In the past six months, nearly every aspect of the economy has shown surprising strength, including auto sales, consumer confidence, weekly jobless claims, manufacturing, exports and retail sales.
Now, some of the smartest of the so-called smart money on Wall Street is betting on a recovery in the ultimate lagging sector: Housing.
Tuesday's housing starts data came in slightly weaker than expected, at 698,000 units. But January's tally was revised up and building permits jumped 5.1% to the highest level since October 2008. Much of the gain was in permitting for multi-family units. Single-family units rose 22,000 last month, its highest level since April 2010.
"The thinking is we've bottomed out and we're going slowly start rebounding in terms of pricing," says Greg Zuckerman of The Wall Street Journal. "Over the last couple of months some of the best investors on the street…have been making big bets on homebuilders."
Zuckerman cited SAC Capital, Blackstone and Caxton Associates as among the funds making big bets on homebuilders, like Beazer Homes (BZH) and Pulte (PHM). Generally speaking, homebuilder stocks have been on a tear, with the S&P Homebuilders Index (XHB) up nearly 70% since its October low while the iShares Dow Jones US Home Construction ETF (ITB) is up more than 75%.
The bullish cash for housing rests largely on record levels of affordability, thanks to a combination of low rates and a steep decline in prices since the highs of 2006. In addition, bulls are betting on pent-up demand for housing from new families and young adults.
This week also brings data on existing home sales (Wed.) and new home sales (Fri.) which will put the optimists' thesis to the test, as will next Tuesday's Case-Shiller Index.
Of course, homebuilding stocks are not the same as housing and calling a "bottom" in housing is a parlor game on Wall Street that no one has won in the past five years, though many have tried. More fundamentally, there's a strong case to be made for why any recovery in housing will prove fleeting. (See: Barry Ritholtz: A Housing Bottom Is Nowhere In Sight)
First, home prices may be down from their bubble-era peaks but they're still high on a historic basis and they have never fallen dramatically below fair value, as is typically the case after a bubble bursts.
Second, the "shadow inventory" of homes (those currently not on the market but likely to be put up for sale at the first sign of a upturn) could suffocate any recovery. Separate but related, the foreclosure pipeline is filling up again after the moratorium last year brought a brief hiatus to short sales, which can significantly depress prices in local areas.
Third, unemployment remains staggeringly high and many Americans are stuck in homes that are underwater and/or unable to get financing to fund a new home purchase, which is gumming up the gears of a housing recovery. (See: Getting a Mortgage Shouldn't Be This Hard: Housing Finance Gets 'Taken to Task'
Fourth, an improving economy is already resulting in rising Treasury yields, which cuts into the "affordability" case for housing.
Fifth, any near-term strength in housing has been artificially boosted by the Fed's extreme aggressiveness and winter's extreme mildness in much of the country.
That said, housing will recover at some point and perhaps now it is (finally) getting to a place where it'll no longer be a big drag on the economy, which itself would be something to cheer.