| is because of affordability. For a major metropolitan area, we enjoy some of the most affordable housing — and living — in the country. First-time buyers and first-time move-ups dominate our market and we see that trend continuing throughout the year. More people, including immigrants from Latin America, continue to move to the Houston area, which is helping to fuel the market. In addition, the jobs situation, post Enron, has stabilized and people feel more secure and willing to buy a new home. Biggest Source of Concern for Builders: We have several. Interest rates are a concern, of course. If they go up, that will impact the affordability of the area and hurt the market. Builders are also experiencing cost increases for lumber, steel and sheetrock, as well as a labor shortage for both skilled and unskilled workers, which is affecting our ability to meet demand and keep home prices down. There is also a growing concern about government regulations. We have lots of wide open spaces in which to build. The greater Houston area encompasses seven counties, with most of the growth in four of them: Harris, Fort Bend, Brazoria and Montgomery. The City of Houston is in parts of only two, Harris and Fort Bend. Two-thirds of our starts are in unincorporated areas where the land is usually less costly and there are fewer regulations. However, the counties want to implement more controls and charge impact fees. School financing and property taxes are big issues. At least one area municipality is charging a park impact fee that increased five-fold in one year. Other municipalities are discussing charging park and school impact fees. Several municipalities are even trying to establish minimum lot sizes and a minimum square footage for homes. How these actions are resolved in the next year or two can have a major impact on home prices and affordability. Market Trends: We believe the trends we are experiencing now will continue. Immigration from Latin America will continue to fuel the first-time and first-move up markets. Our high-end market has stabilized and we are seeing some active adult communities being built in the area. | 
