If you take a classic economist's view on the recent Commerce Department figures on housing you are missing the point on the housing recovery story. An old school economist will tell you that the decline in home building will continue to act as a drag on investment and overall output in the economy in 2009.
In sharp contrast to that view, ours is that the only way the economy is going to get back on a growth trajectory is for the U.S. to work through the excesses of the past-and that means housing inventory.
According to the Commerce Department, housing starts declined 13% to an annual rate of 458,000, which was led by a 46% decline in multifamily starts. Also, building permits, a sign of future construction, fell 3.3% to a record low pace of 494,000. On this news the futures sold off immediately, a classic reaction to a traditional government statistic. It was almost like the traders in the futures pits are reacting to headlines without perspective. Intraday, those pre-market losses were recovered and those who shorted the opening lows are once again feeling shame.
Given the supply of unsold homes and the number of homes in foreclosure, is it any surprise that builders broke ground on the fewest homes on record in April? If you are a builder this is bad news, which is why we don't think the best way to play a housing recovery is to buy home building stocks. As an aside, the insider selling at Toll Brothers Inc has been massive! Since March 16th the Toll Brothers have collectively sold $45 million worth of stock.
If you are Home Depot or any of the second derivative housing names you are indifferent at this point to the housing start number. Right now the second derivative names are looking for the increase in housing turn over, so we can work through the supply of homes. This is the first step in the housing recovery story! The growth in big ticket items will come later! On May 5th, the National Association of Realtors said the Pending Home Sales Index, (a forward-looking indicator based on contracts signed) increased in March by 3.2% to 84.6 from 82.0 in February. Importantly, the index is 1.1% higher than in March 2008.
What has been occurring over the last two months could be the leading edge of a turn in the housing market. As we said in our 4/24/09 post - HOUSING - Which way is up? - affordability is at a 40-year high when looking at median home prices, mortgage rates, monthly mortgage payment, and median family income.
As we work through supply, the decline in home prices will slow! Not until then will homebuilders start to build more homes. Chances are when this happens the S&P 500 will be few hundred points higher!
Howard W. Penney