Wednesday, February 19, 2020

Housing starts are truly impressive

For the past several months, the news from the residential construction sector of the economy has been truly impressive, greatly exceeding forecasts. Only one caveat: building activity in the winter months is typically depressed, so seasonal adjustment factors are large and that can turn a modest increase in actual starts into something bigger than it actually is. Winter weather has been milder than usual, so we need to take the recent data with a grain of salt. Regardless, the outlook for residential construction looks impressive, especially when coupled with the fact that mortgage rates are at or near all-time lows and households' finances have never been so healthy.

Chart #1

Chart #1 may be the most economically bullish chart in my collection. It compares actual housing starts to a measure of homebuilder sentiment. Sentiment has been a good leading indicator of starts, and starts in recent months look to have responded to a dramatic increase in sentiment that began about a year ago. Both now point to a robust environment for residential construction activity which in turn could help power the economy to new heights.
Chart #2

Chart #2 shows the history of housing starts going back to the late 60s. The residential construction sector is still recovering from the bursting of the housing bubble in the late 00s, and there looks to be plenty of upside potential left.

Chart #3

Chart #3 shows residential building permits, which essentially predict future housing starts by several months. This chart reinforces the message of the first two: we are in the midst of a burst of new activity in the residential construction sector after several years of meager gains.

Chart #4

Chart #4 shows 30-yr fixed mortgage rates for conforming and jumbo loans. Both are at historically low levels. The world's seemingly insatiable desire for 10-yr Treasuries (which I featured in Chart #7 of my previous post) provides an ample source of funds for mortgage lending. There's every reason to believe that financial market conditions will support continued growth in housing activity.

Chart #5

Chart #5 shows that the delinquency rate for home mortgages has never been as low as it is today.

Chart #6

The message of Charts #5, #6, and #7 is powerful: households are in great shape financially. Delinquency rates are at historic lows for all types of loans, and households' financial burdens are also at historic lows.  

Chart #7

So much winning! Trump has a strong housing wind at his back as the November elections approach.


Michael McGaughy / 麥德安 said...

Dear CBP. Love your blog and emails! Thanks for posting!

Eyeballing the Mortgage Delinquencies chart it seems that when delinquencies fall before US equity market slumps (i.e. 2000 and 2008). Any correlation in the long term? The chain of thought as follows: mortgage delinquencies decrease as people have money and are employed. When people have money they also buy stocks. (value and equity investing is a very dismal business...looking for bad news when the news is good...oi vey!)

Benjamin Cole said...

Housing has legs too. Housing starts are well below long-term norms. We could have a 20-year-long development boom along the West Coast...but you would have to seriously soften up on property zoning.

Not sure about freight volumes though---

Al said...

Wow amazing. Looks very healthy and strong

John said...

Mr. Grannis:
Why do you use semi-log scale for the first two charts? The data range (0.5-3 million) is within an order of magnitude. Thanks.

Long Cast Advisers said...

found your blog through a link on seeking alpha. thank you for sharing. re: chart 6 i have a very different sense of the household burden using consumer credit / personal income. It shows a very different conclusion, that we are way outside historical norms and that the consumer remains over levered. Here's the graph from FRED data ...

... don't know off the top of my head why the dramatic difference I'd think the trends would at least be similar maybe in the definition of household vs consumer or personal income vs disposable income but it struck me as incongruous with the data I look at.

Johnny Bee Dawg said...

S&P Low Vol index continues to shine.
Up 4% YTD (total return) while regular S&P is barely positive as I write this.

Long Treasury bond up over 11% YTD
REITs and Utilities holding up well.

Apple may get buyable again!!

Orange Man Bad

steve said...

Fed data does not appear to be as a % of disposable income but rather on an absolute basis.

Benjamin Cole said...

Oooooof. COVID-19.

Unfortunately, mainstream media now makes a practice of sensationalizing everything, and Americans have become increasingly susceptible to fear-mongering, on all fronts.

The economy could take a hit in 2020, particularly anything related to travel, hospitality, or retail.

Johnny Bee Dawg said...

Lets talk fear, and see if its "mongering":

So the only lab in China that has technology to house the coronavirus "safely" is in the Wuhan province, on the banks of the mighty Yangtze.
And the workers there routinely sell lab animals to the local meat market after they have been experimented on and die.
No word on how this deadly virus could have escaped from the lab, and spread to humans.

Harvard epidemiology professor Marc Lipsitch says that the coronavirus will not be containable and that 40%-70% of people worldwide will be infected.

The professor clarifies that this doesn’t mean all of those victims will become seriously ill and that “many will have mild disease, or may be asymptomatic.”

In an article entitled "You’re Likely to Get the Coronavirus", the Atlantic explains how the coronavirus is particularly dangerous because it may cause cause no symptoms at all in many carriers of the infection.

Believe it or not, the coronavirus strain that’s currently spreading throughout China and abroad is a patented virus that’s owned by an entity called The Pirbright Institute, which is partially funded by the Bill and Melinda Gates Foundation. Bill Gates, the Depopulation Advocate and NeverTrumper.

Everybody relax.

randy said...

Gosh JBD, which is it? The Chinese and their plots for germ warfare or the Deep State never Trumpers? The left feeds on manic manufactured righteousness and virtue signaling and the right feeds on paranoia and fear. We've collectively forgotten how bad things can get - the Spanish Flu that killed maybe 100 million; race riots; vietnam riots; 2500 bombings in about 18 months in the 1970s; the Cuban missle crisis - not to mention 2 world wars. To me it seems Benjamin is right - the mainstream and social media click bait depends on fear mongering. Most younger than 60 have no memories and are no longer taught what crises we have survived. Hence Bernie and Trump as candidates - because we are all basically stupid now.

Maybe Coronavirus will really be a catastrophe - but if not, there's always next weeks story.

I enjoy your insights a lot - and I think I will take your advice to relax.

Scott Grannis said...

Re Long Cast Survivors: the difference between the two charts highlights why it is so important to avoid comparing a stock (e.g., the outstanding amount of credit) to a flow (eg disposable income). Doing that results in a meaningless conclusion. My chart correctly compares a flow (monthly payments) to a flow (disposable income).

Adam said...

Just waiting for your favour panic chart, ie. VIX/10y

Scott Grannis said...

John, re why I use a semi-log scale for the first two charts. The data range appears to be relatively small, but in actuality the changes in the level of housing starts is large in percentage terms (e.g., the change in starts from 0.5 million to 2 million is an increase of 500%!). A semi-log scale makes it easier to appreciate the magnitude of the changes.

Johnny Bee Dawg said...

80,000 people died in the US last year from the flu.

Long Cast Advisers said...

comparing balance sheet ("stock" or point in time) to cash flow or income statements items (flows) is standard trade in business and industry analysis and used alongside other analysis helps tell a bigger picture so it's not useless to consider other leverage factors when assessing total burden.

still i didn't come here as a housing bear just curious about that graph and why it would contradict the one I was more familiar with. one is an outstanding debt ratio the other a monthly pmt indicator. so ty.

>> "The limitations of current sources of data make the calculation of the ratio especially difficult. The ideal data set for such a calculation would have the required payments on every loan held by every household in the United States. Such a data set is not available, and thus the calculated series is only an approximation of the debt service ratio faced by households ..."

Johnny Bee Dawg said...

2900 area on S&P has "support" because the the October unfilled gap, and the semi-log moving averages.
Worth a shot at selling some TLT at that point, and leaning into broad stock indexes.

Markets bottom once we fully understand "the problem". Nothing has to be fixed for markets to bottom. On the contrary....Once the problem is understood, markets know its just a matter of time until the problem gets solved in a free society. Markets also bottom at the culmination of fear spikes, like Scott ably shows in these charts. So we are nearing a good inflection opportunity.

If this was just virus, Id be in already. But I think the market has been too complacent about the DEM candidates.
Bernie is the worst for America, of course.
The VIX/10 year yield is showing extra fear because of Bernie.
Imagine a populace who rejects poor peoples' record prosperity....for a Communist. That is shocking. The REAL fear is that the election could be compromised by crooked dealings, and temporary corona fears. Trump could win more easily without the virus complication.

If Bernie wins Super Tuesday, markets should react badly (a puke out) and take it seriously. Id buy on that "crash" and spike in fear for this cycle. If markets DONT take Bernie seriously, then I think it may be time to raise more cash. We will just have to see.

FYI....the virus sure did help China to end their protests, and to hurt Trump's chances of election. Every event has winners and losers. Communist dictators have never really minded mass deaths.

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