Residential building permits, starts and completions data came in higher than expected. Although this may be good news for residential construction companies and suppliers (CTX, DHI, GFA, LEN, NVR, PHM and TOL), we believe it is a negative for the overall residential market.
Data released today indicates potential inventory build up, in our opinion. One of the data points that we look at is the ratio of houses for sale to houses sold. In April, this figure stood at 10.1, significantly below January's 12.4 and a 4-month consecutive decline.
However, April's figure remains significantly above the historical average of 6.1 (from January 1963 though April 2009). In fact, this ratio averaged around 8.1 during prior recessions (the supply-demand relationship is presented in the chart below). In addition, we believe such a ratio for May will reverse the declining trend, which is not good news. For these reasons, we do not yet believe the housing market has hit a bottom and view today's economic data as potentially negative, as it may signal increase in inventory.
Lastly, don't forget that those builders are looking to complete their projects before the Obama first-time-buyers 'buyout' ends in Nov.