The iShares US Home Construction ETF (NYSEARCA:ITB) has churned through several ups and downs over the past month, but last week (the week of July 14th) provided what was likely a particularly important skirmish of tug-of-war between bullish and bearish indicators.
iShares US Home Construction bounces around housing-related economic releases
ITB currently trades marginally lower from where it traded a month ago with the release of the June National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index (HMI). At that time, I concluded that sentiment had shifted to generate stabilization in the HMI. The bullish surge in the July HMI seems to have validated that assessment. With a print of 53, the HMI jumped from June's reading by 4 points. Crossing the 50 threshold means that the majority of builders are now overall optimistic on the housing market.
As usual, I prefer to review HMI by its components. Note closely that the single-family detached present lagged the upswing in the future-looking components. The last major discount among components was April, 2013 when both single-family detached and the traffic of prospective buyers lagged the upswing in single-family detached for the next six months. These divergences are very rare in the HMI, so I am watching them closely to determine whether there is finally an extra signal in the components separate from the aggregate HMI.
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Source for data: NAHB/Wells Fargo Housing Market Index (HMI)
The subsequent release of housing starts partially contradicted the improving and bullish sentiment from home builders. Forecast "consensus" was for 1.9% month-over-month growth and instead actuals came in at a plunge of 9.3%. However, the entire decrease came from the South: the region fell an amazing 29.6% while all other regions increased month-over-month. Clearly, the fortunes and prospects of most of the home builders answering the HMI are NOT relying on the South.
The strangest part of the South's plunge is that over half of the decline came from multi-family units. Multi-family has been the strongest part of the housing recovery (now back to former boom levels), so the South becomes a region for a lot of scrutiny. The 375,000 units started on an annualized basis was the lowest rate since 354,000 housing starts in March, 2012. The 278,000 single-family starts was the lowest for the South since 275,00 in August, 2012. Yet, the South was also the ONLY region to sport month-over-month growth in May.
I hope to hear more about the South's market dynamics in the next earnings calls from home builders. Last month, Kb Home (NYSE:KBH) reported good results from Orlando, Florida. It is highly possible that the South's quirky results are an aberration that are not representative of the overall health of the housing market and/or the volatility will smooth out in due time.
It is also important to note that on a year-over-year basis, starts INCREASED 7.5%, led by a tremendous surge in multi-family with 5 or more units which jumped an amazing 39.5% year-over-year. This multi-family surge makes the South's plunge all the more perplexing and dramatic. Single-family declined year-over-year 4.3% with the West joining the South in the decline (-5.1% and -14.5% respectively). The decline in the West could signal more pricing pressures as inventory is tightly constrained in many Western metros (with Phoenix representing a glaring exception with active listings up 69% year-over-year). The Midwest soared 30.3%. The Northeast was up a modest 2.0% year-over-year.
One last angle to examine is the historical May to June pattern. When compared to previous years, 2014′s drop from May to June is less alarming even when including the numbers from the South. In 2013, total starts fell May to June by 7.5%. Again, the South led the way with an 11.2% drop. The West also declined sharply by 7.2%. In 2012, the drop from May to June was 3.7%. And, you guessed it, the South led the way as the only region to decline with an 8.0% drop. Finally, in 2011, the year before the recovery really took flight, housing starts increased 2.5% from May to June…and mainly because the South led the way with a 5.5% increase. In other words, the May to June change in housing starts seems surprisingly dependent on the results from the South. This is hardly something to use to characterize the entire housing market.
Here is a chart tell the story for single-family starts changing from May to June since 2011.
The May to June period has been extremely volatile for 1-Unit housing starts
So, overall and net-net, there are enough caveats to the housing start numbers for me to stand pat on my overall bullish outlook on the housing recovery. However, the spring selling season can be characterized as an overall disappointment given the high expectations going into the season from builders like D.R. Horton (NYSE:DHI). Granted, builders like Meritage Homes (NYSE:MTH) were much more subdued. It is hard to imagine a resurgence this summer. This year then is likely to continue the bumping along that began a year ago when mortgage rates soared. I will be writing a future piece describing how demographic trends for 2015 represent the next key fulcrum point for housing.
Given the need to subdue expectations for the rest of the year, how then to explain the surge in HMI? My assessment of a stabilization, rather tan a fresh uptrend, is consistent with a year that does well but not great. The NAHB was of little help in explaining the surge in the press release. The organization heralded the return to 50+ territory as "…an important sign that [the housing market] is strengthening as pent-up demand brings more buyers into the marketplace." Yet, when the HMI last rose above 50 in January, it did not bring follow-through momentum. The NAHB also gave credit to an improving job market "going hand-in-hand" with improved sentiment. Yet, the job market has steadily improved for many months now, and it has not stopped home builders from getting discouraged in the past. As I suggested above, I strongly suspect the explanation lies in the mix of home builders and the representation of local markets. Since those more detailed numbers are unavailable, we are left to continue getting buffeted by a healthy mix of bullish and bearish indicators with select, individual home builders continuing their strong, yet largely ignored, financial performances.
Be careful out there!
Disclosure: The author is long ITB, KBH, DHI. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Long ITB through call options