All You Need To Know About Housing Starts And Building Permits

| About: SPDR Homebuilders (XHB)

Summary

Building permits slightly below estimates.

Housing starts beat estimates, but decrease on a year-on-year basis.

Homebuilder stocks are not attractive for the next few months.

Today, we got updates from the US housing market. Housing starts increased 6.6% in April. Twice as much as expected (3.3%). Housing starts not only beat estimates, but also were able to recover after an 8.8% decline in March versus February.

Building permits increased 3.6% versus a 5.5% expected increase.

All of these numbers are based on month-on-month calculation. And to be honest, you should not look at them. The most important thing is year-on-year change. And if we look at year-on-year data, we get a different picture.

Building permits fell 2.11% and housing starts decreased 1.5%. Keep in mind that building permits are more important than housing starts since a building permit is the first thing that is needed in case someone wants to build a house. Furthermore, housing starts are less reliable since every single apartment is counted as a house.

So, let's start by looking at building permits in comparison to homebuilders (SPDR Homebuilders ETF (NYSEARCA:XHB)). Homebuilders have been a little weak after the February rally. Building permits however are spoiling the party. It is highly unlikely that homebuilders perform well during the next few months. I expect lower prices or at least returns that are well below market returns.

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Housing starts confirm the outlook given by building permits. Stocks will feel the pressure and perform badly in my opinion.

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My advice to you is, don't go outright long homebuilders. Especially not the companies that build houses like CalAtlantic (NYSE:CAA), PulteGroup (NYSE:PHM), KB Home (NYSE:KBH), etc. XHB components like Home Depot (NYSE:HD) might perform better since they have almost all exposure in the DIY business. However, don't bet on them since you won't generate any alpha on the long side.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.