4.3% 5.7%
Reported EPS
DHI $0.04 $0.16 ($0.03) $0.00 $0.77 $0.12 $0.00 $0.77 $0.13 $0.37
KBH ($0.71) ($0.40) ($0.02) ($0.10) ($1.23) ($0.26) ($0.10) ($1.23) ($0.31) $0.17
LEN ($0.04) $0.21 $0.16 $0.07 $0.41 $0.80 $0.07 $0.41 $0.35 $0.75
NVR $5.01 $11.13 $7.31 $5.89 $29.45 $36.82 $47.12
PHM ($0.03) $0.20 ($2.63) ($0.04) ($2.50) $0.10 ($0.04) ($2.50) ($0.01) $0.23
TOL ($0.24) $0.16 $0.30 ($0.02) ($0.02) ($0.04) ($0.02) ($0.02) ($0.04) $0.25
Larger-Cap Average
BZH $0.08 ($0.41) ($0.81) ($0.44) ($0.57) ($1.08) ($0.44) ($0.57) ($1.21) ($0.80)
HOV ($0.36) ($0.92) ($0.34) N/A $1.36 ($1.22) N/A $1.37 ($1.09) ($0.55)
MDC ($0.45) ($0.08) ($0.22) ($0.08) ($0.83) ($0.35) ($0.08) ($0.83) ($0.18) $0.23
MTH $0.08 $0.13 $0.04 ($0.02) $0.23 $0.26 $0.58
RYL ($0.33) ($0.49) ($0.68) ($0.25) ($1.75) ($0.05) ($0.25) ($1.75) ($0.19) $0.46
SPF ($0.02) $0.04 $0.02 $0.01 $0.05 $0.08 $0.01 $0.05 $0.07 $0.12
Smaller-Cap Average
Operating EPS
DHI ($0.03) $0.19 $0.10 $0.02 $0.36 $0.17 $0.02 $0.36 $0.18 $0.37
KBH ($0.34) ($0.23) $0.05 ($0.06) ($0.58) ($0.26) ($0.06) ($0.58) ($0.25) $0.17
LEN $0.02 $0.26 $0.20 $0.12 $0.71 $0.80 $0.12 $0.71 $0.40 $0.75
NVR $4.83 $11.22 $7.34 $5.89 $29.39 $36.82 $47.12
PHM ($0.00) $0.25 ($0.31) ($0.01) ($0.71) $0.10 ($0.01) ($0.71) $0.07 $0.23
TOL ($0.06) $0.24 $0.40 $0.01 $0.54 $0.12 $0.01 $0.54 $0.11 $0.25
Larger-Cap Average
BZH ($0.22) $0.00 ($0.53) ($0.40) ($1.58) ($1.04) ($0.40) ($1.58) ($1.08) ($0.80)
HOV ($0.39) $0.02 ($0.30) N/A ($2.29) ($1.06) N/A ($2.28) ($0.93) ($0.55)
MDC ($0.27) ($0.06) ($0.09) ($0.08) ($0.50) ($0.35) ($0.08) ($0.50) ($0.18) $0.23
MTH $0.04 $0.15 $0.06 ($0.02) $0.22 $0.26 $0.58
RYL ($0.14) $0.08 ($0.20) ($0.19) ($0.44) ($0.05) ($0.19) ($0.44) ($0.05) $0.46
SPF $0.00 $0.01 $0.00 $0.00 $0.01 $0.08 $0.00 $0.01 $0.07 $0.12
Smaller-Cap Average
31
(1-212) 622-6696 14 December 2010
Beazer Homes
Valuation and Rating Analysis
BZH trades at 0.88x P/B (on an ex-adjusted FAS 109 basis), well below the
overall group’s 1.05x. We believe this valuation is justified, and look for
relative underperformance due to the company’s still solidly negative EPS,
our concerns regarding the company’s above-average leverage position,
featuring an above average net-debt-to-capital ratio of 63% vs. its peer’s 34%
average, as well as our outlook for further equity dilution risk, as we believe
the company will likely continue to repair its capital structure. As a result, we
rate the stock Underweight.
Risks to our Rating

We believe the following three factors present risks to our Underweight rating
for Beazer, which would spur relative outperformance: 1) better than
expected order growth due to an unanticipated turnaround in BZH’s weaker
markets; 2) stronger than expected margin improvement; and 3) better than
expected cash flow generation in FY11.
Underweight
Beazer Homes (BZH;BZH US)
Company Data 2009A 2010E 2010E 2011E 2011E 2012E
Price ($) 4.80 (Old) (New) (Old) (New)
Date Of Price 13 Dec 10 EPS Reported ($)
52-week Range ($) 7.08 - 3.10 Q1 (Dec) (2.08) 1.14A 1.14A (0.44) (0.44)
Mkt Cap ($ mn) 354.31 Q2 (Mar) (2.97) 0.08A 0.08A (0.32)
Fiscal Year End Sep Q3 (Jun) (0.72) (0.41)A (0.41)A (0.27)
Shares O/S (mn) 74 Q4 (Sep) 0.81 (0.81)A (0.81)A (0.18)
FY (4.90) (0.54)A (0.57)A (1.08) (1.21) (0.80)
CY
Bloomberg EPS FY ($) (6.73) (0.93)A (1.18) (0.24)
Source: Company data, Bloomberg, J.P. Morgan estimates. Note: Our EPS estimates are based on a full tax
rate, which we use for longer-term normalized earnings comparability purposes, as opposed to the rate
potentially being near zero as the company generates profits against its DTA, which we believe is likely
reflected by Street consensus.
32
(1-212) 622-6696 14 December 2010
D.R. Horton
Valuation, Rating, and Price Target Analysis
At 1.08x P/B (ex-adjusted FAS 109 charges), DHI trades at a 3% premium to the
group’s 1.05x average. While we remain impressed with DHI's profitability, and
solid balance sheet, we believe this is largely reflected in its valuation. Accordingly,
we rate DHI Neutral.
Regarding our price target analysis, we apply a 1.36x P/B multiple to our 2011-end
book value estimate of $10.76 (ex-adjusted FAS 109 charges) to arrive at our
December 2011 price target of $14.50. Our 1.36x P/B multiple is a 5% discount to
its historical 10-year P/B multiple, better than our targeted roughly 10% average
discount for our universe, which we believe is appropriate given the company’s
positive Operating EPS, and our view that the company is solidly positioned to return
to higher levels of profitability over the next 2-3 years. However, we maintain our
relative Neutral rating on DHI amid our positive sector stance, as we believe DHI’s
strong results and leadership position are fairly reflected on a relative basis, given its
5% premium P/B valuation versus its peers.
Risks to Our Rating

We believe the following factors present risks to our relative Neutral rating on D.R.
Horton: Factors that could lead to outperformance relative to our universe include:
(1) lower than expected land impairment charges; (2) better than expected order
growth; and (3) better than expected pricing trends at the low-end of the market.
Factors that could lead to underperformance relative to our universe include: (1)
greater than expected land impairment charges; (2) inability to generate solid
cashflow in 2010; (3) lower than expected cost savings from its SG&A reduction
initiatives; (4) slower than expected order growth.
Neutral
D.R. Horton (DHI;DHI US)
Company Data 2009A 2010A 2010A 2011E 2011E 2012E
52-week Range ($) 15.44 - 9.41 Q1 (Dec) (0.20) 0.56A 0.56A 0.00 0.00
Mkt Cap ($ mn) 4,045.30 Q2 (Mar) (0.34) 0.04A 0.04A 0.03 0.03
Fiscal Year End Sep Q3 (Jun) (0.45) 0.16A 0.16A 0.04 0.04
Shares O/S (mn) 356 Q4 (Sep) (0.73) (0.03)A (0.03)A 0.05 0.06
Price Target ($) 14.50 FY (1.72) 0.77A 0.77A 0.12 0.13 0.37
Price Target End Date 31 Dec 11 Bloomberg EPS FY ($) (1.28) 0.57A 0.31 0.77
33
(1-212) 622-6696 14 December 2010
Hovnanian Enterprises
HOV trades at 1.13x current book value (ex-adjusted FAS 109 charges), an 8%
premium to the group, which we view as not compelling given the company’s above
average net debt-to-cap of 122%, above its peers' 28% average (ex-NVR). However,
nonetheless, we recognize the stock’s high beta nature, as we believe it represents
above average leverage to a recovery, and hence believe the name is less likely to
underperform its peers, despite its current premium. As a result, we rate the stock
Neutral amid our positive sector stance.
Risks to Rating
We believe the following factors present risks to our Neutral rating on Hovnanian:
Potential catalysts that would spur outperformance include: 1) Lower than expected
land impairment charges; 2) Improving order trends in its key markets of NJ,
Washington D.C., and California; and 3) Improving pricing trends, which would help
its industry-low gross margins. Factors that could lead to underperformance include:
1) A continued slowdown in the Mid-Atlantic and California, to which HOV has an
above-average exposure; and 2) Continued large land impairment charges.
Neutral
Hovnanian Enterprises (HOV;HOV US)
52-week Range ($) 8.05 - 3.40 Q1 (Jan) (2.29) 2.97A 2.97A
Mkt Cap ($ mn) 341.42 Q2 (Apr) (1.50) (0.36)A (0.36)A
Fiscal Year End Oct Q3 (Jul) (2.16) (0.92)A (0.92)A
Shares O/S (mn) 79 Q4 (Oct) (3.21) (0.35)A (0.34)A
FY (9.16) 1.36A 1.37A (1.22) (1.09) (0.55)
Bloomberg EPS FY ($) (7.66) (0.07)A (1.63) (0.92)
34
(1-212) 622-6696 14 December 2010
KB Home
Trading at 0.81x P/B (ex-adjusted FAS 109 charges), a 23% discount to the group’s
1.05x average, we believe KBH’s valuation is attractive given its impressive value-
engineering efforts via its Open Series community program, our outlook for industry
leading order growth in 2011, and its solid cash position. Thus we rate the stock
Overweight.
book value estimate of $15.59 (ex-adjusted FAS 109) to reach a December 2011
price target of $17.50. Our 1.14x P/B multiple is a 15% discount to KBH's historical
10-year P/B multiple of 1.34x, below our targeted roughly 10% average discount for
the group, which we note is appropriate given our outlook for still modestly negative
EPS in 2011. However, the relative discount is an improvement off of the 20%
discount it currently holds versus its larger-cap peers and a 23% discount to the
universe average.
Risks to Our Rating

We believe the following factors present risks to our Overweight rating on KBH, and
could spur underperformance relative to the group: 1) weaker than expected order
growth; 2) greater than expected impairment charges; and 3) lower than expected
margin and sales benefits from its Open Series communities.
Overweight
KB Home (KBH;KBH US)
52-week Range ($) 20.13 - 9.43 Q1 (Feb) (0.75) (0.71)A (0.71)A (0.25)
Mkt Cap ($ mn) 970.59 Q2 (May) (1.03) (0.40)A (0.40)A (0.17)
Fiscal Year End Nov Q3 (Aug) (0.87) (0.02)A (0.02)A 0.03
Shares O/S (mn) 77 Q4 (Nov) 1.31 (0.10)A (0.10)A 0.08
Price Target ($) 17.50 FY (1.33) (1.23)A (1.23)A (0.26) (0.31) 0.17
Price Target End Date 31 Dec 11 Bloomberg EPS FY ($) (2.59) (1.20)A (0.24) 0.91
35
(1-212) 622-6696 14 December 2010
Lennar
At 1.13x book value, LEN is currently trading at an 8% premium to its peers' 1.05x
(excluding FAS 109), which we believe is reflective of LEN’s higher margins and
profitability, as well as additional accretion coming from its Rialto segment.
Moreover, given our outlook for LEN’s continued reduction of its JV exposure, as
well as its solid balance sheet and cash position, we believe further multiple
expansion relative to its peers exists for LEN, and hence, we rate the stock
Overweight.
book value estimate of $16.24 (ex-adj. FAS 109) to reach a December 2011 price
target of $24.50. Our 1.52x P/B multiple is a 5% premium to its historical 10-year
P/B multiple versus our targeted roughly 10% average discount for the group,
however, which we believe is appropriate, given our outlook for continued above-
average margins, solid profitability, and additional accretion from Rialto in 2011.
Our previous price target of $24.00 was based on a 1.44x P/B multiple to our
previous 2011-end book value estimate of $16.68 (ex-adj. FAS 109).
Risks to our Rating

We believe the following factors present risks to our Overweight rating on Lennar:
Potential catalysts that would spur underperformance include: 1) larger than expected
impairment charges; 2) weaker than expected order growth; and 3) unexpected
challenges in its joint venture arrangements.
Overweight
Lennar (LEN;LEN US)
52-week Range ($) 21.79 - Q1 (Feb) (0.98) (0.04)A (0.04)A 0.02
11.75 Q2 (May) (0.76) 0.21A 0.21A 0.05
Mkt Cap ($ mn) 3,234.91 Q3 (Aug) (0.97) 0.16A 0.16A 0.11
Fiscal Year End Nov Q4 (Nov) 0.19 0.07A 0.07A 0.17
Shares O/S (mn) 183 FY (2.45) 0.41A 0.41A 0.80 0.35 0.75
Price Target ($) 24.50 Bloomberg EPS FY ($) (3.02) 0.35A 0.63 1.17
Price Target End 31 Dec 11 Source: Company data, Bloomberg, J.P. Morgan estimates. Note: Our EPS estimates are based on a full tax
Date rate, which we use for longer-term normalized earnings comparability purposes, as opposed to the rate
36
(1-212) 622-6696 14 December 2010
MDC Holdings
Trading at 1.05x book value (on an ex-adjusted FAS 109 basis), roughly in-line
with its peers, we believe MDC's valuation is less attractive than its peers at current
levels, particularly given MDC’s low leverage and land position coming out of the
cycle. While we remain impressed with MDC’s strong cash position, we believe
this to be already priced into the stock, and point to the company’s underlevered
position within our universe to the emerging housing recovery. Therefore, we
maintain our relative Underweight rating amid our positive sector stance as we
continue to anticipate greater upside potential from MDC’s peers.
book value estimate of $23.94 (on an adjusted ex-FAS 109 basis) to reach a
December 2011 price target of $29.50. Our 1.22x P/B multiple is a 15% discount
to MDC’s historical 10-year P/B multiple of 1.44x and below our targeted roughly 10%
average discount for the group. We believe this is appropriate, given its more
defensive nature relative to the group, which should lead to less upside over the
next twelve months, and our outlook for below average gross margin expansion
over the next 1-2 years as it has had to more aggressively purchase land to
replenish its lots position. Our previous price target of $31.50 was based on a 10%
discount to its 10-year P/B multiple of 1.44x P/B to our previous 2011-end book
value estimate of $24.17 (on an adjusted ex-FAS 109 basis).
Risks to our Rating

We believe the following three factors present risks to our Underweight rating on
MDC, which would spur outperformance relative to the group: 1) better than
expected order growth; 2) the company is able to take advantage of significant
distressed land opportunities over the next 12 months as a result of their strong cash
position; 3) pricing and sales in distressed markets of CA, AZ, and NV, to which
MDC has a roughly 60% exposure, return faster than expected.
Underweight
MDC Holdings (MDC;MDC US)
52-week Range ($) 39.28 - Q1 (Mar) (0.88) (0.45)A (0.45)A (0.21)
24.50 Q2 (Jun) (0.64) (0.08)A (0.08)A (0.12)
Mkt Cap ($ mn) 1,249.81 Q3 (Sep) (0.69) (0.22)A (0.22)A 0.02
Fiscal Year End Dec Q4 (Dec) 2.68 (0.08)A (0.08)A 0.13
Shares O/S (mn) 47 FY 0.52 (0.83)A (0.83)A (0.35) (0.18) 0.23
Price Target ($) 29.50 Bloomberg EPS FY ($) (2.52) (0.92)A (0.31) 1.43
37
(1-212) 622-6696 14 December 2010
PulteGroup Inc.
Trading at 0.93x book value (ex-intangibles, ex-adusted FAS 109 charges),
PHM is trading at a 11% discount to its peers’ average of 1.05x. As a result,
we believe PHM’s valuation appropriately reflects its below average order
growth, lower mix of new communities, and higher level of charges, only
partially offset by its solid balance sheet and above average demographic
diversification. As a result, we rate PHM Neutral.
Regarding our price target analysis, we apply a 1.17x P/B multiple to our
2011-end book value estimate of $7.19 (ex-intangibles, ex-adjusted FAS
109 charges), resulting in a December 2011 price target of $8.50. Our 1.17x
P/B multiple is a 5% discount to its historical 10-year P/B multiple, which is
slightly better than our targeted roughly 10% average discount for the group.
We believe this is appropriate as we note the company’s multiple is already
highly depressed versus the industry (its 10-year average is already at a 10%
discount to its peers). Additionally, we believe that this relative price target
is appropriate as most of its significant charges, which were detrimental to
the company’s book value, are largely behind it. Our previous price target
of $9.50 was based on a P/B multiple of 1.24x to our previous 2011-end
book value estimate of $7.53 (ex-goodwill, ex-adjusted FAS 109 charges).
Risks to Our Rating and Price Target

We believe the following factors present risks to our Neutral rating on PHM:
Potential catalysts that would spur outperformance include: 1) lower than expected
impairment charges; 2) better than expected order growth and pricing; 3) better than
expected synergies from its acquisition of Centex. Factors that could lead to
underperformance include: 1) slower than expected order growth, which, given its
above-average land supply, could result in impairment charges well above our
outlook and its peers; and 2) increased competition in its active-adult segment.
Neutral
PulteGroup Inc. (PHM;PHM US)
52-week Range ($) 13.91 - 6.13 Q1 (Mar) (2.02) (0.03)A (0.03)A (0.07)
Mkt Cap ($ mn) 2,663.26 Q2 (Jun) (0.74) 0.20A 0.20A (0.04)
Fiscal Year End Dec Q3 (Sep) (1.15) (2.63)A (2.63)A 0.02
Shares O/S (mn) 379 Q4 (Dec) (0.31) (0.04)A (0.04)A 0.08
Price Target ($) 8.50 FY (3.94) (2.50)A (2.50)A 0.10 (0.01) 0.23
Price Target End Date 31 Dec 11 Bloomberg EPS FY ($) (3.97) (2.12)A 0.04 0.42
38
(1-212) 622-6696 14 December 2010
Ryland Group
Trading at 1.02x current book value (ex-adjusted FAS 109 charges), a 3% discount to
its peer average, we believe RYL’s valuation fairly reflects its low land position and
below average gross margins, only partially offset by its strong balance sheet
position, with its net-debt-to-capital at 72% vs. its peers' 35% average. Hence, we
view RYL’s relative valuation as appropriate and rate the stock Neutral.
book value estimate of $15.40 (ex-adjusted FAS 109 charges) to reach a December
2011 price target of $20.00. Our 1.30x P/B multiple represents a 20% discount to its
10-year average P/B multiple, which is below our targeted roughly 10% average
discount for the group. We believe this is appropriate due to RYL’s below-average
margins and order growth and our outlook for the company to remain unprofitable
through 2011, versus more than half our universe being profitable in the upcoming
year. Our previous price target of $21.00 was based on a P/B multiple of 1.30x to
our previous 2011-end book value estimate of $16.00 (ex-adjusted FAS 109
charges).
Risks to Our Rating

We believe the following factors present risks to our Neutral rating on Ryland:
Potential catalysts that would spur outperformance include: 1) Better than expected
order growth and pricing strength; 2) lower than expected margin contraction; and 3)
lower than expected impairment charges. Factors that could lead to
underperformance include: 1) slower than expected order growth; and 2) higher than
expected impairment charges.
Neutral
Ryland Group (RYL;RYL US)
52-week Range ($) 26.03 - Q1 (Mar) (1.76) (0.33)A (0.33)A (0.20)
14.16 Q2 (Jun) (1.70) (0.49)A (0.49)A (0.10)
Mkt Cap ($ mn) 716.99 Q3 (Sep) (1.20) (0.68)A (0.68)A 0.01
Fiscal Year End Dec Q4 (Dec) 0.88 (0.25)A (0.25)A 0.10
Shares O/S (mn) 44 FY (3.74) (1.75)A (1.75)A (0.05) (0.19) 0.46
Price Target ($) 20.00 Bloomberg EPS FY ($) (4.93) (1.65)A (0.23) 0.86
39
(1-212) 622-6696 14 December 2010
Standard Pacific
SPF currently trades at 1.19x P/B (ex-FAS 109), a 14% premium to the group
average of 1.05x, and well above its historical 25% discount to the group. It also
trades at 2.01x EV/B (ex-FAS 109), above the group’s 1.78x, which we believe is
not compelling given its high concentration exposure to the boom-bust markets of
CA, FL, and AZ (66% of closings versus its peers’ 37% average), as well as high net
debt-to-cap of 60% vs. its peers’ 37%. Moreover, while its equity infusion from
MatlinPatterson has improved its liquidity and capital base, we note its share count
has been substantially diluted, thereby limiting the company’s normalized EPS
potential relative to its peers. Accordingly, we rate SPF Underweight.
Risks to our Rating

We believe the following factors present risks to our Underweight thesis on SPF: 1)
Land impairments come in well below our outlook; 2) Markets of California, Florida,
and Arizona improve significantly faster than we anticipate; 3) Significant cash flow
generation to cover both near-term and longer-term debt obligations; and 4) Smaller
JV partners do not become financially stressed and are able to provide capital when
needed.
Underweight
Standard Pacific (SPF;SPF US)
52-week Range ($) 7.10 - 2.95 Q1 (Mar) (0.21) (0.02)A (0.02)A
Mkt Cap ($ mn) 974.04 Q2 (Jun) (0.10) 0.04A 0.04A
Fiscal Year End Dec Q3 (Sep) (0.10) 0.02A 0.02A
Shares O/S (mn) 251 Q4 (Dec) 0.33 0.01A 0.01A
FY (0.06) 0.05A 0.05A 0.08 0.07 0.12
Bloomberg EPS FY ($) (0.20) 0.04A 0.08 0.12
40
(1-212) 622-6696 14 December 2010
Toll Brothers
Trading at 1.07x book value, representing a 3% premium to the group (ex-adjusted
FAS 109), vs. its historical 10% premium to the group, we believe valuation is
attractive, given our outlook for above-average order growth in 2011, its below
average exposure to the more credit sensitive first-time homebuyer, and its strong
balance sheet (net debt-to-capital at 14% vs. the group’s 40% average), with a cash
position of $1.3 billion. As a result, we rate the stock Overweight.
Our Dec. 2011 Price Target of $25.50 is based on applying a 1.45x P/B against our
2011 book value estimate of $17.61 (ex-adjusted FAS 109 charges). Our 1.45x P/B
multiple is a 3% discount to its historical 10-year P/B multiple, which is slightly
better than our targeted roughly 10% average discount for the group. We believe this
is appropriate at this point in the cycle given TOL’s lower exposure to the more
credit sensitive first-time homebuyer and it also reflects our outlook for above
average order growth in 2011 as the company moves off of an industry low
absorption pace. Our previous Dec. 2011 price target of $26.00 was based on TOL’s
10-year P/B average of 1.50x.
Risks to Our Rating

We believe the following factors present risks to our Overweight rating on Toll
Brothers, and could spur underperformance relative to the group: 1) lower than
expected order growth; 2) greater than expected land impairment charges; 3) credit
availability for higher-priced homes becomes increasingly more challenging to
obtain.
Overweight
Toll Brothers (TOL;TOL US)
Company Data 2009A 2010A 2010A 2011E 2011E 2012E
52-week Range ($) 23.67 - Q1 (Jan) (0.55) (0.25)A (0.25)A (0.02) (0.02)
15.57 Q2 (Apr) (0.52) (0.24)A (0.24)A (0.04) (0.04)
Mkt Cap ($ mn) 3,094.76 Q3 (Jul) (2.93) 0.16A 0.16A 0.00 0.00
Fiscal Year End Oct Q4 (Oct) (0.68) 0.30A 0.30A 0.02 0.02
Shares O/S (mn) 165 FY (4.68) (0.02)A (0.02)A (0.04) (0.04) 0.25
Price Target ($) 25.50 Bloomberg EPS FY ($) (4.46) (0.41)A 0.03 0.75
41
(1-212) 622-6696 14 December 2010
Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily
responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with
respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report
accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research
analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the
research analyst(s) in this report.
Important Disclosures
• Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for D.R. Horton,
Lennar, Ryland Group, Standard Pacific within the past 12 months.
• Client of the Firm: Beazer Homes is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to the
company non-securities-related services. D.R. Horton is or was in the past 12 months a client of JPM; during the past 12 months,
JPM provided to the company investment banking services, non-investment banking securities-related service and non-securities-
related services. Hovnanian Enterprises is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided to
the company investment banking services and non-securities-related services. KB Home is or was in the past 12 months a client of
JPM; during the past 12 months, JPM provided to the company non-securities-related services. Lennar is or was in the past 12
months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-investment
banking securities-related service and non-securities-related services. MDC Holdings is or was in the past 12 months a client of JPM;
during the past 12 months, JPM provided to the company investment banking services, non-investment banking securities-related
service and non-securities-related services. PulteGroup Inc. is or was in the past 12 months a client of JPM; during the past 12
months, JPM provided to the company investment banking services, non-investment banking securities-related service and non-
securities-related services. Ryland Group is or was in the past 12 months a client of JPM; during the past 12 months, JPM provided
to the company investment banking services and non-investment banking securities-related service. Standard Pacific is or was in the
past 12 months a client of JPM; during the past 12 months, JPM provided to the company investment banking services, non-
investment banking securities-related service and non-securities-related services. Toll Brothers is or was in the past 12 months a
client of JPM; during the past 12 months, JPM provided to the company investment banking services and non-investment banking
securities-related service.
• Investment Banking (past 12 months): J.P. Morgan received, in the past 12 months, compensation for investment banking services
from D.R. Horton, Hovnanian Enterprises, Lennar, MDC Holdings, PulteGroup Inc., Ryland Group, Standard Pacific, Toll Brothers.
• Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from D.R. Horton, Hovnanian Enterprises, KB Home, Lennar, MDC Holdings, PulteGroup Inc.,
Ryland Group, Standard Pacific, Toll Brothers.
• Non-Investment Banking Compensation: JPMS has received compensation in the past 12 months for products or services other
than investment banking from D.R. Horton, Lennar, MDC Holdings, PulteGroup Inc., Ryland Group, Standard Pacific, Toll
Brothers. An affiliate of JPMS has received compensation in the past 12 months for products or services other than investment
banking from Beazer Homes, D.R. Horton, Hovnanian Enterprises, KB Home, Lennar, MDC Holdings, PulteGroup Inc., Ryland
Group, Standard Pacific, Toll Brothers.
42
(1-212) 622-6696 14 December 2010
Beazer Homes (BZH) Price Chart
90
72 UW
54
Price($)
36
18
0
Oct Jul Apr Jan Oct Jul
06 07 08 09 09 10
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
This chart shows J.P. Morgan's continuing coverage of this stock; the current analyst may or may not have covered it
over the entire period.
J.P. Morgan ratings: OW = Overweight, N = Neutral, UW = Underweight.
D.R. Horton (DHI) Price Chart
Date Rating Share Price Price Target

N $14 ($) ($)
48 10-Oct-06 OW 24.76 -
N $15.5 N $14.5 13-Aug-07 N 17.44 -
08-Jan-09 N 7.57 5.50
36
OW N N $5.5 N $10 N $17.5 N $14.5 04-Aug-09 N 11.75 10.00
Price($) 18-Sep-09 N 13.25 15.50
24 30-Apr-10 N 14.24 17.50
09-Jul-10 N 10.25 14.50
03-Aug-10 N 10.60 14.00
12 12-Nov-10 N 11.51 14.50
0
06 07 08 09 09 10
43
(1-212) 622-6696 14 December 2010
Hovnanian Enterprises (HOV) Price Chart
60
N
45
Price($)
30
15
0
06 07 08 09 09 10
KB Home (KBH) Price Chart

95 ($) ($)
13-Nov-06 N 44.78 -
76 OW $17.5 08-Jan-09 N 14.22 10.00
18-Sep-09 OW 20.21 25.50
N N $10 OW $25.5 OW $21 25-Jun-10 OW 12.22 21.00
57
Price($) 09-Jul-10 OW 11.37 17.50
38
19
0
06 07 08 09 09 10
44
(1-212) 622-6696 14 December 2010
Lennar (LEN) Price Chart
100 Date Rating Share Price Price Target

($) ($)
08-Jan-09 OW 10.57 8.50
80
18-Sep-09 OW 16.54 25.50
09-Jul-10 OW 14.57 24.00
60 OW $8.5 OW $25.5 OW $24
Price($)
40
20
0
06 07 08 09 09 10
MDC Holdings (MDC) Price Chart
102 Date Rating Share Price Price Target

UW $31.5 ($) ($)
08-Jan-09 OW 33.51 27.00
85
UW $37.5 UW $34 03-Aug-09 OW 34.62 29.00
18-Sep-09 UW 37.67 37.50
68 OW $27 OW $29 UW $34.5
09-Jul-10 UW 28.26 34.50
Price($) 51 30-Jul-10 UW 29.12 34.00
29-Oct-10 UW 25.75 31.50
34
17
0
06 07 08 09 09 10
45
(1-212) 622-6696 14 December 2010
PulteGroup Inc. (PHM) Price Chart
65
($) ($)
52 08-Jan-09 N 12.05 8.50

N $14 N $12 03-Sep-09 N 11.92 10.00
18-Sep-09 N 12.71 14.00
39 N $8.5 N $10 N $15 N $9.5 05-May-10 N 12.59 15.00
Price($) 09-Jul-10 N 8.60 12.00
03-Nov-10 N 7.75 9.50
26
13
0
06 07 08 09 09 10
Ryland Group (RYL) Price Chart

N $22.5 ($) ($)
95
08-Jan-09 N 19.15 13.50
N $23.5 18-Sep-09 N 24.05 23.50
76
30-Apr-10 N 23.50 27.50
N $13.5 N $23.5 N $27.5 N $21 09-Jul-10 N 17.12 23.50
57 29-Jul-10 N 16.32 22.50
Price($)
29-Oct-10 N 14.98 21.00
38
19
0
06 07 08 09 09 10
46
(1-212) 622-6696 14 December 2010
Standard Pacific (SPF) Price Chart

($) ($)
48 10-Oct-06 OW 26.62 -
06-Oct-08 UW 5.06 -
36
OW UW
Price($)
24
12
0
06 07 08 09 09 10
Toll Brothers (TOL) Price Chart

($) ($)
55
10-Oct-06 N 30.29 -
N $12 OW $29 08-Jan-09 N 20.69 15.00
44
05-Mar-09 N 14.89 12.00
N N $15 N $17 OW $27OW $26 12-Aug-09 N 23.42 17.00
Price($) 33 18-Sep-09 OW 22.20 29.00
09-Jul-10 OW 16.92 27.00
22 03-Dec-10 OW 18.87 26.00
11
0
06 07 08 09 09 10
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:

J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] J.P. Morgan Cazenove’s UK Small/Mid-Cap dedicated research
analysts use the same rating categories; however, each stock’s expected total return is compared to the expected total return of the FTSE
All Share Index, not to those analysts’ coverage universe. A list of these analysts is available on request. The analyst or analyst’s team’s
coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying
analyst(s) coverage universe.
Coverage Universe: Michael Rehaut, CFA: Beacon Roofing Supply (BECN), Beazer Homes (BZH), D.R. Horton (DHI),
Fortune Brands (FO), Hovnanian Enterprises (HOV), KB Home (KBH), Lennar (LEN), MDC Holdings (MDC), Masco
47
(1-212) 622-6696 14 December 2010
Corp. (MAS), Meritage Homes (MTH), Mohawk Industries (MHK), NVR, Inc. (NVR), Owens Corning (OC), PGT, Inc.
(PGTI), PulteGroup Inc. (PHM), Ryland Group (RYL), Standard Pacific (SPF), Stanley Black & Decker (SWK), Toll
Brothers (TOL), USG Corporation (USG), Whirlpool (WHR)
J.P. Morgan Equity Research Ratings Distribution, as of September 30, 2010

Overweight Neutral Underweight
(buy) (hold) (sell)
J.P. Morgan Global Equity Research Coverage 46% 43% 12%
IB clients* 49% 45% 33%
JPMS Equity Research Coverage 43% 48% 8%
IB clients* 69% 60% 50%
*Percentage of investment banking clients in each rating category.
For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold
rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on
any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on
the front of this note or your J.P. Morgan representative.
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon
various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which
include revenues from, among other business units, Institutional Equities and Investment Banking.
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48
(1-212) 622-6696 14 December 2010
35-07079 and its registered address is at 8th Floor, Al-Faisaliyah Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi
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North America Equity Research

resurgence in land-related charges, margin compression, and book value erosion. By

See page 42 for analyst certification and important disclosures.

• As a result, we expect home prices to be flat to down only 3% in 2011, in contrast to

• Builders should demonstrate stronger fundamentals in 2011. We believe our outlook

• Valuation compelling; we highlight Overweight-rated LEN, KBH, NVR, and TOL.

Equity Ratings and Price Targets

Stock Performance: A Tale of Two Cities

Figure 1: Homebuilder Price Performance

BZH UW 42.1% (29.8%) (0.2%)

Universe Average 42.3% (28.7%) (0.6%)

S&P 500 7.8% 3.5% 11.6%

Demand: We Expect Moderate

Housing Demand Trends Have Largely Stabilized Over Last

…But Remain Highly Depressed, Well Below the 1991

2011 Demand Should Improve Moderately, Coincident With

. . . As We Note Credit Tightening Appears To Be At Its End

Existing Home Sales

Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10

Source: National Association of Realtors and U.S. Census

Table 3: Macroeconomic and Housing Forecasts

Total Housing Starts 593K 656K 566K 625-650K

Figure 3: Net Percentage of Domestic Respondents Tightening Standards for Residential

Source: Federal Reserve Board Senior Loan Officer Survey.

Supply: Elevated, But More Manageable

Nationally, Supply Down Solidly From Peak Levels

Regional Declines From Peak Are Even More Striking

Lastly, Shadow Inventory Should Continue to Be Liquidated

Figure 6: Sacramento Inventory Figure 7: San Francisco Inventory

Figure 8: Los Angeles Inventory Figure 9: San Diego Inventory

Figure 10: Riverside Inventory Figure 11: Orlando Inventory

Figure 12: Tampa Inventory Figure 13: Jacksonville Inventory

Figure 14: Phoenix Inventory Figure 15: Las Vegas Inventory

Source: Housing Tracker

Source: RealtyTrac. Source: RealtyTrac, J.P. Morgan estimates.

Pricing: Minimal Downside Exists, In Our

Material Pricing Correction Largely Over, Driving

Figure 20: NAR Affordability Index

Composite Index First-Time Buy er Index

Source: National Association of Realtors

Source: National Association of Realtors

Figure 23: Existing Home Median Pricing

Source: U.S. Census Bureau

Additionally, Cost to Own Versus Rent Also Near Record

Table 4: Cost of Ownership Spread Over Rents

Existing Home Regional Analysis

. . . Which Should Be Further Helped By Declining

to continue to rise due to a further decline in apartment vacancy rates. Specifically,

Figure 25: U.S. National Multi-Family Vacancy Rate

Source: REIS and U.S. Census Bureau.

Lastly, Can Rates and Total Specs Levels Help Builders’

Figure 28: Historical Industry Cancellation Rate

Figure 29: Speculative Inventory (Specs) Per Community

Builders Should Demonstrate Stronger

Order Growth Should Resume in 2Q11, and Drive Solid

Figure 30: Industry Order Growth 2001-2012E

Source: Company reports and J.P. Morgan estimates.

Moreover, Longer-Term, Share Gain Opportunity Appears

Top 5 Builders Top 10 Builders

Source: U.S. Census Bureau, Builder Magazine, J.P. Morgan estimates.

Figure 32: Homebuilder Balance Sheets and Liquidity Positions as of 3Q10

BZH $537 $1,212 $674 62.9% $0 $0 $0 $58 58 9.3x $0 $940