Homebuilding

While banks are tightening the lending screws in most categories, they remain willing to extend mortgage credit. Long-term mortgage rates are extremely low, and consumers are taking full advantage, as recent U.S. housing data has been on the strong side. We expect the trend to accelerate on the back of firming income growth. The steady uptrend in mortgage purchase applications suggests that owner-occupied purchases are taking over from financially motivated transactions. That has bullish implications for housing-related equities such as homebuilders and home improvement retailers. Importantly, new home sales and existing home prices have surged, with the latter providing increased incentive for homeowners to renovate and invest in order to boost the value of their homes. We reiterate our bullish stance on the S&P homebuilders and S&P home improvement retail indexes. The ticker symbols for the stocks in S&P homebuilders index are: BLBG: S5HOME-DHI, LEN, PHM. The ticker symbols for the stocks in S&P home improvement retail index are: BLBG: S5HOMI-HD, LOW. Housing-Related Equities Remain Attractive Housing-Related Equities Remain Attractive

The major banks are more willing to lend to the consumer and less willing to lend to the corporate sector.

While we are neutral on the broad consumer discretionary index, we remain constructive on the S&P homebuilding sub-group. U.S. bond yields are probing multi-decade lows mostly as a consequence of global deflationary forces and unorthodox monetary policy abroad. This is a welcome assist to the U.S. housing market, as these exogenous factors have pushed down the U.S. 30-year mortgage rate, providing an incentive for consumers to reenter the housing market (bottom panel). A simple homebuilding demand/supply indicator, comprising new home sales expectations versus new home inventories, is steadily climbing. Historically, this gauge has led new home sales prices, and the current message is to expect the latter to reaccelerate. Homebuilder profits have considerable leverage to selling prices, underscoring that a round of positive earnings revisions lies ahead. Bottom Line: Continue to overweight the S&P homebuilding index. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. bca.uses_in_2016_07_14_001_c1 bca.uses_in_2016_07_14_001_c1

Housing activity should accelerate in the back half of the year given the drop in Treasury yields. Buy home improvement retailers and add to long homebuilding positions.

The previous Insight showed that mortgage demand was rising steadily, courtesy of the decline in mortgage rates and willingness of banks to extend mortgage credit. We expect this to translate into steady sales increases for the homebuilding industry. New home sales are gaining as a share of total home sales, flirting with their highest level in the post-crisis era. Importantly, the supply of new homes is now falling relative to total supply, underscoring that meeting this new demand will require faster new home construction. Single family housing starts are rising relative to total starts, a significant change since the financial crisis ended when multifamily dwellings dominated construction activity, as commercial/financial developers were the only ones with easy access to financing. The upshot is that good value in the S&P homebuilding index should be realized. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. bca.uses_in_2016_06_22_002_c1 bca.uses_in_2016_06_22_002_c1

The decline in global bond yields and negative interest rates abroad represents a windfall for U.S. housing, to the extent that U.S. mortgage rates are lower than they otherwise would be. The latest plunge in yields is translating into a clear acceleration in mortgage demand, as proxied by the advance in mortgage purchase applications. That is a leading indicator for home sales, the lifeblood of the homebuilding industry. Importantly, the financial incentive to buy a home is high and rising, given the attractiveness of owning vs. renting, and the growing gap between house price inflation and mortgage rates. It is no wonder that the latest National Homebuilder's Survey recorded a sharp jump in sales expectations, heralding faster top-line growth ahead. That should be sustainable, as discussed in the next Insight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. bca.uses_in_2016_06_22_001_c1 bca.uses_in_2016_06_22_001_c1

The housing market remains a bright spot within the U.S. economy, which is not yet fully reflected in relative share performance. For instance, the NAHB survey has massively outperformed the ISM composite, signaling that relative profit conditions are more favorable for housing (top panel). The latest data showed that new home sales have surged, and that homes purchased but not yet under construction are at their highest level since 2007. Importantly, while banks are tightening standards on C&I loans, they remain willing to make mortgage loans, and consumers are increasingly willing to take on residential-related debt. This is bullish from a cyclical perspective, particularly since housing starts and household formation have considerable room to run before hitting a saturation point. Stay overweight. The ticker symbols for the stocks in this index are: BLBG: S5HOME - DHI, LEN, PHM. Homebuilders Catch Fire Homebuilders Catch Fire

Chinese housing construction does not look excessive relative to the size of its rapidly growing urban population. On average, China's new urban construction has been about 500 units per 1000 new urban citizens in the past 10 years, roughly comparable to other countries, and is much smaller than Korea and Japan during the prime stage of their urbanization process.

A lack of confirming growth indicators puts the equity advance at risk. Lift hypermarkets to overweight, stick with homebuilders and fade any small and/or mid cap relative strength.

We are confident that the reward/risk tradeoff to holding equities and high-yield corporate bonds is deteriorating and that rallies in these assets are high-risk affairs.