Eye On Real Estate: Week Of February 22, 2016

• Tuesday, A Possible Confusing Existing Home Sales Message: The NAR releases its estimate for January existing home sales at 10:00 am ET. Consistent with the volatility created by TRID the last two months, we expect a confusing message to surface with this release. Based on our local market data checks, we expect closings to decline 31.8% from December, which would be up 6.4% year over year versus 6.1% last month. However, January had a one-day calendar headwind, thus our seasonally-adjusted estimate of 5.28 million stands 9.5% higher than the prior year, the best rate of growth over the last six months. On the surface, we believe this is positive but consensus stands higher at 5.34 million, suggesting headline disappointment. December was an inflated seasonally-adjusted figure (5.46 million) because there was payback from weakness in November (4.76 million), but we believe that consensus is incorrectly modeling from the December pace. Instead, our January estimate suggests improvement from the 5.11 million average for November and December that normalizes for TRID timing. Lastly, with this release, the NAR will revise historical results for updated seasonal-adjustment calculations, another potential influence on the headline trend to be aware of. With our January estimate implying year-over-year growth of 4% for the trailing three months, we believe that the market remains in a solid recovery, and continue to feel comfortable with our 5% growth estimate for all of 2016.
• Wednesday, New Home Sales Expected to Tick Down From December’s Cycle Peak: The Census Bureau reports January new home sales at 10:00 am ET. In December, the Census reported that new home sales increased 9.9% year over year to a seasonally-adjusted annualized pace of 544,000. We forecast January new home sales of 535,000, which would be down 2% sequentially from December’s cycle-peak. This would be up just 3% year over year given a difficult comparison, but we believe actual growth in home sales is stronger than implied from the Census data series. Consensus is forecasting 520,000, down 4% sequentially and flat year over year.
• Calendar 4Q15 earnings season continues with AWI (Buy) on Monday; HD (Hold) and TOL (Buy) on Tuesday; LOW (Buy), RLGY (Buy) and SBY (Buy) on Wednesday; AMH (Hold), AMWD (Hold), MHK (Buy), RMAX (Buy) and WLH (Buy) on Thursday; and NWHM (Buy) and TPH (Buy) onFriday. Please see pages 5-11 for an outline of our earnings expectations and page 12 for a summary of our outlook for calendar 4Q15 homebuilder results versus consensus expectations.

Stock Performance

• Apartment REITs: Our Apartment REIT Equity Index increased 3.6% last week, underperforming the RMZ (up 4.3%), but outperforming the S&P 500 (up 2.8%). Each of the apartment REITs increased, led by MAA (up 7.1%) and ESS (up 5.9%), while PPS (up 1.2%) and AIV (up 1.3%) underperformed the peer group. We believe investors continue to give MAA credit for its recent portfolio transformation, despite some slower trends across its secondary markets. Year to date, our Apartment REIT Index has declined 8.6%, underperforming the RMZ by 285 basis points and the S&P 500 by 240 basis points. ESS (down 13.5%) and EQR (down 10.4%) experienced the greatest relative weakness, which we attribute to their exposure to Northern California. On the other hand, MAA (up 1.8%) is the only Apartment REIT with a positive year-to-date return, followed by CPT (down 3.8%), which has declined the least among its peers.
• Building Products: Our Building Products Equity Index increased 3.9% last week, outperforming the S&P 500 (110 basis points) but slightly underperforming consumer discretionary stocks (30 basis points). Year to date, our index has declined 8.8%, trailing both the S&P 500 (270 basis points) and consumer discretionary stocks (190 basis points). Notably, three out of the four strongest performers last week, AWI (up 9.3%), AWMD (up 6.9%) and MHK (up 6.7%) are reporting earnings this week, signaling that investors have become less concerned about near-term earnings risk given solid releases from peers during this earnings season. Additionally, MAS (up 7.0%) had another week of outperformance and is now up 17.7% since reporting solid 4Q15 earnings less than two weeks ago. Alternatively, SHW (down 0.4%) was the only company to have negative performance last week, although it is still the strongest performer in our building products coverage universe year to date (down 1.6%).
• Homebuilders: Our Homebuilding Equity Index increased 1.8% last week, underperforming the broader market (100 basis points) for the fourth straight week. WLH (up 9.2%) led the group heading into its earnings release this week. Despite this outperformance, WLH remains the weakest performer year to date and the shares are trading at just 3.2 times our 2016 EPS estimate, a 60% discount to its peers, more-than-accounting for company-specific risk and creating an attractive entry point, in our opinion. TMHC (up 7.3%) performed well for the second straight week as TPG, one of the company’s sponsors, continued to buy shares in the open market. Conversely,WCIC (down 6.2%) and CAA (down 3.5%) lagged peers after both companies provided weaker-than-expected 2016 guidance during conference calls last week. However, we continue to believe current valuations create an extremely compelling entry point for both stocks given superior return and growth outlooks. Year to date, our Homebuilding Equity Index has underperformed the broader market by 1,160 basis points.
• Homecenters: Our Homecenter Equity Index was up 4.9% last week, which was the strongest performance since the week of fiscal 3Q15 earnings releases last November; however, for the third consecutive week the homecenters underperformed broader retail. As published last week, we anticipate strong results from both HD and LOW when they report earnings tomorrow and Wednesday, respectively, but some investors have been concerned that the positive expectations are already in the stocks. While it is difficult for us to handicap buy-side expectations, we note that over the last four weeks, our homecenter index is down 140 basis points in absolute terms, posting 200 basis points of underperformance relative to the S&P 500. For comparison, relative performance was as follows ahead of the last four earnings periods: negative 300 basis points for 3Q15, positive 770 basis points for 2Q15, negative 30 basis points for 1Q15 and positive 270 basis points for 4Q14. Based on these figures, it does not appear that investor expectations are overly elevated at this time.
• Mortgage Insurers: Last week, our Mortgage Insurer Equity Index increased 1.0%, underperforming the broader market (180 basis points) for the first time in three weeks. Year to date, our index has declined 19.9%, trailing the S&P 500 by 1,400 basis points following 1,300 basis points of underperformance in 2015. Despite our view that the insurers should continue to benefit from volume and credit tailwinds, the group is trading at an average tangible P/B multiple of 1.1 times, suggesting the market is assuming very negative pricing or default trends as it has historically traded above 2.0 times during prior recoveries. On a company level, ESNT was the top performer (up 9.4%) after it reported better-than-expected 4Q15 earningsin the prior week.
• Real Estate Services: At this time last week, we highlighted that RLGY and RMAX lagged the S&P 500 in 10 and 8 of the last 11 weeks, respectively. Positively, both stocks strongly outperformed the market last week, with RLGY up 9.2% and RMAX up 8.0% versus the 2.8% increase for the broader market. With both companies reporting earnings this week, we believe investors are weighing depressed valuations against the fact that housing market demand has been holding up across much of the country and mortgage rates have continued to move lower. Initial reads on January existing home sales, which we expect to be strong in absolute terms, likely also contributed to the stocks’ performance. Over the last four months, RLGY has trailed the market by 16.1% while RMAX has modestly outperformed.
• Single-Family REITs: Our Single-Family REIT Equity Index increased 3.9% last week, underperforming the RMZ by 40 basis points, but outperforming the S&P 500 by 100 basis points. Each of the four single-family REITs increased last week, led by SBY (up 6.3%) and SFR (up 5.7%), while AMH (up 2.2%) underperformed peers on a relative basis. We believe the relative performance within the Single Family REIT peer group reflects the disparity in price to NAV and that the companies with the greatest price-to-NAV discount experienced a narrowing in that discount. Year to date, our Single-Family REIT Equity Index has declined 12.8%, weaker than the RMZ (down 5.7%) and the S&P 500 (down 6.2%). The relative weakness for the sector is likely due to overall risk aversion and potential investor concern regarding the ability of the single-family REITs to improve and manage expenses, while achieving favorable rent growth in an environment where job growth is slowing. AMH (down 17.1%), SBY (down 16.7%) and ARPI (down 16.7%) declined more than 10% year to date, while SFR (down 1.9%) relatively outperformed its peers, the RMZ and the S&P 500.
• Title Insurers: Our Title Insurer Equity Index increased 1.6% last week, underperforming the S&P 500 by 125 basis points as the group took a bit of a breather after last week’s 730 basis point outperformance. The Title Index’s increase was driven by a 1.2% increase for FNF, a 3.1% increase for FAF and a 0.7% increase for STC. As volatility in the overall markets has subsided, the Title Insurer Equity Index’s 20-day moving correlation to the S&P 500 has returned to more normalized levels, ending last week at 0.55, just below the five-year average of 0.58 and well below the recent high of 0.92 reached on February 3rd.

Michael Haltman is President of Hallmark Abstract Service in New York. He can be reached at mhaltman@hallmarkabstractllc.com.