Friday, June 16, 2017

Weak housing starts misleading

May housing starts were much weaker than expected (1092K vs 1220K) and on the surface suggest that the housing boom that started back in 2011 has run its course. However, continued gains in the prices of homebuilders' stocks suggests that the May print was an outlier, driven mainly by weak multi-family starts, and that there is a rotation underway from multi-family to single-family home construction that continues to be strong. Calculated Risk has more details.

The chart above compares starts to an index of homebuilders' sentiment. Sentiment among those closest to the housing market continues to be healthy, even though starts have been roughly flat for the past two years. Homebuilders see things improving, not stagnating as starts would suggest.

The stock market appears to agree. As the chart above shows, the stocks of homebuilders continue to rise in price. This confirms the sentiment index referenced above.

The chart above compares housing starts (white line) to the index of homebuilders' stock prices (orange). The two are highly correlated, and it appears that the index of stock prices leads housing starts by at least several months. Note that the orange line turned down six months prior to the early '06 downturn in starts, and in 2009 it turned up significantly almost a year before starts did.

At the very least this suggests that it would be premature to conclude that the recent weakness in reported housing starts marks the end of the housing construction boom.


Benjamin Cole said...

Here is a shocker for you: The U.S. Census Bureau projects the U.S. total population will grow from 325.2 million in mid-2017 to 380.2 million by 2040, assuming current immigration levels of about 1.3 million net annually.

In just a little more than the next 20 years, the United States will have to house another 55.0 million residents, equal to nearly a 17% expansion of its population.

For every five U.S. residents who need a roof presently, there will be six in 2040.

Yet look around you, if you live on the coasts: Do you think the NIMBYs will allow that much building in your neighborhood?

The idea that the state (or city) can tell property owners how to develop their own property appears accepted in the U.S., even among "libertarians" or right-wingers, or free-market types. Well, the joke is, "A libertarian is a Republican who wants to smoke pot."

There are some investment vehicles that specialize in buying and upgrading apartments. Might be a place to look.

The Cliff Claven of Finance said...

This is the economics blog where good news is celebrated good news
... and bad news is described as "misleading".

It is impossible to predict a recession, or recognize a recession in progress, if bad news is dismissed as "misleading".

This is the economics blog where a recent post said the Fed raising rates was good news ... implying that any action taken by the Fed is good news (reducing rates = good news, and increasing rates = good news).

Weak May housing starts were not "misleading", they were weak.

Here's what the data release told us:

The May 2017 annual rate of housing starts was the lowest in eight months.

Bad news.

May 2017 was the third consecutive month-over-month decline.

Bad news.

April 2017 housing starts were revised lower.

Bad news.

March 2017 housing starts were revised lower.

Bad news.

It's grossly overoptimistic to describe that data release as "misleading".

Al said...

Hey cliff.

Stop being a doomsdayer and Mr negative.

If it's so bad go sell all of your stocks and your real estate and rent a house and put your money in a mattress and buy a bunch of insurance.

Oh..and stop reading zero hedge. It's bad for u.


Rich said...
This comment has been removed by the author.
The Cliff Claven of Finance said...

To Alain
If an honest analysis of the housing starts data seems to make me a "doomsayer" and "Mr. Negative", then I imagine you must have read something else. That was an honest unbiased analysis.

On March 6, 2009 -- pure luck the exact day -- my economics newsletter was published
and I reversed to became bullish on stocks.
I speculated that the stock market was extremely undervalued.
That's when it payed to be contrarian and POSITIVE.

I remained bullish, in writing for seven years, until Spring 2016, when I became neutral.
The stock market had done nothing for a year.
And valuations were very high.

I have remained neutral since then, and will turn bearish when that seems reasonable.

The Trump Bump seems temporary to me
But has bumped valuations to among the highest in history.

The median stock has the highest valuation in history
The average stock is the second or third highest valuation in history.

Based on these valuations, this is historically a very bad time to own stocks.
That's not being negative, it's being factual.

I have moved my own investments to 75% cash last month,
based on the high valuations and my belief that the
Trump corporate tax cuts will never happen

If you stayed in the stock market since the 2000 peak,
invested in S&P 500 with no commissions or fees,
your total return would be only about 4.5% a year.
with two huge declines along the way.
Those numbers assume everything is sold now.

Don't blame me if another bear market happens.
I'm just reporting the valuations that exist now are
typical of valuations before past bear markets.

An economist who is always positive is like a stopped clock.

Al said...

Well okay now I'll have to eat my words here.

You did back up your thoughts with actual money. That takes gumption.

I can respect that.

Thought you were just a negative guy like the zerohedgers . Super unhealthy mindset.

The Cliff Claven of Finance said...

Alain sez:
"I'll have to eat my words here."
No don't do that -- this is the internet -- you're supposed to start a vicious verbal fight with me
that ends when we compare each other to Hitler, or Stalin, or even worse - Donald Trump or Hillary Clinton.

I think it's healthy to look for bad news when the economy has been growing for eight years,
and to look for good news when the economy is in the middle of a recession.

I read a lot of different media sources, having been retired for over 12 years, since age 51.
I do read Zero Hedge for a negative spin, and Calafia Beach for a positive spin.
I consider both equally biased.

I watch Fox News for a Republican spin, and CNN for a Democrat spin.
I consider both equally biased.

As a libertarian the only show we have on TV is John Stossel !

Remember that people are most bullish when the stock market peaks.
And stock valuations suggest when a peak is near.
I'm not being negative when I report that stock valuations are very high now.

Trump is doing a great job reducing regulations with executive orders
but who knows that with all the noise from the verbal uncivil war going on?

I'm writing a report on what Trump has accomplished since becoming president
and have been surprised at how little has been reported in the news -- even Fox News !

Unfortunately Democrat Senators will block everything they can with filibusters,
even things they should like, such as infrastructure spending, just because they
want Trump to accomplish as little as possible.

I hope Trump wears a bulletproof vest.


Scott Grannis said...

Cliff: You and I agree that equity valuations today are not cheap. Where we disagree is on whether they are still attractive. You think they are so unattractive that you have mostly exited the market. I think they are still marginally attractive, but I'm no longer willing to take outsized equity risks. Being short equities carries a sizable cost (i.e., the difference between equity yields and cash yields) and that positive spread provides a cushion to equity holders against loss. I agree with you that Trump has made substantial progress reducing regulatory burdens, and that is undoubtedly one reason why the equity market continues to move higher. I can't argue I'm free of bias, because I'm biased to believe that lower regulatory burdens and lower and flatter marginal tax rates are bullish for the economy.

I'm also biased to believe that timing the market is extraordinarily difficult, and that there is nothing inherently stupid in a "buy and hold" strategy. It's one thing to exit the market when valuations are rich, but it's yet another thing to get back into the market having once exited.

The Cliff Claven of Finance said...

If you hold stocks at high valuations, then you must decide whether to continue holding,
or to take profits, perhaps using stop loss orders 5% to 10% below the current price.

I didn't say anything about short selling, which is for professional investors.

If you hold, and then are so lucky that you sell nothing until the NEXT valuation peak,
the peak-to-peak return is not going to be very good.

If you miss the next vauation peak and sell at other times, the returns will be worse.

Starting at the 2000 peak:
Hold the S&P 500 and do not sell.
Your total return as of 2017 is only about 4.5% a year.

US Treasury bonds would have been a better investment since 2000, with much less risk.

That's roughly a peak-to-peak analysis that all good economists should strive for
(or trough-to-trough).

I'm assuming tiny management fees / commissions
(I subtracted 0.2 % a year for those -- 4.7% minus 0.2% = 4.5%)

AND you had to hold on during two 50% declines without selling,
suffer enough stress to take a few years off your life,
and hope you didn't have a heart attack!

Check the DALBAR investor studies to see how few mutual fund investors
actually buy and hold.

Avoiding big losses is most important for investors, not buy and hold forever.

What lower marginal taxes?

That's not going to happen.

No Democrat votes.

And lot's of Republicans won't vote to increase the deficit.

Republicans complained about Obama's deficits for eight years,
and now all of them will vote for higher deficits?

I don't think so.

Corporate taxes in 2016 provided only 0.3 trillion of revenue
towards the 4.4 trillion of total US government spending
according to the 2016 Financial Report of the US Government
-- that's less than 7%.

How many Americans (and their Congressmen) will support tax cuts
for corporations whose ...
(1) Profit margins were well above average in 2016,
(2) Stock prices are at or near record valuations now, and
(3) CEOs are making so much money gaming their bonuses with financial engineering (stock buybacks to boost EPS) rather than the old fashioned way of making wise capital investments that grow corporate revenues for long term growth?

Corporations are doing great, so let's slash their tax rates from 35% to 15% ?

The time to cut taxes / increase deficit spending is during a recession
-- not after nine years of economic growth.

Fiscal and monetary policy should be counter-cylcical to damp the natural business cycle,
rather than blowing up asset bubbles even bigger.

We'll never see another Republican President
if corporate taxes are cut when corporations are doing well !

Al said...

Oh the Trumpster. I thought we had it bad here in Canada with Big Sexy Trudeau with his dumb carbon tax and increasing income tax on the wealthy. But now I will take him over Trump lol.

I used to attempt to time the market but I don't anymore.

I am a boring buy and holder in the big blue chippers with the elusive durable competitive advantage as buffet would say and just let the dividends keep on increasing and the price along with it.

Different styles for different personalities.

I just find that worrying about a bad month here and here is not something that is worth my time.

I remember during the 2009 crash and coming out of that crash I was so pessimistic a out markets as I was reading zero hedge and other negatively biased sites that it clouded my judgement.

In hindsight Scotts blog was the only one that provided the best information ot of the dozens I was reading. .calculated hedge. ..mark Perry...and dozens more.

I thought scott was wrong but he wasn't. He was actually one of the o ly ones who was bang one.

Ofours we can disagree with him. And that is part of this section.

I just wanted to hammer on you a bit for being a Debbie downer. Lol

Gotta believe in humanity man.

If you believe in yourself and humans advancing society over time then no reason to fret and worry a out the bad stuff happending month to month.

Just buy great companies and hold. Tweak if you feel the need but generally hold and take part in the advancement of society.

Time in the market is more important than timing the as market as some person who I forget once said.

randy said...

Buy and hold is great - when you're in your 20s, 30s, even 40s. Or later if you have enough that a 40% decline won't kill you. Those are the most fortunate investors, that can take that risk - and they will almost certainly have better returns. But for 95% of investors - even moderately wealthy investors - at some point, you can't risk catastrophe. A 60 yr old with $5 million in 2007, all invested in the SP500, has $3 million a year later. What does he do? Continue to risk it all because history tells him he should? Very difficult.

randy said...

BTW Alain...

"Gotta believe in humanity man. If you believe in yourself and humans advancing society over time then no reason to fret and worry a out the bad stuff happening month to month"

I've been thinking a lot about that lately, in regards to environmental issues primarily, but also as it pertains to investing. While it may seem counter to what I said above, I very much agree with your statement!

The Cliff Claven of Finance said...

The history of stock valuations strongly suggests an investment today will have a lousy return over the next ten years -- perhaps no return at all,

Anyone 100% invested in stocks after eight years of a bull market is blind to risk.

None of the great investors in history were buy and hold investors.

Beware: On "Wall Street" everyone who talks to customers is optimistic and bullish all the time
... even as traders at the same firms are pessimistic and net short !

honestcreditguy said...

Actually Valuations for tech are not bad compared to 2001...

earnings vs market cap are not as divergent

we are moving to an earnings market and away from the interest rate market

Dr. Ed Yardeni has a current piece on this

Al said...

I totally understand the concerns you guys bring up.

For me I don't view a 30% correction as a risk. I see that as an opportunity.

It only took a few years after March 2009 (the worst drop since the deression and black monday) to recover.

Ao unless your crazy and sell during that period there is no risk.

A guy at 60 with 5 mil will just hold until 65 until he is at 6 mil

And more importantly continue to get his $200,000 or so in dividends each year (assuming 4% div yield) he continues to hold.

During those 5 years...that is $1 million in dividend.

So that 60 would be I'll advised to sell his 5 mill before a correction may or may not occur.

He only way it makes sense to sell at that stage in the game is if you think you are about to die and want to pass that money off to your kids or you need hat money for a house or some other life event.

Otherwise there is no risk. You just wait it out assuming you are invested in the best of the best companies.

Warren buffet is the classic example of this in general (coke, ge, Pg, wells fargo, geico, etc)

My average portfolio divodend yield is 4% and for me to sell means I am giving up all of that dividend income which to me is a silly move when I know that IBM, p&g, chevon, trancanada pipe and all those guys will still be here 5, 10 , 20 years from now.

I am not trying to convince you this method is best
..just my mindset of why I don't see continuing to hold great companoes is a risk.

I view it as a risk to sell. Missing out on that dividend income whIle you wait and also you will likely miss on continued gaind as society will continue to move forward despite crazy hinges happening in the wold everyday which has been the case since the dawn of time.

HHDesigns said...

I hope you are right about builder sentiment and housing starts. However, here outside of Chicago we are seeing a tough market. It is not due to demand I believe, it is due to soft appraisals. We have many plans that are collecting dust with the desire for the project to move forward, but the appraisals are not even close to the actual project cost. We have one couple for example that purchased their land for $600,000, have a 5700 square foot home plan and the appraisal for the house came in at $700,000 while the cost to build that home is well above appraisal. It just seems the appraisal system is broke in our area. I am no where near any kind of expert on the economy, but am certainly feeling the pain along with my customers of projects stalling and not moving forward.