War Room - February 2012

1. War Room 29 Feb 2012
Housing – Rebound or Reckoning Ahead?

2. War Room
•Monthly macro discussion
•Using tools in context
•Update on HiddenLevers Features
•Your feedback welcome

3. Housing – Rebound or Reckoning Ahead?
•Housing Fundamentals
•Housing – Harsh Realities
•Scenario: Return to Long-Term Trend
•Scenario: US Housing Rebound

4. HOUSING - FUNDAMENTALS
HiddenLevers

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

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

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

8. Housing Overview: Home Sales
New home sales are at all-time lows despite mortgage rates – the
traditional inverse relationship has broken down.

9. HOUSING – HARSH REALITIES
HiddenLevers

10. 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?

11. 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

12. 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

13. SCENARIO: RETURN TO LONG-TERM TREND
HiddenLevers

14. Return to Long-Term Trend: Timeline

15. Return to Long-Term Trend: Context

16. Return to Long-Term Trend: 120 years

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

18. SCENARIO: US HOUSING REBOUND
HiddenLevers

19. 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

20. 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

21. 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

22. 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