FAF - Ensemble Capital Management - First American: At Its Lowest Valuation In Over A Decade

• First American makes money for each home sale, refinance transaction or commercial real estate transaction they participate in.
• Refinance transactions have fallen dramatically, but we’ve long expected this to happen.
• We believe that near term declines in real estate transactions will recover to new highs in the years ahead.

The following segment was excerpted from this fund letter .

First American Financial Corporation ( FAF )

First American, a title insurance company, makes money for each home sale, refinance transaction or commercial real estate transaction that they participate in.

If the buyer is going to use a mortgage as part of the transaction, the lender requires title insurance because in the US there is no central, validated record keeping system that ensures that a person representing themselves as owning real estate actually has clear title to the property.

There is no doubt that refinance transactions have fallen dramatically. But we’ve long expected this to happen, and we expect refinancing to remain at very low levels over the long term. In addition, First American earns about 2.5x more revenue on home purchase transactions than on refinance transactions.

While the price of homes or commercial real estate may well take a step back, we think it is unlikely that home purchases and commercial real estate transactions decline significantly and stay at depressed levels. Rather we believe that near term declines in real estate transactions will recover to new highs in the years ahead given how depressed activity levels have been.

The stock is now trading at a PE of 8, its lowest valuation in over a decade except when it briefly fell to even lower levels in the early days of COVID when there was worries about a complete collapse of the housing market.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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