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KEY DISCUSSION POINTS
- Building (Positive) Pressure: There is growing potential energy in the Housing market on both the new and existing home fronts. Look no further than the recent spate of data for signs of transitioning towards either good or less bad: Building Materials and Furniture Sales were the strongest components of this morning’s Retail Sales data for February. Further, Mortgage Purchase Applications are reflecting a notable pickup in the early March data alongside broader improvement in domestic growth trends. If rates have already priced in the March increase and multiple hikes in 2017 and if the primary constraint to volume growth in both the new and existing markets is supply based, we can expect the release valve to manifest in the form of higher HPI in the intermediate term, which should ultimately catalyze relief on the inventory side and enable higher volume flow-through rates over the longer term.
- High End Housing Rebound? The High-End segment has been battered over the past few years alongside muted financial asset price inflation and a general slowdown in high-ticket discretionary consumption, but luxury spending trends are showing signs of life of late. This bodes well for Realogy, especially its NRT segment which includes the high end brands Corcoran and Sotheby’s, and is concentrated in more affluent areas.
- Positive Operating Leverage & Cheap Valuation: Realogy is cheap, and while cheap can get cheaper is our oft-touted maxim here at Hedgeye, the potential for earnings to beat expectations over the next two years is great while the potential for them to miss is small. We think the multiple to this earnings vs expectations setup asymmetry is reflexive, i.e. as earnings expectations move higher the multiple will expand. This has been the case on the way down and we think it'll be the case on the way up.
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