Wednesday, January 20, 2010

Housing Data - December 2009

Housing data reported this morning was a mixed bag. On the negative front, housing starts declined by 4% (6.9% for single family) and came in 2.6% below consensus expectations. On the positive front, building permits were very strong, rising 10.9% month over month and 12.6% above consensus expectations. The higher building permit data (which usually precedes housing starts by a month or two) portends increased building activity over the course of Q1. An additional positive is that “houses under construction” continues to hit cycle lows, falling another 3.8% during the month. This suggests declining builder inventories, which should help stabilize end market pricing. Overall, the extended tax credit ($8,000 through April 30th) is clearly having a favorable impact on the housing market and should provide a nice tailwind to the reported industry data for at least the next 4-6 months.



Despite the steadily improving data, with single family housing starts up 27.7% from its February 2009 trough, its important to recognize that the industry is building well below natural demand (a good thing!) As indicated in the chart below, single family starts remain a staggering 75% below the 1.81 million level achieved in January 2006. While we are unlikely to ever recapture these cycle peaks, natural demand is at least 100% greater than current levels. While we continue to have signficant structural challenges to work through, a powerful rebound in housing remains a foregone conclusion given the depressed state of the industry. Removal of government stimulus by the middle of this year could result in a modest relapse (particularly if mortgage rates spike from current levels), but ultimately this will help work down the backlog of foreclosures that continues to build in the pipeline.



As I have stated numerous times, the fundamentals of the "new" housing market have improved dramatically over the course of 2009. Standing inventories of new homes for sale remain at 30 year lows and builders are now complaining about a deficiency of finished lots available to build on. As such, pricing has begun to firm and builders are slowly increasing their community counts in select geographies.



Conversely, the "existing" home market continues to challenge the industry, with inventories still an elevated 3.5 million vs. a more normalized level of 2-2.5 million. While down from a peak of 4.6 million homes for sale, the reported number likely remains artificially low given the backlog of bank-owned properties that are held off the market (and contribute to the supposed "shadow inventory" that weighs on the market). Until this inventory gets cleared it is difficult to proclaim the bottom of the housing market, but clearly we are well on our way.

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