Housing Starts Sink Again

Got that Sinking Feeling?

We understand why you might, but you should not have been caught by surprise by the week's housing data. While economists missed the forecasts badly, Wall Street Greek was spot on in heading off losses in housing stocks for you. After all, we wrote in our weekly copy, "...it seems economists might be playing the downtrend too cautiously." Well, the actual reported data from homebuilders and the US government proved yet another WSG blurb prescient. You should also find this latest copy relevant.

"The Greek" earned clients a 23% average annual return over five years as a stock analyst on Wall Street. While writing for Wall Street Greek and others, he presciently predicted the financial crisis and housing and banking failures of the Great Recession. Visit the front pages of Wall Street Greek now to see our current coverage of business news, the global economy & financial markets, real estate, shipping, fine art & antiquities and global affairs.

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Housing Starts Sink

The first two days of the week produced enough housing data to sink the industry's shares for the foreseeable future. Housing stocks did most of their declining yesterday, on the release of the Housing Market Index by the National Association of Realtors (NAHB). Homebuilders' shares also partook in Friday's drive lower, which followed the reported consumer sentiment dive. Thus today, after an initial drop further into the red, many of the homebuilders' shares moved a bit higher in the early going as investors questioned valuation. Still, we ask investors to consider the core drivers behind the initial reaction, and we find enough reason within the data to raise concern about a sustained weight on homebuilder shares. Furthermore, we see reason to believe home prices might make a second move lower.

"...we see reason to believe home prices might make a second move lower."

Housing Starts

Housing Starts, which were reported this morning for the month of June, ran at an annual pace of 549K, well short of the economists consensus forecast for a rate of 580K. June's pace of starts was 5% lower than May's revised count of 578K, which in itself marked a 14.9% drop from April. That's quite a trend, and it's worth noting that June's pace was the slowest since October of 2009. The latest rate was also 5.8% short of the prior year period, which was a notably weak stint.

A housing sector, and economy, that have been held up by government stilts for some time have now been left to stand on their own. We're sorry to report, she's falling flat onto her face in the mud where a foundation was supposed to be. As the First-Time Homebuyers Tax Credit expired, was renewed and expanded, and expired once more, its ability to spur housing activity wore thin. Don't get me wrong though, the government's efforts served a useful purpose and kept the economy from disappearing altogether. It's just too soon for this unemployment burdened baby to make a significant growth spurt.

Weakness in Housing Starts was concentrated in units of 5 or more, where activity was down 19.3%. This multi-family sector softness is something that worried us before, as we see overlap in the development of commercial and multi-family residential construction. Single-family structure Starts complemented the decline in multi-family, though eased by only 0.7% in June. The drop in starts was driven mostly by softness in the Northeast (-19.3%), Midwest (-6.9%) and West (-5.9%). Activity in the South slipped 2.4%.

Building Permits

A handful of reporters expressed enthusiasm about the 2.1% increase in authorized building permits in June. The annual pace of permitting inched to 586K, but those goofy gents must have missed the fine print. Some 3.4% less building permits differentiated June from May for the single-family property segment, which is of course the cornerstone of American housing. June's pace was the slowest since April of 2009. As for Multi-family variation, it is volatile because there are simply too few projects involved in the measurement.

Regarding single-family project permitting activity, the decline was completely driven by the Southern region of the country where activity fell 7.8%. Multi-family project permitting was strong in the Northeast, where activity was gauged at +32.3%. Still, remember the count is small.

Sad State of Affairs

The low mood in housing continues to find causation in an overhang of near 10% unemployment, extremely altered lending standards and a flood of foreclosure activity. While unemployment lingers at a suspect 9.5% rate (probably understated due to workforce declines), the underemployed, or those working insufficient hours at inadequate income remain upward of 16%. That simply will not inspire a fantastic spending scenario.

With regard to lending, the game has changed. With the secondary market for mortgage securities seeing a seismic shift in investor perception, and with a commensurate change in demand for the investment pools, a significant degree of liquidity is gone. But that's not what is limiting housing starts now. Rather, that's what will limit housing growth once the economy starts to gain traction again.

Lending standards have shifted as well, since these assets are finding less secondary demand. You can't just write them and sell them anymore (though some would say you never really could - Countrywide, Washington Mutual, etc.). Anyway, we would like to take this moment to again thank the rating agencies for rating MBS investment grade in the first place; thanks a lot S&P (NYSE: MHP) and pals (NYSE: MCO). Let your policy makers know that we're still waiting for justice.

Meanwhile, foreclosures continue to mount, flooding the market with low-priced inventory. Why would any cost-sensitive buyer look toward the new construction market under these conditions? Well, plenty are not. RealtyTrac Inc. reported last week that foreclosures jumped 38% in the second quarter of 2010.

"We have found ourselves caught in a continual loop of lousy, a death spiral."

Thus a confluence of factors weigh against housing. The problem is of course that the main factor is systemic; too many Americans simply cannot or will not buy a home under these conditions. Finally, housing itself is a systemic driver of the overall economy and spurs all sorts of consequential spending. We have found ourselves caught in a continual loop of lousy, a death spiral. It will take some original thought to get us out of this mess, or else we will inch ahead and pray for Asian growth and demand to pick us up.



Relevant Tickers include NVR Inc. (NYSE: NVR), D.R. Horton (NYSE: DHI), Pulte Group (NYSE: PHM), Gafisa SA (NYSE: GFA), Toll Brothers (NYSE: TOL), Lennar (NYSE: LEN), MDC Holdings (NYSE: MDC), KB Home (NYSE: KBH), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Standard Pacific (NYSE: SPF), Hovnanian Enterprises (NYSE: HOV), Beazer Homes (NYSE: BZH), Brookfield Homes (NYSE: BHS), Avatar Holdings (Nasdaq: AVTR), Xinyuan Real Estate (NYSE: XIN), M/I Homes (NYSE: MHO), Comstock Homebuilding (Nasdaq: CHCI), Senior Housing Properties Trust (NYSE: SNH), NYSE: DMM, NYSE: UMM, Fidelity Select Construction & Housing (Nasdaq: FSHOX), China Housing (Nasdaq: CHLN), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR, Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), BRE Properties (NYSE: BRE), Apartment Investment Management (NYSE: AIV), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties Trust (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Education Realty Trust (NYSE: EDR), Associated Estates Realty (NYSE: AEC), PennyMac Mortgage Investment (NYSE: PMT) and Two Harbors Investment (NYSE: TWO).

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