Corporates. The Tale of the Measuring Tape. U.S. Home Improvement Industry Special Report. Building Materials and Construction / U.S.A.

Building Materials and Construction / U.S.A. The Tale of the Measuring Tape U.S. Home Improvement Industry Special Report Home Improvement Spending at a Steady Pace Spending Continues to Rebound: Home improvement spending is expanding at a steady pace, despite irregular economic growth in 2014. Improving housing turnover during 2013 and gains in home prices last year and so far this year are leading to increased optimism and spending for home remodeling. Fitch Ratings projects home improvement spending will increase 6% in 2014 and grow at a similar pace next year. Related Research Measuring Wheel (The U.S. Nonresidential Construction Industry 2014/2015) (September 2014) Building Materials Volume and Pricing Trends (Second-Quarter 2014) (August 2014) U.S. Homebuilding/Construction: The Chalk Line (Summer 2014) (July 2014) Building Materials Volume and Pricing Trends (First-Quarter 2014) (May 2014) 2014 Outlook: U.S. Building and Home Products and Services (Residential Construction Will Continue to Drive Growth) (December 2013) 2014 Outlook: U.S. Housing and Homebuilders (A Continued Mild Recovery) (December 2013) Analysts Robert G. Rulla, CPA +1 312 606-2311 robert.rulla@fitchratings.com Robert P. Curran +1 212 908-0515 robert.curran@fitchratings.com Philip Zahn +1 312 606-2336 philip.zahn@fitchratings.com Volatile Housing Turnover: Housing metrics all showed improvement in 2013. However, what began as an untypically moderate housing recovery has decelerated further since late 2013. For the first eight months of 2014, existing home sales fell 5.7%, while new home sales grew 2%. Single-family housing starts increased 3.1% compared with the same period last year. Nevertheless, growing strength in the economy and employment should positively influence home improvement spending in 2015. Higher Home Prices: Despite volatile housing market activity so far this year, national home price indices have been broadly increasing. The median existing home price in August 2014 was $219,800, 4.8% greater than in August 2013. The year-over-year growth has decelerated somewhat from 2013, when the median home price increased 11.5% compared with 2012. Nonetheless, more modest but steady home price inflation ahead should continue to drive home improvement spending. Return on Investment: Higher resale values positively influenced the cost-value ratio of remodeling projects. According to the Cost Versus Value survey from Remodeling magazine, the overall return for remodeling projects improved to an average of 66.1% in 2014 from 60.6% in 2013. According to the report, a modest increase in construction costs was more than offset by the improvement in average national resale value. Challenges Remain: While the home improvement sector has shown positive trends in recent years, certain challenges could derail a sustained rebound in remodeling spending. Unemployment levels remain high, consumer credit standards continue to be tight, and consumer confidence is still subpar relative to historical patterns. Negative Equity Overhang: Strong home price appreciation over the past year has allowed many homeowners to increase equity in their homes. However, the number of homeowners with little or no equity remains elevated. Fitch believes that homeowners with little or no equity may perhaps underinvest in maintenance as well as home improvement projects. Credit Easing but Remains Tight: Bank lending standards are easing a bit but remain relatively tight, making it difficult for homeowners to use credit to finance remodeling projects. Cash-out refinancings continue to be at very low levels and borrowings under home equity loans have been declining since 2008. Restraint in Big-Ticket Projects: Fitch expects spending for big-ticket remodeling projects will continue to lag the overall improvement in the remodeling sector, as credit availability remains constrained. Nevertheless, there are some indications that homeowners, although still cautious, are somewhat more willing to undertake larger discretionary projects and purchases. www.fitchratings.com

Coverage IDR Long- Term Sr. Unsec. Rating Outlook The ADT Corporation a BBB BBB Stable Masco Corporation a BB BB Positive Mohawk Industries, Inc. a BBB BBB Positive Owens Corning a BBB BBB Stable PPG Industries Inc. a A A Stable RPM International a BBB BBB Stable The Sherwin- Williams Company a A A Stable Stanley Black & Decker Inc. a A A Negative USG Corporation a B BB- Stable Whirlpool Corp. a BBB BBB RWN The Home Depot Inc. b A A Stable Lowe s Companies Inc. b NR NR a Covered by Robert Rulla. b Covered by Philip Zahn. IDR Issuer Default Rating. RWN Rating Watch Negative. NR Not rated. Source: Fitch Ratings. Estimates of the Size of the Home Improvement Industry HIRI Estimates The Home Improvement Research Institute (HIRI) estimates the home improvement products market was about $289.8 billion in 2013, up 4.2% over an estimated $278.1 billion for 2012. This market estimate includes products purchased (exclusive of any labor) for existing residential structures. The HIRI also estimates that the annual growth rate during 2009 2013 was 0.7%, with the professional market increasing 1.5% annually while the consumer market grew at a 0.4% annual rate. JCHS Estimates The Harvard University Joint Center for Housing Studies (JCHS) estimates home improvement spending was $275 billion in 2011 (the latest data available), down 4.2% from the $287 billion in 2009. The 2011 spending level represents an almost 95% increase over estimated 1995 expenditures of $149 billion, but is 16.2% below the peak level of $328 billion spent in 2007. The JCHS estimates about 82% of remodeling expenditures in 2011 were from owneroccupied residential properties, with the remaining 18% from rental units. By comparison, home improvement spending on owner-occupied properties represented close to 84% of expenditures during 2007, compared with 16% spent on rental properties. The JCHS also estimates about 75% of expenditures during 2011 were related to improvements and 25% were maintenance and repair spending. In 2007, approximately 80% of the total spending was directed toward improvements and the remaining 20% to maintenance and repairs. U.S. Census Bureau Estimates The most current residential alteration and repair statistics from the U.S. Census Bureau are for 2007. Expenditures totaled $226.4 billion for the year, a 0.8% decline from the $228.2 billion of residential alteration and repair spending in 2006. The Census Bureau discontinued its Survey of Residential Alteration and Repairs, and it last published residential improvements and repair data in its fourth-quarter 2007 report. The Census Bureau s Value of Construction Put in Place Survey provides an estimate of spending for private residential improvements. This measure does not include expenditures for rental, vacant or seasonal properties. This estimate also excludes homeowner spending for painting, landscaping, routine maintenance and repair work. Spending for private residential improvements totaled $133.1 billion in 2013, 5.6% more than the estimated $126 billion spent in 2012. Through the first eight months of 2014, these expenditures totaled $80.8 billion, a 3.9% decline compared with the same period last year. Retailer Estimates In 2005, both The Home Depot Inc. (Home Depot) and Lowe s Companies Inc. (Lowe s), leading home improvement retailers, had estimated the U.S. home improvement market to be approximately $700 billion. (Neither has provided estimates since then.) This market estimate includes do-it-yourself (DIY) products, services, labor and major components of the professional market. The Tale of the Measuring Tape 2

Residential Alterations and Repairs ($ Mil.) Total Expenditures YOY % Change Improvements Owner Occupied YOY % Change Improvements Rental Properties YOY % Change Maintenance and Repairs YOY % Change 1971 16,299 10.4 8,028 10.0 1,911 21.3 6,361 7.9 1972 17,498 7.4 8,534 6.3 2,246 17.5 6,717 5.6 1973 18,512 5.8 8,040 (5.8) 2,549 13.5 7,924 18.0 1974 21,114 14.1 10,244 27.4 2,378 (6.7) 8,491 7.2 1975 25,239 19.5 11,813 15.3 3,668 54.2 9,758 14.9 1976 29,034 15.0 14,389 21.8 3,266 (11.0) 11,379 16.6 1977 31,280 7.7 16,727 16.2 3,209 (1.7) 11,344 (0.3) 1978 37,461 19.8 19,314 15.5 5,238 63.2 12,909 13.8 1979 42,231 12.7 21,916 13.5 5,365 2.4 14,950 15.8 1980 46,338 9.7 25,892 18.1 5,259 (2.0) 15,187 1.6 1981 46,351 0.0 23,768 (8.2) 6,561 24.8 16,022 5.5 1982 45,291 (2.3) 22,427 (5.6) 6,054 (7.7) 16,810 4.9 1983 49,295 8.8 24,877 10.9 6,290 3.9 18,128 7.8 1984 70,597 43.2 30,336 21.9 10,956 74.2 29,307 61.7 1985 82,127 16.3 33,680 11.0 12,099 10.4 36,349 24.0 1986 94,329 14.9 40,946 21.6 15,990 32.2 37,394 2.9 1987 98,413 4.3 40,853 (0.2) 17,333 8.4 40,227 7.6 1988 106,864 8.6 47,202 15.5 16,081 (7.2) 43,580 8.3 1989 108,054 1.1 45,110 (4.4) 16,855 4.8 46,089 5.8 1990 115,432 6.8 42,982 (4.7) 16,647 (1.2) 55,800 21.1 1991 107,692 (6.7) 36,673 (14.7) 12,514 (24.8) 55,505 (0.5) 1992 115,569 7.3 48,685 32.8 16,063 28.4 50,821 (8.4) 1993 121,899 5.5 57,269 17.6 18,845 17.3 45,785 (9.9) 1994 130,625 7.2 64,643 12.9 18,796 (0.3) 47,185 3.1 1995 124,971 (4.3) 56,717 (12.3) 21,223 12.9 47,032 (0.3) 1996 131,362 5.1 66,381 17.0 24,872 17.2 40,108 (14.7) 1997 133,577 1.7 66,634 0.4 25,798 36.7 41,145 2.6 1998 133,693 0.1 72,360 8.6 19,352 (25.0) 41,980 2.0 1999 142,900 6.9 75,031 3.7 25,518 31.9 42,352 0.9 2000 152,975 7.1 81,091 8.1 29,649 16.2 42,236 (0.3) 2001 157,765 3.1 85,023 4.8 25,250 (14.8) 47,491 12.4 2002 173,324 9.9 97,885 15.1 28,091 11.3 47,379 (0.2) 2003 176,899 2.1 100,344 2.5 32,461 15.6 44,094 (6.9) 2004 198,556 12.2 115,399 15.0 32,545 0.3 50,611 14.8 2005 215,030 8.3 131,092 13.6 30,645 (5.8) 53,293 5.3 2006 228,208 6.1 144,931 10.6 29,888 (2.5) 53,389 0.2 2007 226,359 (0.8) 139,103 (4.0) 32,516 (8.8) 54,738 2.5 2008 120,144 (13.6) 2009 112,038 (6.7) 2010 111,564 (0.4) 2011 120,918 8.4 2012 126,050 4.2 2013 133,111 5.6 Jan. Aug. 2013 84,142 Jan. Aug. 2014 80,827 (3.9) YOY Year over year. Source: U.S. Bureau of the Census Construction Put In Place. The Tale of the Measuring Tape 3

Recent Trends Private Fixed Residential Investment Private fixed residential investment grew moderately during the past three years after steep declines during 2007 2009. Total private fixed residential improvement rose 17.5% in 2013 to $519.9 billion after growing 14.6% in 2012 and 1.3% in 2011. Investment in this sector fell 17.8% in 2007, 25.1% in 2008, 24% in 2009 and 2.8% in 2010. While private fixed residential investment grew during the past two years, the level of investment during 2013 remains 39.4% below the 2005 peak. During the past 60 years, private fixed residential investment accounted for about 4.6% of GDP. This percentage peaked in 2005 at 6.5% and gradually declined to 6% in 2006, 4.8% in 2007, 3.5% in 2008, 2.7% in 2009, 2.5% in 2010 and 2.5% in 2011. Private fixed residential investment as a share of GDP rose to 2.7% in 2012 and 3.1% in 2013. Conversely, investments on residential improvements (part of the total private fixed residential investment) have been less volatile, growing 4.4% in 2011, 5.3% in 2012 and 4.3% in 2013 to about $173.4 billion. Previously, investment on residential improvements fell 1.2% in 2007, 6.2% in 2008, 5.7% in 2009 and 0.3% in 2010. The level of investment on residential improvements is now almost equal to the prerecession peak of $173.6 billion in 2005. The Bureau of Economic Analysis uses the value-put-in-place data from the Census Bureau s monthly survey of construction to estimate private fixed residential investment that is included in the GDP estimates. Private Fixed Residential Investment (1980 2013) Total Residential Fixed Investment ($ Bil.) 1,000 Improvements 800 600 400 200 0 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Source: Bureau of Economic Analysis. Private Fixed Residential Investment as a Share of GDP (1952 2013) (%) 7.0 Average = 4.6%; 2013 = 3.1% 6.0 5.0 4.0 3.0 2.0 1952 1955 1958 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Source: Bureau of Economic Analysis. The Tale of the Measuring Tape 4

Market Conditions Continue to Recover The National Association of Homebuilders (NAHB) Remodeling Market Index (RMI) fluctuated within a range of 19.0 57.8 on a seasonally adjusted basis since 2001. The RMI measures remodeler perceptions of market demand for current and future residential remodeling projects. A number above 50 indicates the majority of remodelers view market conditions as improving. The RMI improved in second-quarter 2014 to 56.1 from 52.8 during first-quarter 2014 and 55.0 during second-quarter 2013. However, the second-quarter 2014 results are slightly lower than the 56.8 and 57.0 recorded during the third and fourth quarters of 2013, respectively. The NAHB indicated uncommonly harsh winter weather and continued labor shortages created a drag on many parts of the housing market, including remodeling, during first-quarter 2014. The index gained momentum during second-quarter 2014 as completion of postponed work during the previous quarter helped remodelers regain confidence. Additionally, homeowners felt more secure about their economic situations and were more willing to undertake remodeling projects, according to the NAHB. The current market conditions component of the RMI increased to 55.9 during second-quarter 2014 from 53.4 in the first quarter and 54.1 a year ago. The current market conditions index has been above 50 for eight consecutive quarters. The current market conditions index for owner-occupied properties continues to show positive trends, with all three components (major additions and alterations, minor additions and alterations, and maintenance and repair) registering a score above 50 for eight straight quarters. The owner-occupied scores during second-quarter 2014 were above 60 for all three components, the first time since firstquarter 2004. The future expectations index also is encouraging, rising to 56.3 in second-quarter 2014 from 52.3 during the first quarter and 55.9 a year ago. All of the indicators for future activity (i.e. calls for bids, work committed for three months, backlog and appointments) were more than 50 for five consecutive quarters. According to the NAHB, the remodelers positive sentiment is directly related to increased demand for services. The NAHB indicated rising home prices are making remodeling jobs possible for more homeowners while existing home sales provide additional momentum as homeowners prepare their homes for market. The trend reported by the NAHB s RMI is supported by a survey conducted by the National Association of the Remodeling Industry (NARI). The survey uses a scale of 1 to 9, with a score of 1 indicating much worse conditions compared with the same time last year and a score of 9 indicating much better conditions. A score of 5 indicates current market conditions are about the same from a year-earlier levels. NARI s 2014 second-quarter Remodeling Business Pulse (RBP) data of current and future remodeling business conditions improved during the second quarter after slowing during the first quarter. According to NARI, current business conditions improved to 6.29 during second-quarter 2014 from 6.07 during the first quarter. This rating steadily increased during 2012 and 2013 before falling slightly during the first quarter of 2014. The number of inquiries grew to 6.38 during the second quarter from 6.24 during the first quarter while and requests for bids increased to 6.29 from 6.16. The conversion of bids to jobs jumped to 5.83 from 5.71 and the sales value of jobs advanced to 6.20 during the second quarter of 2014 from 5.84 last quarter. According to NARI, the main reasons for growth continue to be earlier postponement of projects (80% of respondents), improvement in home prices (59%) and economic growth (47%). The Tale of the Measuring Tape 5

Remodeling Market Index (RMI): First-Quarter 2001 to Second-Quarter 2014, Current and Future Expectations Indices, U.S. and Regions (Seasonally Adjusted) Components Current Market Conditions Future Market Indicator National Major Additions and Alterations Minor Additions and Alterations Maintenance and Repair Call for Bids Current Market Future Owner- Rental Owner- Rental Owner- Rental Owner- Rental Period RMI Conditions Expectations Occupied Properties Occupied Properties Occupied Properties Occupied Properties 1Q01 53.7 53.9 53.6 55.4 40.4 55.9 40.0 60.0 54.6 53.9 42.9 2Q01 52.8 51.8 53.9 55.6 35.1 55.8 37.1 59.2 55.7 58.3 40.5 3Q01 44.2 46.2 42.2 44.3 29.8 48.8 37.6 54.8 44.7 39.7 34.0 4Q01 49.9 49.2 50.5 50.2 32.3 56.5 37.7 53.1 46.4 54.1 35.1 1Q02 50.6 50.9 50.3 54.0 33.6 58.1 37.7 56.6 46.9 52.7 33.6 2Q02 49.3 49.7 48.8 52.1 35.8 55.4 38.7 56.0 48.8 51.4 32.8 3Q02 49.3 50.3 48.3 53.0 33.6 53.9 36.8 56.9 46.8 51.0 33.5 4Q02 46.7 47.3 46.1 48.9 27.5 53.8 33.7 53.3 45.9 48.1 29.8 1Q03 45.5 44.8 46.3 47.4 25.4 50.9 32.8 50.7 45.0 49.1 30.9 2Q03 50.9 50.5 51.3 54.9 33.1 57.5 37.3 57.6 46.2 55.1 34.3 3Q03 54.6 54.1 55.1 58.6 27.0 62.0 36.7 54.1 50.6 57.8 37.3 4Q03 56.0 55.0 56.9 63.4 39.9 59.5 44.4 61.2 52.7 60.0 40.9 1Q04 57.4 56.9 57.8 62.1 41.7 63.0 46.7 59.7 53.4 61.6 41.7 2Q04 51.5 50.6 52.4 54.6 35.7 58.0 38.9 53.8 49.7 54.9 38.9 3Q04 52.1 51.8 52.4 54.9 29.6 57.5 36.8 57.8 50.6 53.4 31.7 4Q04 52.4 50.7 54.0 57.5 34.5 54.7 40.7 50.0 53.4 58.2 32.0 1Q05 53.3 52.9 53.6 55.8 39.7 56.1 47.7 55.5 55.9 56.0 42.2 2Q05 52.6 52.4 52.8 55.7 42.5 57.4 43.2 55.4 52.7 54.0 40.9 3Q05 51.3 50.9 51.8 54.7 32.7 55.1 35.5 59.1 46.2 51.9 30.3 4Q05 47.1 46.6 47.5 48.2 36.5 49.2 38.7 49.1 46.7 45.5 39.5 1Q06 48.5 48.1 48.9 52.4 31.8 54.1 35.4 54.8 43.4 51.5 30.4 2Q06 44.6 45.6 43.5 45.6 31.1 49.2 37.1 52.2 49.6 45.3 28.4 3Q06 46.6 46.9 45.1 50.8 27.3 52.4 31.6 54.9 42.4 48.2 27.6 4Q06 47.3 48.6 46.0 48.9 33.3 52.7 38.4 53.2 48.9 51.5 29.3 1Q07 46.6 46.5 46.6 49.3 32.8 51.7 34.2 53.0 45.2 50.1 34.3 2Q07 44.8 45.3 44.3 45.5 30.0 50.5 31.5 55.0 43.6 47.2 27.9 3Q07 43.9 45.1 42.7 45.8 25.1 51.7 32.4 51.5 42.7 46.5 26.9 4Q07 39.6 40.9 38.3 41.8 21.8 44.2 26.7 51.7 42.3 39.9 31.0 1Q08 40.5 42.7 38.3 41.0 26.6 48.9 32.0 51.1 41.6 40.2 27.9 2Q08 40.5 42.2 38.9 41.8 22.7 46.2 27.1 56.1 42.7 40.3 27.7 3Q08 31.7 34.1 29.3 25.2 19.7 38.2 25.0 46.8 37.8 29.8 23.5 4Q08 21.9 24.7 19.0 16.7 13.5 25.4 18.0 39.6 27.5 20.2 15.3 1Q09 32.9 35.6 30.2 28.5 17.2 40.3 23.8 52.2 35.8 36.2 20.4 2Q09 36.9 39.0 34.8 34.5 16.3 45.5 22.9 55.9 38.4 41.7 21.0 3Q09 40.5 41.2 39.8 39.5 20.9 47.4 29.2 52.4 37.4 49.0 30.7 4Q09 42.3 44.3 40.4 43.4 24.0 53.4 25.7 58.4 37.3 49.3 26.0 1Q10 45.1 46.2 43.9 44.8 24.8 53.4 27.4 58.8 43.3 51.5 26.9 2Q10 41.6 43.5 39.7 42.1 22.9 49.5 28.9 56.0 42.3 48.8 26.0 3Q10 41.8 44.8 38.9 44.7 29.7 48.0 34.8 54.5 42.9 44.6 30.7 4Q10 42.8 44.6 41.0 45.9 20.3 53.5 28.2 56.0 39.2 48.9 25.2 1Q11 47.6 47.4 47.7 47.6 27.3 54.9 31.0 57.7 40.9 54.6 30.0 2Q11 45.5 46.6 44.4 44.6 28.8 51.6 34.9 57.2 45.6 50.5 32.4 3Q11 42.9 44.5 41.3 42.6 27.3 51.1 30.5 55.8 43.4 46.9 29.5 4Q11 48.3 50.4 46.2 49.2 32.1 59.1 34.6 58.4 48.6 52.5 33.1 1Q12 46.8 49.2 44.4 49.3 29.4 57.8 36.7 52.3 46.5 52.3 35.3 2Q12 45.2 46.5 44.0 48.1 31.3 52.6 34.0 51.8 46.7 48.7 35.0 3Q12 50.2 51.7 48.8 54.7 38.1 57.5 36.1 60.4 45.3 54.6 33.7 4Q12 54.9 53.6 56.3 56.6 38.4 57.5 45.1 57.7 52.0 64.5 48.2 1Q13 49.1 50.4 47.8 51.8 38.7 55.3 36.2 56.1 49.2 55.4 38.1 2Q13 55.0 54.1 55.9 59.0 32.8 61.4 39.7 58.7 52.0 63.5 40.3 3Q13 56.8 57.5 56.0 64.1 38.2 64.1 44.5 61.4 52.6 63.4 40.6 4Q13 57.0 56.0 58.0 59.0 42.0 61.0 50.0 60.0 49.0 65.0 49.0 1Q14 52.8 53.4 52.3 56.9 32.1 59.7 36.1 62.9 50.2 58.1 37.7 2Q14 56.1 55.9 56.3 60.1 39.8 60.4 44.3 63.0 48.1 62.4 44.0 Note: Major Additions and Alterations are jobs valued at $25,000 or more; Minor Additions and Alterations are less than $25,000. Each component of the Remodeling Market Index (RMI) is measured on a scale of 0 to 100. The overall RMI index is the average of the index for the Current Market Conditions and the index for the Future Market Indicators. The Current Market Conditions is a weighted average of three indices: Major Additions and Alterations (weight 0.30), Minor Additions and Alterations (weight 0.40) and Maintenance and Repair (weight 0.30).The Future Expectations Index is an average of four indices: Calls for Bids, Amount of Work Committed for Next Three Months, Backlog of Remodeling Jobs, and Appointments for Proposals. Each index has equal weight, i.e. 0.25. Source: NAHB Economics Group: Remodeling Market Index, Quarterly Survey of Remodelers, based on 352 responses, July 24, 2014. The Tale of the Measuring Tape 6

Housing Turnover What began as an untypically moderate housing recovery has decelerated further since late 2013. But demographics, attractive housing valuations and a slow, steady easing in credit standards should sustain and ultimately accelerate the upturn. Most of the latest macro statistics are encouraging. In the first eight months of 2014, existing home sales fell 5.7% while new home sales grew 2%. New single-family housing starts increased 3.1% year-to-date compared with a year earlier. Growing strength in the economy, employment and demographics should positively influence housing in 2015. Total housing starts are projected to expand 16% to 1.185 million as single-family starts increase 21% and multifamily volume gains 6.7%. New home sales should improve more than 20%, while existing home sales rise 5%. Trends in Existing Home Prices National home price indices have been broadly increasing since early 2012. The average existing home price in August 2014 was $265,200, a 3.4% increase from the previous August. The median existing home price that month was $219,800, 4.8% greater than August 2013. The August increase marks 30 consecutive months of year-over-year (YOY) median price increases. According to the National Association of Realtors, the median price in August is 4.6% below the all-time record of $230,400 in July 2006. Three years ago, the median price was 25.7% below the peak. In 2003, the average home price was $222,200, 6.6% higher than in 2002. This price rose to $244,400 in 2004, up 10.0%, and to $266,600 in 2005, ahead 9.1%. The price was $268,200 in 2006; $266,000 in 2007; $242,700 in 2008; $216,900 in 2009; and $220,000 in 2010. The average existing home price was $214,000 in 2011, off 2.7% from a year earlier, and $225,400 in 2012, up 5.3%. The average existing home price rose 8.9% in 2013. Sales Price of Existing Homes ($) Median Average (Mean) U.S. Northeast Midwest South West U.S. Northeast Midwest South West Year 2005 219,600 271,300 170,600 181,700 335,300 266,600 297,000 203,800 231,700 363,800 2006 221,900 271,900 167,800 183,700 342,700 268,200 299,700 205,300 230,000 371,300 2007 219,000 279,100 165,100 179,300 335,000 266,000 307,100 200,500 225,600 365,900 2008 198,100 266,400 154,100 169,200 271,500 242,700 297,800 183,400 211,600 312,300 2009 172,500 240,500 144,100 153,000 211,100 216,900 276,300 171,100 192,700 256,700 2010 172,900 243,500 141,600 150,100 214,800 220,000 281,500 172,500 193,000 264,100 2011 166,100 237,500 135,400 144,200 201,300 214,000 276,900 166,900 188,100 252,300 2012 176,800 237,700 142,700 154,000 230,100 225,400 277,900 173,700 198,800 278,100 2013 197,100 249,100 154,600 170,700 273,100 245,500 288,900 186,900 216,400 317,400 Not Seasonally Adjusted August 2013 209,700 268,000 164,100 178,400 286,300 256,600 304,300 198,700 224,600 329,200 September 2013 198,500 238,300 157,400 172,100 283,000 246,300 279,800 188,400 216,300 326,000 October 2013 197,500 243,900 153,600 169,300 282,600 245,000 283,900 185,400 213,100 325,300 November 2013 195,500 242,900 150,000 167,700 282,900 243,600 283,000 182,200 211,600 325,500 December 2013 197,700 239,000 151,100 172,700 283,700 246,700 281,200 185,800 218,300 325,600 January 2014 187,900 241,200 139,800 159,900 272,200 236,600 282,300 173,100 203,000 316,700 February 2014 188,300 234,100 140,400 164,000 278,300 236,600 275,000 170,100 206,700 321,600 March 2014 196,700 244,300 149,100 171,900 281,700 244,800 283,900 179,200 216,100 326,500 April 2014 201,500 244,600 155,900 174,500 289,600 250,700 286,500 188,200 220,600 333,300 May 2014 212,000 256,700 166,300 183,300 294,000 259,400 296,700 198,500 230,300 336,600 June 2014 222,000 270,700 177,200 191,200 299,200 268,100 308,300 212,800 237,500 339,500 July 2014 R 221,600 273,600 174,900 190,100 302,100 267,500 310,800 209,900 235,800 341,500 August 2014 P 219,800 265,800 173,800 186,700 301,900 265,200 302,900 211,800 231,100 341,900 Versus Last Year (%) 4.8 (0.8) 5.9 4.7 5.4 3.4 (0.5) 6.6 2.9 3.9 R Revised. P Preliminary. Source: National Association of Realtors. The Tale of the Measuring Tape 7

The median home price was $180,200 in 2003, up from $166,200 in 2002. The national median existing home price was $195,200 in 2004, an increase of 8.3%; $219,600 in 2005, up 12.5%; $221,900 in 2006, a gain of 1.0%; and $219,000 in 2007, off 1.3%. The median home price was $198,100 in 2008, down 9.5% from 2007; $172,500 in 2009, 12.9% lower than 2008; and was $172,900 in 2010, 0.2% higher than 2009. The median home price was $166,100 in 2011, 3.9% lower than in 2010. The median home price was $176,800 in 2012, up 6.4%, and reached $197,100 in 2013, 11.5% higher than the previous year. Another gauge of home price appreciation is provided by the Federal Housing Finance Agency (FHFA) index formerly the Office of Federal Housing Enterprise Oversight s index which measures average price changes from repeat sales or refinancings of the same single-family homes with mortgages purchased or securitized by Fannie Mae or Freddie Mac. This index was 211.84 in second-quarter 2014, up from 201.21 in second-quarter 2013, and up from 204.46 in fourth-quarter 2013. The average home price increase in second-quarter 2014 for this index, annualized, was 3.24%. Home prices realized a quarterly appreciation of 0.81% in second-quarter 2014. In 2008, there was a four-quarter decline in the Purchase-Only Index, as there was in 2009 and 2010. Two of the four quarters in 2011 realized price appreciation. All four quarters of 2012 and 2013 realized price appreciation. Housing Outlook 2014 Expectations Comparisons were challenging through first-half 2014, and so far this year most housing metrics seem to have defied expectations and fallen somewhat from a year ago. Though the severe winter throughout much of North America restrained some housing activity, there also was an absence of underlying consumer momentum this spring and summer, perhaps due to buyer sensitivity to home prices and finance rates and the slowing of job growth at year end. But demographics, attractive affordability/housing valuations, and a slow, steady easing in credit standards should sustain and ultimately accelerate the upturn. To reflect the subpar spring selling season, as well as the more guarded expectation for the next few months, Fitch tapered its macro housing forecast. Single-family starts are projected to improve 9.5% to 677,000 (down from Fitch s previous forecast of 15%) and multifamily volume to grow almost 12% to 343,000. Total 2014 starts should slightly exceed 1 million. New home sales are forecast to advance about 8% to 465,000 (down from Fitch s prior forecast of 500,000), while existing home sales volume is expected to decline 6% to 4.785 million (down from Fitch s earlier estimate of 5.1 million), largely due to fewer distressed homes for sale. New home price inflation should moderate in 2014, at least partially because of higher interest rates. Average and median new home prices should rise about 3.5% in 2014. 2015 Expectations Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing economy throughout the year. The unemployment rate should continue to move lower (averaging 5.8% in 2015). Credit standards should steadily, moderately ease throughout next year. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25- to 35-year-olds should provide some incremental elevation to the rental and starter home markets. Single-family starts are forecast to rise 21% to 819,000 as multifamily volume expands about 6.7% to 366,000. Total starts The Tale of the Measuring Tape 8

would be approaching 1.2 million. New home sales are projected to increase 20.4% to 560,000. Existing home volume is expected to approximate 5.025 million, up 5%. New home price inflation should further taper off with higher interest rates and the mix of sales shifting more to first-time homebuyer product. Average and median home prices should increase 2.5% 3.0%. Challenges remain, including the potential for higher interest rates and continued restrictive credit qualification standards. Fitch believes the housing recovery likely will occur in fits and starts. Housing s Impact on Remodeling Spending Housing turnover has significant implications for remodeling spending. Homeowners will typically remodel when buying a home to either fix it up or customize it to their tastes. Potential home sellers also tend to remodel to prepare their homes for sale. Fitch believes remodeling spending is influenced to a major degree by housing turnover, especially in existing homes, albeit on a lagged basis. However, there is also the maintenance/repair and replacement side of remodeling spending, driven in part by the aging housing stock, as well as improvements to homes where there is no change in ownership. Fitch believes these factors make the remodeling market less overtly cyclical than the new home construction market. Changes in residential improvement expenditures have roughly paralleled trends in new and existing home sales (with home improvement spending lagging housing turnover). However, in the past 30-plus years, annual residential improvement expenditures declined YOY only six times (1982, 1991, 1995, 2007, 2008 and 2009), while new home sales decreased 18 times, and existing home sales dropped 13 times. Home improvement spending declined 2.3% in 1982, while new and existing home sales dropped for four consecutive years (1979 1982). Similarly, new and existing home sales declined from 1989 1991, while residential improvement expenditures fell 6.7% in 1991. In addition, the contractions in home improvement spending in 1982 and 1991 happened during recessions. In 1995, home improvement spending fell 4.3%, while new and existing home sales declined 0.4% and 3.9%, respectively. New and existing home sales exhibited positive comparisons the previous three years. The U.S. economy was booming in early 1994, and to slow the economy to a sustainable growth rate and forestall higher inflation, the Fed raised interest rates eight times from February 1994 through February 1995. Specifically, the Fed raised the Fed Funds rate from 3% to 6%. The economy landed softly in 1995 with moderate growth of 2.5% and low inflation. Residential improvement spending rebounded in 1996 and grew 5.1% over 1995 expenditures as real GDP improved 3.7%. Fitch estimates home improvement spending was flat to slightly higher in 2010 following three years of consecutive YOY declines. In the previous 30-plus years, the industry had not experienced two (let alone three) consecutive years of declines. New home sales decreased for six consecutive years during 2006 2011 while existing home sales fell for three straight years from 2006 2008 before rebounding in 2009 and then falling again in 2010. Fitch projects home improvement spending will increase 6% in 2014 following an estimated 5% growth both in 2013 and 2012. The continued improvement in the housing market, as well as strong home price appreciation seen last year and more moderate but steady price inflation in 2014, is likely to drive higher spending on home renovation projects in 2014 and 2015. The Tale of the Measuring Tape 9

Change in Residential Improvement Expenditures versus Change in New and Existing Home Sales (1976 2015) (%) Residential Improvement Expenditures New and Existing Home Sales 50 40 30 20 10 0 (10) (20) (30) 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015E E Estimate. Note: Residential Improvement Expenditures methodology change in 1984; 1984 current year based on consumer expenditure surveys and are not comparable to 1983 and prior years. Percentage change for 2008, 2009, 2010, 2011, 2012 and 2013E and 2014E are based on Fitch estimates. Source: U.S. Bureau of the Census; National Association of Realtors; Home Improvment Research Institute; Fitch forecast. Employment, Personal Income and Consumption Trends Employment Nonfarm payroll employment continued to edge up in September 2014, adding 248,000 jobs during the month. Over the prior 12 months, nonfarm employment growth averaged 213,000 per month. The unemployment rate declined to 5.9% in September from 6.1% in August and has dipped 130 bps from 7.2% in September 2013. Fitch projects the unemployment rate to average approximately 6.2% in 2014 and decline to an average of 5.8% in 2015. Total Non-Farm Payroll and Unemployment Rates (1975 2013) Unemployment Rate Total Non-Farm Payroll (Unemployment Rate, %) 10 8 6 4 2 (Non-Farm Payroll, Mil.) 150 130 110 90 70 0 50 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Source: Bureau of Labor Statistics. Personal Income and Consumer Spending Personal income exhibited an upward trend in late 2009, which continued in 2010, 2011, 2012, 2013 and so far in 2014. Personal income increased 0.5% sequentially in January 2014, grew 0.6% in February, 0.6% in March, 0.4% in April, 0.5% in May, 0.5% in June, 0.2% in July, and 0.3% in August. Disposable personal income advanced 0.6% in January, 0.6% in February, 0.6% in March, 0.5% in April, 0.5% in May, 0.5% in June, 0.2% in July, and 0.3% in August. Consumer spending remained somewhat sluggish throughout 2009 and into 2010, and then picked up momentum later in the year. Personal consumption expenditures grew 3.6% in 2010, 4.8% in 2011, 3.7% in 2012 and 3.6% in 2013. Real consumption expenditures expanded 1.9% in 2010, 2.3% in 2011, 1.8% in 2012 and 2.4% in 2013. Real month-over-month growth The Tale of the Measuring Tape 10

averaged only 0.2% during the first eight months of 2014. Nominal growth averaged 0.3% for that same period. Personal Income and Expenditures Personal Income ($ Bil.) Disposable Personal Income ($ Bil.) Personal Consumption Expenditures ($ Bil.) YOY % Change YOY % Change YOY % Change 1981 2,595.9 2,250.7 1,937.5 1982 2,778.8 7.0 2,424.7 7.7 2,073.9 7.0 1983 2,969.7 6.9 2,617.4 7.9 2,286.5 10.3 1984 3,281.3 10.5 2,903.9 10.9 2,498.2 9.3 1985 3,515.9 7.1 3,098.5 6.7 2,722.7 9.0 1986 3,725.1 6.0 3,287.9 6.1 2,898.4 6.5 1987 3,955.3 6.2 3,466.3 5.4 3,092.1 6.7 1988 4,275.3 8.1 3,770.4 8.8 3,346.9 8.2 1989 4,618.2 8.0 4,052.1 7.5 3,592.8 7.3 1990 4,904.5 6.2 4,311.8 6.4 3,825.6 6.5 1991 5,071.1 3.4 4,484.5 4.0 3,960.2 3.5 1992 5,410.8 6.7 4,800.3 7.0 4,215.7 6.5 1993 5,646.8 4.4 5,000.2 4.2 4,471.0 6.1 1994 5,934.7 5.1 5,244.2 4.9 4,741.0 6.0 1995 6,276.5 5.8 5,532.6 5.5 4,984.2 5.1 1996 6,661.9 6.1 5,829.9 5.4 5,268.1 5.7 1997 7,075.0 6.2 6,148.9 5.5 5,560.7 5.6 1998 7,587.7 7.2 6,561.3 6.7 5,903.0 6.2 1999 7,983.8 5.2 6,876.3 4.8 6,307.0 6.8 2000 8,632.8 8.1 7,400.5 7.6 6,792.4 7.7 2001 8,987.1 4.1 7,752.3 4.8 7,103.1 4.6 2002 9,149.5 1.8 8,099.2 4.5 7,384.1 4.0 2003 9,487.6 3.7 8,485.8 4.8 7,765.5 5.2 2004 10,048.3 5.9 9,002.3 6.1 8,260.0 6.4 2005 10,609.3 5.6 9,400.8 4.4 8,794.1 6.5 2006 11,389.0 7.3 10,036.9 6.8 9,304.0 5.8 2007 11,994.9 5.3 10,507.0 4.7 9,750.5 4.8 2008 12,429.6 3.6 10,994.4 4.6 10,013.6 2.7 2009 12,087.5 (2.8) 10,942.5 (0.5) 9,847.0 (1.7) 2010 12,429.3 2.8 11,237.9 2.7 10,202.2 3.6 2011 13,202.0 6.2 11,801.4 5.0 10,689.3 4.8 2012 13,887.7 5.2 12,384.0 4.9 11,083.1 3.7 2013 14,166.9 2.0 12,505.1 1.0 11,484.3 3.6 Seasonally Adjusted Annual Rates (% Change from Previous Quarter) 1Q08 12,360.6 1.5 10,831.2 1.6 9,974.4 0.6 2Q08 12,512.4 1.2 11,175.4 3.2 10,095.8 1.2 3Q08 12,472.1 (0.3) 11,029.7 (1.3) 10,124.9 0.3 4Q08 12,373.4 (0.8) 10,941.4 (0.8) 9,859.6 (2.6) 1Q09 12,054.4 (2.6) 10,858.9 (0.8) 9,770.2 (0.9) 2Q09 12,110.4 0.5 10,985.2 1.2 9,769.8 3Q09 12,059.5 (0.4) 10,933.0 (0.5) 9,890.8 1.2 4Q09 12,125.5 0.5 10,993.0 0.5 9,957.1 0.7 1Q10 12,187.1 0.5 11,041.5 0.4 10,044.5 0.9 2Q10 12,365.6 1.5 11,197.6 1.4 10,137.7 0.9 3Q10 12,496.1 1.1 11,286.7 0.8 10,233.4 0.9 4Q10 12,668.6 1.4 11,425.7 1.2 10,393.2 1.6 1Q11 13,025.1 2.8 11,652.2 2.0 10,523.5 1.3 2Q11 13,142.2 0.9 11,751.7 0.9 10,651.4 1.2 3Q11 13,294.8 1.2 11,876.6 1.1 10,754.5 1.0 4Q11 13,345.8 0.4 11,924.9 0.4 10,827.9 0.7 1Q12 13,650.7 2.3 12,186.0 2.2 10,959.7 1.2 2Q12 13,776.1 0.9 12,296.6 0.9 11,030.6 0.6 3Q12 13,828.9 0.4 12,323.8 0.2 11,119.8 0.8 4Q12 14,295.1 3.4 12,729.7 3.3 11,222.6 0.9 1Q13 13,977.2 (2.2) 12,340.4 (3.1) 11,351.1 1.1 2Q13 14,131.3 1.1 12,470.7 1.1 11,414.3 0.6 3Q13 14,247.4 0.8 12,585.8 0.9 11,518.7 0.9 4Q13 14,311.7 0.5 12,623.7 0.3 11,653.3 1.2 1Q14 14,484.7 1.2 12,772.9 1.2 11,728.5 0.6 2Q14 14,707.7 1.5 12,984.7 1.7 11,870.7 1.2 YOY Year over year. Source: Bureau of Economic Analysis. The Tale of the Measuring Tape 11

Retail Sales Advance estimates of U.S. retail and food service sales (excluding motor vehicles and parts) for August improved 0.3% on a seasonally adjusted basis compared with July and grew 4.1% relative to August 2013. For the three-month period ending August 2014, retail sales increased 1.2% versus the March 2014 May 2014 period and grew 3.8% compared with the same period last year. For the first eight months of 2014, retail sales grew 2.8% compared with the same period in 2013. Advance estimates of sales from building materials and garden and equipment stores in August 2014 were $28 billion on a seasonally adjusted basis, a 6.7% increase from the August 2013 estimate of $26.2 billion and 1.4% above the July 2014 estimate of $27.6 billion. On a trailing-three-months basis from June 2014 through August 2014, sales from building materials and garden and equipment stores grew 2.6% compared with March 2014 May 2014 and advanced 5.9% compared with June 2013 August 2013. For the first eight months of 2014, total sales of $221.6 billion for this segment grew 4.4% compared with the same period last year. Consumer Confidence Consumer confidence, as measured by the Conference Board s Consumer Confidence Index, was on a consistent downward trajectory from early 2007 (111.2) until February 2009 (25.3). As 2009 evolved, the index showed some recovery (albeit somewhat erratically), rising to 54.5 in August. The index slipped to 53.6 by year s end. It dropped sharply in February 2010 (46.4) from January (56.5), but then rose steadily the following three months, reaching 62.7 in May. At the time, the index was particularly volatile, dropping as low as 48.6 in September 2010 and rising to 72.0 in February 2011. Then the index started slipping, reaching 40.9 in October 2011. Thereafter, it improved steadily, reaching 71.6 in February 2012, and then contracted to 61.3 in August. The index next shot up to 73.1 in October 2012 and bottomed at 61.9 in March 2013 and then steadily rebounded to 82.1 in June. The index held steady in the low 80s for another three months and then dipped to the low 70s. The index rebounded to 77.5 in December, 83.9 in March, 86.4 in June, 90.3 in July and 93.4 August. The index fell to 86.0 during the month of September. The Expectations Index edged down to 83.7 in September from 93.1 in August. Consumer Confidence Index (1985 = 100) (%) 120 100 80 60 40 20 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: The Conference Board. The Tale of the Measuring Tape 12

Construction Employment Construction Employment Increasing Construction is a meaningful portion of the U.S. economy and was an above-average contributor to economic growth during the three years concluding in 2005, in terms of both goods and services. During economic downturns, construction employment declines often represented a substantial portion of total job losses. Conversely, growth of jobs within the construction sector tends to be a relatively sizable contributor to total employment growth statistics. In 2004, 2005 and 2006, construction employment s shares of total employment growth were 15.1%, 14.5%, and 13.2%, respectively. However, construction employment lost 61,000 jobs in 2007, 468,000 jobs in 2008, 1,146,000 jobs in 2009, and 498,000 jobs in 2010. As the housing cycle stabilized and started to recover, 15,000 construction jobs were added in 2011, 113,000 in 2012 and 181,000 in 2013. Employment for residential remodelers grew 5,900 in 2011, 11,500 in 2012 and 14,400 in 2013 after losing 13,500 jobs in 2010; 37,600 in 2009; 21,700 in 2008 and 4,400 in 2007. Currently, the construction unemployment rate stands at 7.0%, down from 8.5% a year ago and 11.3% in August 2012. Construction employment on a seasonally adjusted basis increased 16,000 in September and has been on an upward trend since the beginning of the year. Employment for residential remodelers on a seasonally adjusted basis grew by 500 in September compared with August and is up by 9,900 since December 2013. Since the housing market s trough in January 2011, the construction industry added 1.3 million jobs. However, construction employment is still 21% below peak levels seen in 2006. With new residential construction picking up and non-residential construction moderately improving, the industry is positioned to become a job creator for all of 2014 and 2015. However, the construction trade is typically a skilled workforce, so replacing qualified workers who left during the downturn could be challenging. Some retired, some moved onto other higher-paying jobs, and some left the country. The challenge may be to find qualified trades people, and at affordable wages. Construction Employment Trends Civilian Civilian Employment Construction Construction Employment Construction Employment Construction Employment Residential Remodelers (000) Employment YOY Change YOY % Change Employment YOY Change YOY % Change Residential Remodelers YOY Change YOY % Change 1991 117,718 (1,075) (0.9) 4,780 (483) (9.2) 171.9 (27.8) (13.9) 1992 118,492 774 0.7 4,608 (172) (3.6) 163.9 (8.0) (4.7) 1993 120,259 1,767 1.5 4,779 171 3.7 173.9 10.0 6.1 1994 123,060 2,806 2.3 5,095 316 6.6 187.2 13.3 7.6 1995 124,900 1,840 1.5 5,274 179 3.5 188.5 1.3 0.7 1996 126,708 1,808 1.4 5,536 262 5.0 198.7 10.2 5.4 1997 129,558 2,850 2.2 5,813 277 5.0 208.1 9.4 4.7 1998 131,463 1,905 1.5 6,149 336 5.8 218.5 10.4 5.0 1999 133,488 2,025 1.5 6,545 396 6.4 239.5 21.0 9.6 2000 136,891 3,403 2.5 6,787 242 3.7 247.1 7.6 3.2 2001 136,933 42 0.0 6,826 39 0.6 233.8 (13.3) (5.4) 2002 136,485 (448) (0.3) 6,716 (110) (1.6) 243.0 9.2 3.9 2003 137,736 1,251 0.9 6,735 19 0.3 254.7 11.7 4.8 2004 139,252 1,516 1.1 6,976 241 3.6 272.7 18.0 7.1 2005 141,730 2,478 1.8 7,336 360 5.2 288.7 16.0 5.9 2006 144,427 2,697 1.9 7,691 355 4.8 310.2 21.5 7.4 2007 146,047 1,620 1.1 7,630 (61) (0.8) 305.8 (4.4) (1.4) 2008 145,362 (685) (0.5) 7,162 (468) (6.1) 284.1 (21.7) (7.1) 2009 139,877 (5,485) (3.8) 6,016 (1,146) (16.0) 248.1 (37.6) (13.2) 2010 139,064 (813) (0.6) 5,518 (498) (8.3) 234.6 (13.5) (5.4) 2011 139,869 805 0.6 5,533 15 0.3 240.5 5.9 2.5 2012 142,469 2,600 1.9 5,646 113 2.0 252.0 11.5 4.8 2013 143,929 1,460 1.0 5,827 181 3.2 266.4 14.4 5.7 YOY Year over year. Source: U.S. Bureau of Labor Statistics. The Tale of the Measuring Tape 13

According to the U.S. Bureau of Labor Statistics, hourly wages for residential remodelers increased only marginally during 2010 2012. However, hourly wages increased significantly since the beginning of 2013, advancing 4.6% during the year compared with 2012. This trend continued during the early part of 2014, with hourly wages growing 4.7% in January, 4.8% in February and 3.1% in March. The growth rate decelerated during the second quarter of 2014, with an average growth rate of 1.2%. For July and August 2014, hourly wages for residential remodelers fell 0.2% and 2.1%, respectively, on a YOY basis. The wage inflation for residential remodelers, together with higher costs for certain building materials, will likely push the cost of remodeling projects higher. Construction Workers Compensation Trends Average Hourly Earnings All Private Production YoY% Construction YoY % Residential YoY % Workers ($) Change Workers ($) Change Remodelers ($) Change 1992 10.77 2.5 13.81 1.2 11.97 2.1 1993 11.05 2.6 14.04 1.7 12.13 1.3 1994 11.34 2.6 14.38 2.4 12.35 1.8 1995 11.65 2.7 14.73 2.4 12.72 3.0 1996 12.04 3.3 15.11 2.6 12.92 1.6 1997 12.51 3.9 15.67 3.7 13.59 5.2 1998 13.01 4.0 16.23 3.6 14.29 5.2 1999 13.49 3.7 16.80 3.5 14.76 3.3 2000 14.02 3.9 17.48 4.0 15.28 3.5 2001 14.54 3.7 18.00 3.0 15.81 3.5 2002 14.97 3.0 18.52 2.9 16.09 1.8 2003 15.37 2.7 18.95 2.3 16.97 5.5 2004 15.69 2.1 19.23 1.5 17.72 4.4 2005 16.12 2.7 19.46 1.2 17.22 (2.8) 2006 16.75 3.9 20.02 2.9 17.27 0.3 2007 17.42 4.0 20.95 4.6 18.02 4.3 2008 18.07 3.7 21.87 4.4 18.69 3.7 2009 18.61 3.0 22.66 3.6 18.98 1.6 2010 19.05 2.4 23.22 2.5 19.08 0.5 2011 19.44 2.0 23.65 1.9 19.14 0.3 2012 19.74 1.5 23.97 1.4 19.17 0.2 2013 20.13 2.0 24.22 1.0 20.15 5.1 August 2014 20.50 2.4 24.93 2.4 20.21 (2.1) August 2013 20.02 2.1 24.35 0.4 20.65 7.7 Index (December 2005 = 100). YoY Year over year. Source: U.S. Bureau of Labor Statistics. Construction Materials Materials Prices Continue Year-Over-Year Growth The Producer Price Index (PPI) for materials and components for construction grew during 2013 and the trend has continued in 2014. Overall, the PPI for materials and components for construction increased 2.2% year over year during July 2014 after rising 2.1% in June, 1.8% in May, 1.4% in April, 1.8% in March, 1.6% in February and 1.6% in January. The index grew about 2% for all of 2013 after rising 2.6% in 2012 and 3.5% in 2011. The index also has increased sequentially month over month since November 2013. The Tale of the Measuring Tape 14

2004 2009 The construction industry saw steep price increases for a variety of materials from 2004 2006. Prices for materials and components for construction, as compiled by the Bureau of Labor Statistics PPI, grew 8.3%, 6.1% and 6.7% in 2004, 2005 and 2006, respectively. From 1990 2003, prices for construction materials and components increased on average about 1.7% per year. Price increases eased to 2.2% in 2007, but resumed an upward momentum, rising 6.7% in 2008. The increase in crude oil prices in early 2008 pushed the price of petroleum-based raw materials significantly higher, prompting producers to raise prices. In 2009, the steep decline in new housing starts and drop in nonresidential construction significantly decreased demand for building materials. The drop in demand, combined with reduced input costs, resulted in lower prices for building products, particularly during secondhalf 2009. In 2009, the PPI for materials and components for construction fell 1.2%. 2010 2014 In 2010, prices for construction materials rose 1.4% compared with 2009. The materials and components PPI for construction increased 3.5% during 2011, 2.6% in 2012 and 2.0% in 2013. A similar trend has occurred during 2014: Prices grew moderately for a range of construction materials during the first eight months of the year. In August 2014, insulation prices were 5.2% higher than in August 2013, while prices for gypsum products, cement, concrete products, steel mill products, and lumber and plywood grew 7.7%, 5.6%, 4.2%, 4.3% and 11.0%, respectively, on a YOY basis. Prices for architectural coatings were 1.0% higher while prices for copper and brass mill shapes fell 1.1% YOY. Overall, the August 2014 PPI for materials and components for construction increased 2.3% compared with August 2013 and grew 0.4% relative to July 2014. Materials Price Trends Producer Price Index To August 2014 from 12 Months through December July May August (% Change) 2010 2011 2012 2013 2014 2014 2013 Materials and Components for Construction 1.4 3.5 2.6 2.0 0.4 0.6 2.3 Gypsum Products (3.4) (2.3) 14.1 16.7 (0.9) 1.7 7.7 Insulation Materials 1.7 6.3 5.6 5.3 0.6 0.1 5.2 Architectural Coatings (2.1) 4.6 12.0 (0.4) 0.0 (0.1) 1.0 Lumber and Plywood 10.9 (1.1) 5.1 12.9 1.5 1.5 11.0 Cement (6.4) (2.9) 1.5 4.6 0.0 0.1 5.6 Concrete Products (1.6) 0.1 2.0 2.8 0.5 1.3 4.2 Steel Mill Products 16.0 12.8 (3.8) (6.3) 0.3 1.0 4.3 Copper and Brass Mill Shapes 21.9 11.8 (8.4) (4.6) (0.7) 1.7 (1.1) Aluminum Mill Shapes 11.6 0.6 (1.9) (4.6) 3.1 3.7 8.4 Flat Glass (3.3) 1.4 1.6 3.0 0.7 0.6 2.2 Plastic Construction Products 2.5 4.2 4.1 0.5 0.5 0.3 2.2 Source: U.S. Department of Labor, Bureau of Labor Statistics. The Tale of the Measuring Tape 15

Materials and Components for Construction (YOY Annual Change in Producer Price Index) (%) 9.0 6.0 3.0 0.0 (3.0) 1.3 1.3 1.6 4.3 3.5 4.0 1.1 2.0 0.2 1.4 1.2 (0.1) 0.5 1.5 8.3 6.1 6.7 2.2 6.7 (1.2) 3.5 2.6 2.0 1.4 1.7 1.7 1.6 1.5 1.6 1.6 1.8 1.5 1.8 2.1 2.2 2.3 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Architectural Coatings (YOY Annual Change in Producer Price Index) (%) 15.0 12.0 10.0 5.0 0.0 (5.0) 8.6 8.3 8.0 8.3 6.4 3.9 3.7 1.3 1.3 0.9 1.5 2.3 1.6 1.0 1.9 3.4 3.1 3.7 4.7 4.6 0.5 (2.1) (0.4) (0.9)(1.0) (0.9) (0.8) (0.7) (0.3) (0.5) (0.2)(0.0) 0.6 0.5 0.9 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Plumbing, Fixture, Fitting and Trim (YOY Annual Change in Producer Price Index) (%) 9.0 7.4 6.0 3.0 0.0 4.1 4.3 3.1 3.6 2.7 2.7 2.9 2.3 1.3 0.9 1.1 0.2 0.9 2.0 4.2 4.8 4.2 3.6 2.1 2.9 2.7 2.7 2.7 2.7 2.6 2.2 1.6 1.6 1.6 1.6 1.6 1.6 0.7 0.8 (3.0) (0.9) YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. The Tale of the Measuring Tape 16

Heating Equipment (YOY Annual Change in Producer Price Index) (%) 8.0 6.0 4.0 2.0 2.6 2.6 1.3 1.6 1.5 5.9 4.2 1.4 1.5 1.7 0.9 1.1 0.7 1.8 4.5 4.0 3.2 3.2 6.3 3.9 0.7 2.8 2.9 1.5 2.1 1.7 1.4 1.4 1.4 1.3 1.3 1.6 1.5 1.6 1.5 1.6 0.0 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Gypsum Product Manufacturing (YOY Annual Change in Producer Price Index) (%) 30 20 10 0 (10) (20) (30) 1.3 (6.3) 7.6 0.2 23.8 13.4 (0.4) 16.0 10.1 3.7 (3.1) (21.3) 15.114.4 18.5 7.6 1.3 (15.2) (9.8) (0.6) (2.8)(2.2) 12.5 14.9 14.4 13.7 12.9 14.4 12.1 11.5 9.3 4.8 3.5 6.8 8.2 7.2 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Insulation (YOY Annual Change in Producer Price Index) (%) 15.0 10.0 5.0 0.0 (5.0) (10.0) 1.3 2.2 (7.7) 5.8 6.2 3.4 0.1 (1.0) 1.7 10.0 (2.4) (0.8) 6.5 3.6 5.4 0.5 0.4 (3.1) (2.5) 6.3 7.2 7.6 7.6 8.4 10.0 8.4 9.3 5.6 6.7 6.8 7.6 5.3 5.9 5.2 1.7 1.7 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Carpets and Rugs (YOY Annual Change in Producer Price Index) (%) 9.0 6.0 3.0 0.0 (3.0) 1.3 0.8 (0.4) (0.8) 1.6 1.9 2.2 1.4 0.4 (1.4) 2.2 0.9 0.2 2.7 2.3 7.9 5.9 1.2 2.1 4.5 0.8 3.8 2.1 0.6 2.0 2.7 3.0 3.8 4.8 4.0 3.2 2.1 2.5 1.9 1.6 (0.3) YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. The Tale of the Measuring Tape 17

Lumber and Wood Products (YOY Annual Change in Producer Price Index) (%) 20 15 10 5 0 (5) (10) 1.3 1.9 11.0 18.7 3.4 (1.1)(1.1) 4.4 (2.6) 2.5 (2.9) (2.1)(0.6) 2.4 10.3 0.5 (1.1)(1.0)(0.6) (4.4) 5.4 1.0 3.5 6.6 5.5 6.8 6.0 5.4 4.5 4.2 3.5 2.3 4.0 5.2 5.8 5.6 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Hardwood Flooring (YOY Annual Change in Producer Price Index) (%) 20 15 10 5 0 (5) (10) 1.3 (2.3) 9.4 14.0 5.5 (0.8) (4.6) 10.5 9.9 (6.1) 0.3 (0.5) (4.0) 10.0 10.8 (2.6) (4.6) (3.9) 0.1 (0.6) 5.2 1.4 (0.1) 13.2 15.6 16.7 16.5 16.7 13.3 14.7 11.5 12.0 8.1 8.1 7.9 6.1 YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Asphalt Shingle and Coatings Materials Manufacturing (YOY Annual Change in Producer Price Index) (%) 30 20 10 0 (10) 1.3 1.8 (1.9) 0.6 (1.3) 4.3 1.1 0.5 (0.2)(0.2) 4.4 3.1 3.1 4.7 1.1 10.1 10.2 1.2 24.3 18.2 5.0 0.5 0.3 2.4 2.6 1.4 (0.4)(0.7) (1.1) (0.7) 1.0 (1.2) (4.9)(4.7) (6.8)(6.7) YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. Wood Kitchen Cabinets (YOY Annual Change in Producer Price Index) (%) 6.0 4.0 2.0 1 4 3 1 4 3 Stock 5 5 4 4 4 3 3 3 3 2 2 2 2 2 2 2 2 2 1 1 1 1 6 4 4 4 3 3 3 3 2 2 1 1 Custom 5 4 4 4 4 4 4 4 3 3 3 3 3 3 4 4 4 4 4 3 3 3 3 3 3 3 3 3 2 2 0.0 (2.0) (1) (0) YOY Year over year. Source: U.S. Department of Labor, Bureau of Labor Statistics. The Tale of the Measuring Tape 18

Credit Environment Historically, home equity loans and home equity lines of credit (HELOCs), as well as cash-out refinancing have been important sources of funding for home improvement spending, particularly for larger and more expensive projects. When the housing market was booming, getting approved for a home equity loan or line of credit was fairly simple. During 2004 2006, strong housing appreciation, historically low interest rates and a desire to convert accumulated home equity into spendable funds led many homeowners to refinance their mortgages or take out home equity loans, giving them more money to spend. This has not been the case the past few years. Bank lending standards remain tight, making it difficult for homeowners to use credit to finance remodeling projects. Cash-out refinancings also have declined significantly the past few years and remain considerably below the peak level recorded in 2006. Home Equity Loans and HELOCs Borrowings under home equity loans have declined since 2008. According to the Fed s Flow of Funds report, outstanding home equity loans fell $18.5 billion in 2008, $82.5 billion in 2009, $104.8 billion in 2010, $75 billion in 2011, $83.9 billion in 2012 and $66.7 billion in 2013. During second-quarter 2014, total home equity loans on a seasonally adjusted basis declined $44.9 billion from second-quarter 2013 levels. The home equity loan balance of $685.6 billion at the end of second-quarter 2014 is roughly 38% below the peak level of $1.1 trillion recorded during fourth-quarter 2007. Home equity loans and HELOCs are often used to finance major expenses such as home renovations, medical bills or college education. According the Census Bureau s 2011 American Housing Survey (AHS Report), published March 2013, approximately 54% of HELOC dollars were used for home additions, improvements and repairs in 2011. This percentage grew from 51% in 2009, 49% in 2007 and 48% in 2005. Cash-Out Refinancing Remains Weak Cash-out refinancing dropped significantly from the record levels reported during 2006. Freddie Mac estimates homeowners pulled roughly $31.2 billion of equity out of their homes through refinancing of prime first mortgage liens during 2013, a 90.3% decline from the record $320 billion extracted in 2006. According to Freddie Mac, cash-out borrowers (those who increased their loan balance by at least 5%) represented 21% of all refinance loans during second-quarter 2014 compared with 17% during the first quarter and 15% from the same time last year. By comparison, the average cash-out share during 1985 2008 was 50% and the peak was 89% during third-quarter 2006. During second-quarter 2014, about $7.8 billion of home equity was cashed out by homeowners when they refinanced their conventional prime-credit home mortgages, up from $5.0 billion in the first quarter, but substantially less than the $83.7 billion of cash taken out during the peak reported in second-quarter 2006. Adjusting for inflation, Freddie Mac pointed out annual cash-out volumes from 2010 through 2013 have been the smallest since 1997. Fitch believes cash-out refinancing activity will continue to be constrained in the intermediate term due to low homeowners equity and, although slightly loosening, still tight lending standards. The Tale of the Measuring Tape 19

Office of the Chief Economist Cash-Out Refinance Report Annual Cash-Out Volume for All Prime Conventional Loans ($ Bil., As of 2Q14) Total Cash-Out Dollars as a Percentage of Aggregate Refinanced Originations UPB (%) Volume of Cash-Out and Second Mortgages/ HELOC Consolidation Total Home Equity Year Cashed Out 1993 4.2 19.9 39.3 1994 7.2 13.8 29.2 1995 7.5 11.2 21.7 1996 8.4 17.4 34.5 1997 8.6 21.4 39.1 1998 6.1 39.9 72.4 1999 9.0 37.0 71.1 2000 11.5 26.2 60.4 2001 8.7 82.9 135.5 2002 8.0 111.1 170.5 2003 7.2 147.5 226.2 2004 13.0 143.2 187.2 2005 21.5 262.6 301.2 2006 29.2 320.0 348.2 2007 26.0 239.4 267.9 2008 17.5 95.7 117.4 2009 8.0 73.2 107.5 2010 4.5 33.1 61.7 2011 4.1 26.9 53.2 2012 2.8 29.4 63.5 2013E 3.7 31.2 63.2 Quarterly Information 1Q08 14.9 33.7 41.7 2Q08 18.3 31.4 38.0 3Q08 23.3 18.5 21.8 4Q08 14.1 12.1 16.0 1Q09 8.6 22.9 32.1 2Q09 8.1 24.6 34.8 3Q09 8.5 15.4 22.0 4Q09 5.9 10.3 18.5 1Q10 5.8 7.3 11.5 2Q10 5.6 7.3 11.8 3Q10 3.8 8.5 16.5 4Q10 3.4 9.9 21.8 1Q11 4.5 7.1 12.5 2Q11 5.0 5.5 9.5 3Q11 3.7 6.3 12.8 4Q11 3.2 8.0 18.2 1Q12 2.9 7.0 14.4 2Q12 2.5 5.9 13.0 3Q12 2.8 7.7 16.4 4Q12 2.9 8.8 19.7 1Q13E 3.3 8.5 17.9 2Q13E 3.5 9.4 18.7 3Q13E 3.7 6.5 13.3 4Q13E 4.6 6.7 13.4 1Q14E 5.3 5.0 9.1 2Q14E 6.6 7.8 13.0 E Indicates the value is an estimate and is subject to revision. UPB Unpaid principal balance. HELOC Home equity lines of credit. Source: Freddie Mac. Mortgage Rates Are Higher but Remain Very Attractive Thirty-year mortgage rates increased to an average rate of 3.98% during 2013 after averaging 3.66% in 2012. The most recent Freddie Mac average mortgage rate was 4.19%, down 1 bp from the previous week but about 86 bps higher than the average rate during January 2013, a recent low point for mortgage rates. While the current rates are still below historic averages, the increase in mortgage rates during the past year and a half has negatively affected refinancing activity. According to Freddie Mac, the refinance share of mortgage activity during second-quarter 2014 fell below 50% for the first time since third-quarter 2008. According to the Mortgage Bankers Association (MBA), refinance The Tale of the Measuring Tape 20

activity during July 2014 fell 2.6% compared with the previous month and is 42.9% lower from a year ago. Refinance activity has shown 14 months of year-over-year decreases. The MBA forecasts a 60% decline in refinance originations during 2014 and an additional 7% decrease in 2015. The decrease in refinancing activity could further constrain cash-out refinancing. Monthly Average Commitment Rate 30-Year Conventional Fixed-Rate Mortgage (%) 20 16 12 8 4 0 Source: Freddie Mac. Renovation Spending Tied to Cash-Out Refinancing According to the latest AHS Report, approximately 50% of homeowners who refinanced their primary mortgage and received cash (median amount of $26,000) from the transaction used a portion of those proceeds for home additions, improvements or repairs. Roughly 31% of those who received cash as part of the refinancing spent 50% or more of the cash received for renovation projects while 18% used all the proceeds for home remodeling. According to a Federal Reserve survey on mortgage refinancing activity in 2001 and early 2002, many homeowners liquefied some of the equity they accumulated in their homes by borrowing more than they needed to pay off their mortgage and cover the transaction costs of the refinancing. These homeowners used the funds raised in cash-out refinancing to make home improvements, repay other debts or purchase goods and services or other assets. For homeowners in the survey who refinanced in 2001 and the first half of 2002, repayment of other debt was the most common use of funds, accounting for about 51% of the loan volume. Paying for home improvements was cited by 43% of those who took out cash. In terms of dollars (rather than volume of loans), homeowners who took cash out from refinancing spent about 35% of liquefied equity on home improvements and used 26% to pay off debt. Of the 35% of liquefied equity spent for home improvement, the average amount spent was about $20,530. The survey also indicated nearly 40% of homeowners who extracted equity during that period took out more than $25,000. Cash Received in Primary Mortgage Refinance 2005 2007 2009 2011 # of Homeowners Who Received Cash in Primary Mortgage Refinance 2,375,000 2,209,000 1,587,000 2,543,000 Median Cash Received ($) 28,084 31,275 30,000 26,000 % Who Used Cash for Home Additions, Improvement or Repairs 55.7 55.9 54.6 49.4 % Who Used 50% or More of Cash Proceeds for Home Additions, Improvements and Repairs 39.3 35.5 41.5 30.9 % Who Used 100% of Cash Proceeds for Home Additions, Improvements and Repairs 23.5 18.7 26.8 18.0 Source: American Housing Survey 2005-2011 (Table 3-15). The Tale of the Measuring Tape 21

Home Equity Underwriting Standards Easing but Remain Tight The Fed s latest (July 2014) quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices found about 87.3% of domestic respondents reported no change in their standards for approving applications for revolving HELOCs the past three months. The survey also noted some net easing of standards on HELOCs, with about 8.5% of respondents easing standards and 4.2% tightening standards. The July survey is the seventh consecutive quarter in which the survey showed a net easing. The survey indicated about 33.8% of banks reported demand for revolving HELOCs were moderately stronger the past three months as well. This compares with generally weaker demand reported during the past two quarters. Underwriting for Consumer Loans Slightly Easing Based on the Senior Loan Officer Opinion Survey on Bank Lending Practices, credit underwriting standards for consumer loans seem to be easing as well, as 17.1% of banks surveyed indicated they are somewhat more willing to make consumer installment loans now than three months ago while 1.4% were less willing. About 81.4% of the respondents indicated no change in their willingness to make consumer installment loans. According to the survey, 13% of banks indicated standards for approving applications for credit cards eased, while 87% reported no change. Similarly, about 8.5% indicated underwriting standards for other consumer loans (other than credit cards and auto loans) eased, while 90.1% reported no change and 1.4% tightened standards. Underwriting standards for both credit cards and other consumer loans have shown a net easing since the latter part of 2010. Senior Loan Officer Opinion Survey on Bank Lending Practices (Survey Regarding Revolving Home Equity Lines of Credit) Bank s Credit Standards for Approving Applications for Revolving Home Equity Lines of Credit Over the Past Three Months Demand for Revolving Home Equity Lines of Credit Over the Past Three Months (%) Tightened Remained Unchanged Eased Weaker About the Same Stronger January 2008 59.3 40.7 46.3 44.4 9.3 April 2008 70.3 29.6 37.1 44.4 18.6 July 2008 80.4 19.6 33.3 43.1 23.5 October 2008 78.9 19.2 1.9 42.3 38.5 19.2 January 2009 57.7 42.3 40.4 38.5 21.1 April 2009 50.0 50.0 50.0 28.8 21.1 July 2009 35.9 60.4 3.8 28.3 56.6 15.1 October 2009 32.2 67.9 39.3 53.6 7.1 January 2010 9.3 88.9 1.9 48.1 44.4 7.4 April 2010 7.3 80.0 12.7 38.1 50.9 10.9 July 2010 92.9 7.1 14.3 73.2 12.5 October 2010 14.3 82.1 3.6 25.0 55.4 19.7 January 2011 9.1 85.5 5.5 21.8 69.1 9.1 April 2011 1.9 90.7 7.4 33.4 53.7 13.0 July 2011 1.9 88.7 9.4 26.4 54.7 18.9 October 2011 2.0 94.0 4.0 32.0 64.0 4.0 January 2012 5.5 89.1 5.5 23.6 70.9 5.5 April 2012 5.4 91.1 3.6 16.1 71.4 12.5 July 2012 1.6 96.8 1.6 15.9 61.9 22.2 October 2012 9.2 87.7 3.1 12.3 69.2 18.5 January 2013 4.5 89.4 6.1 21.2 68.2 10.6 April 2013 3.1 90.8 6.2 21.5 70.8 7.7 July 2013 2.9 92.6 4.4 11.8 63.2 25.0 October 2013 2.8 88.4 8.7 13.0 65.2 21.7 January 2014 4.2 88.7 7.0 19.7 63.4 16.9 April 2014 7.1 84.3 8.6 27.1 52.9 20.0 July 2014 4.2 87.3 8.5 7.0 59.2 33.8 Source: Federal Reserve. The Tale of the Measuring Tape 22

Net Percentage of Domestic Banks Tightening Standards for Consumer Loans (%) 75 Credit Cards Other Consumer Loans 50 25 0 (25) 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Other Consumer Loans excludes autos starting in the second quarter of 2011. Source: The Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices. Household Net Worth Increasing Household net worth, the difference between the values of households assets and liabilities, was $81.5 trillion at the end of second-quarter 2014, about $1.4 trillion more than at the end of the first quarter, according to the Federal Reserve s Second Quarter 2014 Flow of Funds Report. In the second quarter, the value of residential real estate owned by households increased about $170 billion, while the value of corporate equities and mutual funds increased more than $937 billion. Since reaching a five-year low of $55 trillion in first-quarter 2009, net worth improved by $26.5 trillion and is now $13.6 trillion above the previous record high of $67.9 trillion reached in the quarter ended June 2007, six months before the recession began. Household Net Worth ($ Trn.) 100 80 60 40 20 Source: Federal Reserve Flow of Funds Report (Includes households and nonprofit organizations). Household Assets ($ Trl.) 25 20 15 10 5 0 Corporate Equities and Mutual Funds Real Estate Source: Federal Reserve Flow of Funds Report. The Tale of the Measuring Tape 23

Remodeling Market Drivers Homeownership Rates Homeownership rates rose steadily through the 1990s and into the early part of this century. Demographics (specifically, aging baby boomers), low finance rates, attractive lending terms, government support programs and the attraction of housing as an investment all encouraged homeownership into the 2000s. More recently, the recession, followed by a sluggish economy and tighter lending, have discouraged homeownership. Rates averaged 67.8% in 2001, up from 67.4% in 2000 and 63.9% in 1990. The homeownership rate averaged 68.0% in 2002, 68.3% in 2003, 68.8% in 2004, 68.9% in 2005, 68.8% in 2006, 68.2% in 2007, 67.8% in 2008 and 67.4% in 2009. The homeownership rate was 67.1% in first-quarter 2010, edged down to 66.9% in the second and third quarters, then dropped to 66.5% in fourth-quarter 2010. The rate of homeownership slipped to 66.4% in first-quarter 2011 and 65.9% in the second quarter. It then bumped back up to 66.3% in the third quarter but fell to 66.0% in the fourth quarter. The homeownership rate was 65.4% in first-quarter 2012, 65.5% in the second and third quarters and 65.4% in the fourth quarter. The rate decreased to 65% in first-quarter 2013 and was unchanged in the second quarter. The homeownership rate bumped up to 65.3% in the third quarter and was 65.2% in the fourth quarter. The rate declined to 64.8% in first-quarter 2014 and 64.7% in the second quarter. Overall, the homeownership rate is down 4.5 percentage points since the peak in mid-2004. While homeownership rates have trended lower for all age groups, the steepest declines have occurred among young householders under the age of 45, especially since 2008. From fourth-quarter 2008 to second-quarter 2014, the drop was 7.4 points for households headed by those in the 35- to 44-year age bracket and 5.3 points for those below 35. Homeownership may continue to edge downward over at least the next year, partially because foreclosures are still forcing some current owners out of the ownership stock and credit conditions remain tight. Historically, surveys suggest the public has viewed homeownership as a sound investment, as it is the best opportunity for most families to create wealth for the long term. Of course, many potential homebuyers are choosing to delay purchase because of employment uncertainty. In the future, it will be increasingly challenging to raise ownership back to former highs, or above the 70% level, especially if somewhat tighter lending standards prevail and the government does not emphasize homeownership. Total Housing and Homeownership Rates (1985 2013) (%) 70 66 62 58 54 50 Total Housing Units (RHS) Homeownership Rate (LHS) (Mil.) 150 130 110 90 70 50 Source: U.S. Bureau of the Census. The Tale of the Measuring Tape 24

Homeownership Inevitably Trending Downward? Various surveys from the past few years suggest homeownership will be less attractive to Americans in the future, but some recent surveys have been more encouraging. The homeownership rate has gradually, but for the most part steadily, receded since reaching 69.2% in fourth-quarter 2004. A Goldman Sachs Group, Inc. study, issued during first-half 2012, projects the homeownership rate should bottom near 64% in 2014 from 65% currently. Capital Economics also projects a trough in homeownership at 64% within a year or so. Clearly, the recession and tighter lending standards have discouraged homeownership in recent years. During the last five years of the 1990s and first five years of the 2000s, public policy and increasingly liberal lending standards (especially by government-sponsored enterprises and FHA) created an opportunity for less creditworthy Americans to own homes. Prior to 1995, homeownership rates held steady in the low to mid-60s. Fitch expects that so long as the economic environment remains constrained, the ownership rate may continue to drift downward. Conversely, a more traditionally robust economy is likely to at least stabilize the homeownership rate. Zillow s Housing Confidence Index On Sept. 22, 2014, Zillow Real Estate Research released the first edition of its Zillow Housing Confidence Index. The index is designed to offer insights into homeowners and renters intentions and attitudes concerning the housing market and to be a forward-looking gauge of the housing market health. Survey highlights include: Roughly 82% of young adult renters aged 18 to 34 are confident or somewhat confident that they will eventually be able to afford a home. About 16% of this cohort said that they are not confident or somewhat unconfident. For adult renters ages 35 49, 64% responded that they are confident or somewhat confident that they will eventually be able to afford a home while 33% are not confident or somewhat unconfident. About 36% of renters surveyed ages 18 34 said they expect to buy a home within the next year and about 54% said they expect to buy a home in one to two years or three to five years. For renters ages 35 64, 55% said that they expect to buy a home within the next year and 43% 44% said that they expect to buy a home in one two years or three five years. Approximately 65% of renters ages 18 34 think that owning a home is necessary to live The Good Life and the American Dream. For renters ages 35 49, 56% think that owning a home is necessary to live The Good Life and the American Dream. About 55% of renters ages 50 64 and 62% of 65 and older renters share this view. When it comes to assessing whether owning a home is the best long-term investment, 65% of 18- to 34-year-old renters responded favorably compared with 59% for renters in the 35 49 age group, 61% for the 50 64 age group and 68% for those 65 and older renters. When asked about their expectations for home value appreciation over the next decade, about 33% of renters ages 18 34 said that they expect home values to increase by at least 7% per year over the next decade. This compares to 21% for renters in the 35 49 age group, 15% for 50- to 64-year-olds and 10% for those 65 or older. The Tale of the Measuring Tape 25

Fannie Mae National Housing Survey Fannie Mae s Monthly National Housing Survey polls the adult U.S. general population to assess their attitudes about homeownership, renting a home, the economy and household finances. The survey polls a nationally representative sample of 1,000 respondents ages 18 and older. According to the September 2014 survey, 66% of respondents indicated they will buy a house if they were moving while 28% said that they will rent. Since Fannie Mae has collected this data in 2010, 66%, on average, have responded saying that they will buy a house compared with 30% who indicated that they will rent if they moved. Share of Respondents Who Say They Would Buy or Rent if They Were Going to Move (%) 80 70 60 50 40 30 Buy 20 6/10 9/10 12/10 3/11 6/11 9/11 12/11 3/12 6/12 9/12 12/12 3/13 6/13 9/13 12/13 3/14 6/14 9/14 Source: Fannie Mae National Housing Survey. Rent BMO Harris Bank Study In mid-june 2014, BMO Harris Bank released a survey of Americans that found almost three-quarters of millennials plan to purchase a home in the next five years. The study showed the likelihood to buy is highest among millennials, and increases with a longer timeline for purchase. Also, 16% of Americans planning to buy in the next five years are first-time buyers. According to the study, two-thirds of respondents currently own and one-third rent. The top three reasons homeowners cited for owning rather than renting were having somewhere to call their own (67%), long-term investment (64%) and more stability and certainty (62%). The top three reasons people cited for renting rather than owning were financial instability (59%), less upkeep (30%) and difficulty finding affordable homes in the right location (27%). Some rented for financial reasons 12% said it was less expensive in the long run, and 11% said they were concerned about home prices falling. Of current renters, 12% say they prefer to rent and never plan to buy; 32% said they would like to buy but are not able to afford it. Prudential Real Estate Consumer Outlook Survey In May 2014, Prudential Real Estate released the results of its first-quarter 2014 Consumer Outlook Survey indicating that consumers perception of the residential real estate market is increasingly positive. Overall, 77% of consumers have a favorable view of housing, with millennials showing the highest favorability at 85%. According to the survey, respondents also indicated that they are focused on homeownership and its related opportunities, with nearly 70% saying that they are committed to buying or selling a home now. According to Prudential, as the U.S. economy continues its slow, steady recovery, more people are gaining confidence in their personal situations and are taking a longer look at homeownership s possibilities. The Tale of the Measuring Tape 26

The survey also pointed out that respondents cited higher-than-expected home prices as the top reason why it may be more difficult to buy a home now. Additionally, 76% of consumers believe that pent-up demand will create further competition for existing homes. The survey also indicated that 83% of the respondents said that they plan on buying sooner rather than later, before interest rates rise. American Express Spending and Saving Tracker According to the March 2014 American Express Spending and Saving Tracker survey, more Americans plan to buy a home than rent, reversing a 2013 trend. According to the survey, 16% of consumers are planning to move this year, up from the 15% in 2013 and 10% in 2012. Of those planning to move, about 46% plan to purchase a new home, condo or apartment, while 44% are planning to rent. By comparison, in 2013, 43% of movers planned to buy while 47% planned to rent. About 10% of those surveyed were not sure for both years. JCHS Analysis In mid-august 2012, the Harvard JCHS published an analysis of individuals views on homeownership and experiences with recent housing market distress. Using data from Fannie Mae s National Housing Survey collected in 2010 and 2011, this analysis finds little evidence to suggest individuals preferences for owning compared to renting a home have been fundamentally altered by their exposure to house price declines and loan delinquency rates, or by knowing others in their neighborhood who defaulted on their mortgages. The exceptions are underwater owners, who are less likely to expect they will own in the future, and owners who know a strategic defaulter, who are less likely to view owning as financially preferable to renting. Instead, this analysis finds individual characteristics, and in particular whether one is already an owner or renter, to be the strongest predictors of post-recession demand for homeownership. Ramifications for Improvement Spending Homeownership is an important driver for the home improvement industry. According to the JCHS, approximately 82% of home improvement and repair spending in 2011 was on owneroccupied homes, with more than 25% of these owner-occupied expenditures directed toward discretionary projects. More importantly, owner-occupants typically spend nearly five times as much on improvements per year on average as owners of renter-occupied units. Based on data from the JCHS, the average improvement spending on owner-occupied properties was $2,370 per unit in 2011, compared with $500 per rental unit the same year. Average Annual Improvement Spending per Unit (2011) ($) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Owner Rental 2001 2003 2005 2007 2009 2011 Source: Joint Center for Housing Studies of Harvard University. The U.S. Housing Stock: Ready for Renewal. The Tale of the Measuring Tape 27

Age of the U.S. Housing Stock The increasing age of the U.S. housing stock provides strong, long-term support to the remodeling market. Occupied homes 25 years or older represented approximately 39% of the total U.S. housing stock in 1985. By 2011, this figure increased to about 63.3%. The median age of the U.S. housing stock is 37 years. According to the Census Bureau, expenditures for owner-occupied, one-unit properties totaled $168.4 billion in 2007. Of this amount, $93.8 billion, or 55.7%, was spent on properties built before 1980. (This is the most current residential improvement and repair data available from the Census Bureau.) Higher Spending on Older Homes Age of the U.S. Housing Stock 2011 (Year Structure Built) 1990 2004 22% 1975 1989 21% 2005 2011 7% 1939 and Earlier 15% 1940 1959 16% 1960 1974 19% Source: American Housing Survey of the United States 2011. A 2011 JCHS report, A New Decade of Growth for Remodeling, indicated that, as a group, homeowners in the largest metropolitan areas with the newest housing stocks spent about 17% less on remodeling than the 35-metropolitan average from the study. According to the report, homeowners in areas where the median home was built in the 1980s spent $2,400 on average each year, while those homeowners in areas with older housing spent an average of about $3,300. Need for Newer Amenities Older homes typically need more remodeling work. Owners of older homes also tend to upgrade and modernize the appearance and structure of their homes. This housing segment suffers from older amenity standards and deteriorating components, factors that favorably drive remodeling spending. According to the first-quarter 2012 RMI survey, remodelers indicated the need to repair/replace old components and the desire for better/newer amenities were the top reasons given by homeowners for remodeling their homes. Home Improvement Tax Credits On Oct. 3, 2008, President George W. Bush signed into law the Emergency Economic Stabilization Act of 2008, which gave consumers new and renewed tax incentives for energyefficient homes. These incentives originally were enacted as part of the Energy Policy Act of 2005, which offered consumers federal tax credits beginning in January 2006 for purchasing energy-efficient appliances and products. On Feb. 17, 2009, President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009, which, among other things, extended the tax credits previously effective for 2009 into 2010. Tax Credits Lowered in 2011 On Dec. 17, 2010, President Obama signed the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. This law extended the tax credits for energy efficiency into 2011, although at lower levels compared to 2009 and 2010. The levels revert back to those in effect in 2006 and 2007, which were 10% of the cost of the improvement, up to a $500 tax credit per homeowner. By comparison, the 2009 and 2010 tax credits provided consumers who purchased and installed specific products such as energy-efficient windows, The Tale of the Measuring Tape 28

insulation, doors, roofs and heating and cooling equipment in their primary residences a tax credit equal to 30% of the product cost, up to $1,500. 2012 and 2013 Energy-Related Tax Credits In January 2013, federal tax credits for energy-efficient home improvement projects were reinstated as part of the American Taxpayer Relief Act of 2012. Absent this reinstatement, tax credits for qualifying energy-efficient home improvements, such as HVAC equipment, water heaters, roofing, doors, windows, and biomass stoves, which were eligible for up to 10% of the cost (up to $500) during 2011 (Residential Energy Efficiency Tax Credit), would have been eliminated. More importantly, Congress made these credits retroactive, allowing homeowners who had energy-efficient projects in 2012 eligible for the tax credit. The Residential Energy Efficiency Tax Credit expired on Dec. 31, 2013. Until 2016, homeowners who install solar, geothermal or wind systems to generate electricity or, in some cases, heat water, are eligible for a tax credit worth 30% of the cost of the system, with no upper dollar limit (Residential Renewable Energy Tax Credit). Homeowners also can receive a tax credit for up to 30% of the cost, up to $500 per 0.5 kilowatts of power generated. Added Incentive for Homeowners In addition to helping consumers lower their energy bills at home, the federal tax credits provide additional incentive for homeowners to complete certain home improvement projects. Energy Tax Credit Projects Have Grown Going green has become a popular trend in new home construction as well as home remodeling. More homeowners are focusing on energy efficiency in their homes, particularly when energy prices escalated during 2008. According to the JCHS, remodeling contractors are increasingly targeting energy-related projects and the growth potential they hold. A JCHS survey indicated that between mid-2009 and mid-2010, the share of home improvement contractors reporting they worked on projects eligible for federal energy tax credits jumped from less than 40% to almost 60%. The survey pointed out, in general, homeowners have focused primarily on small-scale green projects that offer a quick payback. Only a small minority of contractors reported that they installed more expensive renewable energy systems. According to Angie s List (a provider of research and review of local service providers), green home improvements ranked sixth among the top home remodeling and interior design trends for 2014. Angie s List said that while green home improvements have been trendy for years, remodelers and designers say homeowners continue to strive to improve the efficiency of their homes, from installing home automation systems that prevent energy waste to replacing outdated light bulbs and shower heads. According to the Houzz & Home Survey published in May 2014, 30% of respondents indicated that making their homes more energy efficient was the most important factor in their decision to complete their most recent project. This trend is also evident in the NAHB s Remodelers Survey released in April 2014, which said that improved availability and affordability of high-performing products means energy-efficient features are being incorporated into more home improvement projects. The most popular green building features in the survey are: high performance windows, including Low-E and Argon gas windows; high efficiency HVAC systems; programmable thermostats; and ENERGY STAR appliances. Other popular features include ceiling fans, moisture-control products, waterconserving fixtures and high-performance insulation. The Tale of the Measuring Tape 29

Project Trends/Return on Investment Project Returns Continue Positive Trend The home improvement industry has shown an increase in the cost recouped from home improvement projects for the second straight year after six years of declining overall returns. According to the Cost Versus Value survey conducted by Remodeling magazine, the overall return for remodeling projects improved to an average of 66.1% in 2014 from 60.6% in 2013 and 57.7 in 2012. The survey indicated that after a record-breaking year in 2005, the trend in cost recouped for all projects dropped more than 10 points in 2006 to 76.1. Overall returns fell further to 70.1% in 2007, 67.3% in 2008, 63.8% in 2009 2010, 60% in 2010 2011, and 57.7% in 2011 2012. According to the survey, improved resale value of residential housing had more influence in the cost-value ratio than construction costs, the first time in four years. Fitch expects overall returns to improve modestly as gains in home prices will likely exceed higher construction costs in the near to intermediate term. Cost versus Value (Percentage Recouped at Resale) (%) 90 80 70 60 50 2003 2004 2005 2006 2007 2008 '09 '10 '10 '11 '11 '12 2013 2014 Source: Remodeling Magazine. Cost versus Value (Percentage Recouped at Resale) (%) 120 Replacement Remodeling 100 80 60 40 2003 2004 2005 2006 2007 2008 '09 '10 '10 '11 '11 '12 2013 2014 Source: Remodeling Magazine. Small Jobs and Replacement Projects Have the Best Returns According to the 2014 Cost Versus Value survey, eight of the top 10 performing projects cost less than $15,000. Historically, exterior replacement projects have always achieved a higher overall cost-value ratio compared with discretionary projects and that was again the case in 2014. The survey indicated that the average cost-value ratio of all 14 replacement projects included in the report was 73.7% during 2014, an almost 9 percentage points higher than that of the 21 remodeling projects, which together averaged 65.1%. Replacement projects have The Tale of the Measuring Tape 30

typically performed better in resale value than other types of remodeling projects, partly because they are among the least expensive (covered in the survey), and partly because they are often nondiscretionary improvements that contribute to curb appeal, which is a strong subjective factor among homebuyers. Spending on Big Ticket and Upscale Renovations Continues to Lag According to the Cost Versus Value Report, the cost-value ratio for all projects improved 10% on average, with midrange priced projects advancing 10.6% versus the 8.8% increase for upscale improvements. Fitch believes the lack of available credit to finance big-ticket renovations, as well as lower returns on upscale projects, will continue to restrain spending on big-ticket renovations. As noted, replacement projects continue to perform better in resale than other types of remodeling projects. An emphasis on essentials over extras likely will continue to influence homeowner decisions in the intermediate term. According to the NAHB s RMI, the component of the index measuring remodelers views of current market conditions for major additions and alterations (jobs valued at $25,000 or more) continues to lag behind the indices for minor additions and alterations, and maintenance and repair. During second-quarter 2014, the current market conditions index for major additions and alterations improved to 54 from 49 during the first quarter. This index has been above 50 five times since the beginning of 2006. (A number higher than 50 indicates the majority of remodelers view market conditions as improving.) By comparison, the current market conditions index for minor additions and alterations improved to 56 during second-quarter 2014 from 53 during the first quarter, and has been above 50 since fourth-quarter 2011. The index for maintenance and repair was 58 during second-quarter 2014 compared to 59 during the first quarter and has been above 50 since fourth-quarter 2009. However, it is important to note that for owner-occupied properties, the index for major additions and alterations have been above 50 since second-quarter 2012 while this index for rental properties remains below 50. There are indications homeowners, though still cautious, are somewhat more willing to undertake discretionary projects and purchases. According to Home Depot, average ticket prices for transactions greater than $900 have increased on a YOY basis during the past 13 quarters. During the second quarter of fiscal 2014, transactions for tickets more than $900, which represent approximately 20% of Home Depot s U.S. sales, were up 8.4% on a YOY basis. This follows a 2.5% improvement in the first quarter, a 5.5% growth in fourth-quarter 2013, and a 10.3% increase in third-quarter 2013. According to Home Depot, the drivers behind the increase in big-ticket purchases during the second quarter were strength in appliances, windows, water heaters and wood and laminate flooring. Cost Versus Value Report Top 10 Performing Projects Project Name Job Cost ($) 2014 2013 Cost Job Recouped (%) Cost ($) Cost Recouped (%) Entry Door Replacement (Steel) 1,162 96.6 1,137 85.6 Deck Addition (Wood) 9,539 87.4 9,327 77.3 Siding Replacement (Fiber-cement) 13,378 87.0 13,083 79.3 Attic Bedroom 49,438 84.3 47,919 72.9 Garage Door Replacement (Midrange) 1,534 83.7 1,496 75.7 Garage Door Replacement (Upscale) 2,791 82.9 2,720 75.2 Minor Kitchen Remodel 18,856 82.7 18,527 75.4 Window Replacement (Wood) 10,926 79.3 10,708 73.3 Window Replacement (Vinyl) 9,978 78.7 9,770 71.2 Siding Replacement (Vinyl) 11,475 78.2 11,192 72.9 Source: Remodeling Magazine, Remodeling Cost Versus Value Report 2014 and 2013. The Tale of the Measuring Tape 31

Preference for Larger Homes Has Again Become Evident Recently released U.S. Census Bureau data for 2013 indicated the typical single-family home size increased 3.7% over 2012. The average home built in the U.S. was 2,598 sf in 2013, up from 2,505 sf in 2012, 2,480 sf in 2011 and 2,392 sf in 2010. The average home size has now increased for three consecutive years after declining each year from 2008 to 2010. Also, residential architects report home sizes are growing, particularly for custom and luxury homes. The 2014 first-quarter American Institute of Architects Home Design Trends Survey stated 15% of respondents reported overall home sizes are increasing and 25% indicated more expensive, upper-end homes are increasing in square footage. The trend is similar for additions and remodels of existing homes, wherein 25% reported an increase in square footage. However, for entry-level homes, only 6% of respondents reported an increase in home sizes. Greater affordability (largely due to lower interest rates) during the past few years and a shift to a higher percentage of trade-up buyers are probably influencing the recent increase in square footage numbers. However, the sharp increase in rates and rising home prices are moderating affordability, which could somewhat dampen preference for larger homes. During the second quarter of 2014, the average size of single-family homes completed averaged 2,652 sf, a 0.3% increase compared with the 2,643 average sf of single-family homes completed during the second quarter of 2013. Ramifications for Improvement Spending Larger homes typically will cost more to repair and remodel than smaller homes. Home improvement projects, such as repainting, replacing the roof, or changing the floor, cost more because of increased square footage. Additionally, homeowners are likely to spend more to remodel or repair additional rooms in a larger home. EPA Lead Renovation, Repair, and Painting Rule The EPA issued a Lead Renovation, Repair, and Painting (RRP) rule in April 2010. The rule addresses remodeling and renovation projects disturbing more than 6 sf of potentially contaminated painted surfaces for all residential and multifamily structures built prior to 1978. The RRP rule requires firms and individuals involved in interior and exterior renovation repair and painting to be certified and follow specific lead-safe work practices to minimize exposure to lead-based paint dust. The rule affects paid renovators, including renovation contractors, painters and other specialty trades. The EPA estimates the new rule will add approximately $8 to $167 to the cost of the average interior remodeling job. However, certain contractor estimates indicate the extra time and effort required under the new mandate could add 5% to 30% in fees on small renovations. Fitch expects the added cost likely will be passed on to the consumer as contractors comply with this requirement. Foreclosures 2008 2010 According to RealtyTrac, Inc. (RealtyTrac), more than 2.3 million American homeowners faced foreclosure proceedings in 2008, up 81% from 2007. Nationwide, more than 860,000 properties actually were repossessed by lenders. There were approximately 95,000 short sales in 2008. The four states with the highest foreclosure rates in 2008 were Nevada, Florida, Arizona and The Tale of the Measuring Tape 32

California. More than 1.1 million properties in those four states received foreclosure notices, almost half the national total. RealtyTrac indicated 2.82 million U.S. properties received at least one foreclosure filing in 2009, a 21% increase over 2008. There were an additional 260,000 short sales in 2009. In 2010, 3,825,637 foreclosure filings were reported on a record 2,871,891 properties, an increase of almost 2% from 2009. There were 365,000 short sales in 2010. 2011 2013 RealtyTrac stated foreclosure filings in 2011 totaled 1,887,777, a 34% decrease compared with 2010. A total of 1,836,634 foreclosure filings were reported in 2012, down 2.7% from 2011. In 2013, foreclosure filings were reported on 1,361,795 properties, a 26% decrease from 2012 and down 52.6% from the peak in 2010. 2014 Foreclosure filings were reported on 613,874 properties in first-half 2014, off 23% from first-half 2013. One in every 214 U.S. housing units had a foreclosure filing in the first six months of the year. There were 107,194 U.S. properties with foreclosure filings in June 2014, a 2% decline from May and off 16% from a year earlier. June was the 45 th consecutive month in which foreclosure activity declined from a year earlier, helping to drop the first-half foreclosure activity to the lowest level since 2006. Effect on Remodeling Spending Homeowners facing foreclosure (or are at the risk of facing foreclosure) are unlikely to undertake home renovations, including maintenance-type projects. However, home foreclosures also could spur remodeling spending as owner-occupant buyers update these homes and/or investors remodel these homes to either sell or rent. Over the past couple of years, an unusually large percentage of existing home sales have been foreclosures and short sales, and a sizeable portion of the buyers appear to be investors. According to the JCHS, spending on distressed properties reached almost $10 billion in 2011. The JCHS research estimates institutional sellers made improvements to about a third of their foreclosed properties for sale, totaling about $1.7 billion or an average of $6,500 per unit. The research also indicated about 60% of homebuyers who purchased a foreclosed home made improvements to the property, averaging about $11,000 per home for a total of $4.2 billion. By comparison, investors spent roughly $15,600 per home ($3.9 billion total) after purchasing a distressed property. Underwater Mortgages CoreLogic indicated 5.3 million, or 10.7%, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2014. This is down from 7.1 million properties, or 14.5%, in the second quarter of 2013. An additional 1.3 million borrowers had less than 5% equity, referred to as near-negative equity, in the second quarter of 2014. Homeowners are in negative equity when they owe more on their mortgage than their home is worth. Additionally, there are 10 million residential properties with a mortgage (19% of the total) that have less than 20% equity. During the first half of 2014, 1.26 million residential properties returned to a state of positive equity due to home price appreciation. During 2013, rising home prices led to improvements in The Tale of the Measuring Tape 33

home equity, with 4 million residential properties regaining equity last year. CoreLogic indicated that if home prices rose another 5%, an additional 1 million properties would regain equity. According to the second-quarter Zillow Negative Equity Report, approximately 17% of all homeowners with a mortgage or 8.7 million were underwater in second-quarter 2014. This figure is down from the 12.2 million homeowners (23.8%) reported during second-quarter 2013 who had negative equity. For those homeowners with 20% or less equity in their homes, the percentage is about 34.8% during second-quarter 2014. Ramifications for Improvement Spending Homeowners with negative equity typically cannot move unless they default on their mortgages or are able to arrange a short sale. Additionally, homeowners with less than 20% of equity may also find it difficult to afford the down payment on another home as well as cover all the associated costs, including closing costs and real estate agent fees. This situation affects remodeling activity by reducing home sales and the improvements triggered by the turnover. Additionally, similar to homeowners facing foreclosure, homeowners with underwater mortgages are unlikely to undertake remodeling projects, particularly large renovations, as they may not recover these investments once the property is sold. According to data compiled by the JCHS, owners with less than 20% equity on their homes spent roughly 22% less, on average, on home improvements and 30% less on discretionary projects compared with owners with at least 20% equity. Average Annual Per-Owner Improvement Spending in 2011 ($) 4,000 Discretionary Replacement Other 3,000 2,000 1,000 0 0% or Less 1 19% 20 49% 50 99% 100% Owners Providing Mortgage Information Note: Percentages represent equity as a share of home value. Source: Joint Center for Housing Studies of Harvard University. The U.S. Housing Stock: Ready for Renewal. Demographic Trends Current and emerging demographic trends point to steady and often generally increasing longterm demand within the home improvement industry. While the considerable number of baby boomers and Generation X consumers continue to fuel spending in residential improvements, the growing importance of women, minorities and immigrants also should boost demand for home improvement activities going forward. Baby Boomers The baby boomers represent a significant customer base for the home improvement industry. With more than 80 million people, this generation accounts for about one-quarter of the U.S. population. With a higher homeownership rate and disposable income than other age groups, baby boomers fueled home improvement spending the past decade, accounting for a greater than 50% share of total improvement spending. According to a study published by the JCHS, The Tale of the Measuring Tape 34

baby boomers accounted for about 49% of total home improvement spending in 2011. Over the next 15 years, the entire baby boomer generation will turn 65 and go into their retirement years. This likely would lead to changes in housing needs that may trigger significant housing turnover or meaningful home renovations in the decades ahead. Generation X Although smaller in number than the baby boomers, Generation Xers (those born roughly between 1965 and 1984) are a major emerging segment in homeownership as well as the home remodeling market. According to the JCHS, Gen Xers, who began to be homeowners in 1995, accounted for only 5% of improvement spending by owners that year. This generation s share of improvement expenditures grew to 27% in 2005 and 32.2% in 2011. In 2011, Generation Xers spent $56.8 billion on home improvements, or an average expenditure of $8,690 per homeowner. This is just slightly below the $8,800 average spent by the baby boomers. Within the Gen X cohort, those born between 1965 and 1974 had the highest average expenditures at roughly $9,375 during 2011. This age group, now in their 30s and 40s, likely will increase spending on home remodeling as they enter their peak earning years. However, it is important to note for a certain age group within this cohort, homeownership rates declined significantly during the past six years. According to Census data, homeownership rates for households headed by an individual age 35 44 fell from about 70.1% during the first quarter of 2005 to 60.2% during the second quarter of 2014, a 9.9 point decline. By comparison, the national homeownership rate for all age groups fell 4.4 points from 69.1% to 64.7% during the period. The significant decline in homeownership rates for this age group (35 44) could affect overall home improvement spending for the Gen X cohort going forward. Role of Women in Home Improvement Women are making up a growing share as the heads of U.S. households. This segment has a significant and growing role in the housing market, with homeownership rates for households headed by females hitting 46.7% in 2013, up from 44% in 1990. As such, the remodeling industry started to pay attention to the buying power of the female consumer. While women have always played a role in home improvement choices, they are now undertaking remodeling projects and doing it themselves. Women DIYers have become an important segment in the home improvement marketplace. By 2003, both Lowe s and Home Depot reported 50% of their customer base was female. Websites such as BeJane.com and the Do-It-Herself Workshops offered by Home Depot were established to address the needs of women DIYers. Growing Importance of Minorities Minorities also continue to represent a larger portion of U.S. household growth. Based on household projections by the JCHS, immigrant and minority households are expected to account for roughly 72% of net growth between 2013 and 2020. Although homeownership generally has increased among minorities the past decade, there is still a disparity between ownership levels for different groups. The homeownership rate for non-hispanic whites during second-quarter 2014 was 72.9%. By comparison, 43.5% of African-Americans were homeowners, while the rate for Hispanic households was 45.8%. The homeownership rate for Native Americans, Asians, and Pacific Islanders was 54.7%. Based on data compiled by the JCHS, minority homeowners have increased their share of remodeling expenditures. Minority homeowners accounted for about $27.7 billion of improvement expenditures, or 15.7% of total expenditures, in 2011. This compares to roughly $30 billion, or 16.1% of total expenditures, in 2009 and $13.5 billion, or 12.4% of total expenditures, in 1995. The Tale of the Measuring Tape 35

Foreign-Born Households The increasing number of immigrant homeowners also provides a key source of demand for home improvement spending. Based on Census data, foreign-born households are projected to account for about 35.7% of total household growth between 2010 and 2020, down from the 39.2% growth seen during 2000 2010. Homeownership rates are projected to increase from 49.8% in 2000 to 52.4% in 2010 and 55.7% in 2020. According to the JCHS, foreign-born homeowners spent about $23.4 billion on improvements to their homes in 2007, a figure that has been growing almost 13% per year since 2000 and exceeds the 7% growth among the domestic-born population. As a result, immigrant owners accounted for more than 10% of home improvement expenditures in 2007, up from 8.5% in 2001. With the recession, net immigration slowed to about 860,000 per year between 2007 and 2009, down from the 1 million annually during 2000 2007. The JCHS indicated that, during 2007 2011, per-household spending on improvements fell more among foreign-born than native-born homeowners, resulting in the foreign-born share of remodeling spending decreasing below 10% during 2009 to $18.7 billion. Total spending for this group fell further in 2011 to $16.1 billion and accounted for about 9.1% of the total. Do-It-Yourself DIY home improvement projects gained popularity as more homeowners became exposed to makeover and home improvement television shows. Additionally, the increasing availability of affordable and easy-to-use tools and the abundance of remodeling information on the Internet have encouraged homeowners to undertake DIY projects. According to the JCHS, approximately 24% of home improvement expenditures during 2003 were DIY projects. Fitch previously assumed the DIY market would be more resilient than the professional market, particularly during economic recessions. This was not the case during the recent housing downturn and recession. While total home improvement expenditures declined from peak levels in 2007, the DIY segment has shown a greater contraction compared to the professional market. Based on the data compiled by the JCHS, DIY spending fell to $31 billion or 17.6% of the total during 2011 from $49 billion (21.4%) during 2007. This represents a 36.7% decline from 2007 to 2011. By contrast, overall spending fell 23.1% during this period and the share of professional home improvement only contracted 18.8%. The larger decline in improvement spending among DIYers reflects, in part, the economic conditions of younger homeowners, which are traditionally the most active group in the DIY market. From the second quarter of 2008 to the second quarter of 2013, the homeownership rates for households under the age of 35 fell from 43.3% to 35.9%, a 7.4-point decline. Similarly, for the 35 44 age group, the homeownership rates fell 9.9 points to 60.2%. By comparison, the overall homeownership rate during this period dropped 4.4 points. Do-It-for-Me Baby boomers (often less physically able to do projects), time-pressed schedules, greater affluence, and growing desire for high-end projects requiring highly skilled labor have shifted some consumers from DIY to do-it-for-me (DIFM). With the first of the baby boomers having turned 65 in 2011, this generation is expected to be a significant influence in the DIFM market. This age group generally has the wherewithal to pay someone else to do the work. As such, major retailers, including the big box centers, have rapidly expanded their installation services to capitalize on this trend. According to the JCHS, DIFM accounted for 82% of total home improvement expenditures during 2011, totaling $145.3 billion. The Tale of the Measuring Tape 36

Big Box Home Improvement Stores The home improvement industry is fragmented, with various retail channels including home centers, lumberyards, hardware stores, and garden stores/nurseries. Home Depot and Lowe s, the two largest chains, are building very few new stores in the U.S., and are generating virtually all of their growth from existing stores. Home Depot is now one of the largest U.S. retailers and the world s largest home improvement retailer with 2013 sales of $78.8 billion and 2,263 stores. Lowe s is the world s second-largest home improvement retailer with 2013 sales of $53.4 billion and 1,832 stores. The prototype big box store has about 110,000 sf of retail space plus a 20,000- to 30,000-sf garden center, and stocks 35,000 45,000 products. These stores offer lumber, paint, hardware tools, lawn and garden equipment, and appliances. Furthermore, the large home centers offer a wide selection of services, such as in-store clinics and workshops to help customers do projects themselves, truck and tool rental and installation services. Sales at home improvement retailers are anticipated to grow low to mid-single-digits in 2014, driven by the housing recovery. Home Improvement Spending Surveys Several surveys regarding plans for remodeling projects in 2014 suggest slightly more homeowners expect to do home improvement projects this year compared with 2013 levels. However, it also appears large-ticket projects will continue to lag the growth in the overall home improvement market as most homeowners expect to finance remodeling projects with cash and credit card payments. American Express Spending and Saving Tracker In March 2014, American Express released the results of a survey completed online among a random sample of consumers 18 and up. A total of 1,503 interviews were completed. According to the survey, 73% of homeowners have some form of home improvement project planned this year. This percentage is up from the 2013, 2012 and 2011 surveys, wherein 72%, 70% and 64%, respectively, indicated they have a home improvement project on the docket. On average, homeowners expect to spend about $4,000 per project, flat compared with 2013 and moderately above the $3,500 expected to be spent during 2012. Among those surveyed, 72% of these homeowners will undertake DIY projects, up from 71% last year and 66% in 2010. The Tale of the Measuring Tape 37