Housing Starts On Fire

 |  Includes: IYR
by: Calafia Beach Pundit

The residential construction sector is in full-blown recovery mode, with plenty of upside potential left.

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December housing starts jumped by 12% from November, exceeding all expectations (954K vs. 890K). Starts rose 37% last year, and they are up by a very impressive 77% in the past two years. Yet despite those impressive gains, starts are only now back up to the level that has marked the low of most of the recessions in the past 50 years.

That's how bad the collapse was, but it also points to lots of upside potential -- starts could easily double from here over the next few years. Residential construction will be a strong force sustaining overall economic growth for the foreseeable future.

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The ongoing recovery in the housing market also provides support for further gains in homebuilders' stocks, and in many other housing-related industries.

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Just in case you haven't been involved in trying to buy a house recently, it's a seller's market. The chart above shows the Radar Logic housing price index for 2011 (orange) and 2012 (white). Housing prices have strong seasonal tendencies, and typically decline from August through January. This year, however, they aren't declining. Prices in mid-November were 9% higher than in mid-November 2011. If my personal experience and that of close friends is any guide, there are bidding wars erupting and houses (especially the more affordable ones) are going for much more than their asking price.