“I’m against picketing, but I don’t know how to show it”
Suppose I told you that a certain macroeconomic phenomenon manifests as a discrete trigonometric function with a period of approximately 7 years.
The phenomenon in question is highly autocorrelated (i.e. it goes in the same direction for extended periods), peaks and troughs at approximately the same levels in each cycle and is levered to glacial, analytically tractable drivers.
Moreover, our mystery metric currently sits in the bottom quartile of historical observations with mean reversion upside of ~40% to its LT historical average and ~65% upside to average peak levels. Now further suppose that in addition to this sanguine secular backdrop, in the nearer term it will probably (continue to) post the best rate-of-change numbers in all of global macro.
In abstract terms, what I’ve described – which is probably not particularly mysterious given my ongoing Early Look chronicling of our evolving housing investment thesis - is the core argument behind the secular bull case in housing and residential construction activity.
In today's Chart of Day we show the historical cycles in Housing Starts over the last half century. Immediately below, we show the periodic nature of New Home Sales in the pre-bubble period.
Click image to enlarge
Back to the Housing Macro Grind...
… “Yeah, but it’s a dry heat, so it’s not that bad”.
With summer upon us and the temperature inflecting, your hopes for the future of human originality will again be tested as you’re invariably subjected to some version of that “insight”, probably repeatedly.
You can tell when the comment is coming. You can’t do anything to stop it. And when the person actually says it, it feels just as trite you thought it would be. Or maybe that’s just me…
To extend the superfluousness even further – another of my etymological pet peeves is when talk radio callers call-in and lead with “Hi..First time, long-time” (short for “first time caller, long-time listener”).
If nails and chalkboards managed copulation, those irksome platitudes would be their progeny.
Anyway, we did get a first-time, long-time moment in housing this week as 1st-time buyers, after a half-decade hibernation, showed signs of stirring.
1st-Time Buyers | Call it a Comeback? First-time buyers represented 32% of Existing Sales in May, up from 30% last month and 27% in May of last year. It’s been our view that ongoing improvement in labor and income fundamentals along with maturation of the employment recovery beyond the 2-year mark for the key 20-34 YOA age demographic would support household formation growth with slow flow through to demand in the single-family market.
It’s difficult to take a convicted view of a single month of data in isolation but with cash/investor/distressed sales declining, mortgaged purchases rising and young buyer demand percolating the slow march towards market normalization is progressing.
Whether the mini-step function rise in 1st-time buyer demand in May represented a head-fake or an early inflection back towards the historical average of ~40% share of EHS remains to be seen but its evolution will represent a fulcrum factor for the direction of the existing market from here with transaction activity having retracted back to longer-term historical averages.
Indeed, the sequential +5.1% rise in May took aggregate existing sales up to 5.35MM units SAAR, marking the strongest level of housing demand since the artificially (tax-credit) amplified late 2009 period.
Further, the high-frequency weekly Purchase Application data from the MBA – which clocked purchase demand growth at +18% year-over-year in the latest week – suggests the strength observed across Pending and Existing Sales in March/April extended to May/June.
Trends in the New Home market have been similarly strong.
New Home Sales | 2nd Derivative Bonanza - New Home Sales in May (reported Tuesday) rose +2.2% month-over-month to +546K, the strongest level since February 2008 (88 months). On a year-over-year basis, sales growth registered +19.5% with the positive revision to the prior month (+1.3% MoM) taking April sales growth up to a remarkable +30% year-over-year.
Further, given the favorable comp dynamics, it’s likely we see similar strength from a rate-of-change perspective in the coming months. For context, if sales were to hold flat at current levels, year-over-year growth would come in at +34%, +35% and +20% over the next 3-months, respectively.
But isn’t Housing Early-Mid Cycle?
That has been a recurrent inquiry given our late-cycle view of the broader economy.
A somewhat obvious but seemingly underappreciated dynamic of the current cycle is that the recovery in housing lagged the broader macro inflection by more than two years. Given that housing was the final, pre-crisis beneficiary of an epic, multi-decade (policy) game of rotate-the-asset bubble, it’s not surprising that the subsequent recovery has been slow, choppy and broadly unimpressive.
However, Housings unique role in precipitating and propagating the financial collapse also makes historical cycle precedents (in terms of housings position in the temporal pattern of the archetypical cycle) less informative as analogs. In short, while we’re late or mid-late cycle more broadly, we’re somewhere closer to early-mid or mid cycle in housing itself. The housing cycle and the economic cycle are, of course, not mutually exclusive but they can tread variant short-to-medium term paths.
Teasers & Siren Songs: The secular upside opportunity for housing is both conspicuous and sirenic. But between here and the omni-amorphous “long-term”, however, there are/will be discrete investible periods on both sides of the trade.
We reversed to bullish on Housing in late 2014 and with positive 2Q results out of KBH and LEN over the past week, the top down inflection in housing fundamentals we’ve been calling for is now showing up in the reported numbers and being embedded in more sanguine forward guidance from management.
The fundamental data should remain good over the nearer term. Will good be good enough to support ongoing outperformance in the housing related equity complex? We’ll be updating our outlook on our 3Q15 Housing Themes call on Thursday, July 9th (ping for details)
Our immediate-term Global Macro Risk Ranges are now:
Oil (WTI) 59.04-61.22
To long-term opportunities, tactical risk management, and who-ever invented “the teaser”.
Christian B. Drake
U.S. Macro Analyst