Green Monstah

“I had a better year than he did”
–Babe Ruth

The Babe lined that beauty up the middle on the media when asked why he deserved to get paid more than the President.  The year was 1930, Ruth made $80K, President Hoover made $75K.

Now, quick, without looking:  Is housing having a better or worse year than the S&P500?

Not sure?  No worries, it’s only a $27.4 Trillion Dollar asset class and largest singular source of net wealth for most households.  Trivial!

Collectively, the team (S15 Homebuilder Composite Index) is batting +72.7% YTD.  Here’s quick look at the top of the lineup:

1. Leadoff:  PHM = +83% YTD
2. 2^nd: DHI = +86% YTD
3. 3^rd:  KBH = +96% YTD
4. Cleanup: NVR = +105%

That’s a rare, relative performance 4-bagger and probably one of the most stealth banner years in recent memory.

And the fundamental data accords.  For the heat-map enthusiasts and Fenway Faithful, you can see the rise of the #GreenMonster below in the Chart of the Day.

Back to the Macro Sabermetrics Grind…

Housing batted for the (fundamental) cycle this week and we haven’t “hit” on the sector in the Early Look in a while so let’s walk the bases this morning.  

This week’s triple crown of Housing data has been unequivocally bullish. 

Indeed, 18Y highs in Builder Confidence, 10Y highs in new single-family construction and 11Y highs in Existing Sales leave little room for ambiguity or narrative framing. 

There are, however, a number of worthwhile contextual highlights.  To quickly review, starting with the New Market: 

• Rookie Exploits | New Construction, New Highs:  New Single-Family Starts hit a 122-month high, rising +5.3% M/M while accelerating to +13% Y/Y.  SF Permits also made a new 10Y high, rising +1.4% sequentially while accelerating to +9.7% Y/Y.  Higher, cycle highs in permit activity should continue to buoy new construction activity nearer-term.
• Supply | Deepening the Bench:   New Home Inventory continues to make higher highs and further, albeit moderate, improvement in SF permits will slowly help to offset still exceedingly tight supply conditions in the existing market.  Recall, there are 3 primary channels at work here.  First, new construction is a direct addition to the aggregate housing stock.  Second, to the extent new construction drives trade-up purchase activity, it will help increase supply at the low-to-middle tiers where shortages are most acute.  Third is an indirect but relevant dynamic related to the mix-shift in new construction activity.  While the conspicuous slowdown in multi-family construction is a drag on growth in reported Headline Starts activity, former multi-family laborers are free to transition over to supporting single-family construction.  A less tight resi labor market should directly support supply while also providing (modest) relief to the exigent scarcity and price pressures currently surrounding skilled construction labor. 
• Clinching the Division: Headline comps get tougher from here mostly on account of volatility in the multi-family numbers.  On the single-family side, comps remain moderate-to-favorable through May of next year and should continue to support rate-of-change strength into the new year, at least.  And with Starts and New Home Sales tracking +9% and +16% Q/Q, respectively, residential investment looks set to reverse to a healthy positive contribution to investment/GDP in 4Q.  

Meanwhile, in the 90% of the Market that is Existing Sales ….

• Mid-Season Form:  All anti-coal for the sales stocking in November as EHS rose +5.64% M/M to +5.81Mn, marking a new 132-month highs.   It’s difficult to negatively characterize higher highs and absent a rate or regulatory shock, the enduring expansion, continued labor market tightening and pro-cyclical expansion in mortgage credit availability should continue to support demand fundamentals over the nearer-term.
• The Caveat:   The outsized sequential gain and new decade high was only good for a +3.8% Y/Y increase and comps don’t ease from here.   And the supply situation is only worsening ….
• The Constraint:  Inventory fell -7.2% on a unit basis to 1.67mn units.  Recall, inventory data isn’t seasonally adjusted so the year-over-year figures offer the cleaner read on the underlying trend.  On that score, Unit inventory fell -9.73% Y/Y, marking the 2nd fastest pace of decline in 16-months next to last month’s -10.5% Y/Y cratering.  The accelerating decline in inventory is all the more remarkable given we’ve been comping negative for almost 3 straight years at this point.   Indeed, the combination of higher sales and falling unit inventory drove months-supply to a new all-time low at 3.45 months. 

Last-Minute Trade | Tax Reform:  In a last minute decision, members of the Conference Committee decided to retain the current laws on the exclusion of capital gains on the sale of a principal home.  As such, homeowners who have owned and used the property as a primary residence for at least 2 out the last 5 years may continue to exclude capital gains (up to $250,000 for individuals; $500,000 for joint filers) upon sale.  The proposal heading into conference was to lengthen the time to qualify to 5 out of the last 8 years – a provision which would have (significantly) curtailed supply even further.

As it currently stands, 2 of 5 potentially negative provisions (Capital Gains & Private Activity Bonds) have been eliminated from the final bill and the MID (Mortgage Interest Deduction) amount has settled at $750k, above the original House proposal for $500k. On the margin, the legislation has shifted positively for housing. You can see contrast between the original proposal(s) and the final legislation in the graphic below.

The Conclusion | Constrained Positivity:  Without over analyzing, the broader reality is that Housing is doing what it’s supposed to be doing at this phase of the cycle.  Importantly – and to reiterate a point we’ve made recurrently – a seemingly underappreciated dynamic of the current cycle is that the recovery in housing lagged the broader macro inflection by more than two years.  While we’re late or mid-late cycle more broadly, we remain somewhere closer to mid cycle in housing itself – at least with respect to New Home Sales & Construction.  There will be tradeable opportunities on both sides but the baseline TREND/TAIL outlook remains favorable.  Nearer-term in the existing market, however, the ‘tight supply will continue to constrain the upside in volume growth’  refrain that has characterized the last two years will continue to predominate and volume growth will remain underwhelming. 

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.34-2.50% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
Nikkei 220 (bullish)
DAX 121 (bullish)
VIX 9.01-10.62 (bearish)
USD 92.51-94.25 (neutral)

To being long of winning, short of whining and calling your (market) shot in 2018,

Christian B. Drake
U.S. Macro Analyst