Industry Primer Bofa

Accessible version
Homebuilders
Industry primer: Millennials building
another addition to housing cycle
Industry Overview
Constructive near-term outlook on homebuilders 08 November 2021
In parallel with our re-launch on homebuilders (see our reinstatements on: DR Horton, Equity
Dream Finders, KB Home, Lennar, PulteGroup, and Toll Brothers), our industry primer offers United States
insights into the US homebuilding market that will build roughly 1.6mm units in 2021. We Homebuilders
have a positive industry outlook supported by favorable demographics (millennials entering Rafe Jadrosich
home buying age), healthy consumer, low existing inventory and aging housing stock. We Research Analyst
BofAS
expect the current US housing starts pace of 1.6mm to edge higher in 2022. +1 646 855 5815
rafe.jadrosich@bofa.com
Millennial homebuyer tailwind is still in early stages Shaun Calnan, CFA
We anticipate the annual housing starts pace will remain above the 1.4 long-term Research Analyst
BofAS
average beyond 2022. Since the industry trough in 2009, housing starts have lagged +1 646 855 1362
household formations by roughly 100k per year. We believe underbuilding over the last shaun.calnan@bofa.com
decade has absorbed the 2-3mm home glut from pre-financial crisis overbuilding and Chris Flanagan
FI/MBS/CLO Strategist
created a deficit of 4mm+ homes. In addition to the home shortage, demand improved BofAS
in late 2019 and accelerated during COVID-19. The tailwind from millennial homebuyers christopher.flanagan@bofa.com
is still in the early stages - US homeownership rates jump from low-30% for 25-29 year Pratik K. Gupta
CLO/MBS Strategist
olds to 60% for 35-39 year olds and the amount of 35-44 year olds (historically a BofAS
leading indicator of housing starts) is set to increase by 5mm over the next eight years. pratik.gupta@bofa.com
Curtis Nagle, CFA
Changing lifestyles, enabling tech will drive home demand Research Analyst
BofAS
Flexible work arrangements mean homeowners will spend more time at home (now also c.nagle@bofa.com
an office) and 2nd vacation homes could get more use. Technology including ride-sharing
and food and grocery delivery apps have improved the convenience and quality of life in
suburbs. New home construction is also heavily weighted to the Southeast/Texas where
the cost of living/taxes are more attractive and job growth is stronger.
For more information on the overall
Supply chain bottlenecks will last into 2022 US housing market outlook and
Homebuilders have faced supply chain bottlenecks since 2Q21 including material/labor forecasts, see Housing Watch:
shortages and slower municipal approvals. Build cycles (typically 3-9 months) have Housing: still under pressure 08
increased by 1-3 months and we expect cycle times to remain elongated through 1H22. November 2021 from BofA US
Unauthorized redistribution of this report is prohibited. This report is intended for tushar.ghosh@bofa.com
economics team
Affordability is a risk, but homeownership still attractive
The surge in home prices (September Case-Shiller +18% YoY) coupled with an outlook
for higher mortgage rates could dampen demand. We believe homeownership becomes
more attractive in an inflationary environment where wages and rents are rising rapidly
and the real cost of borrowing remains low. Despite the rise in home prices, our rent-to-
own cost analysis indicates that monthly mortgage payments at current rates are lower
than median rents in 12 of the 20 largest homebuilding markets.
Housing is cyclical, but this cycle won’t end in tears
The homebuilding industry has changed for the better since the housing bubble and we
see many reasons that this cycle will not end in a crash, including: (1) builders have
reduced land position risk through option contracts and carry less debt, (2) lending
standards are higher, (3) industry is more consolidated, (4) more measured building pace
due to stringent entitlement/permit process, and (5) fewer international buyers. We see
growing institutional demand for single-family rentals (see below) and iBuyers (see
below) as an incremental risk, but they still account for a small portion of the market.
BofA Securities does and seeks to do business with issuers 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.
Refer to important disclosures on page 35 to 37. 12348752
Timestamp: 08 November 2021 07:11AM EST

Millennial homebuyer tailwind is still in early stages
The tailwind from millennial homebuyers is still in the early stages. The amount of 35-44
year olds (historically a leading indicator of housing starts) is set to increase by 5mm
over the next eight years.
Exhibit 1: US population aged 35-44 and housing starts
Increasing amount of 35-44 year olds in the US should be favorable for housing starts
53 2400
Population aged 35-44 (MM, left) US Housing Starts (000s, right)
2000
47 1600
1200
41 800
400
35 0
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
Source: Census Bureau, Euromonitor
BofA GLOBAL RESEARCH
Aging millennials will drive homeownership rates higher

US homeownership rates jump from low-30% for 25-29 year olds to 60%+ for 35-39
year olds and overall homeownership rates should benefit from aging millennials.
Exhibit 2: US population by age (in millions) Exhibit 3: Homeownership rates by age

Millennials are now approaching peak home buying age Homeownership rates jump as buyers enter their 30s
6 90
Gen A Gen Z Millennials Gen X Boomers Silent Age 25-29 Age 30-34 Age 35-39
Age 40-44 Age 45-49
Homeownership rate (%)
60
2
0
5
Under 1
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
30
Jun-1997Jun-2001Jun-2005Jun-2009Jun-2013Jun-2017Jun-2021
Source: Pew Center Source: Census Bureau

BofA GLOBAL RESEARCH BofA GLOBAL RESEARCH
Monthly Consumer Survey shows interest in home buying remains high

The BofA Monthly Consumer Survey Series (launched in December 2020 – see linked
report), surveys ~1,000 respondents in the US regarding spending expectations. In
September, 22.8% of participants responded that they plan to buy a
home/apartment/condo in the next 12 months – a sequential improvement from prior
2 Homebuilders | 08 November 2021

months. Please see the most recent report (results from September 8 – September 14)
including details on methodology: Consumer: Monthly Consumer Spending Survey #10 –
September 2021 08 October 2021
Exhibit 4: Monthly Big Ticket Spending – New Baby Exhibit 5: Monthly Big Ticket Spending – New Home
In the next 12 months are you or your partner expecting / trying to have a In the next 12 months do you plan to buy a home/apartment/condo?
baby?
25%
12% 11.2% 23.2%
10.1% 10.5% 10.5% 22.8%
9.7% 9.9% 23%
8.9% 9.1% 8.8%
8.3%
20.8%
8% 21% 20.3% 20.2%
19.8% 19.5% 19.8% 19.8%
19% 18.3%
4%
17%
0% 15%
Jul-21
Mar-21
Aug-21
Feb-21
Jun-21
Apr-21
Jul-21
May-21
Jan-21
Mar-21
Dec-20
Sep-21
Aug-21
Feb-21
Jun-21
Apr-21
May-21
Jan-21
Dec-20
Sep-21
Source: Survey Monkey, BofA Global Research Source: Survey Monkey, BofA Global Research
Respondents: ~1,000 each month Respondents: ~1,000 each month
Housing demand has outpaced supply since 2012

Single family housing starts have trended below the long-term average every year since
2007.
Exhibit 6: Single & multifamily housing starts (units 000s), SAAR
Single family housing starts were below the long-term average from 2007-2020
2,000
Single family starts Multifamily starts
1,750
1,500
1,250
1,000
750
500
250
0
1959 1965 1971 1977 1983 1989 1996 2002 2008 2014 2020
Source: Census Bureau, BofA Merrill Lynch Global Research

Supply has lagged demand since 2012

We believe underbuilding over the last decade has absorbed the 2-3mm home glut from
pre-financial crisis overbuilding and created a deficit of 4mm+ homes. Since the industry
trough in 2009, housing starts have recovered gradually and lagged household
formations by roughly 100k per year. We expect the current US housing starts pace of
1.6mm to edge higher in 2022 and 2023.
Homebuilders | 08 November 2021 3

Exhibit 7: Estimated housing supply vs. demand (units 000s)
We believe housing demand has outpaced supply since 2012
3,000
Total housing supply Total housing demand
1,500
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021E
2023E
Source: Census Bureau, BofA Global Research estimates
Demographics, flexible work arrangement should support demand going forward

Housing demand started to pick-up in late 2019 and accelerated during COVID-19. We
think favorable demographics (millennials entering home buying age), healthy consumer
backdrop and low existing inventory/aging housing stock were the primary drivers of the
upswing in demand trends pre-COVID.
Going forward, we see additional tailwinds from flexible work arrangements and
technology including ride-sharing and food /grocery delivery apps that have improved
the convenience and quality of life in suburbs. New home construction is also heavily
weighted to the Southeast/Texas where the cost of living/taxes are more attractive and
job growth is stronger. According to Freddie Mac, 60% of MSAs are experiencing more
growth in the suburbs than in cities. In 2019, suburbs grew at an annual growth rate of
about 0.7% while cities grew at less than half that rate (0.3%).
We estimate housing demand consists of new household formations, demolitions of

existing homes (around 250-300K per year) and second homes used for vacation
purposes (tracking at 350K). The long-term average of household formations (since
1975) has trended around 1.25mm – we are assuming a lower run-rate (800-900k) going
forward, more in-line with 2010-2019 trend. Also, given distortions of data collection
during COVID-19, we assume US household formations of 1.2mm for 2020 compared to
the reported 3mm+.

Exhibit 8: Housing demand breakdown (units 000s)
We expect demand to remain above 1.5mm units in 2022 and 2023
3,000
Household formations
Annual demolitions
Second/vacation homes
Total housing demand
1,500
0
1975
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021E
Supply has ramped up gradually since the trough

We estimate housing supply consists of housing completions, new manufactured
(mobile) homes, and excess vacant for sale homes (the vacancy level above the average
vacancy rate from 1975-2020). Since 1975, US housing starts have averaged 1.43mm on
an annual basis with an additional 100K of manufactured homes.
Exhibit 9: Housing supply breakdown (units 000s)
Housing supply will return to the long-term average pace in 2021
3,000
2,000
1,000
0
Housing completions Manufactured homes
Excess vacant homes for sale Total housing supply
(1,000)
1975
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
2018
2021E

We expect supply/demand near parity in 2022, but there is still pent up demand
Our analysis suggests that the 2021 ratio of supply to demand is around 89%, indicating
that the market is underbuilding (demand is outpacing supply). In 2020, the supply to
demand ratio fell to roughly 25% as demand surged and new construction temporarily
halted due to COVID-19. From 2007-2009, in the midst of the Great Recession and
housing collapse, the ratio of new home supply to demand averaged close to 200%,
reflecting a period of mass oversupply. We expect the supply to demand ratio to return
to roughly 100% in 2022, but there is still pent up demand remaining from years of
underbuilding.

Exhibit 10: US housing supply / demand ratio
We expect incremental housing demand and supply to reach parity in 2022, but there is still pent up demand
300%
Supply/demand ratio 1975-2020 Avg
200%
100%
0%
1975
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022E
Homebuilding is cyclical, but this cycle won’t end in tears

The housing industry is 12 years into the recovery from the trough in housing starts and
10 years into the recovery from the trough in new home sales. The prior upcycle (trough-
to-peak) lasted 14 years and was followed by a four year downturn. The peak-to-trough
decline was 74% in housing starts. The recovery pace of the current upcycle was initially
slow coming out of the financial crisis, but building has picked up significantly in 2021.
We see potential for annual housing starts to remain above the 1.4 long-term average
beyond 2023.
The homebuilding industry has changed for the better since the housing bubble and we
see many reasons that this cycle will not end in a crash, including: (1) builders have
reduced land position risk through option contracts, (2) lending standards are higher, (3)
builders are carrying less debt, (4) industry is more consolidated, (5) building pace has
slowed due to stringent entitlement/permit process, and (6) fewer international buyers.
Exhibit 11: US housing cycles, economic cycles and valuation

Housing starts have increased for 12 consecutive years and new home sales have increased for 10 consecutive years
Housing New home Real GDP HB performance vs.
Year Housing peak/trough starts sales growth YoY P/E multiples S&P500 Corresponding Recession
1981 1,084,100 436,000 2.60% 9.1x --
Trough in housing starts & new
1982 1,062,200 413,000 -1.90% 18.2x -- '81-'82 OPEC/Rate hike
home sales
1983 1,703,000 622,000 4.60% 11.0x --
1984 1,749,400 639,000 7.30% 15.9x --
1985 1,741,700 688,000 4.20% 13.3x --
Peak in housing starts & new
1986 1,805,400 748,000 3.50% 14.2x --
home sales
1987 1,620,600 672,000 3.50% 7.0x -10.1%
1988 1,488,000 675,000 4.20% 5.6x -21.9%
1989 1,376,100 650,000 3.70% 5.9x -58.8%
1990 1,192,600 535,000 1.90% 6.7x -12.7%
Trough in housing starts & new
1991 1,014,000 507,000 -0.10% 11.8x 302.2% '90-'91 S&L Crisis
home sales
1992 1,199,600 608,000 3.60% 14.4x 14.4%
1993 1,287,700 666,000 2.70% 11.9x 51.2%
1994 1,457,000 670,000 4.00% 12.4x -41.6%
1995 1,354,200 665,000 2.70% 12.3x 79.1%
1996 1,476,900 758,000 3.80% 11.2x -27.9%
1997 1,474,000 805,000 4.50% 11.7x 17.5%
1998 1,617,000 885,000 4.50% 9.4x -18.3%
1999 1,641,200 881,000 4.70% 5.8x -48.2%
2000 1,568,600 877,000 4.10% 6.0x 116.3%

Exhibit 11: US housing cycles, economic cycles and valuation
Housing starts have increased for 12 consecutive years and new home sales have increased for 10 consecutive years
Housing New home Real GDP HB performance vs.
Year Housing peak/trough starts sales growth YoY P/E multiples S&P500 Corresponding Recession
2001 1,602,900 909,000 1.00% 6.3x 40.5% '2001 Y2K & 9/11
2002 1,705,000 972,000 1.80% 6.9x 9.5%
2003 1,847,700 1,088,000 2.80% 7.9x 96.7%
2004 1,955,600 1,203,000 3.80% 8.1x 47.2%
Peak in housing starts & new
2005 2,068,100 1,283,000 3.30% 7.3x 6.6%
home sales
2006 1,800,900 1,052,000 2.70% 10.2x -30.0%
2007 1,355,100 776,000 1.80% 10.9x -51.8%
2008 905,500 485,000 -0.30% 28.4x 0.4%
2009 Trough in housing starts 553,900 374,000 -2.80% 18.8x 2.7% '08-'09 Great Recession
2010 586,900 322,000 2.50% 21.6x 2.3%
2011 Trough in new home sales 608,800 305,000 1.60% 27.5x -1.7%
2012 780,600 369,000 2.20% 22.5x 42.2%
2013 924,900 429,000 1.80% 15.3x -4.4%
2014 1,003,300 439,000 2.30% 16.1x -8.9%
2015 1,111,800 501,000 2.70% 15.9x 0.9%
2016 1,173,800 561,000 1.70% 11.8x -10.5%
2017 1,202,900 613,000 2.30% 14.1x 11.3%
2018 1,250,000 617,000 2.90% 9.4x -20.3%
2019 1,289,900 682,000 2.30% 10.5x 11.1%
2020 1,380,200 810,000 -3.40% 9.3x 10.4% COVID-19 pandemic
2021E 1,580,000 805,000 5.90% 8.3x
Source: Bloomberg, BofA Global Research
Inventory is tight and aging

Inventory of new and existing homes is low
Surge in demand for homes coupled with supply constraints have pressured inventory
availability in both new and existing homes.
Exhibit 12: Month’s supply of new & existing homes
Existing home inventories are still well below historical averages
11 11
Months' new supply Months' existing supply
8 8
5 5
2 2
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021E
2023E
Source: Census Bureau, NAR, BofA Merrill Lynch Global Research estimates
New and existing home sales are declining YoY against a high base from 2020, partially
due to a lack of supply.

Exhibit 13: US new home sales (000s) Exhibit 14: US existing home sales (000s)
We believe lack of supply (rather than lower demand) is pressuring new Existing home sales have declined YoY, but are still tracking up significantly
home sales growth YoY compared to 2019
1050
2018 2019 2020 2021 2018 2019 2020 2021
6000
950
5500
850
5000
750
650 4500
550 4000
450 3500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: Census Bureau, BofA Global Research
Existing home inventory is also aging

We estimate the median age of the 2021 housing stock at approximately 45 years,
implying a median year built of 1975. The US housing stock is now at its oldest point in
history, which should be supportive for new home demand.
Exhibit 15: US housing stock is at its oldest point in history
Median age of US housing stock and implied median year built
60 1976
Median age of stock Implied median year built
1973
1970
45
Median Age
Year Built
1967
1964
30
1961
1958
15 1955
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021E
2023E
Source: American Housing Survey

Consumer backdrop appears healthy

Savings rate has increased
The US personal US savings rate has increased significantly since the beginning of 2020
and continues to track above its long-term historical average.

Exhibit 16: U.S. Personal Savings Rate (LT History) Exhibit 17: U.S. Personal Savings Rate (2017-2020)
US savings rate is still above historical levels US personal savings rate is tracking higher on a 2-year basis
45 35 2018 2019 2020 2021
30 25
Percent %
Percent %
15 15
0 5
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Dec
Jun
Jan
Jul
Feb
Nov
Oct
Apr
May
Aug
Mar
Sep
Source: Haver Analytics, BofA Global Research Source: Haver Analytics, BofA Global Research
Average household net worth hitting record levels

Based on data from the Federal Reserve, we estimate average household net worth
increased 19.8% y/y in 2Q21 (compared to 23.2% in 1Q21 and vs. 5.4% increase in
2Q20). The historical average (since 1953) growth rate for household wealth is +5.8%.
Exhibit 18: Average net worth per U.S. household
We est. avg. household net worth increased 19.8% y/y in 2Q21 (vs. +23..2% in 1Q21 & +5.4% LY)
$1,300,000 30%
Household Net Worth y/y % Change Long-term avg. (since 1953)
20%
$900,000
10%
0%
$500,000
-10%
$100,000 -20%
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: Federal Reserve, Haver Analytics, BofA Global Research

Financial obligations are well below historical levels

The ratio of financial obligation payments to DPI is significantly below its long-term
historical average given a stimulus-driven surge in disposable income and slowing
growth in debt payments and obligations. It also remains below the long-term average
of 16.3, implying room for the consumer to increase borrowing & spending from current
levels in 2021 if the economy improves.

Exhibit 19: Financial Obligations Ratio (1980-Current) Exhibit 20: Financial Obligations Ratio (2007-Current)
Financial obligations payments as % of disposable personal income Financial obligations payments as % of disposable personal income
19.0
18.0
18.0
17.0
17.0
16.0
16.0
15.0
15.0
14.0
14.0
13.0
13.0
12.0
2008-Q1
2009-Q1
2010-Q1
2011-Q1
2012-Q1
2013-Q1
2014-Q1
2015-Q1
2016-Q1
2017-Q1
2018-Q1
2019-Q1
2020-Q1
2021-Q1
12.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: BofA Global Research, Federal Reserve Board/Haver Analytics Note (b): The financial Source: BofA Global Research, Federal Reserve Board/Haver Analytics
obligations ratio is an estimate of the ratio of debt payments to disposable income and includes BofA GLOBAL RESEARCH
estimated debt payments on outstanding mortgage & consumer debt (includes student loans),
automobile lease payments, rental payments on tenant-occupied property, homeowners’
insurance, and property tax payments
Consumer interest payments are below historical average

Personal Interest Payments % of DPI (excludes mortgages) remain low compared to
historical levels.
Exhibit 21: Personal Interest Payments % of DPI (Long-term history) Exhibit 22: Personal Interest Payments % of DPI (4 year history)
Personal interest pmts as a % of DPI are below pre-2008 recession levels Personal interest pmts as a % of DPI was 1.52% in Jul. vs. 1.48% LY
3.5% Personal Interest Payments % of DPI 2.5% Personal Interest Payments % of DPI
3.0%
2.0%
2.5%
2.0% 1.5%
1.5%
1.0%
2017-Apr
2017-Oct
2018-Apr
2018-Oct
2019-Apr
2019-Oct
2020-Apr
2020-Oct
2021-Apr
1.0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: BofA Global Research, Bureau of Economic Analysis Source: BofA Global Research, Bureau of Economic Analysis
Mortgage lending standards have eased recently

According to the 3rd quarter 2021 Senior Loan Officer Survey from the Federal Reserve,
trends in lending standards for consumers were easing (negative net tightening =
easing) for residential mortgages. Lending standards for residential mortgages
experienced 14.2% net easing in 3Q21 vs. 61% net tightening in 3Q20.

Exhibit 23: % of Bank survey respondents reporting tightening Exhibit 24: Residential mortgage lending standards (4-yr history)
standards on residential mortgages 14.2% reported net easing in 3Q21 vs. 61% reporting net tightening LY
14.2% reported net easing in 3Q21 vs. 61% reporting net tightening LY
65
120
45
80
25
40
5
0
-15
2017-Q4
2018-Q2
2018-Q4
2019-Q2
2019-Q4
2020-Q2
2020-Q4
2021-Q2
-40
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
2017
2019
2021
Source: BofA Global Research, Haver Analytics, Federal Reserve Board Senior Loan Officer Survey Source: BofA Global Research, Haver Analytics, Federal Reserve Board Senior Loan Officer Survey
Supply chain bottlenecks will likely last into 2022

Homebuilders have faced supply chain bottlenecks since 2Q21 including material/labor
shortages and slower municipal approvals. Build cycles (typically 3-9 months) have
increased by 1-3 months and we expect cycle times to remain elongated through 1H22.
Cost structure is largely variable, particularly COGS
The average cost structure of a homebuilder is largely variable. We estimate that total
homebuilding operating costs consist of approximately 85% variable cost and 15% fixed
costs. As a % of cost of goods sold, we estimate land accounts for 1/3, materials
account for 1/3, and labor accounts for 1/3. The vast majority of COGs are variable
(90%+). We believe SG&A is 70-80% variable for builders, with the most significant
structural component associated with compensation expense found in the G&A bucket.
Materials: expect peak lumber pressure in 4Q21
Lumber is the largest material for homebuilders. Lumber prices surged in 1H21, peaking
in June. We expect peak lumber prices to impact the cost of goods for builders of entry
level homes in 2H21 and luxury homes in early 2022. Shortages of other key
materials/components, including windows and appliances, have caused delays in
construction throughout 3Q21 and inventory availability still remains challenging. We
expect material input cost (ex-lumber) to rise 10-15% in 1H22.
Exhibit 25: Lumber, OSB and Plywood prices
Lumber costs surged during early 1H21. We expect a headwind to builder gross margins 3Q21 – 1Q21
$1,800 Framing Lumber Composite ($/mbf)

$1,600 OSB 7/16" North Central ($/msf)
Southern Plywood 15/32" 4 ply ($/msf)
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
2016 2017 2018 2019 2020 2021
Source: Random Lengths

Land: expect shift to option contracts to continue
Land costs are split roughly 50% between raw land and development/entitlement.
Builders are increasingly shifting to a building strategy aimed at minimizing outright land
ownership and the need to develop its lots. Builders also generally do not buy land unless
it has entitlement for the community they plan to build. To accomplish this, builders
enter into purchase agreements with developers of finished land, and in return for what
is generally a 10% deposit, gains the exclusive right (option) to acquire specific lots. If
the builder decides it no longer wants or needs certain lots under contract, it simply
forfeits the associated deposits or tries to renegotiate the contract. In our view, this
approach provides builders with a degree of flexibility and reduces the amount of capital
it has allocated toward land inventory at any given time. While optioning carries lower
margins, the end result is greater flexibility and balance sheet efficiency.
Exhibit 26: Estimate % of controlled lots under option for select builders
We expect builders to continue to use option contracts to acquire land
100.0% FY18 FY19 FY20
80.0%
60.0%
40.0%
20.0%
0.0%
Source: Company data

Labor: local market share is key to working with subcontractors

Substantially all of the land development and home construction work is performed
by subcontractors. Local market share is important to negotiating and building
relationships with skilled building trades (includes framers, electricians, and plumbers for
example). Builders that are able to provide their subcontractors with consistent flow of
jobs tend to get better pricing and efficiency as well as shorter lead times in their build
cycles. The labor market in housing construction remains tight and the cost of labor has
consistently increased at 3-4% rate annually over the last few years. We expect upward
pressure in labor costs to continue (or even accelerate), but see labor as the least
inflationary between land, materials and labor.

Exhibit 27: Average hourly earnings of US construction employee
Construction wages continue to rise
$34
$32
$30
$28
$26
$24
$22
$20
Sep-06 Mar-08 Sep-09 Mar-11 Sep-12 Mar-14 Sep-15 Mar-17 Sep-18 Mar-20 Sep-21
Source: BLS
Affordability is a risk, but we see offsets

Affordability has declined as prices have surged
The NAR’s housing affordability index was 150.4 in July (up from 146.5 in Jun. but below
170.8 LY). Housing affordability remains above the long-term average of 140.8, but
below the 10-year and 20-year averages of 168.9 and 151.8, respectively. The National
Association of Realtors factors in median price existing single-family homes, mortgage
rates, estimated principal and interest payments, payments as a % of income, and
incomes levels to calculate whether or not a typical family could qualify for a mortgage
loan when calculating its housing affordability index. A value of 100 means that a family
with a median income, as defined by the U.S. Census Bureau, has exactly enough income
to qualify for a mortgage on a median-priced home (assuming a 20% down payment). In
July 2006, the index bottomed out at 101.1 and peaked at 214.5 in Jan. ’13. Despite the
surge in home prices, the affordability index still remains slightly better than the long-
term average due in large part to persistently low mortgage rates, with the current 30
year fixed rate at roughly 3.1% according to Freddie Mac.
Exhibit 28: Mortgage rates are at historically levels, but affordability has worsened
Mortgage rates and housing affordability
220 Housing Affordability Index Average housing affordability index 15
200 Mortgage rates (rhs)
180
11
160
140
120 7
100
80 3
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Source: National Association of Realtors, Freddie Mac


Home prices have appreciated significantly
Home prices have increased significantly over the last year. National S&P Case Shiller
Home Price Appreciation (HPA) is up 13% year-to-date and 20% YoY in August. US
Census Bureau median home sale prices increased 18.7% YoY in September.
Exhibit 29: National S&P Case Shiller Home Price Appreciation Exhibit 30: US median home sale price
Case-Shiller HPA increased 13% year-to-date and 20% YoY in August US median home sale prices increased 18.7% YoY in September
300 National S&P Case-Shiller Home Price 25% $430,000 30.0%
Median Sale Price
Appreciation (left axis) y/y % change
20% $410,000 25.0%
YoY change
250
$390,000 20.0%
15%
200 $370,000 15.0%
10%
$350,000 10.0%
150 5%
$330,000 5.0%
0%
100 $310,000 0.0%
-5% $290,000 -5.0%
50
-10% $270,000 -10.0%
0 -15% $250,000 -15.0%
Mar-20
Mar-21
Mar-18
Mar-19
Jun-21
Jun-18
Jun-19
Jun-20
Sep-21
Sep-18
Dec-18
Sep-19
Dec-19
Sep-20
Dec-20
Aug-90
Aug-93
Aug-96
Aug-99
Aug-02
Aug-05
Aug-08
Aug-11
Aug-14
Aug-17
Aug-20
Feb-92
Feb-95
Feb-98
Feb-01
Feb-04
Feb-07
Feb-10
Feb-13
Feb-16
Feb-19
Source: S&P CoreLogic Case-Shiller Home Price Index Source: U.S. Census Bureau
Higher rates would pressure affordability

With an outlook for higher and more sustained inflation, BofA Head of US Economics,
Michelle Meyer now anticipates the timing of the first Fed rate hike in 4Q22 and expects
the Fed to deliver 25bp a quarter through 2023 and 2024 (see our report: US Economic
Weekly: When cost-push comes to shove 22 October 2021). The potential headwind
from rising rates is two-fold: (1) entry level buyers could be priced out of the market, and
(2) current homeowners could be hesitant to sell their home that was financed at an
attractive fixed mortgage rate and buy a new home that will be financed in a higher rate
environment.

100bps rise in rates would add $170 to monthly mortgage payments
Assuming the 2Q21 median US new home price of approximately $375K, a 10% down-
payment, and a 30-year fixed-rate mortgage, we estimate that a 100bps hike in
mortgage rates to 4.0% would increase the median monthly mortgage payment by $170.
We estimate an increase to a 5.0% mortgage rate would increase the median monthly
mortgage payment by $370.
Exhibit 31: Estimated effect on monthly payments from increasing mortgage rates
We estimate a 100bps rise in rates would add $170 to monthly mortgage payments
2Q21 median US new home price $374,900
Assumed down-payment 10%
Implied loan value $337,410
Mortgage type 30 year fixed
Components of monthly payment Assumed annual interest rate

Interest rate 3.10% 3.50% 4.00% 4.50% 5.00%
Principal $569 $531 $486 $444 $405
Interest $872 $984 $1,125 $1,265 $1,406
Property tax $250 $250 $250 $250 $250
Insurance $125 $125 $125 $125 $125
PMI $141 $141 $141 $141 $141
Estimated monthly payment $1,956 $2,031 $2,126 $2,225 $2,327
Delta in estimated monthly pmt (vs. 3.1% rate) nm $74 $170 $269 $370
Delta in estimated annual pmt (vs. 3.1% rate) nm $892 $2,041 $3,226 $4,446
Source: Bloomberg, BofA Merrill Lynch Global Research estimates
Higher rates also usually a headwind for homebuilder stocks

The prospect of rising interest rates, particularly mortgage rates, is likely to create some
unease among homebuilding investors, given the real and perceived impact on
affordability. Homebuilder stocks historically have maintained an inverse relationship
with mortgage rate movements. When mortgage rates rose from 5.53% on June 30,
2005 to 6.80% on July 20, 2006, the Philadelphia Stock Exchange Housing Sector Index
(HGX) index fell 28%. After the Federal Reserves “taper talk” drove mortgage rates up
from 3.35% on May 2, 2013 to 4.58% on August 22nd, 2013, housing stocks also sold
off by roughly 14%. In 2018, rate hikes throughout the year pushed mortgage rates up
by roughly 100bps to the highest level since 2011 (4.8%) – homebuilder stocks declined
approximately 20% for the year.
Exhibit 32: Philadelphia Stock Exchange Housing Index vs Freddie Mac 30 year Mtge Rate
Homebuilders tend to have an inverse relationship with mortgage rates
$600 9.0%
6.0%
$400
3.0%
$200
0.0%
$0 -3.0%
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
Jan-16
Jan-17
Jan-18
Jan-19
Jan-20
Jan-21
Philly Housing (HGX) - left axis

Freddie Mac 30 YR Mtge Rate - right axis
Source: Bloomberg

Rising inflation, wages and rents could be key offsets
While rising rates and higher home prices will undoubtedly pressure affordability for
housing, we see several key offsets: (1) the real cost of borrowing remains very low and
becomes even more favorable in an inflationary environment, (2) rents are rising rapidly,
which makes owning a home with a fixed mortgage relatively more attractive, (3)
stronger wages could support demand, and (4) population shifts to lower cost from high
cost areas.
Exhibit 33: Philadelphia Stock Exchange Housing Index vs US wage Exhibit 34: Philadelphia Stock Exchange Housing Index vs CPI YoY Index
growth Higher inflation could drive down the real cost of borrowing
Rising wages have historically coincided with housing stock appreciation
$600 6.0%
$600 6.0% Philly Housing (HGX) - left axis
Philly Housing (HGX) - left axis
CPI YoY Index - right axis
US wage growth (YoY) - right axis
$400 3.0%
$400
3.0%
$200 $200 0.0%
$0 0.0% $0 -3.0%
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Jan-03
Jan-05
Jan-07
Jan-09
Jan-11
Jan-13
Jan-15
Jan-17
Jan-19
Jan-21
Source: US Census Bureau Source: US Bureau of Labor Statistics
A hot rental market, tight labor markets

Strong incomes and migration trends within the US are driving rents higher. While the
level of renter households and vacancies may not be fully recovered to pre-pandemic
levels, higher turnover is supporting rents. In addition, the combination of stimulus and
the labor shortages have contributed to resilient wage growth which supports rents. The
September CPI report revealed a 0.43% pop in owners’ equivalent rent (OER) and a
0.45% jump in the rent of primary residence, suggesting upside risks. As such, BofA
Head of US Economics, Michelle Meyer, now anticipates rents will average 0.4% mom
next year, which will translate into a 4.9% yoy clip. This would be the strongest gain in
OER since the 1990s and reflects even stronger sticky inflation. Our US economics team
anticipates strong trend in rents can continue into 2023, underpinned by tight labor
markets (see our report: Inflation: homecoming).

Exhibit 35: Owners’ equivalent rent (OER) vs rent of primary residence Exhibit 36: High frequency rent indicators vs OER (% yoy)
(% yoy) OER inflation is smoother and lagging
OER and rents track closely together as they are estimated from the same
rent survey 12%
5% 10% Zillow ApartmentList OER

OER
Rent of primary residence
4% 8%
6%
3%
4%
2%
2%
1%
0%
0% -2%
2015 2016 2017 2018 2019 2020 2021
-1%
2000 2004 2008 2012 2016 2020 Source: Bureau of Labor Statistics, Apartment List Rent Estimates, Zillow
Source: Bureau of Labor Statistics
Vacancy rates appear to be improving

According to Census Bureau data, rental vacancy rates were 6.2% in 2Q21 down vs.
6.8% in 1Q21 but up vs. 5.7% last year. Homeowner vacancy rates were 0.9% in 2Q21,
in-line with 0.9% in 1Q21 and vs. 0.9% last year. The homeownership rate was 65.4% in
2Q21 down vs. 65.6% in 1Q21 and vs. 67.9% last year. It’s worth noting, data collection
for vacancy rates has been distorted during the pandemic and to the extent that the
changes in data collection procedures resulted in some vacant units being classified as
nonresponses rather than vacant units, the Current Population Survey/Housing Vacancy
Survey estimates will underestimate the true vacancy rate
Exhibit 37: Rental vacancy rate (%) Exhibit 38: Homeowner vacancy rate (%)
Rental vacancy rates were 6.2% in 2Q21, down vs. 6.8% in 1Q21 Homeowner vacancy rates were 0.9% in 2Q21
0.11 3.5%
0.09 2.5%
0.07 1.5%
0.05 0.5%
1989 1992 1995 1998 2002 2005 2008 2011 2015 2018 1989 1992 1995 1998 2002 2005 2008 2011 2015 2018
Source: BofA Global Research, US Census Bureau Source: BofA Global Research, US Census Bureau

Exhibit 39: Homeownership rate Exhibit 40: Real estate agents and brokers employed LT chart
The homeownership rate was 65.4% in 2Q21 (000s)
Number of employees on business payrolls (NSA)
71%
380
68%
340
65% 300
260
62% Jul-2014 Jul-2015 Jul-2016 Jul-2017 Jul-2018 Jul-2019 Jul-2020 Jul-2021
1989 1992 1995 1998 2002 2005 2008 2011 2015 2018
Source: BofA Global Research, US Census Bureau
BofA GLOBAL RESEARCH Source: Bureau of Labor Statistics, BofA Global Research
Rent-to-own analysis shows it is still better to own in key markets

In our rent-to-own analysis, we look at 116 major MSAs in the US and compared the
median rent of a 2-bedroom unit to the average monthly mortgage payment (including
personal mortgage insurance). We assume a 10% down payment. At a 3.25% mortgage
rate, 77 out of 116 MSAs and 12 of the 20 largest homebuilding markets, we estimate
that monthly mortgage payments are lower than median rent.

Exhibit 41: Rent-to-own cost analysis – assuming 10% down payment and 3.25% mortgage rate
We estimate that monthly mortgage payments are lower than median rent in 12 of 20 largest homebuilding markets. Shaded rows are top 20 homebuilding markets
MSAs - Favorable to Own MSAs - Favorable to Rent
Median 2 Median Top 50 Median 2 Median Top 50
City Name BR rent mtge pmt market City Name BR rent mtge pmt market
Riverside, CA $2,023 $1,989 X San Jose, CA $2,339 $6,626
Miami, FL $2,016 $1,892 X San Francisco, CA $2,815 $5,402 X
North Port, FL $1,650 $1,560 X Anaheim, CA $2,307 $4,327
Worcester, MA $1,752 $1,472 San Diego, CA $2,484 $3,315
Fresno, CA $1,443 $1,424 Boulder, CO $1,906 $3,257
Minneapolis, MN $1,473 $1,410 X Los Angeles, CA $2,222 $2,949 X
Orlando, FL $1,705 $1,376 X Seattle, WA $1,530 $2,792 X
Charlotte, NC $1,433 $1,375 X Stamford, CT $1,400 $2,645
Nashville, TN $1,437 $1,363 X Boston, MA $2,213 $2,587 X
Chicago, IL $1,889 $1,360 X Denver, CO $1,927 $2,413 X
Wilmington, NC $1,356 $1,354 Washington, DC $1,837 $2,229 X
Richmond, VA $1,374 $1,346 X New York, NY + Newark $2,087 $2,200 X
Dallas, TX $1,443 $1,321 X Portland, OR $1,453 $2,128 X
Tucson, AZ $1,312 $1,296 X Jersey City, NJ $2,029 $2,093
Milwaukee, WI $1,846 $1,278 Reno, NV $1,498 $2,028 X
Yakima, WA $1,581 $1,265 Austin, TX $1,829 $2,009 X
Tampa, FL $1,767 $1,252 X Sacramento, CA $1,779 $1,970 X
Jacksonville, FL $1,447 $1,248 X Salt Lake City, UT $1,447 $1,892 X
Atlanta, GA $1,416 $1,229 X Boise, ID $1,261 $1,830 X
Philadelphia, PA $1,449 $1,208 X Colorado Springs, CO $1,466 $1,713 X
New Haven, CT $1,508 $1,208 Manchester, NH $1,650 $1,663
Houston, TX $1,249 $1,198 X Eugene, OR $1,329 $1,645
Hartford, CT $1,581 $1,177 Phoenix, AZ $1,453 $1,594 X
Gainesville, FL $1,340 $1,170 Durham, NC $1,415 $1,561
Palm Bay, FL $1,504 $1,153 Providence, RI $1,415 $1,560
Albuquerque, NM $1,219 $1,144 Raleigh, NC $1,528 $1,533 X
Virginia Beach, VA $1,889 $1,131 X Las Vegas, NV $1,497 $1,521 X
Kansas City, MO $1,155 $1,118 X Spokane, WA $1,321 $1,500
San Antonio, TX $1,261 $1,117 X Kennewick, WA $1,400 $1,467
Columbus, OH $1,145 $1,101 X Ann Arbor, MI $1,321 $1,458
Grand Rapids, MI $1,252 $1,085 Madison, WI $1,255 $1,440
Greenville, SC $1,349 $1,078 X Baltimore, MD $1,411 $1,440 X
New Orleans, LA $1,443 $1,075 Bismarck, ND $956 $1,083
Tallahassee, FL $1,403 $1,072 Birmingham, AL $1,067 $1,081
Huntsville, AL $1,141 $1,064 Sioux Falls, SD $978 $1,047
Knoxville, TN $1,262 $1,060 Fargo, ND $849 $1,029
Allentown, PA $1,583 $1,037 Des Moines, IA $944 $1,010
Indianapolis, IN $1,110 $1,021 X Chattanooga, TN $893 $1,009
Lakeland, FL $1,043 $1,018 X Detroit, MI $972 $1,000 X
Albany, NY $1,329 $1,009
Champaign, IL $1,247 $995
Cincinnati, OH $1,096 $992 X
Corpus Christi, TX $1,210 $990
Memphis, TN $1,449 $979
Baton Rouge, LA $1,047 $978
Sherman, TX $1,082 $972
Omaha, NE $1,132 $964
Lincoln, NE $1,051 $951
Winston-Salem, NC $1,023 $927
Louisville, KY $1,051 $918
Columbia, SC $1,266 $915
St. Louis, MO $1,144 $911
Greensboro, NC $1,181 $897
Harrisburg, PA $1,181 $866
Jackson, MS $1,020 $863
Tulsa, OK $1,029 $852
Lexington, KY $1,188 $851
Abilene, TX $1,110 $850
Buffalo, NY $1,249 $804
Amarillo, TX $884 $799

Exhibit 41: Rent-to-own cost analysis – assuming 10% down payment and 3.25% mortgage rate
We estimate that monthly mortgage payments are lower than median rent in 12 of 20 largest homebuilding markets. Shaded rows are top 20 homebuilding markets
MSAs - Favorable to Own MSAs - Favorable to Rent
Cleveland, OH $1,098 $798
Rochester, NY $1,267 $778
Mobile, AL $1,090 $773
El Paso, TX $1,024 $768
Oklahoma City, OK $1,057 $764 X
Montgomery, AL $1,054 $763
Wichita, KS $896 $749
Fayetteville, NC $1,099 $747
Fort Wayne, IN $924 $736
Cedar Rapids, IA $893 $735
Lansing, MI $1,425 $731
Little Rock, AR $920 $720
Syracuse, NY $1,104 $687
Topeka, KS $998 $640
Toledo, OH $927 $617
Davenport, IA $774 $612
Springfield, IL $875 $559
Source: Apartmentlist.com; NAR; BofA Global Research
Rent-to-own cost analysis sensitivity to mortgage rate

Rates would need to rise 100bps before renting is favorable to owning in the majority
markets we analyzed.
Exhibit 42: Interest rate sensitivity of rent-to-own cost to mortgage rates
Rates would need to rise to 4.0%+ before renting cost is favorable to owning in the majority of markets we
analyzed
115
92
69
# of markets
46
83 77 71 64 59 53
23 50 46 40 37 30
0
3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75% 5.00% 5.25% 5.50%
"Own" markets "Rent" markets
Source: Apartmentlist.com; NAR; BofA Global Research


Homebuilders: price, customer, geography
and scale are the differentiators
Price, customer and geographic mix are differentiators
US homebuilding market is gradually consolidating
We estimate that US new home sales represent a market opportunity of approximately
$275bn (roughly $2 trillion including existing home sales), based on LTM industry sales
and average pricing. D.R. Horton (DHI) is the largest builder by orders with approximately
10% market share followed by Lennar (LEN) with 7%, PulteGroup at roughly 4% share
and NVR at roughly 3% share.
Exhibit 43: Market share of new home sales by orders
We estimate large public builders hold around 35% market share in the new home market
DR Horton
10%
Lennar
7% Taylor Morrison
Pulte
4% 2%
NVR Meritage
3% 2%
KB Homes
Other 2%
60% MDC
1%
Other top 20 LGIH
public builders 1%
5% Century
M/I Toll
1%
1% 1%
Source: Census Bureau, Company filings, BofA Global Research estimates

Public company builders have modestly outpace the industry

The industry is highly fragmented, but gradually consolidating - we estimate the public
builders have increased their market share from high-20% pre-financial crisis to
approximately 40% of the new home market in 2021, based on LTM company order
value.
Exhibit 44: Public homebuilder order growth compared to new
Large public homebuilders are growing slightly faster than the overall industry
40.0%
20.0%
0.0%
(20.0%)
(40.0%)
Public Homebuilders NHS
(60.0%)
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020


Regional footprint is very important
Geographic exposure is one of the key differentiators for homebuilders. Most large
builders are targeting growth in the “smile states” (Washington state through California,
Texas and up to Virginia), which have stronger order growth due to job creation and
population gains in those regions. Local market share (rather than national) is important
for builders in order to establish enough scale with vendors and subcontractors to
ensure better pricing and efficiency.
Exhibit 45: Builder Geographic Mix
Builder geographic exposure is weighted toward the Southeast, Texas and West
Geographic Position
New Mid- South Central
England Atlantic Southeast (includes Texas) Southwest Northwest Midwest West
DR Horton (DHI) ● ● ● ● ● ●
Lennar (LEN) ● ● ● ● ● ●
PulteGroup (PHM) ● ● ● ● ● ● ●
NVR Inc (NVR) ● ● ●
Taylor Morrison (TMHC) ● ● ● ● ●
Meritage Homes (MTH) ● ● ● ●
KB Homes (KBH) ● ● ● ● ●
Century Communities (CCS) ● ● ● ●
LGI Homes (LGIH) ● ● ● ● ● ●
Toll Brothers (TOL) ● ● ● ● ● ● ● ●
MDC Holdings (MDC) ● ● ● ●
M/I Homes (MHO) ● ● ●
Dream finders Homes (DFH) ● ● ● ●
Source: Company Filings; BofA Global Research estimates
Building is shifting to Texas / Southeast

New home construction is also heavily weighted to the Southeast/Texas where the cost
of living/taxes are more attractive and job growth is stronger. In addition, land
availability, construction costs and municipal approval processes tend to be more
attractive in these regions as well.
Exhibit 46: US Housing starts by region
US housing starts are growing fastest in the South
1200
Housing Starts: 1-Unit: Northeast SAAR, 1,000s Units
Housing Starts: 1-Unit: Midwest SAAR, 1,000s Units
Housing Starts: 1-Unit: South SAAR, 1,000s Units
Housing Starts: 1-Unit: West SAAR, 1,000s Units
800
400
0
May-2013
May-2014
May-2015
May-2016
May-2017
May-2018
May-2019
May-2020
May-2021
Jan-2013
Jan-2014
Jan-2015
Jan-2016
Jan-2017
Jan-2018
Jan-2019
Jan-2020
Jan-2021
Sep-2012
Sep-2013
Sep-2014
Sep-2015
Sep-2016
Sep-2017
Sep-2018
Sep-2019
Sep-2020
Sep-2021
Source: Census Bureau

Population shifts support continued shift to Texas and Southeast

Over the past ten years, out of the largest MSAs, Dallas, TX (1.2 million), Houston, TX
(1.1 million), and Phoenix, AZ (0.7 million) have had the largest absolute growth in
population. Some of the other largest MSAs that experienced growth included Atlanta,

GA, Austin, TX, Seattle, WA, Orlando, FL, Tampa, FL, Charlotte, NC and Las Vegas, NV.
Population in smaller and medium-sized MSAs have increased faster in percent terms
than the larger MSAs. Over the past ten years, the top three MSAs with the fastest
growth are The Villages, FL (40.5%), Myrtle Beach, SC (31.3%), and Austin, TX (28.9%).
Exhibit 47: Largest homebuilder markets by closings (2020)
Texas accounted for 4 of the 6 largest homebuilding markets in 2020
MARKET
RANKING MARKET
1 Dallas-Fort Worth-Arlington, TX
2 Houston-The Woodlands-Sugar Land, TX
3 Atlanta-Sandy Springs-Alpharetta, GA
4 Phoenix-Mesa-Chandler, AZ
5 Austin-Round Rock-Georgetown, TX
6 San Antonio-New Braunfels, TX
7 Orlando-Kissimmee-Sanford, FL
8 Tampa-St. Petersburg-Clearwater, FL
9 Charlotte-Concord-Gastonia, NC-SC
10 Washington-Arlington-Alexandria, DC-VA-MD-WV
11 Nashville-Davidson-Murfreesboro-Franklin, TN
12 Raleigh-Cary, NC
13 Denver-Aurora-Lakewood, CO
14 Riverside-San Bernardino-Ontario, CA
15 Las Vegas-Henderson-Paradise, NV
16 Jacksonville, FL
17 Miami-Fort Lauderdale-Pompano Beach, FL
18 Seattle-Tacoma-Bellevue, WA
19 New York-Newark-Jersey City, NY-NJ-PA
20 Minneapolis-St. Paul-Bloomington, MN-WI
21 North Port-Sarasota-Bradenton, FL
22 Boise City, ID
23 Indianapolis-Carmel-Anderson, IN
24 Los Angeles-Long Beach-Anaheim, CA
25 Portland-Vancouver-Hillsboro, OR-WA
Source: Builder Magazine
Customer mix is also a differentiator

Builders generally group their product offerings as entry level/first time homes, move-up
homes, luxury homes and active adult (ages 55+), although the categories are fairly
subjective. Therefore, there tends to be overlap between certain categories, particularly
entry-level and move-up.
Exhibit 48: Builder customer mix Exhibit 49: Builder average home price
Most large public homebuilders focus on entry-level and move-up segments Large public homebuilders primarily sell homes between $350K-$500K
Type of Buyer Average home price ($1,000s)
Entry- Active $350 - $425 - $50
Level Move-up Adult Luxury < $350 $425 $500 0+
DR Horton (DHI) ● ● ● DR Horton (DHI) ●
Lennar (LEN) ● ● ● ● Lennar (LEN) ●
PulteGroup (PHM) ● ● ● PulteGroup (PHM) ●
NVR Inc (NVR) ● ● ● NVR Inc (NVR) ●
Taylor Morrison (TMHC) ● ● ● Taylor Morrison ●
Meritage Homes (MTH) ● ● Meritage Homes ●
KB Homes (KBH) ● ● ● KB Homes (KBH) ●
Century Communities (CCS) ● ● Century ●
LGI Homes (LGIH) ● ● ● LGI Homes (LGIH) ●
Toll Brothers (TOL) ● ● ● Toll Brothers (TOL) ●
MDC Holdings (MDC) ● ● MDC Holdings (MDC) ●
M/I Homes (MHO) ● ● ● ● M/I Homes (MHO) ●
Dream finders Homes Dream finders
● ● ●
(DFH) Homes
Source: Company Filings; BofA Global Research estimates Source: Company Filings; BofA Global Research estimates

Single-family rental market update
Chris Flanagan
Head of US Mortgage and Structured Finance Research
+1 646 855 6119
christopher.flanagan@bofa.com
Pratik K. Gupta
Head of CLO and RMBS Strategy
+1 646 855 9146
pratik.gupta@bofa.com
SFR: Institutional growth has momentum

The single-family rental (SFR) sector remained fairly resilient during the COVID-19 crisis
and since the first wave of the crisis last spring, the performance remains strong relative
to other sectors in the RMBS sector. Despite the COVID pandemic, SFR primary
issuance in 2020 was $10bn, an increase of 128% YoY and 37% higher than the previous
high in 2018. See our report: Non-agency MBS Weekly: SFR: Institutional growth has
momentum 15 October 2021
A large number of SFR operators have announced their growth strategies either via
consolidation (acquisitions) and/or via build to rent. We highlight some of the pertinent
trends in the single-family rent space:
• Rent growth: Single family rent growth is 8.5% YoY in July, reaching a 16 year high
according to Corelogic.
SFR rent growth was stronger in properties more prevalent in SFR deals: The rent
growth is more pertinent in higher priced rental (9.8%) vs lower priced rentals
(5.9%). Rent growth in detached homes was 11.1% vs. 5.5% for attached rentals.
The public SFR operators reported blended rent growth of 5-6%.
• Asset market value increase: HPA growth has been stronger in sub-urban areas
where SFR properties are located driven by migration & work from home trends
post-COVID.
• Performance: SFR operators have reported occupancy rates around 97% &
normalization of delinquency rates. Same Home NOI growth was around 6% driven
by lower turnover and high rent growth.
• Growth: The number of single-family rental homes in the US has grown by 45%
since 2005. There are now nearly 17 million single-family rental homes in the US.
Institutional SFR operators currently own ~2% of the Single Family Rental market
(or 25bps of all Housing Units). Growth strategies vary from consolidation amongst
smaller operators to achieve economies of scale & geographical footprint, build-to-
rent, traditional acquisition of distressed properties & via fix and flip market, iBuyer
direct sales, community home purchases.

Exhibit 50: Number of single-family rental homes in US
At the end of 2020, there were nearly 17 million single-family rental homes in the US
18
12
0
2005
2005
2006
2006
2007
2007
2008
2008
2009
2009
2010
2010
2011
2011
2012
2012
2013
2013
2014
2014
2015
2015
2016
2016
2017
2017
2018
2018
2019
2019
2020
Source: BofA Global Research, Wall Street Journal
Exhibit 51: Breakdown of US rental homes by cohort Exhibit 52: Breakdown of ownership / rental status of US households
Single-family rentals are the largest cohort of rented homes in the United Less than 40% of all households in the US rent
States
Mobile homes, Boats, Etc.

4%
2-9 unit Single family

apartments… rental Rented
34% 38%
Owned
62%
10+ unti apartments

33%
Source: BofA Global Research, INVH company data Source: BofA Global Research, INVH company data
Exhibit 53: Home count by owner type (millions)

Institutional owners currently only have ~300k single-family rentals
18
15
12
9
6
3
0
Mom & pops Institutional owners
Source: BofA Global Research, INVH company data

Single borrower SFR shelves have much less ownership in high cost of living markets
such as the North-east that are seeing migrations away to lower-cost of living markets
like Atlanta, Phoenix, and Florida. These MSAs have seen stronger HPA growth vs other
areas nationally.
This will make new issue single-borrower SFR transactions favorable to investors as
operators continue to target stronger geographies.
Exhibit 54: SFR Geographic data
Atlanta has the highest share of homes in SFR deals outstanding
Share of SFR Blended rent HPA growth YoY%
MSA market change July 2021 Aug 2021
Atlanta, GA 15% 11.0% 18%
Phoenix, AZ 6% 13.4% 31%
Charlotte, NC 6% 9.6% 21%
Dallas-Plano-Irving, TX 6% 7.6% 18%
Tampa, FL 5% 10.8% 25%
Miami, FL 3% 7.5% 12%
Nashville, TN 3% 8.6% 22%
Orlando, FL 3% 9.1% 16%
Las Vegas, NV 3% 14.5% 22%
Houston, TX 3% 6.3% 13%
Indianapolis, IN 2% 9.2% 19%
Chicago, IL 2% 7.1% 10%
Jacksonville, FL 2% 10.1% 23%
Raleigh-Cary, NC 1% 10.1% 23%
Memphis, TN 1% 9.8% 15%
Kansas City, MO 1% 7.5% 13%
Los Angeles, CA 1% 4.5% 15%
Riverside-San Bernardino, CA 1% 8.7% 24%
Fort Worth-Arlington, TX 1% 7.8% 18%
Fort Lauderdale, FL 1% 8.4% 16%
Source: BofA Global Research, Intex, DBRS, CoreLogic
Invitation Homes & American Homes 4 Rent have seen 20-30% same store NOI growth
from 2017 to 1Q21. We expect NOI growth to be higher in 2021 on account of high rent
growth and lower expenses due to lower turnover rates.
Exhibit 55: Same store NOI from to 2017-2021E Exhibit 56: INVH same store NOI growth by year (only reflects 1Q21)
INVH’s same store NOI grew by 30% since 2017 INVH same store NOI grew by 7% in 2017
40% 6%
INVH AH4R Tricon
30%
20%
10% 3%
0%
-10%
INVH AH4R National Coastal Multifamily
Multifamily
0%
Source: BofA Global Research, INVH company data 2020 2021

American Homes 4 Rent, Invitation Homes, and Tricon are planning acquisitions in 2021
of over $1bn each. After 1Q21, the firm had already invested $233mm of the planned
$1bn.
Exhibit 57: INVH acquisition invested basis by year

2021 is expected to be the busiest year for INVH in terms of acquisitions
1000
Acquisition invested basis
800
600
400
200
0
2015 2016 2017 2018 2019 2020 2021E

Occupancy rates are up YoY across all three SFR issuers in 2021 despite nearing the
100% bound after COVID began. All three issuers saw increases in occupancy rates of
1-2% during 2020 and have seen 10-20bp increases so far in 2021.
Exhibit 58: Occupancy rate at year-end and 2Q21

Occupancy rates continue to climb despite nearing max levels
99% 2019 2020 2021
98%
96%
95%
93%
INVH AH4R Tricon
Source: BofA Global Research, Company data
4Q20 earnings and showed continued strength throughout COVID and this strength has
continued albeit slowed in 2021 after the initial surge in SFR demand.
Build to rent: Growing SFR trend

There has been an increasing trend amongst some of the servicers to build out rental
houses, most likely driven by the rising home prices. Median prices for newly built homes
have been on an upward trajectory since 2011, however, the race for space caused by
the pandemic and the lack of supply has pushed median prices for newly built homes
even higher, and it reached a max in July 2021. Over the past five years, the prices of
newly built homes has increased by 31%.

Exhibit 59: Median price of newly built homes
Upward trajectory of median prices, which reached a max in July 2021
440
Median price of newly built home ($)
400
360
320
280
240
200
Source: Global Research, Bloomberg

More than 50,000 homes were built to serve as rentals during the 12 months ended
Sept 30, 2020 according to John Burns Real Estate Consulting, which is well above the
31,000 average for the past four decades. Executives at LGI Homes have said that as
much as 10% of the builders 2020 home sales, or 900 houses, would be to landlords.
Recent investments in SFR

• On December 2019, Tricon Residential acquired a portfolio of 708 homes in
Nashville, Tenn., for $210 million from Invitation Homes through a joint
venture. The recent Nashville acquisition expands Tricon’s footprint in the city
to about 850 homes, representing around 4% of the company’s overall
managed portfolio of homes. On August 27 2020, Blackstone announced a
$300mn minority investment in Tricon through a BREIT, with expectations of
strong underlying fundamentals in single family rentals as compared to multi-
family and the ongoing rise in suburban rental demands.
• More than 50k homes were built to serve as rentals during the 12 months
ended Sept 30, 2020 according to John Burns Real Estate Consulting, which is
well above the 31k average for the past four decades. Executives at LGI Homes
have said that as much as 10% of the builders 2020 home sales, or 900 houses,
would be to landlords.
• In May 2020, American Homes 4 Rent and JPMorgan Asset Management
announced a joint venture to raise $625 million of equity to build those 2,500
new SFR properties in multiple high-growth markets in the West and Southeast.
AH4R expects deliveries of ~2k BTR homes in 2021 making it the only
servicer expecting more than 50% of home acquisitions in 2021 to
come from BTR.
• Amherst Group, hired a former construction executive as chief operating officer

during the summer of 2020 with an eye to buying land and building its own
homes. A former Colony Capital Inc. executive is raising $1.2 billion in equity
and debt to build 5,000 rental homes.
• In March 2021, Tricon announced that the firm is committed to developing 10

communities per year (in 2021 & 2022) of build-to-rent homes in a JV with the
Arizona State Retirement System which began in 3Q19.
• On April 19th, American Homes 4 Rent (AH4R) announced that it had closed a
$1.25bn sustainability-linked revolving credit facility, expanding it’s previously
$800mn facility. The sustainability-linked facility will be used for external

growth and to continue the firm’s direction in becoming more sustainable and
better in line with ESG principles.
• On June 1st, Invesco real estate announced it was backing MYND Management
to spend as much as $5bn to purchase ~20k SFR homes in the US over the next
3 years.
• In June 2021, Builder magazine announced AH4R is the 45th largest home
builder in the US in 2021. This announcement comes about 4 years after AH4R
began building homes in the growing “Build to rent” sector of SFR. In 2020,
AH4R delivered 1,647 new homes while the top builder was D.R. Horton which
delivered ~72k homes.
• In June 2021, the developer, FivePoint, announced that it is building a 21K

home community that will be the largest net-zero emissions community in the
United States. The community will be called FivePoint Valencia (in Valencia,
CA)
• In June 2021, Blackstone announced a deal to buy Home Partners of America

(HPA) for $6bn.
• In June 2021, KKR announced it is reentering the SFR market by investing in

“My Community Homes” with the intention of buying and manufacturing single-
family houses in the US to rent.

iBuyers outlook
Curt Nagle, CFA
US Internet Research
+1 646 855 2939
c.nagle@bofa.com
We see iBuying as risky and low return

The iBuyer model is a relatively new one to the real estate market. An iBuyer is a
company that typically uses technology to buy homes directly from owners over the
internet. The process is far simpler than a traditional real estate transaction. Instead of a
potentially lengthy, complex and opaque process where the final selling price is
uncertain, the iBuyer makes an offer on the home which is accepted or not. In exchange
for the convenience and certainty of a quick transaction, a service fee of 5-10% is
charged (vs. 4-6% for a traditional real estate transaction). iBuyer transactions had
grown significantly over the past several years to an estimated 51k homes bought by the
top four competitors in 2021 (vs. 11k in 2018) but total transactions comprise less than
1% of the market.
The largest iBuyers in ranked order are Open Door (launched in 2014), Zillow, Offerpad
(launched in 2015) and Redfin (launched in 2017). On November 2, 2021, Zillow
announced plans to fully wind down its iBuying businesss Zillow Offers and liquidating
its Homes portfolio following an earlier decision to to pause iBuying, ZG announced
plans.
Exhibit 60: iBuyer total homes sold Exhibit 61: iBuyer homes sold as a % of total existing home sales
Total transactions have been growing at a strong pace iBuying still represents a tiny portion of overall home sales
60,000 1.2%
2018 2019 2020 2021 Opendoor Zillow Offerpad*
Redfin Total
0.02%
40,000 0.8% 0.1%
0.2%
0.01%
0.1%
20,000 0.4% 0.1%
0.01% 0.5%
0.00% 0.1%
0.1%
0.0% 0.4% 0.1%
0.1% 0.1%
- 0.0%
Opendoor Zillow Offerpad* Redfin Total 2018 2019 2020 2021
*midpoint of company guidance
*midpoint of company guidance
Source: Company reports, Visible Alpha, BofA Global Research, National Association of Realtors
Source: Company reports, Visible Alpha, BofA Global Research

Glossary and data points
Housing starts
According to the Census Bureau, a housing start is logged when construction excavation
begins for the foundation of a building. For a multifamily building, all housing units are
defined as being started when excavation begins. In addition, estimates of housing
starts also include units in structures being rebuilt on an existing foundation. Total starts
have averaged around 1.5mn units since 1959, with normalized single-family starts of
roughly 1mn units and multifamily starts of approximately 500k units. US housing starts
data is released on the 16th or 17th of every month.
Exhibit 62: Single & multifamily housing starts (units 000s), SAAR
Single family start will increase above its long-term average in 2021
2,000
Single family starts Multifamily starts
1,750
1,500
1,250
1,000
750
500
250
0
1959 1965 1971 1977 1983 1989 1996 2002 2008 2014 2020
Building permits
According to the Census Bureau, building permits represent the approval given by a local
jurisdiction to proceed with a construction project. Permits generally serve as a leading
indicator for housing starts, with starts typically occurring on a one- to two-month lag
after a permit is issued. US Building permit data is released on the same day as housing
starts data every month (generally on the 16th or 17th of every month).
Exhibit 63: Single & multifamily building permits (units 000s), SAAR
Single family building permit growth has slowed recently
2,000
Single family permits Multifamily permits
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

New home sales
According to the Census Bureau, a new residential home sale is defined as the sale of
new single-family residential structures only. Sales of multifamily units (i.e. condos) are
excluded. A new home is considered sold when either a sales contract has been signed
or a deposit accepted, regardless of the stage of construction or whether a building
permit has been issued. The statistic is not tracked to the completion ("closing") of the
sales transaction, so if the transaction is cancelled, the house is still considered sold.
Approximately 25% of new home sales occur at the time of completion with the
remaining 75% fairly evenly split between homes that have yet to be started and those
under current construction. The new home sales figure excludes houses that are built for
rent, houses that are owner built, and houses built by a general contractor on the
owner's land. The long term average of 650-700K annual new home sales, together with
roughly 300K owner built homes, make up the approximately 1mm normalized single-
family housing starts per year. Data is released on the 23rd or 24th of every month.
Exhibit 64: New single family residential sales (units 000s), SAAR
Single family residential sales remain strong
1,800
1,200
600
0
1964 1970 1976 1982 1989 1995 2001 2007 2014 2020

Existing home sales

According to the National Association of Realtors (NAR), an existing-home sale includes,
transactions of single family homes, townhomes, co-ops, and condos. Existing home
sales are based on closings data provided by multiple listing services around the US.
Existing home sales data differs from the Census Bureau's new single family home sales
report, which is based on contracts or deposit acceptance. Existing home sales account
for over 90% of total home sales and capture a much larger data sample, reducing
retroactive revisions. Data is released on the 22nd or 23rd of every month.

Exhibit 65: Existing home sales (units 000s) SAAR, 15 year average of 5.3mm
Existing home sales are tracking well above the long-term average
7,500
6,000
4,500
3,000
1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021

Pending home sales index

According to the NAR, the Pending Home Sales Index is a leading indicator for the
housing sector, as it captures pending sales of existing homes. A sale is categorized as
pending when a sales contract has been signed but the transaction has yet to close.
Sales are then generally completed within a couple of months of signing. The index is
based on a large national sample, which represents about 20% of existing-home sales
transactions. The index began in 2001 with the data typically released between the 27th
and 29th of each month.
Exhibit 66: Pending home sales index vs. existing home sales (units 000s)
Pending home sales rebounded in 2021
150 8,000
Pending home sales index (lhs) Existing home sales (rhs)
7,000
120
6,000
90 5,000
4,000
60
3,000
30 2,000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Source: NAR, BofA Global Research

National Association of Homebuilders (NAHB) Housing Market Index (HMI)

The NAHB Housing Market Index (HMI) is a monthly survey of NAHB members used to
gauge homebuilder sentiment in the single-family housing market. Survey respondents
are asked to rate market conditions for the current sale of new homes as well as their
expectation for the next six months. The HMI ranges between 0 and 100, with a score
above 50 perceived as a positive indicator. The HMI is released on the 15th or 16th of
every month.

Exhibit 67: NAHB Housing Market Index -30-yr average = 52
Homebuilder sentiment remains well above the long-term average
120
90
60
30
0
Jan-85 Aug-89 Mar-94 Oct-98 May-03 Dec-07 Jul-12 Feb-17 Sep-21
Source: NAHB, BofA Global Research

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What are the key factors driving demand for homebuilding?

What are the key factors driving demand for homebuilding?

What supply chain issues are impacting homebuilders?

What supply chain issues are impacting homebuilders?

Accessible version

Constructive near-term outlook on homebuilders 08 November 2021

Timestamp: 08 November 2021 07:11AM EST

Aging millennials will drive homeownership rates higher

Exhibit 2: US population by age (in millions) Exhibit 3: Homeownership rates by age

Source: Pew Center Source: Census Bureau

Monthly Consumer Survey shows interest in home buying remains high

2 Homebuilders | 08 November 2021

Housing demand has outpaced supply since 2012

Source: Census Bureau, BofA Merrill Lynch Global Research

Supply has lagged demand since 2012

Homebuilders | 08 November 2021 3

Demographics, flexible work arrangement should support demand going forward

We estimate housing demand consists of new household formations, demolitions of

4 Homebuilders | 08 November 2021

Supply has ramped up gradually since the trough

Source: Census Bureau, BofA Global Research estimates

Homebuilders | 08 November 2021 5

Homebuilding is cyclical, but this cycle won’t end in tears

Exhibit 11: US housing cycles, economic cycles and valuation

6 Homebuilders | 08 November 2021

Inventory is tight and aging

Homebuilders | 08 November 2021 7

Existing home inventory is also aging

Source: American Housing Survey

Consumer backdrop appears healthy

8 Homebuilders | 08 November 2021

Average household net worth hitting record levels

Source: Federal Reserve, Haver Analytics, BofA Global Research

Financial obligations are well below historical levels

Homebuilders | 08 November 2021 9

Consumer interest payments are below historical average

Mortgage lending standards have eased recently

10 Homebuilders | 08 November 2021

Supply chain bottlenecks will likely last into 2022

$1,800 Framing Lumber Composite ($/mbf)

Homebuilders | 08 November 2021 11

Source: Company data

Labor: local market share is key to working with subcontractors

12 Homebuilders | 08 November 2021

Affordability is a risk, but we see offsets

Source: National Association of Realtors, Freddie Mac

Homebuilders | 08 November 2021 13

0 -15% $250,000 -15.0%

Higher rates would pressure affordability

14 Homebuilders | 08 November 2021

Components of monthly payment Assumed annual interest rate

Higher rates also usually a headwind for homebuilder stocks

Philly Housing (HGX) - left axis

Homebuilders | 08 November 2021 15

$200 $200 0.0%

A hot rental market, tight labor markets

16 Homebuilders | 08 November 2021

5% 10% Zillow ApartmentList OER

Vacancy rates appear to be improving