Why Did Construction Spending Disappoint in March?
Current housing starts
In March, housing starts fell to an annualized rate of 1.1 million from 1.2 million the month before. Building permits fell from 1.2 million to 1.1 million as well.
Analyzing the depths of the housing bust
Following the collapse, we saw housing starts average ~687,000 units per year with a low of under 500,000. These levels are completely unprecedented. Prior to the Great Recession, the lowest numbers were during the 1991–1992 recession and the 1981–1982 recession. Both had a few months around 900,000. The pre-bubble average ever since the 1960s was 1.5 million. Interestingly, if you divide housing starts by the population, we have barely reached the depths of the 1981-1982 recession. It was the worst recession since the Great Depression prior to the financial crisis.
Housing starts typically lead economies out of recessions. In the past, there was usually a V-shaped crash and rebound. You can see the last major crash during the 1991–1992 Gulf War recession. Prior to that, we had the Fed-driven recession of 1982 that broke the back of inflation in the 1970s. This time around, we didn’t get the rapid bounce off the bottom. That was due to the excesses of the bubble.
Excesses of the bubble have been worked off
During the bubble years, we clearly overbuilt. However, we didn’t build enough for many years as well. While land tends to last, houses don’t. We need to maintain a steady flow of houses to keep obsolescence at bay. The market for existing homes is extremely tight as well. In March, existing homes for sale were up 1.5% to 5.3 million homes. This is a 4.5-month supply. A balanced market is closer to 6.5 months of inventory. There’s pent-up demand for housing. So far, the uptrend in multi-family residences has been strong, albeit volatile. Single-family residences have moved up steadily, but without the huge volatility. As we discussed in the previous part, there are builders that are positioned to benefit in different ways.
Average selling prices are still rising in the mid-to-high single digits for all of the builders. New home prices are rising faster than existing home prices as well. This indicates the tight supply.
Once home construction accelerates and we get an economic virtuous cycle happening, we could start to experience the robust recovery we’ve been waiting for. This scenario assumes that interest rates rise gently over the next few years.
Keep this in mind with the builders. Even if we only get back to historical levels, there’s a lot of earnings potential for homebuilders such as Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL). You could also consider the SPDR S&P Homebuilders ETF (XHB).
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