Despite disappointing recent data from the US housing market, analysts at Jefferies International still believe in a housing recovery with a slow steady improvement in the new build environment in 2011 and for the overhang of existing homes to continue to reduce.
Current levels of new-build remain unsustainable in the long term, argue Jefferies analysts in a recent industry note. To just maintain current levels of houses per head of population, it estimates that the US will need to build around 1.3 million homes per year, 2.4x current levels.
Household formations have been depressed by the economic crisis, as individuals have been put off leaving shared accommodation. Jefferies estimates somewhere in the region of 1.2 million household formations have been deferred since 2007. As the US economy recovers it expect these households to mop up some of the bloated existing homes inventory.
New housing starts fell to 479k, just above the trough of April 2009 and 22% below January’s figure; although obviously disappointing there is a weather effect to consider. Permit applications perhaps give a better indication of the underlying health of market. Numbers fell to 534k, 5% below January’s figure.
February saw new homes sales fall to their lowest recorded level, 250k. Despite continuing poor sales numbers, the level of new starts has been depressed to such an extent that the inventory of new homes remains at record lows, 186k, a 20% decline on 2010’s number.
Despite a decline of 3.5% on January’s figure, existing homes sales (4.88 million) still remain comfortably above the lows of summer 2010. Inventories continue to hover around the 3.5 million mark, as months of supply increased to 8.6.
Those cement/building materials companies with the largest share of their EBITDA derived from the US and particularly the US housing market will be the most impacted by any change in the trend in US housing. Of the non-US companies under coverage Cemex and CRH will be impacted the most. Cemex derives 12.4% of its mid-cycle EBITDA from US housing and is particularly concentrated in the southern states where the housing market has been weakest. US housing and these states in particular are where much of Cemex’s recovery potential is based. CRH has the majority of its businesses in the US, 55% in US housing. Of the US companies under coverage, Eagle Materials will feel the impact most. Its wallboard business pushes its exposure to housing to double that of Vulcan Materials