War Room 29 Feb 2012

Housing – Rebound or Reckoning Ahead?

War Room

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•Update on HiddenLevers Features

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Housing – Rebound or Reckoning Ahead?

•Housing Fundamentals

•Housing – Harsh Realities

• Scenario: Return to Long-Term Trend

•Scenario: US Housing Rebound

HOUSING - FUNDAMENTALSHiddenLevers

Housing Overview: Prices

Commercial real estate has worked off the bubble faster than residential, touching 0% 10 year growth recently.

Housing Overview: Foreclosures

The foreclosure rate is declining – this effect is more pronounced in Commercial RE, which has no robo-signing issues.

Housing Overview: Construction

New housing starts and home builders' sentiment track closely, and both show a slight rebound since the housing crash.

Housing Overview: Home Sales

New home sales are at all-time lows despite mortgage rates – the traditional inverse relationship has broken down.

HOUSING – HARSH REALITIESHiddenLevers

Housing Inventory

Inventory charts = mixed bag

- Fast decline in overall inventory

- Higher inventory than late 80s still

- big gap = shadow inventory

Shadow Inventory- 17 months of supply- downside pressure- head and shoulders?

Household Formation

Usual Bullish Argument: Housing Starts below trend (5 year low) IRRELEVANT

Housing Inventory- About 3.5 mm excess US homes- Must be absorbed by household formation

Household Formation- Usually above 1mm/year- Closer to 500k/year now- Affected by:

- marital status changes- birthrates- immigration - joining families- adult children at home

HOUSEHOLD FORMATION – FAMILIES

Family Household Formation = key to equilibrium

Non-Families = 34% of US population – dipped in 2008, now back to trend

Families = 66% of US population – decoupled since 2008

SCENARIO: RETURN TO LONG-TERM TRENDHiddenLevers

Return to Long-Term Trend: Timeline

Return to Long-Term Trend: Context

Return to Long-Term Trend: 120 years

Return to Long-Term Trend: What’s next?

SCENARIO: US HOUSING REBOUNDHiddenLevers

Housing Rebound: Affordability

Affordability highest in decades

Historically low mtg rates + price declines

75% of homes sold are now affordable to median income buyers

In many markets buying cheaper than renting

Sources: National Associations of Realtors, Home Builders, and Wells Fargo

NAR Affordability Index

NAHB Housing Opportunity Index

Housing Rebound: Jobs = Households

Household formation at half historical rate as young adults stay home

Job growth will eventually lead to household formation

Very tight correlation between household formation and housing market

Sources: National Associations of Realtors, Home Builders, and Wells Fargo

Consequences:

1. Home prices may suffer up to 30% more downside

2. Good chance of US economy going into recession

3. Pendulum’s don’t stop in the middle

4. Home ownership dies as an American tradition

Housing Rebound vs Back to Long-Term Norms

Consequences:

1. S+P to new highs, but muted impact from here

2. Industrial commodities will benefit most

3. Employment picture change will be cause

4. Rebound will in turn affect employment in sector

HiddenLevers - New Features

• Fixed Income Support

• Time Frames for Scenario Modeling

• Yield taken into account in Models

• Auto-notification of Missing Tickers

Coming soon:

• Macro Profile for a Portfolio