Housing starts were reported today to be 9.3% above October's adjusted figures and 24.3% higher than November 2010 levels. Markets subsequently rejoiced sending the S&P 500 (SPY) up almost 3%.
I propose this rally is to be 'faded' by investors as it is simply driven by hope and desperate grasps for any good news. Here's why:
1. There are about 19 million empty homes in America. If supply and demand are ever to balance, the last thing the US real estate market needs is more properties on the market. True, there may be preference for new constructions over existing homes, but that does nothing to help the depression-level housing market in America. At the current rate, the Housing Starts data estimates 685,000 new starts being added annually. These new starts create construction jobs, but can anyone show this more than offsets the damage done to existing homeowners? The bottom line is this economy is not going to recover in any real way until national housing prices stop declining. And new supply is not going to help.
2. The housing starts growth is massively skewed to structures with 5 or more units. This means that private investors are building properties to rent-out, not to use as personal dwellings. In other words, housing starts aren't up because regular folks are buying single-family homes. Housing starts are up because rich folks with a lot of capital are looking to invest. While development and investment isn't necessarily bad, the fact that these starts are not driven by families signals that a) confidence has yet to return, and b) the knock-on economic effects (e.g. durable goods orders) will not be felt.
3. Real bull markets are steady and boring. Remember this: the market's best days usually occur around the same time as the market's worst days. This means that all big up days like today signal is that we are in an extremely volatile market. Real bull markets are built on boring, steady sub-1% daily returns. Today's rally was fueled by vapor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
