The bad news: housing starts dropped significantly last month, falling 11.7% to an annual rate of 519,000. The good news: the decline occurred almost entirely in multi-family dwellings (which tend to be volatile), as construction on buildings with five or more units fell 47.5%. The other good news: single family housing starts have held steady for the past few months for the most part. And even more: building permits ticked up .5% for the month (with single-family permits rising for the first time in seven months).
Source: nahb.org
And homebuilders are feeling confident. The National Association of Home Builders (NAHB) Housing Market Index gained one point this month. Even better is that the future expectations component of the index has gained seven points within the last two months … and traffic of prospective home buyers is also picked up one point. And according to NAHB Chairman Bob Jones, “ … the quality of that traffic seems to be getting better – meaning that more people appear to be serious about buying in the near future.”
But there’s more to builders confidence than a good month or two for an index. What’s at play here is a downtrend in new home inventories. According to a recent report by the NAHB, “ … the single-family housing market in the U.S. currently finds itself in a significantly under built state.”
Here’s the thing: there was some serious overbuilding between 2003 and 2005 … but that phase ended in 2006. And since then, the decline in building has more than offset the overbuilding that occurred, according to the report.
(Click to enlarge)
Source: nahb.org
Just how underbuilt is the new home segment? Between 2008 and 2009 single-family production fell one million units short of what a healthy, functioning U.S. economy would need. Granted, the economy is not healthy right now, but once growth stabilizes this means that homebuilders will have some serious catching up to do. And beyond that, the NAHB report expects that this year the deficit of new homes will grow by an additional one million units.
But there are issues. In particular, access to credit for development. According to NAHB Chairman Bob Jones, “builders remain very concerned … about the lack of available financing for new-home construction at a time when inventories of completed new homes are quite thin; after all, you can’t sell what you can’t build.”
But still, you can’t sell what people aren’t going to buy. And home builders know it. Just ask D.R. Horton CEO Donald Tomnitz, “We expect another very challenging year for the homebuilding industry as the fundamental drivers of demand … are still very weak.” Still, pent-up demand and sparse inventory will be a boost to homebuilders … eventually.
In the meanwhile, homebuilder ETFs have faced some downward pressure: the iShares Dow Jones U.S. Home Construction Index Fund (ITB) ended last week down 4.5%. But the decline doesn’t represent a buying opportunity at this point. The bottom line: the home building space is going to see “the headwinds as tougher in 2011 than 2010,” according to Stifel Nicolaus & Co. So yes, someday homebuilders will have a lot of catching up to do, but that someday is not today.
Disclosure: No position
Disclosure: No position
