Ignore the Home Builder Pessimism

By The Greek:

Earlier this week, the National Association of Homebuilders’ (NAHB) Housing Market Index showed an intensified level of pessimism for homebuilders. Yet, I’m telling you not to worry about it, because it doesn’t matter.

The NAHB’s Housing Market Index (HMI) dropped 2 points in March, after shedding a point in February. The HMI fell to a mark of 44 in March, from 46 the month before, and made fools of economists who on average were expecting the index to improve by one point to 47.

The NAHB explained the falloff and the third straight month of flat to deteriorating data on ancillary issues. The industry group said that builders were still seeing increasing demand for new homes, but were frustrated by “bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor.” And despite what seems like a better capital position for housing lenders like Bank of America (NYSE: BAC), according to the Federal Reserve, credit availability was reported as an ongoing problem. The NAHB also regularly mentions faulty appraisals, which include the values of sold distressed properties as comparables.

Yet, I’m telling you that there’s nothing to worry about. This index has remained underwater since the real estate market collapse, despite the nascent success of the nation’s largest builders. That’s the issue here. The NAHB is made up of builders, large and small, liquid and insolvent. Many small builders remain constrained by an inability to access capital. However, the large publicly traded builders including those listed herein are doing fine and dandy and are on an optimistic high today. They have access to capital, and the ability to steal market share from their humbled brothers. The evidence of their success is clear here.

Publicly Traded Builder	Year-to-Date Gain Thru 03/21/13
SPDR S&P Homebuilders (NYSE: XHB)	+13%
K.B. Homes (NYSE: KBH)	+40%
D.R. Horton (NYSE: DHI)	+26%
PulteGroup (NYSE: PHM)	+16%
Ryland Group (NYSE: RYL)	+14%
NVR (NYSE: NVR)	+14%
Toll Brothers (NYSE: TOL)	+10%
Lennar (NYSE: LEN)	+10%
MDC Holdings (NYSE: MDC)	+5%

They are not all higher on the year though. Beazer Homes (NYSE: BZH) and Hovnanian (NYSE: HOV) are in the red. Some of the difference has to do with regional variation. Some of the once hottest markets fell far from their peaks, but those same markets are on fire today again, including Phoenix, Las Vegas, California and Florida. K.B. Homes’ (KBH) west coast operations are a big reason for its performance this year. The HMI Report showed that the three-month moving average for the West Regional Index was up four points in March, and was easily in positive territory above 50 at a mark of 58. The Northeast Index was unchanged at 39, while the Midwest and South Indexes skidded by a point each to 47 and 46, respectively.

The part of the report I’ve always found most interesting is where builders are asked to report on current sales conditions, forward expectations and actual prospective buyer traffic. I find the first two measures are purely perceptional, and that the measure of real traffic tells a different and truer story for the majority of builders, who are mostly small. The index measuring current sales conditions fell by four points to reach a mark of 47. The measure of sales expectations for the next six months rose by one point to 51. However, the measure of prospective buyer traffic rose three points, and still measured deeply under breakeven sentiment at a mark of 35. Remember, though, it doesn’t matter because the real estate recovery is underway nonetheless. It’s just being enjoyed by a select few publicly traded companies which have garnered a good deal of market share from the least among their peers.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Real Estate is Fueling Inflation

Housing has served to quell prices generally over the past several years, but that’s all changing now. With real estate prices clearly on the rise, this important sector with its many tentacles threatens to give lift to prices of all sorts.

Rental Rate Rise
The latest Consumer Price Index (CPI) published this past week for the month of January showed pricing for shelter up 0.2% month-to-month, and it was up 2.2% for the year. Not all of the increase was due to the real estate recovery though. For instance, the real estate collapse almost immediately affected residential rental rates in an inflationary manner, because as homeownership diminished, shelter was still necessary. So, as demand for rentals increased, given limited supply, rental prices rose and they are still rising. The CPI report showed that rent and owner’s equivalent rent increased by 0.2% in January 2013. That’s good news for Apartment Investment & Management (NYSE: AIV) and peers but not for American renters.

Commercial Property Cull
The economic recession that followed the real estate collapse and financial sector crisis put pressure on commercial property leasing rates. But as the economy recovers, with accelerating GDP growth anticipated for this year and next by the Federal Reserve, commercial property rates should inflate in kind. Indeed, they have been and continue to appreciate.

Residential Rise
With distressed housing supply dissipating and with demand spurred by low rates and lower home prices; plus aided by the support of population and economic growth, residential housing prices are also finally on the rise. Indexes of home prices produced by the FHFA and S&P Case Shiller each indicate an apparent appreciating trend for real estate prices. It’s an important change from recent years past, with extensive consequences.

Materials Cost Increase
As demand for new homes and for home improvement products increase, so does demand for construction materials and the retailers which provide them, including Home Depot (NYSE: HD) and Lowe’s (NYSE: LOW). Building materials and supply makers like USG (NYSE: USG), Weyerhaeuser (NYSE: WY) and Fastenal (Nasdaq: FAST) should see raw materials costs increase but they are gaining more pricing power as well.

Higher Cost of Labor
The real estate collapse led to a massive purging of construction sector employment, with millions of laborers losing their jobs. Many of those former construction workers have moved on and found other work, and in some cases, careers. So as the sector recovers, a labor shortage has developed as confirmed to me by Toll Brothers (NYSE: TOL) executives earlier this month. Where supply does not meet demand, prices rise, and so labor costs for homebuilders should likewise be on the rise. All of these matters matter to homebuilders like Ryland Group (NYSE: RYL), PulteGroup (NYSE: PHM) and Hovnanian Enterprises (NYSE: HOV).

Peripheral Price Rise
Similarly, prices for the things that fill homes should gain support now. This means furniture makers and retailers and manufacturers of home items like Pier 1 Imports (NYSE: PIR), Ethan Allen Interiors (NYSE: ETH), Whirlpool (NYSE: WHR) and General Electric (NYSE: GE) should gain some pricing power as they see increasing demand.

Mortgage Rate Rise
Mortgage lenders are also benefiting from increasing demand for homes. Mortgage rates are on the rise despite the Fed’s best efforts to keep rates down through monetary policy and its asset purchase programs. We recently suggested that there is a lender shortage, due to the business fallout during the crisis and the regulatory rules established after the fact. Big banks like Bank of America (NYSE: BAC) and Citigroup (NYSE: C) are contending with hefty aggregate loan balances, while the two and peers Wells Fargo (NYSE: WFC), J.P. Morgan Chase (NYSE: JPM) and U.S. Bancorp (NYSE: USB) also deal with the low returns available to them. This is drawing smaller players back into the game, but perhaps not fast enough.

As you can see, demand for shelter is an important factor in the inflation equation. It has extensive reach and broad consequences. Price gains here are symptomatic of a recovering economy and asset class, but they also mark cost of living increases for American consumers nonetheless. Inflation threatens and housing is one sure factor that will fuel it.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Hot and Bothered by the Housing Market Index

By The Greek:

It’s not the one point decline in the Housing Market Index that worries me, but the why and the how the index declined. I think the component measures of this index say a lot about the real state of housing inclusive of smaller non-public builders. As far as the public companies go, I continue to see those firms gaining market share due to their capital advantage and crisis survival, where smaller builders failed. Still, even the larger builders face some negative fallout from the crisis and that is also discussed herein.

The National Association of Homebuilders (NAHB) reported its Housing Market Index (HMI) for the month of February Tuesday. The HMI declined by a point to a mark of 46, down from 47 in January. Economists were looking for another increase in the recently improving trend that would have taken the index to a mark of 48 this month. The NAHB attributed the softness to the usual suspects, an uncertain employment situation and constraints to consumer borrowing. Obviously, that second factor is for the industry’s own good and the result of the excesses of the financial crisis and real estate collapse.

However, the NAHB added a couple new issues to the spectrum of challenges facing homebuilders. The organization indicated that rising materials costs and a labor shortage in construction were working against recovery. The labor issue was a topic that came up during the presentation by Toll Brothers (TOL) at the Emerald Groundhog Day Investment Forum, which I was privileged to attend this year in Philadelphia. Construction shed jobs measuring in millions through the industry purge post real estate collapse, but it should be luring manual laborers back as it regains steam. Still, many of those former construction workers will have developed new skills and found other work by this point, and that’s the issue the industry must confront now. It pushes the cost of labor higher, though both higher materials costs and labor are also the result of housing demand in this case, and that’s a good thing.

What has me hot and bothered about the HMI this month are the component indexes, which continued to illustrate a difficult truth. The NAHB offers measures of the industry’s current sales conditions, forward sales expectations and traffic of prospective buyers. While both the current sales conditions metric (down 1 to 51) and the forward sales expectations read (up 1 to 50) marked ground above the break-even threshold of 50, the real measure of actual prospective buyer traffic remained deeply underwater. With the traffic mark falling by four points to a level of 32, it represents a sad state of affairs that actually deteriorated in February. Expectations can be built on what builders are reading here and elsewhere about the housing recovery, but prospective buyer traffic is a true measure of actual activity, and it says a lot about the state of housing.

What it tells us is that the many small builders still being surveyed by the NAHB remain troubled due to a lack of access to capital and their relative inability to compete in terms of pricing and marketing. This is the reason why this recovery is so bifurcated, with the surviving large public builders gathering up massive market share from the purge of the disease stricken little guys. That said, the news of the overall index slippage still harmed housing stocks broadly Tuesday, with many major builders seeing share price decline.

Builder & Ticker	2/19 Change
SPDR S&P Homebuilders (NYSE: XHB)	-0.2%
PulteGroup (NYSE: PHM)	-1.8%
D.R. Horton (NYSE: DHI)	-1.6%
K.B. Homes (NYSE: KBH)	+0.8%
Toll Brothers (NYSE: TOL)	-0.5%
Beazer Homes (NYSE: BZH)	-0.8%
Lennar Homes (NYSE: LEN)	-0.7%
Hovnanian (NYSE: HOV)	-4.3%

Of this group, K.B. Homes (KBH) likely benefited from the appearance of Weyerhaeuser’s (NYSE: WY) CEO on CNBC Tuesday, and the company’s continued enthusiasm about its strongly improving California market. KBH has serious west coast exposure. The NAHB Likewise had some good news to report on a regional basis for the West Coast. The regional metric for the West showed a four point uptick to a reading of 55. The Northeast measure was up three points to 39, but the Midwest and South regions both deteriorated by two points to 48 and 47, respectively.

Toll Brothers (TOL) was down slightly ahead of its later reported earnings disappointment, but readers of this column should have been prepared for that given our expression of concern yesterday regarding visibility into the current result for TOL (see page 2). Our report linked here, offers insight into the rest of the week for real estate as well.

The HMI data reminds us that this recovery is not all encompassing, with varying degrees of activity by region and by industry player. The change in industry shares on such a small adjustment also tells us that much of the good news is priced in to homebuilder shares, making them especially sensitive to bad news.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Mortgage Lender Shortage Affects Rates

There's a good reason for it.

By The Greek:

In the boom time of housing, there were an abundance of lenders spreading funds to all sorts of borrowers. As everything unraveled, many of those firms went underwater or escaped bankruptcy through last minute deals, ala the Countrywide acquisition by Bank of America (NYSE: BAC). But with major mortgage lenders including BofA, Citigroup (NYSE: C) and Morgan Stanley (NYSE: MS) today burdened by MBS liability and tough mortgage memories, there may be a shortage of willing lenders, especially at the margin of borrower qualification. As demand for mortgages ramps up, a lack of commensurate supply could prove a factor behind higher mortgage rates. Such a change could impede the real estate recovery, though perhaps only temporarily until supply demand dynamics balance.

Many major mortgage lenders are still heavily in the game with Wells Fargo (NYSE: WFC) leading in terms of mortgage lending market share and J.P. Morgan Chase (NYSE: JPM) and U.S. Bancorp (NYSE: USB) pushing for more, but others including BofA and Citi have shied away a bit. Costs in the mortgage servicing business may also be serving smaller players willing to pick up scraps, as major banks have the impact to overall shareholder returns to consider.

With an absence of lenders at the margin due to the real estate & financial crisis baggage still born by BofA and others, there’s an allure for new players to enter the field. They have been, as indicated by the slipping market share of the five largest mortgage lenders as mortgage demand picks up. The share of those largest lenders is down from two-thirds of the market in 2010 to roughly 53% last year, according to Inside Mortgage Finance. However, if mortgage demand picks up faster than new lenders fill missing capacity, then rates could rise faster than normal market dynamics might otherwise dictate. Indeed, the Mortgage Bankers Association last week showed that interest rates on 30-year fixed rate mortgages have increased for seven out of the last eight weeks.

An opportunity has thus availed itself for relatively young firms filling the void, including for instance Guaranteed Rate, an independent mortgage lender. However, the increasing importance of smaller firms may also indicate a return of risk taking, though hopefully to a lesser extent than in the relatively recent past... Community banks and independent mortgage companies are making more use of the FHA than the larger banks. Furthermore, the management teams of smaller companies may be less seasoned than those on the big stage, which begs to question whether risk taking is ramping up again and whether the lessons of the crisis are perhaps already lost to newborn greed. Of course, the government has acted to safeguard against problems, but its protection is relatively untested. The Consumer Financial Protection Bureau (CFPB) will do its best to ensure consumers are not had. It’s also supposed to ensure that certain higher lending standards are employed, but whether it has the real resources, capacity, will and skill to do so is yet uncertain.

One thing is certain: the shares of companies in the mortgage business are on fire. Tree.com (Nasdaq: TREE), with its leading brand LendingTree.com, for instance, boasts a 164% 12-month appreciation after dividends and splits. Players like Impac Mortgage (NYSE: IMH) are back from the flat-line, with its shares 350% higher than last year. Everything mortgage finance and investment related is revived from the dead today, and some of the best yields in the market are offered by Mortgage REITs like Annaly Capital (NYSE: NLY) and American Capital Agency (Nasdaq: AGNC), though we’ve expressed our concerns about those very specifically recently.

For real estate investors, homeownership affordability may face several threats in the months and years ahead, but one thing is for certain today. Homes are extremely affordable for those who have the resources and staying power to cover the expenses that come with it. I’ve tried to voice my opinion on this subject as loudly as possible in recent months (Time to Buy Real Estate & Real Estate for a Powerball Jackpot for instance). Yet, in the near term, those bottom dollar mortgage rates we’ve gotten used to may come under pressure from simple supply demand dynamics. So here’s yet another reason to act on real estate today.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Real Estate Finding a Higher Gear

By "The Greek"

At the start of the housing revival, a majority of the growth was found in multi-family construction. That was of course due greatly to a struggling economy, tighter credit conditions and rising demand for rental units. While there’s still a concentration of strength in the multi-family segment today, single-family housing is clearly participating in an intensifying manner as well. While I like all real estate over the short-term, my perspective for the longer term favors real assets including real estate, and rental unit providers, but not single-family home builders.

The latest Housing Starts data was published last week for the month of December 2012. It showed housing starts running at an annual pace of 954,000, well ahead of the economists’ consensus forecast for 887,000 and November’s pace of 851,000 (revised). Once again, there was strength in multi-family property construction, with Starts of residential properties of 5 units or more up by 23.1% over the November pace. Relative starts were up 115.7% over the rate of activity from a year ago. Today’s new housing market, however, is well-rounded. Starts of single family homes were also up nicely, rising 8.1% over November and up 18.5% over last year’s December pace.

The housing starts news was immediately embraced by investors in housing stocks, with the SPDR S&P Homebuilders (NYSE: XHB) charging ahead by 1.6%. The shares of many individual builders fared even better, with Lennar (NYSE: LEN), PulteGroup (NYSE: PHM) and Toll Brothers (NYSE: TOL) exceeding the XHB. Population growth, debt consolidation efforts for many Americans, and very little new supply added over recent years, has finally allowed for clear recovery in new home sales.

However, I don’t expect the fervor in builder stocks to last as long as the gains in real estate assets do, because I see a key catalyst in price increase coming from depreciation of the dollar. In fact, I believe many Americans could even be priced out of homeownership if interest rates rise and home prices increase in dollar terms as I expect. So the window of opportunity could be small and closing for real estate investors.

Despite the very serious challenges I see on the horizon for the economy and the nation, I believe the current opportunity in real estate is special, especially in rental units. Furthermore, I see real asset values rising significantly in the years ahead, though this time not due to a bubble, but due to damage to the dollar (and this is not the first or even the fifth time I’ve warned of this). A great many more people are finally getting on board with this viewpoint, including it seems the head of the IMF and the nation of Germany (requesting possession of its gold). If politics play a role in the United States not meeting its obligations (due to debt ceiling debate), and another downgrade of U.S. credit occurs, I believe President Obama’s and Madame Lagarde’s usage of terms like “globally catastrophic” are perfectly appropriate in describing the consequences. Even if the debt ceiling issue is mitigated properly, our current path seems to be leading to that same fiery end (read burning dollar bills).

Thus, I reiterate my recommendation for the purchase of real estate where and when you can get it for capital appreciation, and also for basic shelter if you need it and can afford it. Equity investors should also benefit from inclusion of residential REITs like Apartment Investment and Management (NYSE: AIV) and Equity Residential (NYSE: EQR), as homeownership rates remain pressured. Otherwise, I continue to favor agricultural commodities and precious metals and related securities like the SPDR Gold Shares (NYSE: GLD) and the iShares Silver Trust (NYSE: SLV). Further down the food chain, look to gold producers like Goldcorp (NYSE: GG) and/or others and agriculture participants like Monsanto (NYSE: MON).

In conclusion, the very short-term could stay supportive of all real estate, including more participation in the single-family segment. However, my view for the longer term favors rental unit and real asset rise, and continues to look for a weighing economy and rising costs of homeownership to eventually impact the homebuilders. Though those builders holding land inventory might retain some market value on a similar increase in book value, and stay afloat if they can sell off assets. I reiterate: I would buy real assets including real estate now. This is clearly a unique and ballsy perspective; the sort you can only find from unbiased, independent research, and out-of-the box thinking. But it’s also the same off-Wall Street resource that warned you of the real estate collapse and financial crisis when others thought that was far-fetched. We look forward to your continued support.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Bothered by Stalled Homebuilder Sentiment?

By "The Greek"

The National Association of Home Builders (NAHB) reported a stalling in the improvement trend in its Housing Market Index (HMI), which is produced monthly in conjunction with Wells Fargo (NYSE: WFC). The HMI measures the mood of builders, and has been steadily improving over the last year. In the case of the latest report, I think the pause in that trend reflects fear rather than reality, and so real estate enthusiasts can expect the good trend to continue at least for the near future.

The NAHB said its Housing Market Index stuck at a mark of 47 in January 2013, killing an improvement trend that had lasted eight months. Economists were looking for a modest gain this month, with the consensus expectation set at 48, according to a Bloomberg survey.

Component indexes were mixed in January. The measure of the home builder view of current sales conditions stuck at 51, while expectations for the next six months eased by a point to a sub-index mark of 49. In the past, I’ve warned that each of these measures is prospective, and that the measure of current traffic conditions is more useful. This last measure improved by a point, but only to a level of 37. I’m reminding readers that 50 is the delineating point between good and poor perspectives. If prospective buyer traffic (a tangible measure) sits so far below 50, then operating conditions are not so great. I’ve explained this in the past by noting that the majority of builders are small operators who are poorly capitalized today versus the big public builders like PulteGroup (NYSE: PHM), D.R. Horton (NYSE: DHI) and Toll Brothers (NYSE: TOL). When given an equal vote, these smaller builders accurately pull down the indexes measuring general perspective. At the same time, larger builders are taking market share and benefiting more from the real estate market recovery.

Still, even the traffic numbers have been improving, despite the obstacles noted by the NAHB including: still relatively tight credit conditions; difficulty in obtaining accurate appraisals; and D.C. dysfunction. In fact, I believe it was very likely the fiscal cliff fiasco that hampered home builder sentiment at the January inquiry. In articles leading up to the end of 2012, I warned of and noted the economic effects of fiscal cliff fear alone, versus the well-documented impending impact of potential legislative change. I believe that’s what we’re seeing in the HMI this month as well. Even after last minute mitigation materialized and stocks celebrated the result, the economy remained on hold due to the risks tied to the debt ceiling debate.

Still, the SPDR S&P Homebuilders (NYSE: XHB) grabbed ground this past week thanks to a better than expected improvement in Housing Starts. The XHB gained 1.6% on the week, beating the 0.85% increase of the SPDR S&P 500 (NYSE: SPY). PulteGroup (NYSE: PHM) did far better, taking 5.9% of upside; TOL was up 4.8%. So, the reality of the situation, as clarified by data tracking real activity, outweighs the importance of the sentiment measure, which has been more grossly infected by the chaos in Congress. Though real and actually terrifying risks remain around the debt ceiling issue, general improvement should continue in housing for as long as Congress doesn’t drop the ball. If they do, all bets are off.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Reverse Your Bank & Builder Bets on Bad Mortgage Data Today

Real Estate and securities investors might make the mistake of reading too much into the latest mortgage activity data reported today by the Mortgage Bankers Association (MBA). Please don’t make a panicked securities trade or real estate investment based on any one data point, and especially not this one this week.

Our founder earned clients a 23% average annual return over five years as a stock analyst on Wall Street. "The Greek" has written for institutional newsletters, Businessweek, Real Money, Seeking Alpha and others, while also appearing across TV and radio. While writing for Wall Street Greek, Mr. Kaminis presciently warned of the financial crisis.

The MBA’s Weekly Application Survey for the period ending January 4 showed a sharp increase in mortgage activity. The Market Composite Index, which measures activity across all application types, increased 11.7% against the immediately preceding period. That’s a huge increase, and it will draw the attention of many investors reading sensationalized headlines published by the popular press and promoted by other media.

You might make the mistake of believing the data is clean, since the MBA offers this as the seasonally adjusted figure. When not adjusted for New Year’s Day, the MBA notes the Market Composite Index increased by 49%. But it’s difficult to perfectly account for holidays and the data-counters themselves will tell you not to rely too heavily upon data published through such noisy periods.

I’ve noted in years past that I believe the data adjustments are imperfect because they do not account for the slack in business activity on the day before and the day after a holiday, especially three-day weekends. I’ve noted that the MBA data often shows big swings in even the adjusted data around holidays. I reiterate that investors are better served by waiting a bit for cleaner data produced in cleaner periods. Furthermore and where offered, moving averages can help investors to see things more clearly.

An investor with an itchy trigger finger, noting such a big increase in mortgage activity this week, could direct capital into the biggest mortgage lenders and other specialists. The shares of some of the nation’s biggest mortgage lenders are mostly higher today, and I hope it is not at all related to this week’s mortgage data. It’s all I can do to warn investors, but traders will put capital to work for even the wrong reason if it turns a profit. Now these lenders have other issues affecting their trading today, and so we’ll look at other real estate related securities as well.

5 Major Mortgage Lenders	Wed. Morning Change (10:42 AM)
J.P. Morgan Chase (NYSE: JPM)	+0.7%
Citigroup (NYSE: C)	+1.2%
Wells Fargo (NYSE: WFC)	+0.8%
Bank of America (NYSE: BAC)	-0.7%
U.S. Bancorp (NYSE: USB)	+1.1%

It certainly looks to me like traders are in frenzy mode, and in error, due to the mortgage activity gain published today. The shares of major homebuilders are also much higher on the news. The gains in both lenders and builders are outsized versus the market, as the SPDR S&P 500 (NYSE: SPY) and the SPDR Dow Jones Industrials (NYSE: DIA) were up just 0.4% and 0.6%, respectively, at the same point in time.

Homebuilder Shares	Wed. Morning Change
SPDR S&P Homebuilders (NYSE: XHB)	+1.3%
PulteGroup (NYSE: PHM)	+0.9%
D.R. Horton (NYSE: DHI)	+2.5%
K.B. Home (NYSE: KBH)	+1.3%
Toll Brothers (NYSE: TOL)	+0.9%

Looking more closely at the data from the MBA helps to clarify things even further, and it should serve to guide traders in frenzy mode today to reverse positions before the close. The Refinance Index, measuring mortgage refinance activity, was marked up 12% against the previous week. However, the MBA notes that when comparing it to the week prior to the holidays, it’s up less than 1.0%. Likewise, the Purchase Index, which measures activity on the purchase of homes, was marked up 10% against the immediately preceding week. However, it was down 2% from the period before the holidays and down 8% against the prior year period.

This information demands that investors reconsider any investment fervor that might have been fueled by today’s report. I hope it has not pushed anyone into a premature or ill-advised real estate purchase, though I favor real estate purchases now generally speaking and where proper due diligence has been applied. Please consider this clarification and act accordingly in your interests.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.

Construction Spending Should Pick Up Post Cliff

By "The Greek"

Construction spending was reported down in November, falling short of its October comparable and surprising economists as well. However, the factor most likely holding up activity in construction and the economy generally at the close of the year has since been mitigated. After crossing the fiscal cliff, construction activity is likely to pick right back up on the same drivers that have gotten us this far: low borrowing rates; attrition of inventory after a period of construction freeze; increasing demand for rental property; a growing population; and an expanding (albeit slowly) U.S. economy.

The Construction Spending Report for November, reported Wednesday, showed a month-to-month decline of 0.3%. That compared poorly to October’s growth of 0.7%, though October was revised lower from the initially reported rate of 1.4%. The lull in spending surprised economists; a survey by Bloomberg shows the consensus expectation at +0.6%. The range of economists’ views extended from no change to plus 1.0%, with not one economist expecting a decline, which is what materialized.

Construction spending and projects are slow moving ships with paths not easily altered by day-to-day news. However, the fiscal cliff was long-anticipated, far reaching and widely publicized, so should have been an issue for the construction sector to some degree. Investors and construction firms expected that it would at least impact public spending on infrastructure projects. Thus, the first decline in eight months was greatly driven by a deep decline in spending for federal projects.

Public construction spending was down 0.4% overall and fell 0.5% in the non-residential sub-segment. Thus, the passing away of fiscal fear allowed the shares of engineering and construction related companies to move sharply higher. Jacobs Engineering (NYSE: JEC), for one, gained 2.8% on the day despite the construction spending data. Spending on private construction fell by 0.2%, but residential construction spending still managed to grow 0.4% privately.

The shares of homebuilders were decidedly higher on the day. The reasons were all fiscal cliff related, and extend beyond the income tax issue. Needless to say but necessary to mention, the mortgage interest deduction was untouched and mortgage debt forgiveness on troubled properties retained its tax break for another year, both of which play well for housing. With industry recovery unencumbered by fiscal policy, the SPDR S&P Homebuilders (NYSE: XHB) gained 2.7% on the day, and the shares of many of the nation’s more important publicly traded builders rose even more.

Homebuilders	Day 1 Post Cliff Performance
PulteGroup (NYSE: PHM)	+2.4%
D.R. Horton (NYSE: DHI)	+3.1%
K.B. Home (NYSE: KBH)	+3.1%
Toll Brothers (NYSE: TOL)	+3.6%
Beazer Homes (NYSE: BZH)	+6.1%

Still, spending on commercial projects was also hampered by the fiscal cliff speed bump. Nonresidential private construction declined by 0.7% while overall nonresidential construction fell 0.6%, with spending on office properties down 2.2%. It’s safe to say consumer sensitive construction projects on malls and retail operations were hampered by the fiscal cliff fiasco.

Now that the cliff has been greatly mitigated, capital is freed up again for spending on the expansion of business operations, commercial development and housing projects. That said, overall construction spending remains nearly half of what was once considered a healthy level of activity. Though, our prior health was clearly boosted by the synthetic stimulant provided by wrongly rated MBS and a greed driven mortgage push. For the nation to once again reach its full potential economic metrics including unemployment will need to improve substantially, so fiscal stimulus is still needed. Construction should continue to benefit, now that it has been mostly assured.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.