Bienville Macro Review (U.S. Housing Update)

7/27/2019 Bienville Macro Review (U.S. Housing Update)

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CONFIDENTIAL

BIENVILLE MACRO REVIEW

Prepared by:

Blake [email protected]

Billy [email protected]

U.S. Housing Update July 26, 2013


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CONFIDENTIAL

Bienville Macro Review July 26, 2013| 2

It has been more than a year since we updated our original U.S. housing review (May 2012), an investment initially monetized through adual approach of both debt (RMBS) and equity (Gulf Coast Opportunities Fund, LP). Our thesis has played out so far. Despite the recentrise in mortgage rates, U.S. housing fundamentals continue to support the mounting recovery

The S&P/Case Shiller 20-City Composite Home Price Index has risen 13.6% since its bottom in March of 2012. Rising home prices have had a positive effect on the value of U.S. households real estate assets, which have increased by $2.4 trillion

since the end of 2011, helping to repair household balance sheets. Additionally, residential investment as a share of GDP has begunticking up, but remains the lowest on record and less than half its historical average.

An improving labor market is helping support the increase in household formations, in turn providing more sustainable demand tothe growing recovery. At the same time, U.S. homeownership rates have returned to normal. A deficit in housing starts since thecrash has created excess pent-up demand for new homes, a positive sign for U.S. homebuilders. However, the recent turn in marketleadership from the homebuilder index could be signaling a slowdown in activity.

New and existing home sales continue their strong performance, rising by 65% and 21% over the past year, respectively. The strongcorrelation between new home sales and homebuilders expectations of futures sales has recently diverged, with homebuildersexpectations far outstripping actual new home sales. Either homebuilders expectations need to come down, or new home sales aresoon to increase rapidly.

Total housing supply remains tight. New and existing homes months of supply are nearing all-time lows, while investmentprograms such as REO-Rental have been effective in reducing the number of vacant homes for sale on the market.

Although mortgage rates have recently risen by 1%, the absolute level of rates remains near historical lows. While this spike in ratescould mark an end to the recent refinancing boom, statistical analysis suggests that there is nearly zero relationship between risingmortgage rates and new mortgage applications. The fear of higher rates may in fact pull potential buyers off the sidelines and propelnear-term activity. Of course, a material increase in interest rates would adversely affect housing fundamentals.

Despite the increase in home prices and rise in mortgage rates, it remains cheaper to buy than to rent, while the HousingAffordability Index still shows that housing remains inexpensive relative to median incomes. While a further rise in rates would actas a drag, it is unlikely that the Federal Reserve would allow sustainably higher real interest rates.

Mortgage collateral pools have benefitted from improving fundamentals as credit burnout has removed the least-creditworthyborrowers. This, combined with a decreasing mortgage delinquency rate and fewer monthly foreclosure filings has helped subprimeRMBS prices (the focus of our RMBS allocation) rally sharply since the end of 2011. To be clear, this trade has matured and we areless constructive on the asset class than we were 18 months ago.

U.S. HOUSING UPDATE

Summary

*This document is not a solicitation to invest in any investment product nor is it intended to provide investment advice. Please see the Disclaimer slide for information about Bienville Capital Management, LLC and for certain disclaimers relating to this presentation.


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90

110

130

150

170

190

210

Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07 Jan-09 Jul-10 Jan-12

Since 1970, there have been 24 major housing busts in 15 OECD countries. The average duration of each declinewas 6.25 years with an average cumulative decline in home prices of 31%. In line with historical housing busts,U.S. home prices fell 35% from their peak in July 2006 to the bottom in March 2012. Despite the recent recovery,home prices remain far from their highs

At the bottom in March of 2012, prices reached alevel not seen since

November of 2002,meaning nearly a decadeworth of gains wereextinguished

despite the rally off thebottom, U.S. home pricesremain one-fourth of their way back to prior peaklevels

U.S. HOUSING UPDATE

S&P/Case Shiller 20-City Composite Index

Source: Bloomberg data, Hayman Capital, Bienville Capital Management

U.S. home prices have risen13.6% off the bottom, but stillneed to increase another 34%to reach previous highs

At the bottom in March of 2012, prices hit levels notseen since November of 2002

*Any financial indicators or benchmarks shown are for illustrative and/or comparative purposes only. Certain information has been provided by and/or is based on third party sources and, although believed to be reliable, such information has not been independently verified and its accuracy, timeliness or completeness cannot be guaranteed.


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12

14

16

18

20

22

24

26

2000 2002 2004 2006 2008 2010 2012

U.S. HOUSING UPDATE

Not only does this help liftborrowers with negativeequity back above water, italso incentivizes them tostay in their homes

After falling by $6.7 trillion from the peak inQ4 2011, U.S. householdshave recovered roughly1/3 of their real estatewealth

After stabilizing from 2009-2011, U.S. household real estate wealth has picked up considerably, rising by $2.4trillion from the bottom in June of 2011, increasing overall household net worth

Source: Bloomberg data, Bienville Capital Management

U.S. Household Real Estate Assets ($trillions)


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1

2

3

4

5

6

7

8

1946 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010

U.S. HOUSING UPDATE

By historical standards,the most recent housingbust was by far the mostcostly in terms of detracting residentialinvestments share of

GDP

.which needs tomorethan double in order toregain its long runaverage

Residential investment has averaged 4.6% of GDP since 1946. The Financial Crisis destroyed the residentialinvestment component of GDP, bringing it to a low of 2.2% in the third quarter of 2011 before rising to 2.6% inQ1 2013


Residential Investment as a % of GDP

Savings & Loan Crisis(3.3% low)

The Great Recession(2.2% low)


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62

63

64

65

66

67

68

69

70

1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013

U.S. HOUSING UPDATE

The long-run average of U.S. homeownership isroughly 65%...

this ratio has returnedto normal levels

After peaking at 69% between 2004-2006, U.S. homeownership rates have now reverted back to historicallevels


U.S. Homeownership Rate (% of households)


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0

200

400

600

800

1000

1200

1400

1600

1800

2000

2002 2004 2006 2008 2010 2012

U.S. HOUSING UPDATE

as an increasingnumber of households are formed, this should help

solidify the demand for both single and multi- family U.S. housing

U.S. household formations are once again rising after falling dramatically during the recession


U.S. Household Formations (in thousands)


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0

500

1,000

1,500

2,000

2,500

3,000

D e c - 60 M a y - 6 1 O c t -6 1 M a r - 6 2 A u g -6 2 J a n - 6 3 J u n - 6 3 N o v - 63 A p r - 6 4 S e p - 6 4 F e b -6 5 J u l - 6 5 D e c - 6 5 M a y -6 6 O c t - 6 6 M a r -6 7 A u g - 6 7 J a n - 68 J u n - 6 8 N o v - 6 8 A p r - 69 S e p - 6 9 F e b - 7 0 J u l - 7 0 D e c - 70 M a y - 7 1 O c t -7 1 M a r - 7 2 A u g -7 2 J a n - 7 3 J u n - 7 3 N o v -7 3 A p r - 7 4 S e p -7 4 F e b - 7 5 J u l - 7 5 D e c - 7 5 M a y- 7 6 O c t - 76 M a r - 7 7 A u g - 77 J a n - 7 8 J u n - 7 8 N o v - 78 A p r - 7 9 S e p - 79 F e b - 8 0 J u l - 8 0 D e c - 8 0 M a y -8 1 O c t - 8 1 M a r -8 2 A u g - 8 2 J a n - 83 J u n - 8 3 N o v - 8 3 A p r - 84 S e p - 8 4 F e b - 8 5 J u l - 8 5 D e c - 85 M a y - 8 6 O c t -8 6 M a r - 8 7 A u g -8 7 J a n - 8 8 J u n - 8 8 N o v -8 8 A p r - 8 9 S e p -8 9 F e b - 9 0 J u l - 9 0 D e c - 9 0 M a y- 9 1 O c t - 91 M a r - 9 2 A u g - 92 J a n - 9 3 J u n - 9 3 N o v - 93 A p r - 9 4 S e p - 94 F e b - 9 5 J u l - 9 5 D e c - 9 5 M a y -9 6 O c t - 9 6 M a r -9 7 A u g - 9 7 J a n - 98 J u n - 9 8 N o v - 9 8 A p r - 99 S e p - 9 9 F e b - 0 0 J u l - 0 0 D e c - 00 M a y - 0 1 O c t -0 1 M a r - 0 2 A u g -0 2 J a n - 0 3 J u n - 0 3 N o v -0 3 A p r - 0 4 S e p -0 4 F e b - 0 5 J u l - 0 5 D e c - 0 5 M a y- 0 6 O c t - 06 M a r - 0 7 A u g - 07 J a n - 0 8 J u n - 0 8 N o v - 08 A p r - 0 9 S e p - 09 F e b - 1 0 J u l - 1 0 D e c - 1 0 M a y -1 1 O c t - 1 1 M a r -1 2 A u g - 1 2 J a n - 13 J u n - 1 3 N o v - 1 3 A p r - 14 S e p - 1 4 F e b - 1 5 J u l - 1 5 D e c - 15

Dec-60 Dec-64 Dec-68 Dec-72 Dec-76 Dec-80 Dec-84 Dec-88 Dec-92 Dec-96 Dec-00 Dec-04 Dec-08 Dec-12

U.S. HOUSING UPDATE

Additionally, it if takes 3years before returning tothe 1.5mm trend, another 1.3mm units would beundersupplied, resultingin a total of 5.9mm total

units being underbuilt

the 2.1mm units beingoverbuilt during thebubble years minus the5.9mm units beingunderbuilt since the crashwould leavea total net shortfall of 3.8mmunits of pent-up

demand by the end of 2015

Based on a long-run average of 1.5mm new housing units built per year, 2.1mm housing units were overbuilt during the bubble years. Since the crash, historically low housing starts resulted in 4.6mm units beingunderbuilt. This net shortfall represents pent-up demand


U.S. Housing Starts (in thousands)

Housing being oversupplied

Housing being undersupplied


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0.0

0.2

0.4

0.6

0.8

1.0

1.2

1995 1998 2001 2004 2007 2010 2013

U.S. HOUSING UPDATE

now that this ratio hasrecently stalled, it may besuggesting that U.S.

housing could be enteringa period of slower improvement or evencontraction

however, given the fundamentals previouslyoutlined, we believe themarket is resting onrobust support

After a period of considerable outperformance, homebuilders recent lack of leadership relative to the broadermarket is something to watch

Source: Bloomberg data, Jefferies, Bienville Capital Management

Homebuilders Relative Performance to the S&P 500


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3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

7.5

1999 2001 2003 2005 2007 2009 2011 2013

U.S. HOUSING UPDATE

Sales of existing homeshave been rising for morethan a year

existing home saleshave carved out a volatilebottom as a result of government first-timehomebuyer credits pullingdemand forward

Sales of existing homes collapsed following the housing crash, falling 52% from the peak. After bottoming in July 2010 at an annualized rate of 3.45mm, existing home sales have risen by 50% to 5.1mm


Sales of Existing Homes (in millions)

+50% from the bottom


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0

200

400

600

800

1000

1200

1400

1600

0

10

20

30

40

50

60

70

80

90

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

NAHB Futures Sales Expectations (LHS) New Home Sales (RHS, in thousands)

U.S. HOUSING UPDATE

The NAHB index hasremained below 50 since July of 2006, before finallyturning positive earlier this year

more important, theseexpectations led new homesales on the way down,and if this pattern holdstrue on the way back up,new home sales shouldcontinue higher

Homebuilders expectations of future sales have recently surged, while current levels of actual new home saleshave lagged, despite their tight correlation since 2005


NAHB Future Sales Expectations vs. Actual New Home Sales


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0

2

4

6

8

10

12

14

16

1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

New Home Sales (Months Supply) Existing Home Sales (Months Supply)

U.S. HOUSING UPDATE

The oversupply of newand existing homes havelargely been cleared

in fact, the datasuggests a tight market byhistorical standards

Supplies of new and existing homes relative to current demand indicate a tight market, suggesting continuedupward pressure on home prices


New and Existing Homes (Months Supply)

New and Existing monthssupply of homes near all-time lows


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500

700

900

1,100

1,300

1,500

1,700

1,900

2,100

2,300

2,500

1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

U.S. HOUSING UPDATE

The peak in vacant homes for sale reached 2.3mmunits in 2008

this represented morethan twice the pre crisisaverage of 1.1mm homes

Housing inventory has come down significantly from the peak. Large pools of capital investing in REO-to-rental programs seem to have helped remove many of these homes from the market


Vacant U.S. Housing Units for Sale (in thousands)

Pre-crisis average


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2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Mar-81 Mar-84 Mar-87 Mar-90 Mar-93 Mar-96 Mar-99 Mar-02 Mar-05 Mar-08 Mar-11

U.S. HOUSING UPDATE

The Federal Reservesquantitative easing programs have largelybeen focused on Agencymortgages and U.S.Treasuries, both of whichhave helped pushmortgages rates evenlower

While mortgage rates have recently risen, they remain near historical lows


Freddie Mac 30-Year Fixed-Rate Mortgage (%)


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CONFIDENTIAL

0

2,000

4,000

6,000

8,000

10,000

12,000

2000 2002 2004 2006 2008 2010 2012

U.S. HOUSING UPDATE

Still, from the bottom inweekly mortgagerefinancing applicationsin July of 2008, more than900,000 homeowners have

taken advantage of lower mortgage rates

The recent sharp rise in rates could mark an end to the recent refinancing boom. Since May of this year,refinance applications are down 55% as 30-year fixed mortgage rates rose by 1% to 4.46%


Weekly Mortgage Refinancing Applications


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100

150

200

250

300

350

400

450

500

550

600

2000 2002 2004 2006 2008 2010 2012

U.S. HOUSING UPDATE

New mortgageapplications arerecovering slowly, butimproving nonetheless

and should continue ashome affordabilityremains at all-time highs

However, home sales follow a different path. Statistically, a regression between new mortgage applications andprevailing mortgage rates have produced a historical R 2 of 0.02. This indicates mortgage rates have had nearlyzero effect on new purchase applications, albeit over an era of falling rates. With that said, a material rise inmortgage rates would be detrimental to the recovery.

Source: Bloomberg data, McAlinden Research, Bienville Capital Management

New Mortgage Applications Index

It remains to be seen whether or not the recent rise in rateswill impede the strength innew mortgage applications


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CONFIDENTIAL

80

100

120

140

160

180

200

220

1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013

U.S. HOUSING UPDATE

A value of 100 impliesthat a family with amedian income canqualify for a prevailing-rate mortgage loan on amedian priced home,assuming a 20% down payment

the current level of 175suggests that families caneasily afford to buy ahome should they be ableto obtain a mortgage

Overall, despite the spike in mortgage rates and the double digit YoY increase in home prices, housingaffordability remains high. According to the National Association of Realtors, a typical American householdwith a median income has 75% more income than is needed to qualify for the purchase of a median-pricedhome

Source: Bloomberg data, Deutsche Bank, Bienville Capital Management

National Association of Realtors Housing Affordability Index

Level of mortgage rate:

0.5% higher 1.0% higher 1.5% higher 2.0% higher


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0.5

0.8

1.0

1.3

1.5

1.8

2.0

1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

U.S. HOUSING UPDATE

Figures are based onmedian U.S. sale prices,median U.S. rental pricesand a 30-year fixed-ratemortgage with a 20%down payment

Despite the rise in home prices and recent rise in mortgage rates, it is still cheaper to buy a home than to rent.Furthermore, this ratio remains well below its long-term average of 1.3, meaning it has historically been 30%more expensive to own than rent a home

Source: US Census Bureau, Bienville Capital Management

Ratio of Monthly Mortgage Payment to Median Asking Rent

Historical average

It still remains cheaper to buy than rent

Nearly twice ascheap to rent


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7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

11.5

Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

U.S. HOUSING UPDATE

As the faultiest borrowersare kicked out of themortgage pool, RMBS fundamentals continue toimprove

delinquency rates have fallen from a peak above11% in Q1 2010 to 9.7%as of Q1 2013

Credit Burnout is driving the weakest borrowers out of mortgage pools, helping enhance the underlyingquality of Residential Mortgage Backed Securities bonds


Total U.S. Mortgage Delinquency Rates (%)


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20

30

40

50

60

70

80

90

100

Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

U.S. HOUSING UPDATE

driven by fallingmortgage delinquencies,higher recoveries on foreclosed homes, and anincreasing number of borrowers being pulledback above water byrising home prices

since digesting the salesof Maiden Lane portfolios from the Federal Reserve,Non-Agency RMBS

prices have risen by 41% from their bottom inNovember 2011

In turn, helping drive RMBS prices higher


ABX 2006 Vintage Subprime Index

Subprime prices have risen41% since the end of 2011


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CONFIDENTIAL


Disclaimer

The Bienville Macro Review (the

Presentation

) is a distribution which highlights the research of Bienville Capital Management, LLC (

Bienville

) in different areas ofinterest across the macro landscape. Bienville believes that understanding the global macroeconomic backdrop is a prerequisite to efficiently allocating capital.

The Presentation is not intended to be an all-encompassing review of the financial markets. Rather, it should serve as a concise summary, which provides clients with anupdate of Bienvilles areas of focus within its research process. We hope that the Presentation will create an ongoing dialogue with our investors on the global dynamicsthat drive the financial markets. The topics covered in the Presentation may or may not be related to Bienvilles active positions or investment strategies.

The content of the Presentation includes forward-looking statements, estimates, projections, assumptions, beliefs and opinions (collectively, Projections ), which mayprove to be substantially inaccurate or based upon flawed reasoning and assumptions. Moreover, Projections are inherently subject to significant risks and uncertaintiesbeyond the control of Bienville and its affiliates, including Bienville Capital Partners, LP, Bienville Capital Partners Offshore, Ltd. and Gulf Coast Opportunities Fund,LP (and collectively with other private investment funds that Bienville or its affiliates may form and manage in the future, the Funds ).

The information contained in the Presentation regarding Bienville and the Funds has been prepared solely for illustration and discussion purposes. Except whereotherwise indicated, the Presentation speaks as of the date hereof, and Bienville undertakes no obligation to correct, update, or revise the Presentation, or to otherwise

provide any additional materials. Although Bienville believes the Presentation is substantially accurate in all material respects and does not omit to state material factsnecessary to make the statements herein not misleading, Bienville makes no representation or warranty, express or implied, as to the accuracy or completeness of thePresentation or any other written or oral communication it makes with respect to the tactical positions or investment strategies described herein. Bienville expresslydisclaims any liability relating to the Presentation or such communications (or any inaccuracies or omissions herein). The Presentation merely constitutes an opinion orbelief based upon the information set forth herein, which opinion or beliefs may prove to be wrong. The information and opinions contained in the Presentation arebased on public information.

Neither Bienville nor the Funds makes any commitment or undertaking to take or refrain from taking any investment decision or other action with respect to the tacticalpositions or investment strategies described herein. Bienville may change its views about the tactical positions and investment strategies described in the Presentation atany time, for any reason. Bienville and the Funds may buy, sell, or otherwise change the form or substance of any of their investments at any time. Bienville disclaimsany obligation to notify any recipient of this Presentation of any such changes.

The Presentation is not investment advice, or a recommendation or solicitation to buy or sell any securities mentioned herein or otherwise. If any offer of interests in anyFund is made, it shall be pursuant to one or more definitive private placement memoranda for such Fund which would contain material information not containedherein and which shall supersede this information in its entirety. Any decision to invest in a Fund should be made after reviewing the definitive private placementmemoranda for the Fund, conducting such investigations as the investor deems necessary and consulting the investors own investment, legal, accounting, and taxadvisors in order to make an independent determination of the suitability and consequences of an investment in the Fund.

This Presentation and its contents are confidential, and proprietary information of Bienville, and any reproduction of this information, in whole or in part, without theprior written consent of Bienville is prohibited. For additional information about Bienville, including fees and services, please see our disclosure statement as set forth onForm ADV. Additional information is available from Bienville upon request.

DISCLAIMER

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