Residential Construction: The Foundation Has Been Poured

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Includes: DHI, HOV, KBH, LEN, PHM, RYL, TOL, XHB
by: Rubicon Associates

This morning the Census Bureau and the U.S. Department of Housing and Urban Development released May's residential construction figures - much to the disappointment of the market and investors in real estate and homebuilders. Excerpts from the release (emphasis mine) are:

BUILDING PERMITS: Privately-owned housing units authorized by building permits in May were at a seasonally adjusted annual rate of 780,000. This is 7.9% above the revised April rate of 723,000 (revised from 715k) and is 25% above the May 2011 estimate of 624,000. Single-family authorizations in May were at a rate of 494,000; this is 4% above the revised April figure of 475,000.

HOUSING STARTS: Privately-owned housing starts in May were at a seasonally adjusted annual rate of 708,000. This is 4.8% below the revised April estimate of 744,000 (revised from 717k), but is 28.5% above the May 2011 rate of 551,000. Single-family housing starts in May were at a rate of 516,000; this is 3.2% above the revised April figure of 500,000.

HOUSING COMPLETIONS: Privately-owned housing completions in May were at a seasonally adjusted annual rate of 598,000. This is 10.3% below the revised April estimate of 667,000 (revised from 651k), but is 10.1% above the May 2011 rate of 543,000. Single-family housing completions in May were at a rate of 458,000; this is 6.3% below the revised April rate of 489,000. The May rate for units in buildings with five units or more was 130,000.

Permits came in ahead of estimates of 723k and a 2.6% increase. While this is certainly good news, the flow through to starts came in below expectations (717k and +2.6%). The breakdown of the flow through is:

Click to enlarge

What troubles me about this data is the permit abandonment and the reclassification from multifamily to single-family. Abandonment means that something has fallen apart in the process, which is not a good sign (there have been signs of reduced lending and tighter credit by banks).

While today's data points are somewhat disappointing, the revision to prior month data in a positive sense helps offset the negative effect of the release.

In reaction to the data we are seeing the following reaction in the equity markets:

  • SPDR S&P Homebuilders (NYSEARCA:XHB): $20.93 +1.45%
  • PulteGroup (NYSE:PHM): $9.61 +3.00%
  • Lennar (NYSE:LEN): $27.32 +1.30%
  • Toll Brothers (NYSE:TOL): $27.30 +1.78%
  • D.R. Horton, Inc. (NYSE:DHI): $16.84 +2.0%
  • KB Home (NYSE:KBH): $8.66 +4.09%
  • Hovanian (NYSE:HOV): $2.74 +4.18%
  • Ryland Group (NYSE:RYL): $23.70 +2.33%

The market obviously agrees that the data support a continued pick up in housing and real estate. Investors in the real-estate and home-builder space must continue to be ever vigilant and look for ideas to reposition their portfolios within the sector as these companies have had a good run this year.

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

Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.