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Saturday, January 28, 2012

UBS Report on Homebuilding: 10 Predictions for 2012

Conditions Are Getting Better . . .
Over the past 6-12 months, macro data points, including accelerating household
formation, increasingly suggest an increased demand for housing. At the same
time, government support appears to be improving. This, in turn, has led to
increased optimism among investors for a robust improvement in fundamentals.

. . . Just Not Quickly Enough to Justify Current Valuations
In contrast, we believe a more dramatic recovery, especially relative to owner
occupied demand, faces constraints. We note that: 1) pro-cyclical underwriting is
unlikely to materialize given regulatory and macro uncertainty & 2) the transition
of foreclosures from owner to renter occupied remains gradual. Concurrently, we
expect government actions—constrained by the factious environment—to focus on
economic stimulus (i.e. mass refis) resulting in a more limited impact on housing.

...Accordingly, We’re Moving to the Sidelines
Since 8/31, the HB stocks have risen 38% and now trade at 1.3x tang BV (adjusted
for the PV of future tax benefits). In our view, the earnings power needed to justify
these levels will only be realized in a robust recovery. Said differently, we believe
housing has bottomed and that an improvement is unfolding, we just don’t believe
the rate of acceleration will be sufficient to justify upside for most of the group.
...Valuation: PTs Are Based on 1.3x Current BV
Given our view, we’re making the following changes: DHI, LEN and TOL go to
Neutral (from Buy) and KBH and MTH to Sell (from Neutral). For investors that
are more optimistic, we’d focus on higher beta names like PHM and SPF.
Prediction #1. Single family housing starts will grow by approximately 5-10%
in 2012, marking the first year in the last seven years that starts will have grown
meaningfully on a year over year basis. At the same time, multi family starts will
accelerate at a faster pace, leading total starts up 10-15% versus 2011.

Prediction #2. With community count growth ranging from 5-10% year over
year, we expect the public builders to post unit order growth of around 15-20%
when compared to 2011 levels.

Prediction #3. We’re increasingly comfortable with our forecast for flat new
home pricing in 2012. Additionally, we think distressed prices have basically
bottomed. Further, we believe that understanding distressed prices is much
more complex that it appears on the surface.

Prediction #4. More pro-cyclical underwriting will be the crucial element to
driving a more robust recovery in housing. We don’t expect loosening to
materialize until 2013 at the earliest; when it does we’d look for private
lenders—as opposed to the GSEs or the FHA—leading the way.

Prediction #5. Government support for the new home market will be slightly
better than “do no harm”. That said, we’d emphasize the word “slightly” given
the incredibly factious nature of the current political environment. Further, even
if efforts are more robust than we expect, they will be focused on the existing
home market and providing broader economic stimulus (as an example, we’d
note the likelihood for a large scale refinancing program).

Prediction #6. While many believe that record affordability should drive sales,
we continue to expect that mortgage availability will constrain owner occupied
demand over the next couple of years. Despite this, with home prices down 33%
from the peak and 30 year fixed rate mortgages at 3.9%, the opportunity for
investors to buy and rent homes is increasingly attractive. The demand
generated by this opportunity will set a floor for home prices and will eventually
lead to improved conditions. That said, the process of transitioning this supply is
likely to be long and drawn out, thereby constraining home price appreciation.

Prediction #7. With volumes growing and prices stable, we don’t forecast
significant book value erosion in 2012. Further, while some companies will lose
money, this will primarily be driven by financial leverage.

Prediction #8. Over the last two years, the homebuilding stocks have traded
between 0.7x-1.3x tangible book value (based on a 50% discounted value for
allowances against deferred tax benefits), as sentiment has swung from
anticipating accelerating impairments to faster earnings growth. Given our view
that meaningful book value erosion is unlikely (see prediction #7), we expect the
trading “range” for the stocks to reset in 2012, with the “floor” rising to
around 1.0x tangible book value. That said, visibility around a turnaround
remains limited, which should constrain potential upside for valuations to
approximately 1.4x adjusted tangible book values.

Prediction #9. We don’t expect public to public M&A activity in the coming
year, as the availability of well located lots in more attractive locations is
sufficient to meet current demand levels. Further, we wouldn’t expect any such
activity until one or more of the following variables changes: 1) land scarcity
became more acute, such that builders couldn’t reload with parcels at relatively
attractive prices; 2) a more robust recovery, driving companies to try to expand
their land holdings more quickly to grow EPS; and/or 3) differences in
valuations gave some builders more “expensive” currencies relative to peers,
allowing them to pay a premium.

Prediction #10. Although the long term trends for housing are likely positive,
we have less conviction in the near term demographic story. In fact, we believe
there are likely trends that will work against an acceleration in homeownership
in the near term.

Wells Fargo's Weekly Economic & Financial Commentary- January 27, 2012

- Real GDP grew at a 2.8 percent annualized rate during the fourth quarter, as growth was helped by a $58 billion swing in inventory building which accounted for 1.9 percentage points of the quarter’s growth.

- Real personal consumption rose at a 2.0 percent annual rate, reflecting a 14.8 percent surge in durable goods purchases and a more modest 1.7 percent rise in nondurable goods.

. The two percent rise in personal consumption outpaced income growth during the quarter, indicating that consumers will likely take a breather during the first part of 2012.

- New home sales fell slightly during December to a 307,000-unit seasonally adjusted annual rate, as sales have remained near current levels for the past 18 months.

- Our forecast currently projects that real GDP will grow between 1.5 and 2.0 percent during the first half of 2012, and average just under a 2.0 percent pace for the year.

Wednesday, January 25, 2012

Architecture Billings Index Positive for Second Straight Month

Washington, D.C. – January 18, 2012 – After showing struggling business conditions for most of 2011, the Architecture Billings Index (ABI) has now reached positive terrain in consecutive months. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the December ABI score was 52.0, following the exact same mark in November. This score reflects an overall increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 64.0, down just a point from a reading of 65.0 the previous month.

“We saw nearly identical conditions in November and December of 2010 only to see momentum sputter and billings fall into negative territory as we moved through 2011, so it’s too early to be sure that we are in a full recovery mode,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Nevertheless, this is very good news for the design and construction industry and it’s entirely possible conditions will slowly continue to improve as the year progresses.”

Key December ABI highlights:
      • Regional averages: South (54.2), Midwest (53.1), Northeast (52.6), West (45.1)
      • Sector index breakdown: multi-family residential (54.3), commercial / industrial (54.1),
      • institutional (51.3), mixed practice (44.5)
      • Project inquiries index: 64.0

Friday, January 20, 2012

Wells Fargo's Weekly Economic & Financial Commentary- January 20, 2012

- Industrial production rose 0.4 percent in December following a 0.3 percent decline during November, as production was driven by a 0.9 percent increase in manufacturing.

. Overall production would have been stronger if not for a 2.7 percent decline in the utilities segment, which was largely due to a sharp 8.5 percent decline in natural gas output amid unseasonably warm weather.

- The Producer Price Index (PPI) fell 0.1 percent in December, as falling prices for food, residential gas, and gasoline led the decline.

. Meanwhile, core PPI inflation increased to 3.0 percent year-over-year, the highest rate in two and a half years.

- Consumer prices were unchanged for the third consecutive month in December, but were up 3.0 percent from a year ago.

. The 2.2 percent year-over-year increase in core consumer prices was the highest in over three years.

- Existing home sales rose in December to a 4.61 million unit annual rate.

. Record low mortgage rates fueled a 23.1 percent surge in mortgage applications and a 10.3 percent jump in purchase applications in the last week.

Existing home sales gain momentum

The National Association of Realtors said existing home sales increased 5% month over month to an annual rate of 4.61 million units, an 11-month high, while homes listed for sale dropped to a 7-month low. Calculated Risk's Bill McBride notes that 6.2 months' inventory--while the absolute number is down to its lowest level since March 2005--is "still a little high." Keep plugging; one more good month and scarcity will be a factor.

Single-family housing starts increase in December

According to the Commerce Department's tally, December's total housing starts were down from November, but single-family starts were at the highest rate in 21 months.
December housing starts were at a seasonally adjusted annual rate of 657,000, down 4.1% from the November pace of 685,000. But compared with last year, total starts are up 24.9%.
While total starts faltered in December, the single-family numbers gave some optimism for a home improvement and housing industry hungry for growth. On a single-family basis, starts in December were at a rate of 470,000, up 4.4% from November and up 11.6% from December 2010. The December number was the strongest since April 2010.
Building permits were at a rate of 679,000, essentially flat from November but up 7.8% from December 2010.
For the full year, an estimated 606,900 housing units were started in the United States, up 3.4% from the 2010 figure of 586,900. However, single-family starts declined in 2011 to 428,600 for the full year, down 9.0% from 2010. The 2011 single-family figure is the lowest on record.

Sunday, January 15, 2012

Wells Fargo's Weekly Economic & Financial Commentary- January 13, 2012

- Consumer credit surged by $20.4 billion in November, nearly three times more than the consensus estimate and the largest gain in nearly ten years.

. Growth reflected increases in credit card use, car loans, and student loans, and there is fear that the lack of real income growth and higher prices for necessities have caused consumers to reduce savings and take on more debt.

- Retail sales rose just 0.1 percent month-over-month in December following a 0.4 percent rise in November.

. Sales excluding gasoline, building materials, and motor vehicle dealers fell 0.2 percent in December, the largest drop since July 2010.

- During the first week of January, weekly jobless claims jumped to 399,000, as recent improvements may have been exaggerated by the seasonal adjustment process.

- Recent data on trade and inventories suggested more modest growth, and as a result we have slightly reduced our estimate for fourth quarter real GDP growth to 3.4 percent.

Wells Fargo's Monthly Economic & Financial Commentary- January 2012

- Our outlook calls for moderate GDP growth of 2.1 percent in 2012, with a slower pace at the start of the year in response to the 3.7 percent expected gain during the fourth quarter.

. Consumer spending will likely slow in the first quarter of this year to 1.4 percent after a strong gain of 2.8 percent in the fourth quarter, while business fixed investment is expected to rise six percent or more in the first half of this year as equipment and software and structures continue to improve.

- Inflation should moderate in the year ahead, as the employment cost index will likely remain at 2.1 percent for the second consecutive year and producer prices are expected to rise 2.5 percent in 2012 after a gain of 6.0 percent last year.

- We estimate that any additional quantitative easing by the Federal Reserve would take place through a purchase of mortgage-backed securities, and therefore work primarily to provide liquidity while lowering the mortgage rate.

. The 10-year Treasury note is expected to gradually rise and end the year at 2.3 percent.

- Concerns for 2012 include the potential for lower exports as a result of a recession in Europe, risks associated with new proposed policies in an election year, and tensions with Iran which could inflate the price of oil and limit growth.

Saturday, January 7, 2012

Architecture Billings Index Rises Nearly 3 Points In November

- Multi-family residential and commercial sectors are most healthy

- New projects inquiry index up dramatically

Continuing the positive momentum of a nearly three point bump in October, the Architecture Billings Index (ABI) reached its first positive mark since August. As a leading economic indicator of construction activity, the ABI reflects the approximate nine to twelve month lag time between architecture billings and construction spending. The American Institute of Architects (AIA) reported the November ABI score was 52.0, following a score of 49.4 in October. This score reflects an overall increase in demand for design services (any score above 50 indicates an increase in billings). The new projects inquiry index was 65.0, up dramatically from a reading of 57.3 the previous month.

“This is a heartening development for the design and construction industry that only a few years ago accounted for nearly ten percent of overall GDP but has fallen to slightly less than six percent,” said AIA Chief Economist, Kermit Baker, PhD, Hon. AIA. “Hopefully, this uptick in billings is a sign that a recovery phase is in the works. However, given the volatility that we’ve seen nationally and internationally recently, we’ll need to see several more months of positive readings before we’ll have much confidence that the U.S. construction recession is ending..”

Key November ABI highlights:

◦ Regional averages: South (54.4), Midwest (50.9), Northeast (49.1), West (45.6)

◦ Sector index breakdown: multi-family residential (55.8), commercial / industrial (53.9), institutional (48.9), mixed practice (41.6)

◦ Project inquiries index: 65.0

The regional and sector categories are calculated as a 3-month moving average, whereas the index and inquiries are monthly numbers.

Friday, January 6, 2012

Wells Fargo's Weekly Economic & Financial Commentary- January 6, 2012

- Total nonfarm payrolls increased by 200,000 in December and the unemployment rate fell to a new cycle low of 8.5 percent.

. Gains for the month were broad-based with just the government and temporary job sectors posting declines, but the surge in courier hiring was more reflective of an increase in online holiday shopping than a pickup in business deliveries.

i In December, the number of couriers and messengers employed rose by 42,000 to nearly 568,000.

- The headline ISM index rose to 53.9 in December from 52.7 in November, as the nonmanufacturing component came in at 52.6, up from 52.0 last month.

. The employment component of the ISM nonmanufacturing report remained below 50, suggesting that businesses are reluctant to add to payrolls.

Thursday, January 5, 2012

Construction spending rises in November

Construction spending during November 2011 rose 1.2% over the previous month, according to an estimate released by the Department of Commerce, which posted a seasonally adjusted annual rate of $807.1 billion.

The increase was the third in four months and followed a revised 0.2% drop in October.

The November figure is slightly higher (0.5%) than November 2010's construction spending estimate of $803.0 billion.

For the first 11 months of 2011, construction spending amounted to $724.8 billion, which is 2.5% below the $743.6 billion for the same period in 2010, according to government estimates.

Residential construction rose 2.0% in November 2011, at a seasonally adjusted annual rate of $243.7 billion compared to the revised October estimate of $238.9 billion. Nonresidential construction was at a seasonally adjusted annual rate of $278.6 billion in November, nearly the same as the revised October estimate of $278.5 billion.

In year-over-year figures, residential construction rose 3.4% between November 2011 and November 2010. Residential construction includes both single and multi-family dwellings.