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Anon - Housing Thesis 09 12 2011

Anon - Housing Thesis 09 12 2011

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Published by: cnm3d on Sep 14, 2011
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02/05/2013

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Disclaimer:
This communication does not constitute a solicitation for any investments or any investment products
and is for informational purposes only.
Any views expressed in this messageare those of the individual.
 
 Any comments or statements made herein do not 
necessarily reflect those of the individual’s employer, or their respective subsidiaries, affiliates, officers, directors,
 partners or employees.
 
No representation is made as to, and no responsibility or liability is accepted for, the accuracy or completeness
,
express or implied 
,
of the information provided herein or any other subject matter hereof. Information contained herein is subject to change at any time without notice.
Housing Bull ThesisSeptember 11, 2011IntroAt present valuations, US stocks related to residential construction, such as construction materials,home products, and homebuilders, represent strong risk/reward adjusted longs. The space is widely outof favor, with most considering the stocks dead money at best and short opportunities at worst. Forexample:
BuyHoldSellMAS1134USG0131MHK691LPX3101HOV056TOL7111
 Consensus thought is that any recovery in residential construction is at least five years away with a hostof reasons, from foreclosures to vacancies to mortgage standards, cited as negatives holding back arecovery. However, the market is underestimating 1) the scale of the underbuild in US residentialconstruction, 2) demographic trends that favor increased housing demand over the next decade, and 3)the improved state of housing affordability and consumer credit. Instead, bears have zeroed in upon 1)
the “pending foreclosure crisis,” which is
an exaggerated problem that will have little effect upon newhousing deman
d, 2) the supposed “oversupply” in current housing, which runs contrary to housing
statistics and uses dubious guesstimates to reach dire predictions, and 3) the troubled state of USconsumers in the face of higher mortgage standards.While the current state of residential construction is in the doldrums, 2012-2014 housing starts areunlikely to drop below the current 550k/year run rate. I believe housing starts could significantlyimprove and approach normalized levels greater than 1MM by 2013. Companies that have weatheredthe late 2000s downturn are in strong position to capitalize upon a recovery. These survivors havestreamlined their business, improved operating structure, and face less competition. Further, due to lowexpectations and the basement level of new starts, even if housing fails to recover in the next two years,the stocks are unlikely to move materially lower on a full year basis. (Note: I am not making a call fortheir price action in a panicked sell off.)
Residential construction stocks represent an attractive riskreward where we stand to lose little money if we are wrong and we stand to make a great deal if weare right.
With the recent sell off, certain good, cash flow positive businesses are trading at attractivevaluations even if housing remains repressed.
 
Disclaimer:
This communication does not constitute a solicitation for any investments or any investment products
and is for informational purposes only.
Any views expressed in this messageare those of the individual.
 
 Any comments or statements made herein do not 
necessarily reflect those of the individual’s employer, or their respective subsidiaries, affiliates, officers, directors,
 partners or employees.
 
No representation is made as to, and no responsibility or liability is accepted for, the accuracy or completeness
,
express or implied 
,
of the information provided herein or any other subject matter hereof. Information contained herein is subject to change at any time without notice.
Macro ThesisContrary to popular conception, new housing demand has little to do with foreclosures, home prices,etc. New household formation drives new housing demand. The largest drivers of new householdformation are population growth, demographic trends, and general economic conditions, such asunemployment and consumer confidence. Circularly, the biggest drag upon current US economicconditions is the dearth of residential construction, thus the housing sector and economy are in a classicKeynesian feedback loop. Once the feedback loop is broken, whether through stimulus or old fashioned
animal spirits, the rebound in residential construction will be sharp as there is large “pent up” demand
for housing and new housing starts are at unsustainable lows.The MathThe basic math is that the US needs to build 1.3MM to 1.7MM homes a year, whether single family ormutli-tenant, to keep up with population growth, homes destroyed, and secondary home demand. Forthe last three years, including 2011 projections, housing starts have averaged ~550k/year,approximately .75MM to 1.15MM below trend. Including the below trend years of 2007 and 2008, theUS will have underbuilt housing by approximately 4MM units exiting 2011. From 2000 to 2006, the USoverbuilt homes by approximately 300k/year and 2.1MM in total. Including manufactured housesdelivered from 2000-2010 of 1.4MM, the total overbuild was approximately 3.5MM versus anunderbuild of 4MM.
In a “normalized”
housing environment, the US would actually be experiencing ashortage. Further, the 10 year housing start total from 2002 to 2011, which encompasses both thebubble and crash, will be the second lowest 10 year housing start total in any 10 year period since the1960s, when the population of the United States was 40% less. If there is a large oversupply, when wereall these excess homes built?Why then does the vacancy rate remain elevated? The trouble lies with the anemic pace of net newhousehold formation over the last three years. From 2008 to 2010, new household formation averaged~500k/year versus ~1.2MM/year from 2000-2007. The biggest drivers behind this shift are 1) thedecrease in young adults living alone/away from their parents
, 2) an increase in “doubling up” among
families, and 3) a sharp slowdown in immigration. Some of this is attributable to structural changes; forinstance, rising incomes in the emerging markets have kept many potential immigrants at home while atthe same time the US has clamped down on illegal immigration. However, I believe the main driverbehind low household formation is unemployment, thus the dearth in new household formation ismainly a cyclical issue. Young adults still prefer to live away from their parents or with fewerroommates, as shown in surveys and the significant increase in young adults living alone if they are fullyemployed. Households that previously lived separately but are currently
“doubling up” presumably
aspire to live alone again. Further, while the change in immigration could prove more structural, the
demographic shift from the “Baby Bust” generation to the “Echo Baby Boom” generat
ion, who will bethe largest generation of Americans to ever form households, should more than offset any slowdown inimmigration. (Note: For a more detailed explanation of the Echo Baby Boom, please see the JCHS 2011State of Housing report.)
 
Disclaimer:
This communication does not constitute a solicitation for any investments or any investment products
and is for informational purposes only.
Any views expressed in this messageare those of the individual.
 
 Any comments or statements made herein do not 
necessarily reflect those of the individual’s employer, or their respective subsidiaries, affiliates, officers, directors,
 partners or employees.
 
No representation is made as to, and no responsibility or liability is accepted for, the accuracy or completeness
,
express or implied 
,
of the information provided herein or any other subject matter hereof. Information contained herein is subject to change at any time without notice.
I believe the below trend new household formation represents pent up demand for housing. The USCensus Bureau
estimates there was a 1.4MM decrease in “not doubled up” households from 2008 to
2010, a 2.2MM increase in doubled up households, and a 0.8MM increase in total households. (So1.4MM plus 0.8MM = 2.2MM.)
(Note: a “doubled up” household includes young adult
s living at home.) I
assume that the entire 1.4MM decrease in “not doubled up” house
holds represents pent up demand.
Approximately 77% of all households were “not doubled up” in 2008, so I assume
77%, or 0.6MM, of the0.8MM increase in overall households that chose to double up also represents pent up demand. Thus I
estimate pent up demand for housing currently living in “doubled up” housing at 2.
0MM. Interestingly,this roughly corresponds with the difference between trend household growth and population growth,as illustrated here:Now we must estimate the number of 
“excess”
vacant houses. I will explain this further in a subsequentsection, but estimating vacancies is more art than science. Most sell side analysts and housing expertsput the total number of excess vacancies between 1.5MM and 3MM, with some very bearish analysts at5MM. I do not think a model of housing starts versus new household formation versus inventories willbe an accurate forecasting tool; although, humorously, I do indulge traditional methods and provide oneat the end of this report. However, I believe underbuilding by 1MM units a year with 2.0MM in pent up

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