Conclusion: We’ve been pretty vocal about our view of Housing Headwinds and the data is now suggesting that the headwinds may actually be worse than our street-low expectations. While Billy Ackman’s best idea might be to buy U.S. homes, ours certainly isn’t. Substantial downside remains in the housing sector.
We’ve had both massive pushback and substantial amount of compliments on Hedgeye’s Housing Headwinds call, which was orchestrated by our Financials Sector Head Josh Steiner and his team. Steiner gave his presentation on June 25th. In that time period, the SP500 is up 11.2%. Conversely, we have in the table below highlighted the stocks that Steiner was bearish on:
Setting aside my doing a victory lap on Josh’s behalf, the bearish case on housing continues to play out and be validated. Even if Billy Ackman’s best idea is to buy U.S. Housing, ours still isn’t (email if you are an institutional client that wants to see Steiner’s 101 page presentation on Housing that lays out the bear case).
Some recent data highlights from Steiner and his team include:
Housing Takes A Dive, but the Worst is Yet to Come ...
Today's two negative housing data points on mortgage applications and housing starts add to yesterday's lackluster housing market index report. Next week we'll get new home sales, which we expect to be anemic as well. The week after that we'll get Case-Shiller, which should show the largest sequential decline we've seen this year. We expect these headwinds will keep a lid on near-term upside in housing-related names.
Bigger picture, we think the trends we're seeing in today's data are consistent with both our cumulative displacement theory under which we expect housing activity to remain heavily subdued for the next decade and our outlook for material further downside in home prices throughout the rest of this year and 2011.
Mortgage Demand Falls Sharply As Rates Rise
MBA Purchase Applications fell 5% versus last week. The MBA's data showed that mortgage rates backed up by 18 bps WoW (4.46% versus 4.28% the previous week). The effect was more pronounced in the Refinance Index, which plummeted 16.5% WoW in response to the rate move.
The real takeaway from this series is just how high the elasticity of demand is to even modestly higher interest rates. A backup in rates to 4.46% from 4.28% took refis down 16.5% and purchase activity down 5%. The point is that if we've already seen the lows in rates put in from QE2, then there's no reason to expect to see any improvement going forward.
Housing Starts Plunge to New Lows
Housing Starts fell -11.7% to 519k in October, the lowest level since April of 2009. The September Starts print saw a large downward revision, taking the level down to 588 from 610. Permits inched up slightly in October to 550k from the revised level of 547k.
Starts and Permits are correlated with New Home Sales (better than .90 r-squared over the last ten years), suggesting that this month's New Home Sales number released a week from today will be worse than last month. Perhaps counterintuitively, there is not a lag in this correlation - Starts and Permits in a given month best predict the New Home Sales number that same month. This implies that all three series respond to varying degrees of confidence in the housing market.
While it is widely believed that permits lead starts, in fact, the two series move simultaneously. The chart below shows both series back to 1959. Clearly, by any historical standard, the current activity level is very low.
Housing Market Index Essentially Flat
The National Association of Homebuilders (NAHB) released their monthly Housing Market Index yesterday. The composite index rose one point to 16, but this was after a downward revision of the prior week. Excluding that revision the series was flat sequentially. Confidence remains extremely low is the bottom line. The chart below shows the relationship between homebuilder confidence as measured by the HMI and single-family starts.
Daryl G. Jones
Josh Steiner, CFA