Yesterday I posted some comments from Credit Suisse re the remarks made by Robt. Toll (Toll Brothers NYSE:TOL), taking exception to the ‘rosier than reality' perspective of Mr. Toll.

Today, I have given some considerable thought to what we can learn from this situation. I hope you read my notes at the end.

---

This morning one of our community sent the following e-mail:

As you may know, in ironic counterpoint to the Credit Suisse analysis of Toll's earnings, Citigroup's analyst yesterday raised his price targets on a number of home builder stocks. He is not only arguing that there will be a swift and dramatic recovery from the self-proclaimed housing bottom, but that these stocks deserve to trade at much higher multiples. Indeed, he set a price target for many above their all-time highs.

I have read suggestions elsewhere that people suspect Citigroup has selfish motives for pumping up this sector -- either by underwriting new loans for struggling builders, or protecting their exposure to the home loan crisis. I don't know what their rationale truly is, but I am certain that it has nothing to do with providing an honest assessment of the situation. When markets are hyped like this, little guys get crushed.

---

First, here is the Citigroup research note:

SUMMARY:

* We are raising target prices for the homebuilding stocks across the board, even as we embed more conservative assumptions in our CY07 estimates.

* While many wait for an improvement in fundamental data such as prices or inventory to signal an "entry point" in the stocks, we urge investors to look back to prior cycles, when the group rallied far ahead of fundamentals.

* If (as we expect) order trends turn positive by 1Q07, then even if earnings estimates decline further, the time to buy the stocks is now.

* The rally thus far has already occurred sooner than many expected, and we believe the group is about to accelerate its ascent.

* New Target Prices: BZH $80; CTX $68; DHI $48; HOV $63; KBH $92; LEN $88; MDC $85; MTH $87; PHM $45; RYL $95; SPF $43; TOA $18; TOL $42

* On average, we look for return potentials of roughly 67% over the next 12 months, and retain our Buy ratings on all the builders we cover.

---

Recently, UBS hosted an annual CEO Investor Conference, with 27 companies participating and 300 investors in attendance. Homebuilder participants included: Beazer, Centex, D.R. Horton, Hovnanian, MDC Holdings, Meritage, Pulte, Ryland, Standard Pacific, Technical Olympic, Toll Brothers, and WCI Communities.

The UBS report is summed up as "Unearthing the Opportunity in a Challenging Environment". The group trades at an average 15x our 2007 EPS estimates versus its historical average of 8x and a range of 4-15x.

They say key takeaways are:

• management teams are realistic that vacant housing inventory needs to be absorbed before supply can increase, which will take another 12+ months;

• balance sheets are being scrubbed of unprofitable land positions, setting the land cost basis lower and improving financial liquidity;

• opportunities for scale economies and permanent cost-cutting are rife, but execution is key;

• M&A activity is expected, but not until land values stabilize.

---

Building & Building Products December 6 2006 report

The following is a transcript of the CEO panel at our investor conference held November 8 and 9.

Featured Speakers: Homebuilder CEO Panel

*Ara K. Hovnanian: President & CEO, Hovnanian Enterprises

*Ian McCarthy: President & CEO, Beazer Homes

*Robert I. Toll: Chairman & CEO, Toll Brothers

*Donald J. Tomnitz: President & CEO, D.R. Horton, Inc.

Introduction—Margaret Whelan: This is the fourth year in a row that we've hosted our CEO conference... For the first two years, business was very strong; last year we were starting to see cracks; and now we are facing a much tougher environment; The theme for our conference is "Unearthing the Opportunity in a Challenging Environment."

This correction has unfolded more sharply than most of us expected, and so I'd
like to start by having you identify specifically what your company is doing to
manage permanent costs out of the business, how your company is mitigating
risk and protecting the balance sheet. I find it interesting that as many of the
builders have started to report regional profit breakouts for the first time, the
Midwest and Central are barely breaking even, with a disproportionate
percentage of the profits being generated in the coastal markets.

Question: UBS expects home prices to fall by 10% in 2007. How do you
generate an acceptable operating margin and return in markets that do not
enjoy pricing power?

Ian McCarthy: We're looking at a scenario that is quite tough right now, and
could become very tough through 2007. I think we all hope, but don't fully
believe, that it will recover by 2008. Certainly, the economists are now saying
that by 2008, the uptick will come. We certainly hope that's the case. But, in the
meantime, we have to plan for the worst, and we have to really take action right
now to get us through another tough year, and eventually position our company
to take advantage of consolidation of the industry during that time.

Our number one goal today is to make sure that we have the strongest balance
sheet possible. We started taking action on this about nine months ago, and it
was partly in conjunction with our share buybacks. We committed to share
buybacks, and pulled back on some land deals; it actually turned out to be a very
sensible thing to do at the time. We raised capital in the senior market and the
subordinated market, and we renegotiated our bank facilities.

So, we're sitting on a very strong position today, probably a billion dollars of
liquidity, and we really feel that we're going to be cautious over the next period.
We took our headcount down in the last few months by 25%; we took our land
bank down in the last quarter by 15%—and we'll continue to act in that way as
we go through 2007 if we don't see any sign of an uptick.

Obviously, we would like to predict when that uptick is going to happen and
take advantage of it, but if we miss the first couple of quarters of an uptick,
that's not the end of the world for me. I'd rather be prudent and cautious over
this next—whatever it is—12- to 18-month period that we have to get through.
And I really believe when it does come back, when we get rid of the overhang in
inventory that we have at this time, this market's going to rebound very
strongly. But, in the meantime, there could be some tough times, and we need to
be prepared for that.

Question: Ara, specifically what are you doing to prepare for the tough
times?

Ara Hovnanian: Well, it's a never-ending list of what we're doing to position.
Clearly, one of the things is looking at our assets. We announced two days ago
some land charges, about half of which were related to walking away from land
options that we reevaluated, and, as I said yesterday in our presentation, at
today's net-net prices, at today's net-net-net absorptions, we felt that the further
investment was not worth it, and we'd rather keep our capital available for the
times that will probably be not far away, when new land will be worth it and we
can make good returns on our new investments.

We've been through these cycles plenty of times before, and I think it's smarter
to preserve the capital. As painful as it is to walk from options, we think it
absolutely makes sound financial sense. So, balance sheet management is
clearly one of the things we're looking at.

In ongoing communities, it's a delicate balance all the time between absorption
and margin, and there's no carte blanche answer. We look at every single
community, and even within the same geographical region, the answer is
different from community to community. How much inventory do you have?
What kind of competition is coming up? Is there a temporary glut on the
market? Are you better off sitting back and waiting? What's your backlog
position, because you don't want to make your backlog nervous. So, that's
something we just take on a case-by-case basis.

Everybody's talked about trimming headcounts. We're certainly doing the same.
Everybody's talked about going back to the subcontractors, asking them to
reduce their prices. We're certainly doing that.

One other thing we're doing in many locations where we own the land, and in
some cases even when it's optioned, is that we are reconsidering the site
planning and product in order to enhance profitability. We had one in the D.C.
area that was designed as a 12-story mid-rise building. As we re-ran the
numbers, we found it economical to lose some density and drop to a seven-story
building. That reduced the construction costs, because it went into a different
cost categorization. We looked at taking duplexes and separating them, maybe
losing density count, but, in this environment, with what was happening in the
market in that case, it made sense. So, we're looking at a variety of our different
locations and redesigning the product, either the house types or the site plans.
And that takes some time, especially if it involves a site plan, but, in this
environment, there is a little bit of time.

Question: Bob, do you want to address that one?

Robert Toll: Is there anything left to say? We're doing all of the above except
not buying a lot of stock back; actually, we're not buying any back right now.
Our balance sheet is in pretty good shape. We've got $1.4 million available on
the revolver. We've got about a half a billion in cash. Naturally, you're looking
at your costs all the time, in good times and in bad times. In slow times, you're
cutting back your overhead, and we've done that also.

We're aware that the cycle is different than it's ever been before. You've got
low interest rates. You've got low unemployment. You've got a stock market
setting records. You've got a good economy. It's a strange set of circumstances.
It's been heightened by the fact that the party in power got thrown out during
good economic times. That's unusual. Generally you have drawdown in the
party in power in an off-year election, but not to the extent that you see here.
People have lacked confidence, rightfully so, because of how we look in the
world and how we look at ourselves, and times are changing now.

Because the cycle is different, there's a possibility that things can come back
faster, as well as slower. The accepted intelligence is that ‘07 will suck and ‘08
will do okay, and I don't see any reason for that being any better than any other
prognostication you can invent. So, we're trying to get ourselves ready for good
times as well as for poor times. In the one-on-ones, we were questioned about
what will happen if the inventory starts to draw down, finally, the speculative
cancellation deals that have come back at us. And the answer is, well, as soon as
we see our inventory drawn down, we'll start to remove the incentives.

Now, there's a huge market out there that wants to buy. We know it because
when we run specials here, there, and yonder, all of a sudden hundreds of
people, hundreds and hundreds of people, show up, and they deposit. And then
slowly they drift away, and you don't take that many agreements. But there's a
tremendous number out there that are ready to go into the market. If incentives
start to go down—and right now there's no sign of that, the inventory is still
hanging over us, we all have high cancellation rates—but if the inventory starts
to go down even a little bit, you're going to see the incentives go down a little
bit, because a majority of the incentives are on the stuff that we're stuck with,
not the stuff to be built. We can sit with the land, but we sure don't like sitting
with the homes.

Question: So, once your inventory starts to go down, you expect your
cancellation rate to fall, too?

Robert Toll: Well, once your cancellation rate goes down and your inventory
goes down, then your incentives will be drawn in. The minute your incentives
are drawn in, people who visited the community and who are in the market—
and there's tons of them who are in the market—start fishing. "All right, Bob
and I have made a decision. We're pretty certain we'd like to go forward. You
still have the $50,000 incentive here on the Andover model." And the salesman
says, "Oh, no, that's $30,000." "Well, it was $50,000 last week." "Well, that
was last week and this is this week. You see, we sold the end of the inventory on
the A model. You're talking about one to be built. There, the incentives are only
$30,000." The minute that happens, and people go home and tell their friends
about it, you may see a fast turn.

So, to get back to the question, I think that you want to be careful that you're not
just getting ready to man the ramparts and guard the fort, but that you're getting
ready for the other side, which could be the good times. So, naturally, we're
watching costs; naturally, we're watching the balance sheet. We're not buying
back any stock, because I think we'll make more money with our cash
plundering those that have fared less well than us. And we're getting ready for
good as well as bad times.

Don Tomnitz: I'm glad to hear that you're not buying any stock back. At least
there's one other sorry guy out there!

Question: So, putting the question a little differently for you, Don, because I
think Horton has changed its strategy in the last couple of months. How
does builder strategy affect buyer sentiment, in that when builders are
continuing to discount, continuing to fire-sale the homes, aren't you really
hurting yourselves?

Don Tomnitz: There's no question. Clearly, we are. We're shooting
ourselves—it's sort of a death spiral. Because as we continue to increase the
incentives and the discounts and so forth that we're offering, then obviously we
create more of a concern on the buyer over here on the side, and that's why I say
as we go through ‘07, we've all got to deal with our inventory. Every builder's
got different inventory levels, but the industry in general has too much
inventory, and we're all going to deal with our inventory in a different way. We
believe the best way to deal with the inventory is to sell it and get back the cash
into the corporate till and redeploy that as we see fit.

But during ‘07, and certainly the first two quarters of ‘07, we're all going to be
dealing with our inventory on a division, subdivision, and market-by-market
basis differently based upon our own inventory levels in that particular market.
And we're going to create more doubt in the buyer's mind during the course of
‘07. And toward the end of ‘07, I think, as the inventory in the industry comes
down, then we'll find ourselves in a position where we are able to achieve some
price stabilization, and then I am absolutely convinced that there's a pool of
pent-up demand being created over here, where the buyer is uncertain whether
they're going to buy today, but they're going to buy.

Question: Do you agree that pent-up demand is building, Ara?

Ara Hovnanian: Yes, I think there is clearly a lot more traffic than buyers in
the market. I think there is a bad psychology out in the marketplace today, and
what Bob was describing in terms of pent-up demand, which is something we all
hope will happen, is reversed today, as we all know. They go to our office and
there is $10,000 more in concessions than the prior month. So, they see the trend
and they're saying, "Well, if I wait another month or two, maybe it will get
better yet." And you have people waiting on the sidelines. But I agree, there's a
lot of interest out there, and once that psychology does change—and it will change
in the scenario that Bob just described—and the incentives start going
the other way, I think the turn may be more rapid than we might expect.

Ian McCarthy: I think the other point that we talked about this morning in our
presentation is that, with very few exceptions, most of the public builders are
really cutting back on inventory now, managing it very carefully. And we are
being prudent, as a group, in terms of how we run the business. But the 75% of
the business that's still in the hands of private builders, it's in their interest to
keep drawing down their bank lines, and to keep doing that, they have to keep
building. So, I think that's causing more of a problem at this time.

How long that runs on for, I'm not sure, because every day those private
builders have to put their net worth on the line, and every day those bankers
look at the returns they're getting and the risk profile they have with those
private builders. I think we'll see a lot more consolidation next year. But
currently, I think they're still pushing inventory into the market, because they
have to pay their wages, they have to have their draws. So, as someone pointed
out to me, they are actually causing an inventory problem. They're not working
it down at this point. But I don't see it going on for very long.

Ara Hovnanian: Well, Ian, one of the big questions I guess we have is, there
are obviously two kinds of inventory. One is a house. And, as we know, we're
all interested in moving that. And those of us that weren't big spec builders,
we've inherited accidental specs from a customer that canceled at the last
minute, after a house was built. We're all going to move the standing inventory
down rapidly, as much as we can.

The wild card, and the hard question, is, what about the land? And where are
public builders, as well, standing with the land? And it's hard to sell land as just
land, developed or undeveloped. So, many are choosing a tactic, private and
public, of popping a house on that land, because you can sell it when it has a
nice house on it more easily than you can just sell raw land. So, you know,
there's a lot more of that kind of inventory, and it's not clear how that's going to
play out.

Bob Toll: But are you suggesting that public builders are building specs to
move land?

Ara Hovnanian: Not uniformly, but, yeah, absolutely.

Margaret Whelan: Some definitely are.

Ara Hovnanian: I would say that. I don't think Toll is, but I think some
builders are.

Bob Toll: Toll is certainly not.

Margaret Whelan: Bob, is that a surprise to you?

Ian McCarthy: Nor are we. We clearly have said we're going to mothball
communities. We'll actually close the communities down for sale. If we've got
an investment in that community that we're not getting the return on today or in
2007, we'll keep it.

Bob Toll: Even once he puts a road in?

Ian McCarthy: Yes, we'll keep it.

Bob Toll: Once you put the improvements in, you'll still mothball?

Ian McCarthy: To a degree, we will. Yeah.

Question: So, I guess the question is, then, if you really believe that it's a
short-term issue and the inventory is going to be cleared out, and you really
believe you're going to get a better return on capital in the next couple of
years from dirt that you're buying in ‘07 than you will in ROE on your
stock today, why aren't you more engaged in getting involved with these
private builders, the land bankers, the joint venture partners, whoever it is
who's controlling the paper?

Don Tomnitz: First of all, we don't know the value of the paper today. As I've
mentioned in our presentation, we know what the costs are, relative to our gross
margins, but not the value of the dirt.

But as ‘07 continues on, and land sellers begin to lower their prices to us, then I
think, if you buy a piece of land today, you'd better have a good, built-in buffer
on your gross margin, because there's a probability over the course of the next
six months that you could buy that piece of land for less.

Bob Toll: We are getting involved. I mean, we've called all the banks and told
them here we are, and we're available. But it's too early to expect the builder-
developer or loan officer to cut their respective throats because we want to buy
that ground at a price that makes sense today. The reason they're in trouble—the
builder-developer and the banker, the bank loan officer, not the credit workout
side of the bank—is that they mis-figured, and they paid too much for the land,
or they over-improved the land, or they built too expensive a home on the land.
But for one reason or another, it doesn't work. And it doesn't work even in a
breakeven scenario for them. Otherwise, they would be breaking even, and there
wouldn't be a problem.

So, automatically, we know you've got to buy it underwater for less than
they've put into it. And that requires things to shift from the builder-developer
to the bankruptcy court, and from the loan officer to the workout department.
Those shifts haven't taken place yet.

Question: As private builders are trying to survive, and improve their
liquidity, are they going to build more spec homes that are going to prolong
the downturn?

Bob Toll: No. Once it's moved to the bankruptcy workout department, he's not
making more draws and he's not building more houses—but they're not there
yet, as it's still too early.

Don Tomnitz: I do think that many banks across the country are cutting back on
the new loans that they're making to small and medium-size builders, and
they're just dealing with what they already have on the books.

Ara Hovnanian: It's early because everybody's not ready to take that pain, the
sellers that have the land. And from the buyer's perspective, you know, I've said
this many times, we're anxious for the market to bounce along the bottom. We
don't mind the bottom. What's difficult is the trip to get there. Because if you go
out and make a deal today, the problem is—and you do it based on house price
of X and an absorption of Y—the problem is, two months from now the house
price might be .9X and the absorption may be .8Y, and all of a sudden that deal
didn't work, because it's still moving down. I hope we're getting near the end of
that. But certainly that didn't change from the third quarter to the fourth quarter
for us.

Margaret Whelan: We're not getting near the end of it if the privates are
going to go into the spring building more specs. And, you know, the one
thing about this conference versus the last five years that's refreshing for
me is that I have not heard one of you, thankfully, complain about your
multiple being so low. The only way the group will be revalued to a higher
level is you prove to be good stewards of capital at the bottom.

Don Tomnitz: We are unhappy with our multiple.

Ara Hovnanian: Everybody's PE went up. It's mostly because the EPS went
down.

Margaret Whelan: Exactly. But the way you would get a better multiple
through this cycle is by having a better return on capital, and I do not
believe you're going to get the opportunities you saw in the early ‘90s from
the RTCs, so maybe now it's time to start engaging. One of the ways I think
about it is that instead of opening new communities and putting supply into
the market, you could be taking supply out by buying these companies
before they get very distressed next year.

Don Tomnitz: But we are taking inventory out of the market, because I don't
think there's a public builder in our industry that's not having a lower number of
starts this quarter versus last quarter. So, we are putting less supply and
inventory into the market.

Question: But you're still opening communities?

Bob Toll: We're still opening new communities.

Don Tomnitz: Well, sure. If we've got streets, we're going to move through the
subdivision and build our homes.

Bob Toll: If you haven't got streets, Margaret's asking if you're putting in the
streets. If you haven't got the streets, but you've got the land—it's through the
approval process—are you putting in the streets?

Don Tomnitz: Yes and no.

Bob Toll: Yes and no is the right answer.

Don Tomnitz: Because you may have San Diego, where you have a five-year
inventory of lots and you don't need it, or you may have Ventura County, where
you only have a one-year supply of lots, and you need to develop those lots. So,
yes, we are. The homebuilding business is not the same—I know you may think
that—in all 50 states.

Bob Toll: Did you suggest that we altruistically go buy busted builders to stop
inventory being built? Did you say that?

Margaret Whelan: Yes, I think if you should stop putting new supply into
the market and take their supply out, Bob, it's a concept, right? You're
going to get the market share. We've seen it happen in other cycles. And
you're all saying, "Well, we don't know the timing of the recovery, so why
not take some market share while we're waiting?"

Bob Toll: I'll get a share of my shareholders' boots.

Question: You're there already, right? And the way to get you out of this is
by driving better returns. That's how I would think about it.

Ara Hovnanian: But I would disagree with you, because we're not there
already. We're just at 12 months, at the most, into a slowing housing cycle.

Don Tomnitz: Right. That's correct.

Bob Toll: Watch what you wish for.

Margaret Whelan: Which brings me to the next point. We're sitting here in
front of all your big shareholders, and you're saying, "Guys, come back in
12 months. Hopefully, we'll be at a turning point." The investors are going
to sell your stock, so why aren't you using the capital to buy in the shares
here if it's so depressed? You have more liquidity and dry powder now than
ever before.

Bob Toll: Because, as we just stated, when the opportunity presents itself is
when it's moved from loan officer to credit workout officer. And when it's
moved to bankruptcy court, we want to have the powder. That's all we want to
do right now.

Margaret Whelan: You have the dry powder. You have more liquidity now
than ever before. The land options are working, as you're able to
renegotiate or walk away.

Don Tomnitz: I will argue with you all day long. You don't know that you have
too much powder, especially when you're in the forefront of a downturn in the
cycle. I've seen that too many times. How much is enough powder? We've
never found enough powder.

Ara Hovnanian: In a consolidating industry, you can choose to use your capital
to buy back stock—which, by definition, unless you're willing to leverage more,
is going to cause you to either shrink or certainly grow less rapidly—or you can
save your capital, as Bob is suggesting, to take advantage of opportunities and
grow more. And, in our case, first of all, my family still owns just under 50%, so
I'm not sure that it would make a lot of sense for us to be buying back a lot more
shares and concentrate our ownership even more. But we want to save our
capital for the opportunities that come every time in these cycles. And the
opportunities are not there yet; we have to be patient at this time. But they will
be there. We've been here time and time again.

Bob Toll: When we went through it the last time, there is not one of us that
doesn't wish that we had bought more dirt. The banks disgorged the properties;
none of us wished that we hadn't bought more.

Don Tomnitz: Absolutely.

Question: We've had a couple of people, including some of you on the panel,
say in the last two days that land prices are not falling that much. So, if
land prices are not falling that much, and we have lots of nontraditional
buyers who want to come in and buy land and compete with you, the land
prices are not going to go down as much as they did the last time, are they?

Bob Toll: That's correct, land prices have not fallen much yet. But I've yet to
see nontraditional buyers trying to buy land. I haven't run into one, but if you'll
give me his name and number afterwards, instead of taking some markdowns,
we have some interesting bargains.

Ara Hovnanian: Margaret, I think land prices are coming down. They're just a
lot stickier than house prices and they lag six months behind. And so housing
prices are going down and land prices are adjusting. But not quite fast enough to
make economic sense. Once it hits the bottom and rolls along, then land prices
will eventually get there and it will make sense. But we're not quite there.

Question: It seems to me that one of the reasons land prices are sticky is
because the private builders often have one- or two-year paper to secure
that dirt. So, we're going to get a flood of land next year. How much do you
think land prices will be down by next year, and how will that impact your
book value or your balance sheet?

Ian McCarthy: I'd say it's very hard for us to tell at this time where that is. I
think forecasting where there may be impairments is impossible to do. If you
think there may be an impairment, you need to take it today. So, I don't think we
are forecasting that there will be considerable reduction in land prices, but there
may be. And I think that it comes down to who holds the land. If it's the farmer
who holds the land, does he need to sell today? Does he need to sell next year?
Or can he wait for better times?

I think that we need to look at who that seller is. If it's the workout department
of the bank, they will sell it, and I agree with Bob. At some point there is going
to be some distressed land there that's going to be an opportunity for us to buy.
Does that then impact other landholders alongside? Potentially, but it's really
hard for us to say at this time, obviously, as it varies by market.

Ara Hovnanian: Land values and land prices are two different things. Land
values have come down. That's unequivocal, I think. The sellers are reluctant to
recognize the land value. So, prices are stickier.

Bob Toll: Most cases, they don't have to recognize the impairment in value.
They're going to be as patient as we are—those who are in shape to be patient.

Question: But your companies are not in shape to be patient. If your net
income next year is down 50% from this year, when you start taking big
impairments, you're going to be losing money.

Bob Toll: I don't see it.

Ara Hovnanian: Neither do I. This year we'll make some $200 million for the
year. The only loss, obviously, is because we took significant impairments in
land charges this quarter. From an operating basis, we're still solidly profitable
Question: And you think you'll be profitable next year, fully loaded for land
charges?

Ara Hovnanian: Absolutely, pre any impairments. I think we went through it
very carefully, as much as we can in a changing marketplace. We looked at
every asset. And we feel pretty comfortable that we've walked from the options
that deserved to be walked from, and we've brought down the land values—by
GAAP standards and assumptions we use, which we think are reasonable ones,
we think we've brought down those values. Now, that's as of a few weeks ago.
If the land market or home market continues to deteriorate, then we'll have to
look at it again.

And, by the way, I heard some scuttlebutt that some were saying we were overly
aggressive in our land impairment. And I can only repeat the assumptions we
used, because once you set the assumptions, it's a mathematical calculation.
And the assumptions we used in our land impairment, which is about half of our
land charges, started with net-net-net prices—after all the incentives, including
taking specs that everybody's trying to move, and accidental specs. If you take
that as your pricing and assume that doesn't change, and also assume that you
don't get further cost reductions, and you take something that's very close to
today's recent absorption—not 12 months' absorption for a community, because
it was very different in the beginning of ‘06 than it is right now—and you do the
calculation, in our case, there was not a choice. We had lands that were
impaired. So, people can call that aggressive. I call it realistic.

Now, maybe others have different properties they bought at different times.
And, by the way, the majority of it, really, coincides to properties where the
contract was signed and/or closed in ‘05. I mean, that was the challenging year
in hindsight, and I wish I had gone on a long vacation in ‘05. But we didn't.
We've been in the market. And you have to be in the market. But there are times
when the market hiccups, and you find yourself with some land at a cost basis
that you wish wasn't there, and we just have to deal with it.

Question: So, you will be profitable next year?

Ara Hovnanian: We certainly plan to be. Absolutely. We haven't released our
projection for ‘07, as some have done. We haven't released our fourth quarter
number. We just gave a preannouncement, as we ended in October. But at this
point, I would certainly expect that to be the case.

Question: When you see the changes that have unfolded in the last 12
months relative to the last three or four years that we had this big run-up, it
seems that the controls that are in place could've been better. Then we
wouldn't have had so many speculators, and so much artificial pricing
power. How do you think about the opportunity now to really put the
controls into your business?

Ian McCarthy: I don't think the controls were lacking on our part. I think that
there was an overshoot of the market, that people came in as investors. Again,
I'll speak for myself, although I think I speak for most of the other public
builders. We put contracts in place to try and weed the investors out. We tried to
restrict in every way we could and stop investors coming into our communities,
because we felt that if at any point they wanted to turn those over and flip them
back out, that was going to be really bad for our communities. So, we tried
really hard to stop those, even looking at the type of mortgage they were taking,
any kind of mortgages they had outstanding.

So, I don't think it's fair to say that we didn't have controls in place. Those
investors did get into our communities. We didn't keep them all out. But across
the whole market, they were just buying because the returns were so strong; the
return in the stock market for the equivalent amount of equity outlay, you
couldn't leverage it to the same extent. You couldn't even get the absolute
return in the stock market. So, why wouldn't investors get in, buy these units,
whether they were condos or single-family units, flip them back out again, make
a very quick return, almost no equity? And that just pushed the market beyond.
But I don't think it's fair to say in any way that we didn't have controls in place.
And I think we continue to have the right controls in place.

Bob Toll: Ian, don't fault yourself. We all went through the exact same
scenario. We all had the controls in place. We had people at the end signing
four-page documents, "I am not an investor, I am not an investor, I am not an
investor," and initialing it all over the place—and he turned out to be an
investor, of course.

But even if we had been 100% successful in Happy Acres 106 and got no
investors into that community, they would've gone into my dear competitor's
community. Having gone into the competitor's community, the competitor's
price would have risen in line with the demand that that competitor felt. And
there were specific instances we can think of even amongst ourselves as public
companies. For instance, one comes to mind in Vegas that happened about two
years ago.

What happens is, the price gets driven up for your dear competitor, because he
feels a demand from the investor that he's not screening well so he doesn't
realize the buyer is an investor. And you do a review of your community, and
your staff sits around and says, "Why are we selling them for $596,000 when
Bobo is selling them for $615,000 and we've got a better product? We're
leaving money on the table." So you raise the price, and then we go out to the
market, we're all still selling. Then one day we wake up and find out that we're
all selling to the same guy, who's buying a house from each one of us, and that's
what happened in this market.

Ara Hovnanian. And, to make it worse, then we went to buy the next land
parcel, because we sold it out, and we now know it's $615,000, we're all
competing against one another, and we know we can sell it for $615,000.

Bob Toll: Absolutely right. And then we found out, of course, now, in ‘06, well,
the investors who would pay $615,000 are gone, and the $615,000 price is now
down to $495,000. And it's created a challenge.

Margaret Whelan: But, see, that's more what I was thinking about in
controls, because everyone's told me for the last couple of years that it was
very limited, and now Don Tomnitz said it's closer to 20-25% versus the
10% he thought a year ago. Okay, fine.

Bob Toll: Who said that?

Don Tomnitz: I did. I said that.

Margaret Whelan: But my point is more that you are the executives who are
signing off the checks to buy dirt at much more elevated pricing, as Ara
said, much higher absorption rates than normal. And now you're having to
walk away from that.

Bob Toll: You know, Margaret, if only my darn crystal ball would work better.
The darn thing breaks down all the time.

Margaret Whelan: But it's not a crystal ball. You've all been through many
cycles and you bought too much land at the top.

Ara Hovnanian: I know, and can I tell you—in fact, in our presentation we put
up covers of Fortune, of Barron, and all of them predicted this crash and
adjustment and correction, whatever you want to call it, and the years on the
covers have been ‘00, ‘99, ‘01. And, you know, if you predict doomsday, one
day the market will slow down. And the fact is, had we listened back in ‘00 . . .

Bob Toll: Clock is right twice a day.

Ara Hovnanian: No, we would've missed a billion dollars in pretax. So, all you
can do is make sure you're properly capitalized and make sure as you sell
inventory you're replenishing. Monday morning, do I wish we were a lot more
conservative in ‘05? Yes. But that's Monday morning.

Bob Toll: Margaret, when we go out to comp before we buy the ground, we
have in our model not only the current price that the developer is selling, but
also the price when the bulk of the sales took place, so that we're not fooling
ourselves. I mean, obviously, the developer that we're comping against, the
builder-developer, now has his price. It's $699,000. And he's sold five of those.
But he sold 15 or 20 of them at a price reduced by, let us suggest, $100,000.
Well, we're using, in our models, that $100,000 reduced price as comp threshold
for what we can pay for the land. Still, it happened to be wrong.

But, as Ara said, if we had followed the advice of the media in ‘99 and 2000 and
2001, we would've lost the opportunity to gain, which we did, billions of
dollars. You look at where these companies were, just the four that are on this
panel, 10 years ago. Take a look at how much book there was and what we were
worth then. Now, we have accumulated billions of dollars of capital and book,
and so we're very different companies. And I think we can wait through the
times that we're in now, as opposed to ‘87, '88, and ‘89, when it was perilous
for us, and, in fact, some of the majors didn't make it through. I don't think
anybody thinks that any of the majors are not going to make it through this one.

Ian McCarthy: And a lot of that had to do with the capital structure at the time.

Bob Toll: Right.

Ian McCarthy: With long-term commitments and short-term debt. And, today,
every one of us has been prudent in terms of how we structure our balance sheet.

Bob Toll: Well, you can be, because you've got the book. You've got the
capital behind you.

Don Tomnitz: The other thing is, the money that we put to shareholders' equity
over the last three to five years is going to be far above any impairments that
anyone is going to take in this industry. So, we've got the money, as Bob says.
Now, we may have some adjustments to what we've already put in the till, but
they're going to be very minute relative to what we've put in.

Question: Can you comment on how the incentive structure at the division
level or at the community level has changed maybe over the last year or so
as things have slowed. Also, how has the compensation structure at the top
maybe changed? Obviously, you've benefited from the good times. How will
it be during slower times?

Don Tomnitz: We change our division presidents' bonus plan about every two
years. We changed it this year, to focus on three primary things: gross margin,
SG&A, and ROI. And we deleted some items that we compensated for last year
because we wanted the focus of those three items on our business this year.

Bob Toll: We've always paid on a discretionary basis. We were in the process
of moving to an incentive-based pay program, and as we saw the market go
down, we didn't think that would be fair, and so we pulled it, said we'll be back
when we reach more normalized levels, but they will stay purely discretionary-
based. With respect to the CEO pay, I would expect that it will go down. If
we're paid off of what we did in ‘05, currently, it may look outsized compared to what we're doing now, since 2005 was a banner year. But based on this year's
results, our compensation will be down.

Ara Hovnanian: In our case, we haven't really changed the structure out in the
divisions, so as their profits are dropping, their bonuses are dropping. It's one of
the great automatic overhead adjustments that changes rapidly. Regarding CEO
pay, in our case, it's a percentage of pretax after land charges, so that hits a lot,
and that percentage shrinks quite a bit as ROE shrinks. CEO pay goes down
more rapidly than pretax profit shrinks. So, there'll be good adjustments there.
Bob gave me a quarter. I'll save it.

Ian McCarthy: I was going to see if I can earn that quarter now. For us, it's
very much formula-based. We have what we call value-created return on
investment, and it's based on absolute value created for absolute return and
incremental improvement. We've just closed out September, our fiscal 2006,
with record revenues, closings, and EPS, so incentive payments for ‘06 are
reasonably strong. The incremental portion wasn't as high as in ‘05, so CEO pay
has gone down for ‘06 to ‘05 even though we hit record results, because we
didn't have the incremental improvement there.

Looking at next year, incremental goes both ways. I made the point this morning
that I just announced our 50th quarterly results since we went public in 1994,
and it was the first time we'd ever had to forecast down earnings going into the
next period. Prior to that, we've had 49 quarters of always forecasting up. So,
we've had a good run there. But we recognize that 2007's going to be tougher.
Incremental compensation is definitely going to go down. Even if we make
absolute value created, incremental will go down, and it goes down at a fast rate.

To make sure that we incentivize managers within the company to take actions
that we want them to take in this period, we authorized a discretionary plan at
the will of the compensation committee but driven by certain factors, which
include reducing SG&A. So, we absolutely do not want our managers to think,
"this year's blown, I'm not going to get paid, I know the formula's not going to
work." We want them focused on revenue levels, EBIT levels, reduction in
SG&A, and, if we hit those targets, the compensation committee will look at
some discretionary payments.

Question: It seems to me that you're doing to the land sellers what the
customers are doing to you. You're waiting on the sidelines. You're waiting
for the lower prices. You're maybe trying to negotiate next year's prices
today, expecting them to be lower, and of course they're not willing to sell
yet at that price. And that's what your buyers are trying to do to you. Are
you a much more sophisticated set of buyers than your customers are—are
you guys also building up a pent-up demand for lots? What's the trigger
going to be to get that pent-up demand chasing prices higher again?

Don Tomnitz: It's going to get back to a market-by-market situation, because
we each have different lot inventories and land inventories in each market. So,
as a result, in a number of our markets today, we have an adequate supply of
land and lots, and we don't have to be purchasing that land today. As our sales
and our closings increase over the course of time, then our year supply of land
will go down, so then we'll be looking at each market and ascertaining whether
we need to supplement that particular operation with additional lots.

Bob Toll: Pretty much all of us get sales reports by Monday afternoon, if not by
Sunday night, of what's happening out there. And when we see two or three of
those things pop through in a row that shows us on the upswing, we'll be
loosening our threshold, lowering our thresholds, for the land purchase. It's just
a natural reaction.

Question: There's been a lot of discussion about the possibility of buying
smaller private builders as they go into some distress over the next 6 to 18
months. There was also some discussion in the last six months or so about
private equity interest in the big builders. Do you think that there will be
big, public-to-public mergers, or do you think that some private equity
takes out one of the big public builders? Do you think that happens over the
next 12 or 18 months?

Bob Toll: The answer is maybe. I don't think you're going to see public buying
private. We did that when it was the easiest way to get expansion cooking—
translation, to get the land. Now, we don't have to buy the builder to get the
land. As a matter of fact, we don't want to buy the builder to get the land. If we
did that, at best—if we give no credit to the builder organization—we get land
that was overpriced. We want to get that land at less than the builder's cost. So,
again, we go back to some time ago—we'll be looking to buy it from the bank,
not from the builder.

Ara Hovnanian: My answer would be a little different than Bob's, but we've
had a different strategy. We have been acquisitive historically with the private
builders. And, in our case, if it's in a new geography, we would still be
interested in buying private builders. For us, and our approach, we've found that
to be a better way to enter a new marketplace. Having said that, for the same
reason we find it difficult right now to make the right evaluations on a piece of
land, as prices and absorptions haven't yet stabilized, we find the same
challenge when we evaluate a private homebuilder.

So, we think there will be interesting opportunities, and we think it does play to
one of our core strengths. The good news is, there are still many markets for us
that we haven't entered, so we think we can still take advantage of those
opportunities, but it's too early at this moment. Also, we haven't historically
bought fixer-uppers. So, when we talk about distressed homebuilders, there are
distressed and then there are distressed—distressed where the wheels start
falling off—and that's less likely, in our case. Again, we're just not a fixer-upper buyer. We like to buy good, sound companies. In our case, we like land,
but we really focus on the management team. And if we've got a good solid
team there, at the right price, when the market stabilizes, we're pretty confident
we'll be buyers again.

Ian McCarthy: So, I'll say that I agree with that, to an extent, and I think that if
there's a new opportunity that we want to get into and there's a private builder,
let's say, that we can get in there, and it adds value to us, then I think people will
still look at those. I think others will, but very prudently. I think more of your
question was really about the public-to-public and the private equity.

The private equity guys have been around for a very long time, have really not
made much of an entry into the market other than in joint venture, as Ara did
with Blackstone. And I actually think that's quite an interesting prospect. I think
that maybe, rather than trying to buy us out at today's price, which none of us
will be happy about, we look at ventures together with them, and that's possibly
an opportunity, maybe a way for them to get in with slightly less risk, and
maybe you can comment on it.

Ara Hovnanian: Well, no, I think there's a lot of interest in that type of
transaction, large privates, medium privates, et cetera. As Ian said, I don't think
there is a lot of motivation for the large publics or medium-size publics to sell at
today's prices. It may make economic sense at today's prices, but I don't think
there's a lot of interest at today's prices. Now, if one was willing to make a
substantial portion of the purchase stock, so perhaps the shareholders could still
share in the upside, perhaps that may have some interest. But at least our
company isn't willing to do that at today's prices. Now, if there was an
extraordinary opportunity, we'd consider that, but it would have to really be an
extraordinary opportunity.

Question: A common theme across all the presentations here has been that
in the midst of this downturn, the economy's remained stable, when, in fact,
historically that's never been the case. It seems like the assumption for this
‘08 recovery is that the economy will remain stable. Yet, so much
employment is tied to the construction industry. How can you reconcile
that, and how can you expect this assumption of a stable economy when it's
never been that way before and there's so much uncertainty out there as to
whether that's going to be the case or not?

Don Tomnitz: We do not expect the economy in ‘08 to be as good as it is today.
I think that would be a false assumption on our part, and I agree with you.
Rarely, when you're in a downturn, do you find that something's going to help
you out of it like a better economy or equally as good economy as today.

So, we're planning for a worse economy in ‘08, but we're optimistic relative to
what we see in the marketplace, that it won't be that. Yet, at the same time, as
we already identified, we have got the next level of cuts identified based upon whatever the current sales are going to be for about the next four or five months,
and we're going to have to adjust our business based upon what we're selling. It
gets back to "sales solve all problems," or solves a lot of problems. We're going
to design our business and adjust our business based upon what the sales are,
what the current demand is.

Ian McCarthy: I think housing today is down in a fairly strong economy.
Housing was up in a very weak economy the last few years and you've got to
look at that. I think you need to take into account that by ‘08, it's an election
year, and judging by what happened this week, I think that there'll be money
pumped into the economy. There's going to be a very big drive, and
traditionally, there's money pumped into the economy in election years like '08.

You know, I think it's a risk for us. There's no question it's a risk as we go
through ‘07 and go into ‘08 that if the economy does go down, it will impact us,
and it will probably push back the uptick in housing. But I think that's
something that is not fully within our control. Housing's a big part of the
economy, but it's not the only part of the economy. There are other components
of the economy that we've got to hope are going to remain drivers while we're
in this somewhat of a downturn.

Ara Hovnanian: I don't think many of us are trying to make EPS projections
for ‘08. As I said earlier, what we are trying to do is make our decisions based
on what we're seeing in the market. And, as I mentioned, at this point, we are
still seeing the market continue to correct and adjust, so we're not being very
bullish investors in new properties or companies. It doesn't have to improve for
us to make good decisions, we just would like to see it stabilize, for absorptions
to stay steady and pricing to stay steady, and we could do very well in that kind
of environment.

Once land comes down—and it lags—but once land comes down, and to make
sense at current pricing, then we can do well. And then when you get the uptick,
we could do extraordinarily well. The highly regulated markets are where all of
the action has been. We build in Texas. We build in North Carolina. Those are
wonderful markets. We do very well there. We did well there five years ago.
We're doing well there today. But they're never the kind of markets that are
going to make significant dollars. They make good, steady dollars, good, solid
returns. But the locations that really put your equity on the map are the highly
regulated markets, because, by definition, they control supply, or supply is
controlled, effectively, by the highly regulated market.

As those markets start to improve, and demand increases, and supply is limited,
it's economics 101—its what we've seen for the last five years, pricing goes up
and margins become phenomenal. You pay the price during these kinds of
corrections, but in the long term we still think it's a great environment to be in.
If we buy for pricing that's stable, we should do well and earn very respectable
returns on equity without a lot of leverage. And then if you get improvement
in the economy or in homebuilding, particularly in those restrictive markets, then
margins go really high.

Question: Ian, you said in your presentation earlier that, being European,
you appreciated having the opportunity to run a U.S. housing business,
because we really do have fundamental population growth here. Do any of
you think about the opportunity to invest cash in other parts of the world,
given that the U.S. is depressed now for a couple of years?

Ian McCarthy: What I said this morning was based on the volume here; look at
300 million people here now in October, and look at the next 35, 40 years, we'll
be up to 400 million. That's what drives our industry. That is absolutely going to
be the driver. We've got positive birth rate here. We've got positive
immigration. If you look at Europe, it hasn't got that. We looked at going back
into Europe seven or eight years ago and looked at the opportunities and didn't
feel that they were, at that time, really opportunities that we could match
compared to the opportunities we had here.

But I think at some point in the future, if these companies continue to grow as
they have done in the last 10 years, when we look at the next decade, and we say
what kind of market share do we take in the U.S., should we look to other
markets, I think there may be some opportunities. It's a case, though, of what do
you really bring to the table in those other markets? Is it capital? Is there any
skill set there? So, I would certainly say today that we don't have any plans
outside the U.S., but in the next five-plus years, there may be some
opportunities, and we may want to take advantage of them.

Bob Toll: Yeah, we're looking now. We were looking before the market turned
south here, and now consider that we're better off saving our powder for here
than we are for there. But we are still continuing to investigate there. I haven't
said where "there" is—but specifically Eastern European markets that have
relatively recently been let go that have had lousy economies through
mismanagement.

Question: Let go into capitalism from the Soviet Union?

Bob Toll: Exactly. And they've got tremendous population growth. It's not
going the other way. They're making people. And they're making good
economies. You look at their housing, it's off the mark. So, we have skill sets
that we can deliver. We have capital we can deliver. Right now, we're keeping
our eye on the ball at home, because these are treacherous times, and we're
keeping powder dry. But, I think there's good opportunity there.

There's also opportunity for our brand in very brand-conscious territories or
countries. China, remarkably brand conscious. I was just there, took a couple of
days with some developers and builders to investigate Shanghai, and there's opportunity.
Now, you have to be very careful, because that's not like Eastern Europe. It's capitalism.

Ara Hovnanian: We're in somewhat the same boat. I mean, we've been
investigating, not overly anxious to pull the trigger too rapidly. Given the
change in domestic circumstances, I think we're focusing more at home, but still
looking at opportunities in a variety of countries, and, at this point, just getting
to know them. I mean, there are a couple of reasons why it would make sense,
even though, obviously, this country continues to have great population growth.

One is, although Texas and the Carolinas are having a pretty good day, most of
the states in the U.S. move in unison, and there are some countries—Shanghai is
almost a country, China, India, Russia—that are having pretty solid housing
markets right now. So, it would be reasonable diversity in some of those
markets. And even England, which was fairly coincident in terms of market
cycles with the U.S., I think bottomed a little earlier. It was on the road to
recovery earlier. And it creates a little bit of a hedge. So, to some extent, that
can provide a nice domestic balance. Number two, as we're all getting larger,
globalization makes sense, as it does with any industry. But we're all, even the
largest, still relatively small or just on the edge in terms of normal globalization
standards.

The third reason is really a longer-term one, and that's that our market is great,
but not projected to grow dramatically. Housing starts, 1.8 million to 1.2 million
over the next 30 years. And that's fabulous. That's a lot of houses. But it's not

1.8 million for the next five years, 2 million the next five, 2.5 million the next
five, 3 million the next five. Meantime, all of us up here are growing. Right
now, we've got whatever we have, 27% market share as public builders. We've
been growing market share, trying to double every four, five, six years. Well,
you double from 27 once, that gets you around 54.
That next doubling is really hard mathematically, so we're all going to start
competing pretty aggressively domestically, and, just like other industries,
eventually you have to look, and look at a wider market by definition. We're all
peanuts in the global housing market. So, it will be a natural evolution. But,
given what's happening at home right now, I don't think anybody's in a
particular rush at this moment. And, unfortunately, some of the markets that are
really hot, Shanghai and Moscow, et cetera, probably they're too hot and may
see what's happening here in a few years.

Don Tomnitz: No!

Margaret Whelan: We'll wrap it up here. Thank you very much.

---

BZH Rating: Buy 1

􀂄Beazer Homes—Balance Sheet Focus and Strategic Growth
Management expects a protracted downturn, and has aggressively streamlined
overhead to better match the anticipated sales pace. Land positions are also being
scrutinized as overvalued assets are abandoned in favor of liquidity, with buybacks
a priority use of cash. Once demand reaccelerates, product breadth is to be
expanded in existing geographic markets, which provides a low-risk growth
opportunity.
􀂄Valuation: $50 PT is 17x CY07E EPS, Upside 8%
BZH trades at 16x our CY07 EPS estimate versus its historical average of 8x and a
range of 3-17x.

---

CTX Rating: Buy 1

􀂄Centex—Three-Pronged Strategy
Management outlined a three-pronged strategy: 1) reposition the balance sheet
with a smaller inventory position; 2) manage permanent costs out of the business
on a local market and overall supply chain basis; and 3) gain market share in target
markets to maximize margin potential. Identifying and training key employees was
noted as the most effective way to execute this strategy.
􀂄Valuation: $60 PT is 17x CY07E EPS, Upside 6%
CTX trades at 1557x our CY07 EPS estimate versus its historical average of 9x
and a range of 5-19x.

---

DHI Rating: Buy 1

􀂄DHI—America's Builder Will Continue to Diversify Geographically
Management outlined a thorough strategy to maintain its balance sheet strength
and secure as much financial flexibility as possible. Industry-low overhead costs,
which continue to fall, allow the company to diversify into satellite markets with
significant growth potential. This strategy has proved successful for the last four
years and may be supplemented by acquisitive growth in the future.
􀂄Valuation: $28 PT is 15x CY07E EPS, Upside 5%
DHI trades at 15x our CY07 EPS estimate versus its historical average of 9x and a
range of 4-20x.

---

HOV Rating: Buy 1

􀂄At Hovnanian, Liquidity Is Key
Management sees many opportunities arising from the current correction, which it
expects to last another ~12 months. The company has aggressively scrubbed its
balance sheet and written off underperforming assets with the goal of increasing
financial flexibility. Equity will be issued to finance attractive acquisitions, with
the goal of continuing to increase its product breadth and geographic diversity.
􀂄Valuation: $38 PT is 16x CY07E EPS, Upside 2%
HOV currently trades at 16x our CY07 EPS estimate versus its historical average
of 6x and a range of 3-13x.

---

MTH Rating: Buy 1

􀂄Meritage—Same Strategy but Realistic Approach to the Correction
Management remains committed to its long-term disciplines to drive profitable
growth and carefully manage risk. Controlling land via option has been a strategic
advantage for Meritage, as already 40% of the lots under control have been
renegotiated with its land partners. Spec homes are being discounted selectively,
which should protect the backlog versus some of its more agressive peers.
􀂄Valuation: $58 PT is 13x 2007E EPS, Upside 17%
MTH trades at 11x our 2007 EPS estimate versus its historical average of 5x and a
range of 1-9x.

---

PHM Rating: Buy 1

􀂄Pulte—Operational Excellence Remains a Key Goal
With the potential for this correction to last another 12-24 months, management is
focused on pursuing operational excellence and simplifying the business. Costcutting
is a key theme to reduce overhead and lift margins, while the balance sheet
is being scrubbed of underperforming assets. Pulte enjoys geographic diversity and
wide product breadth, which may be supplemented with select acquisitions going
forward.
􀂄Valuation: $38 PT is 19x 2007E EPS, Upside 12%
PHM is trading at 17x our 2007 EPS estimate versus its historical average of 9x
and a range of 3-17x.

---

RYL Rating: Buy 2

􀂄Ryland—Risk-Averse Strategy Remains
Management is committed to a moderate but high-quality growth strategy, as
opposed to chasing volume in every market. Liquidity remains a key focus, and the
company prefers to buy land later in the development process to elevate asset
turns. Share buybacks—which have prevented overexposure to land over the last
few years—are expected to remain a key use of cash.
􀂄Valuation: $52 PT is 12x 2007E EPS
RYL trades at 12x our 2007 EPS estimate versus its historical average of 8x and a
range of 3-18x.

---

SPF Rating: Buy 2

􀂄Standard Pacific—Striving for Market Concentration
Standard Pacific has diversified geographically over the last few years and has
morphed into a national player. Management is now focused on increasing its
share in existing markets through broader product breadth. The company has a
large land position, which has been a drag on returns, but should start to shrink as
options are renegotiated and spending slows.
􀂄Valuation: $28 PT is 13x 2007E EPS, Upside 4%
SPF is trading at 13x our 2007 EPS estimate versus its historical average of 6x and
a range of 3-13x.

---

TOA Rating: Buy 1

􀂄Technical Olympic—Controlling What It Can
Management spent a lot of time discussing its financial exposure to the struggling
Transeastern JV. The company is committed to its business model and plans to
focus on meeting consumer demands to generate sales, while cutting costs
wherever possible. Florida remains a core focus for TOUSA, and we do not expect
further geographic diversity until the correction finds a bottom.
􀂄Valuation: $16 PT is 9x 2007E EPS, Upside 70%
TOA trades at 5.4x our 2007 EPS estimate versus its historical average of 7x and a
range of 4-11x.

---

TOL Rating: Buy 1

􀂄Toll—Seeking Low-Risk Growth in Existing Markets
Toll's seasoned management team has embraced the downturn as best as possible.
The company remains committed to expanding its product breadth in existing
markets, which it views as the lowest-risk growth strategy. Balance sheet liquidity
will be a key strength as M&A opportunities arise. Toll expects to continue to
develop ~90% of its lots, which contributes to its above-average margins.
􀂄Valuation: $38 PT is 24x CY07E EPS, Upside 16%
TOL trades at 21x our CY07 EPS estimate versus its historical average of 9x and a
range of 4-24x.

---

WCI Rating: Reduce 2

􀂄WCI—"Not Dead Yet"
Management made a defensive presentation, insisting that the company will be
profitable in 2007. While the potential for higher cancellation rates in the Tower
business was acknowledged, the company is focused on cutting costs by
simplifying the procurement and building process. Despite above-average
leverage, the company remains committed to its share repurchase plan.
􀂄Valuation: $12 PT is 0.5x WCI's Book Value, Downside 38%
WCI trades at 0.8x book value versus its 1.3x historical average and 0.6-2.2x
range.

---

UBS Investment Research: Global Equity Ratings Definitions and Allocations

Buy 1: FSR is > 6% above the MRA, higher degree of predictability

Buy 2: FSR is > 6% above the MRA, lower degree of predictability

Reduce 2: FSR is > 6% below the MRA, lower degree of predictability

KEY DEFINITIONS

Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months.

Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium).

---

---

Monthly (interactive) charts of U.S. House-builders.

---

Weekly (interactive) charts of U.S. House-builders.

---

Daily (interactive) charts of U.S. House-builders.

---

Hourly (interactive) charts of U.S. House-builders.

---

On June 7, I wrote a blog called: "Are home-builders now a Buy?". I pointed out to readers that ";we are in the Accumulation one " when buying does make sense. Wait for it. The RSI numbers will show it. There is no need to out-think the market. Let the market come to you. Because of this over-sold situation I expect to see this group of stocks to be among the leaders of the next bull market."

I created a table to show you the RSI values for the Monthly-Weekly and Daily data that existed June 6. Compare the RSI values and Prices for these stocks today.

A couple points are in order:

1. Making decisions in an equity market is always a challenge. Traders cannot apply a simple concept like RSI and expect to pick off the tops and bottoms. But anybody going through my blogs over the two years I have been doing it will see that RSI is an effective tool of several you need.

2. Traders need to keep an open mind-set. Major drivers are at work that few of us see until many months go by. With respect to the U.S. house-builders, I was counselling caution at the very time (June 2006) that this sub-sector had clearly entered the Cara Accumulation Zone. I was concerned that long-term oriented traders would get caught in a flushing out of market prices like 1987, so I also proffered the caution sign. Short-term traders were watching, however, and in July did take advantage when they saw that this group plus the U.S. Tech stocks (as I pointed out on or about July 21) were ready to pop.

3. I try to learn something from every experience ("Fool me once, shame on you; fool me twice, shame on me"), so I look at these situations in the blog (eg, house-builders, technology, gold & silver miners, etc), as learning opportunities and business case teaching opportunities. As I see my role in this free blog, it's not to tell anybody what or when to buy or sell; it's to generate discussion among a growing community, and to show traders that there must be a strategic trading plan in place together with a disciplined tactical approach. Trading must be managed like any business, meaning the decisions must emanate from within each owner and manager of capital. Each of us, however, has different interests, different time frames; hence I cannot write for all of you unless I use broad strokes of the pen, and I think you appreciate that.

Have a good day; I have to get back to writing a book.

---