ubs view on housing outlook - miamici.miami.fl.us/economicdevelopment/pages/research... · ubs view...

UBS View on Housing Outlook

January 25, 2007 Analyst certification and required disclosures begin on page 30UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Customers of UBS in the United States can receive independent, third-party research on the company or companies covered in this report, at no cost to them, where such research is available. Customers can access this independent research at www.ubs.com/independentresearch or may call +1 877-208-5700 to request a copy of this research.

This material has been prepared by UBS Securities LLC

Margaret WhelanManaging Director, Global Housing [email protected]

1

Long Term Demand for ~2 million New Homes

Source: U.S. Census Bureau, UBS estimates

6%-15%UBS - YOY Change in Starts Forecast1.651.55Forecast Total Starts-0.35-0.44Less Inventory Reduction (mns)2.011.99Total Demand For New Construction (mns)

Forecast Housing Starts (SF & MF)0.090.08Total Second Home Demand

2.20%2.20%Forecast Second Home Growth3.93.9Beginning of Period Housing Stock (mns)

Second Home Sales0.560.56Total Replacement Demand (mns)

0.44%0.44%Forecast Teardown Rate127.4125.9Beginning of Period Housing Stock (mns)

Teardowns1.361.35Forecast Total YOY Δ Households (mns)116.6115.2Forecast Total Households (mns)

Household Formation2008E2007E

2

Demand

3

U.S. Household and Housing Unit Growth by Decade

Source: U.S. Census Bureau, UBS forecasts

0

5

10

15

20

1940s 1950s 1960s 1970s 1980s 1990s 2010E

millio

ns

Total Housing Units Total Households

4

Household Formation and Housing Stock

Household formation and employment growth continue to accelerate more rapidly than the housing stock.

Source: U.S. Census Bureau

0.80

0.85

0.90

0.95

1.00

1.05

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

Index

ed, 1

965 =

1.00

Units per Household Units per Employee

5

Live Births Since 1909

Source: National Center for Health Statistics

2,000

3,000

4,000

5,000

1909 1921 1933 1945 1957 1969 1981 1993 2005

Total

Birth

s (00

0s)

6

Immigration Trends


0

500

1,000

1,500

2,000

1970 1975 1980 1985 1990 1995 2000 2005

Lega

l Ann

ual U

.S. Im

migr

ation

(000

)

7

U.S. Employment vs. Household Formation

Source: U.S. Census Bureau and Bureau of Economic Analysis

40,000

60,000

80,000

100,000

120,000

140,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Total

Non

farm

Emplo

yees

(000

)

40,000

60,000

80,000

100,000

120,000

Total Households (000)

Total Nonfarm Employees (000) Total Households (000)

8

Composition of U.S. Population by Age

Source: U.S. Census Bureau, UBS forecasts

40

60

80

100

2002 2005 2010E 2015E 2020E

millio

ns

20-39 yrs old 40-59 yrs old 60+ yrs old

9

Growth of White vs. Minority Households


0%

2%

4%

6%

8%

1973 1977 1981 1985 1989 1993 1997 2001 2005

Year

-Ove

r-Yea

r Gro

wth

White HH Minority HH

10

U.S. Homeownership Rate, 1920 to 2005


40%

45%

50%

55%

60%

65%

70%

1920 1940 1960 1980 2000

11

Home Ownership by Age, Total Population


20%

40%

60%

80%

100%

Under 25 25-29 30-34 35-44 45-54 55-64 65 and older

12

Household Mix


0%

20%

40%

60%

80%

100%

1970 1975 1980 1985 1990 1995 2000 2005

Married Single Parent Male HH Female HH

13

Single-Family Starts as % of Total New Supply

20%

40%

60%

80%

1970 1980 1990 2000 2005

Source: U.S. Census Bureau, UBS estimates

14

Second Homes, Total Units


1,000

2,000

3,000

4,000

1970 1975 1980 1985 1990 1995 2000 2005

Total

Unit

s (00

0s)

15

Supply

16

U.S. 30 Year Mortgage Rates

Source: Mortgage Bankers Association

5%

10%

15%

20%

1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005

30 year Mortgage Rate Average

Average = 9.3%

17

Historical Home Price Appreciation: 1970 – 2006


$0

$70

$140

$210

$280

$350

84 86 88 90 92 94 96 98 00 02 04 06 YTD

New

Home

ASP

($/00

0)

-4%

0%

4%

8%

12%

16%

Y/Y

% C

hang

e

New Home ASP Y/Y % Change

CAGR = 5.3%

18

Housing Affordability Index


60

80

100

120

140

160

1973 1977 1981 1985 1989 1993 1998 2002 2006

Com

posit

e Ind

ex

Average =114.1

19

New Home Sales Versus Supply


300

500

700

900

1,100

1,300

1,500

70 75 80 85 90 95 00 05

New

Home

Sale

s (00

0s)

2

4

6

8

10

12

14

Months Supply

Months Supply New Home Sales

20

Top 50 MSAs Total Inventory Level

Inventory up 51% YOY, starting to plateau?

Source: U.S Census Bureau

350

450

550

650

750

Aug-05 Sep-05 Oct-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 Jun-06 Jul-06 Aug-06 Oct-06

Inve

ntor

y To

p 50

MSA

(000

s)

-4%

-2%

0%

2%

4%

6%

Sequ

entia

l Cha

nge

Sequential ChangeTotal Inventory Levels Top 50 MSAs

(000s)

21

Inventory Overhang Quantified

Source: U.S. Census Bureau, National Association of Realtors, and UBS estimates

Note: Normalized levels based on 2001-03 averages.Source: U.S. Census Bureau, National Association of Realtors, and UBS estimates

Source: U.S. Census Bureau, National Association of Realtors, and UBS estimates

Excess Inventory Estimate—Vacant For-Sale UnitsExcess Inventory Estimate—Months of Supply

986Estimated Excess Inventory (000s)

5.1Normalized Months Supply

6.7Current Months Supply

7,760Total Sales (000s)1,118TTM NHS (000s)

6,642TTM EHS (000s)

4,303Total For Sale (000s)557New Homes For Sale (000s)

3,746Existing Homes For Sale (000s)

6.0NHS Normalized Months Supply

5.0EHS Normalized Months Supply

757Estimated Excess Inventory (000s)

98Excess Unsold, In-Progress Inventory (000s)

212Normalized Unsold, In Process, Avg '01-'03 (000s)

310Current Unsold, In Process (000s)

659Excess Vacant For Sale (000s)1,276Normalized Vacant Level, Avg '01-'03 (000s)

1,935Current Vacant For-Sale Level (000s)

22

Build to Order, not to Inventory

Since 1970, the rate of speculative building has dropped to 30% from 40%

Source: U.S Census Bureau

0%

20%

40%

60%

80%

100%

1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 YTD

Not Started Under Construction Completed

23

U.S. Housing Stock – 33% of the housing stock is ~50 years old


1990-199915%

1980-198915%

1970-197917%

1960-196912%

Before 196033%

2000 or later8%

24

Net Removals

Removed From Average AnnualTotal Removed From Changed Removed From Annual Removals

Period Removals Demo/Disaster to Non Res Damaged/Condemned Removals % of Total Stock1985-1987 1,116 465 242 409 558 0.57%1987-1989 1,057 408 235 414 529 0.52%1989-1991 1,012 414 227 371 506 0.48%1991-1993 837 286 166 385 419 0.40%1993-1995 898 335 217 346 449 0.43%1995-1997 1,020 331 331 358 510 0.47%1997-1999 971 431 199 341 486 0.44%1999-2001 1,036 421 248 367 518 0.45%2001-2003 989 382 354 253 495 0.42%

TOTAL (1985-2003) 8,936 3,473 2,219 3,244 496

= + +

Note: All data in thousandsSource: HUD and UBS estimates

25

Builders’ Response

26

Increased Use of Options

Options represent 56% of land controlled, up from 25% in 1990

Source: UBS estimates and company reports

0%

20%

40%

60%

80%

100%

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 3Q06Optioned Owned

27

Land Options Provide Financial Flexibility

Source: Company reports and UBS estimates

200

400

600

800

1,000

1,200

1,400

1,600

1Q02 3Q02 1Q03 3Q03 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06

Lot C

ount,

000s

$200

$220

$240

$260

$280

$300

$320

ASP,

New

Hom

e Sale

s

28

Strengthened Financial Condition•HB net Debt/Cap is 46%, down from 56% in 1990

•In most cases, builders have lengthened portfolio duration and diversified capital sources to reduce exposure

Note: LennarSource: Company reports and UBS estimates

Floating Note $200

7 5/8% Senior Note

$282

FloatingSenior Note

$300.0

5 1/8% Senior Note

$300

5.95% Senior Note

$350 5.50% Senior Note

$250

5.60% Senior Note

$500.0

$0

$200

$400

$600

$800

2007 2009 2009 2010 2011 2013 2014 2015 2011 2016

Credit Revolver

$185

5.90% Senior Note

$250.0

6.50% Senior Note

$250.0

29

Acquisition Activity Remains Robust

Source: Company reports

Recent M&A transactions•Hovnanian – Town and Country Homes and First Homebuilders

•Technical Olympic – Transeastern by TOA

•Meritage – Greater Homes of Orlando

•January 2006, WY buys Maracay for 9x EPS

• June 2006, Emaar buys WL Homes for an estimated 3.2x BV

0

5

10

15

20

25

30

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006YTD

# of A

cquis

itions

5%

6%

8%

9%

30-Yr Fixed Mort. Rate

# of Acq. Avg Mort Rate

30

Risk statement

Risks for the homebuilders in our coverage universe involve the overall health of the economy and its impact on consumers and employment, which could result in a sharp slowdown in demand for housing.

Also significant over the intermediate term is the outlook for mortgage rates, as an increase in rates could have an impact on consumer behavior, in our view.

31

Analyst certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report.

32

Required disclosures

1: Percentage of companies under coverage globally within this rating category.

2: Percentage of companies within this rating category for which investment banking (IB) services were provided within the past12 months.

Source: UBS; as of 30 September 2006.

This report has been prepared by UBS Securities LLC, an affiliate of UBS AG (UBS).

For information on the ways in which UBS manages conflicts and maintains independence of its research product; historical performance information; and certain additional disclosures concerning UBS research recommendations, please visit www.ubs.com/disclosures.

UBS Investment Research: Global Equity Ratings Definitions and Allocations

27%12%SellFSR is > 6% below the MRA, lower degree of predictabilityReduce 2FSR is > 6% below the MRA,

higher degree of predictabilityReduce 1

32%38%Hold/NeutralFSR is between -6% and 6% of the MRA, lower degree of predictabilityNeutral 2

FSR is between -6% and 6% of the MRA, higher degree of predictability

Neutral 1

34%49%BuyFSR is > 6% above the MRA, lower degree of predictabilityBuy 2FSR is > 6% above the MRA,

higher degree of predictabilityBuy 1

IB services2Coverage1Rating categoryDefinitionUBS ratingDefinitionUBS rating

33

Definitions & exceptions

KEY DEFINITIONS Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12 months. Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a forecast of, the equity risk premium). Predictability Level The predictability level indicates an analyst's conviction in the FSR. A predictability level of '1' means that the analyst's estimate of FSR is in the middle of a narrower, or smaller, range of possibilities. A predictability level of '2' means that the analyst's estimate of FSR is in the middle of a broader, or larger, range of possibilities. Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are subject to possible change in the near term, usually in response to an event that may affect the investment case or valuation. EXCEPTIONS AND SPECIAL CASES US Closed-End Fund ratings and definitions are: Buy: Higher stability of principal and higher stability of dividends; Neutral: Potential loss of principal, stability of dividend; Reduce: High potential for loss of principal and dividend risk. UK and European Investment Fund ratings and definitions are: Buy: Positive on factors such as structure, management, performance record, discount; Neutral: Neutral on factors such as structure, management, performance record, discount; Reduce: Negative on factors such as structure, management, performance record, discount. Core Banding Exceptions (CBE): Exceptions to the standard +/-6% bands may be granted by the Investment Review Committee (IRC). Factors considered by the IRC include the stock's volatility and the credit spread of the respective company's debt. As a result, stocks deemed to be very high or low risk may be subject to higher or lower bands as they relate to the rating. When such exceptions apply, they will be identified in the Companies Mentioned or Company Disclosure table in the relevant research piece.

34

Companies Mentioned

Company Name Reuters Rating Price Price date/time Beazer Homes2a,4a,6a,16 BZH.N Buy 1 US$41.94 06 Nov 2006 19:55 EST Centex Corp2b,16 CTX.N Buy 1 US$50.34 06 Nov 2006 19:55 EST D.R. Horton Inc.2a,4a,6a,6b,7,16 DHI.N Buy 1 US$22.89 06 Nov 2006 19:55 EST Hovnanian2a,4a,5,6a,16,23 HOV.N Buy 1 US$29.61 06 Nov 2006 19:55 EST KB Home2c,4b,6b,7,16 KBH.N Buy 1 US$43.54 06 Nov 2006 19:55 EST Lennar2a,4a,5,16,23 LEN.N Neutral 2 US$46.48 06 Nov 2006 19:55 EST MDC Holdings, Inc.16 MDC.N Not Rated US$48.28 06 Nov 2006 19:55 EST Meritage Corporation2c,4b,5,16 MTH.N Buy 1 US$42.59 06 Nov 2006 19:55 EST NVR, Inc.16 NVR.A Neutral 1 US$534.00 06 Nov 2006 19:55 EST Pulte Homes2a,4a,6b,7,16 PHM.N Buy 1 US$30.18 06 Nov 2006 19:55 EST Ryland Group2a,4a,6a,16 RYL.N Buy 2 US$44.74 06 Nov 2006 19:55 EST Standard Pacific2c,6b,6c,7,16 SPF.N Buy 2 US$23.50 06 Nov 2006 19:55 EST Technical Olympic2c,4a,6a,16 TOA.N Buy 1 US$10.79 06 Nov 2006 19:55 EST Toll Brothers16 TOL.N Buy 1 US$28.05 06 Nov 2006 19:55 EST WCI Communities2c,4a,6a,6b,7,16 WCI.N Reduce 2 US$15.27 06 Nov 2006 19:55 EST

Source: UBS. EST: Eastern standard time.

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35

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