MACRO: Where are the housing bulls now?

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Conclusion: New homes sales in July were the lowest ever reported (excluding May’s downward revision).  Our street low 1.7% GDP estimate for 2011 is officially under review by the Hedgeye Research Committee, and will be going lower. Call us dogmatic if you will, but it looks like we nailed our Housing Headwinds Q3 theme call.


It’s no secret, Hedgeye has been very bearish on housing.  Our Financials Sector Head Josh Steiner presented his seminal work on this topic in a 101 page presentation about two months ago (if do not have that presentation and are not yet subscribing to our Financials vertical please email sales@hedgeye.com).  The presentation boiled down to one key point: home prices have anywhere between 15 – 50% more to fall nationally based on the supply and demand dynamics we see in our mathematical models.
 
New home sales reflect contact signings and deposits, which is more real-time than yesterday’s Existing Home Sales release (which reflect activity from 1-2 months prior).  The chart below shows New Home sales fell off a cliff in May, which are post tax-credit.  The July number reported today is not positive.  More aptly, it is a disaster.  (And this low-key Canadian isn’t prone to hyperbole.)
 
Specifically, purchases fell 12 percent from June to an annual pace of 276,000, the weakest initial release prior to revision since data began in 1963.  As it relates to price, the median price of $204,000 was the lowest since late 2003 and down 4.8% year-over-year.  We’ve outlined new home sales data going back 18 months in the chart below.  Not surprisingly, consensus estimates were off large with the range being 291,000 to 355,000.

 

 

 

MACRO: Where are the housing bulls now? - Screen shot 2010 08 25 at 1.41.50 PM

 

 

We obviously have had many debates on the housing topic with the bulls. The key push back we get is in regards to the longer term tail of demand and reversion to the mean of housing.  That is, over time household formation will, sooner rather than later, drive the market back into balance.  That, of course, assumes that household formation is positive.  Fortunately our proprietary census research shows just the opposite. The following chart shows household formation data. It shows new household formation rates through June 2010. The first half of this year saw negative household formation rates in the US, which is unprecedented.

 

 

MACRO: Where are the housing bulls now? - Screen shot 2010 08 25 at 2.01.42 PM

 

 

To conclude, and to quote our Financials Team from earlier today:
 
“New home sales came in at just 276K, near their record low.  This anemic level is consistent with our cumulative displacement theory, published on 7/13/10 and republished below.  To summarize, there was an epidemic of overbuilding during the bubble, which will take a very long time to work off.  Using a sales rate of 300K, we calculate that sales would have to continue at this level for ten years for the cumulative displacement from the mean to return to zero.  Yes, new home inventory is very low, but we don't see sales rebounding anytime soon.”  
 
The question now is of course: where are the housing bulls?  We hope renting.
 
Daryl G. Jones
Managing Director


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