Tuesday, May 18, 2010

Housing market recovery underway

It is now abundantly clear that the U.S. housing market is recovering. From the all-time lows registered in April of last year, starts have now risen 40%. To be sure, the level of activity is still dismally low, but that a recovery is underway is virtually certain. The Bloomberg index of home builders' stocks has been saying the same thing for some time now, with the average stock up 125% from last year's low. Recovery skeptics have been telling me for many months that a true recovery can't happen without a recovery in housing; if they are right, then this is pretty good news indeed. Regardless, I view this as just one more of many signs that the economy is in recovery mode. The only item of debate at this point is how fast the economy will recovery, not if. I see no reason to change my long-held expectation of 3-4% growth, which amounts to a moderate recovery, albeit one in which a lot of V-shaped sector recoveries, like this, can be found.


brodero said...

The housing starts to nonfarm payrolls ratio is now .516. The low was made April 2009 at .346.
We are now up for the fourth month in a row. The 20 year average for this ratio is 1.15.

Benjamin Cole said...

BTW, the producer price index out today was down, not up. Deflation, not inflation.

This chart indicates the housing industry is in a depression, not a recession--but at least recovering.

Much of US property markets are in the same fix. Office buildings in California are selling for half-price, and well below replacement cost.

Frankly, I think the Fed needs to dump truckloads of money into this economy. Ain't no inflation that I can see.

John said...

I would point out that Lowes (LOW) and Home Depot (HD) have both reported very good sales and earnings numbers within the last couple of days. HD said growth was broad based across all catagories. Canada was particularly strong...they are our largest trading partner... much more so than Europe.

I also read the other day that the bid/ask spreads on large blocks of unsold homes in California are narrowing and competition is increasing for these assets. While full liquidity is still not there, price discovery is getting better. This should help the banks.

As Scott continues to point out, our economy is continuing to improve. I believe the stock market still has more backing and filling to do in the short term but will be higher by a reasonable amount by yearend.

We need clarity on the banking regs. An advanced economy needs a healthy, profitable banking industry to grow the economy and create jobs. I do not think the stock market moves to new highs for the year until this uncertainty is removed.

The euro remains the bears mantra. It is IMO a ridiculous excuse to sell a good company's stock. The bears were stung badly by the ECB's intervention in the sovereign debt markets and they have not given up. Many investors do not understand currencies' relationship to market fundamentals and I feel like this is being exploited. It is also a fact that fear is a more powerful emotion than greed and this tool is also used by those whose agendas are to make fast money on declining market prices.

Volatility is something that comes with the territory of equity investing. Sophisticated markets can provide instant liquidity for highly illiquid assets but the price is volatility that can be gut wrenching at times. It certainly isn't for everyone but if you can take it, I continue to believe (as, I think, does Scott) there are very good opportunities in high quality equities near these levels.

S&P 1132

John said...

Brodero & Benj,

I think the direction is more important right now than the level. As long as these indicators continue to point up, we will be fine.