Housing Starts Remain Bullish

Includes: CAA, KBH, LEN, PHM
by: John Gilluly

The St. Louis Federal Reserve Bank offers a valuable service for investors in its monthly data series called the Federal Reserve Economic Data, or FRED, for short. With a little research and a few mouse clicks, an investor can use this data to view ongoing construction activity in the U.S.

Here is a simple search that can be easily duplicated in a Google search bar: Housing Starts in California, FRED. You can also search by metropolitan area (again, directly from Google): Housing Starts in San Francisco, CA FRED.

The FRED research page allows you to edit the data in your graph. I like to pick five years for the time span and then add a diamond for each month in the display. In this way, you can quickly see the trend of monthly starts. I also choose 1-unit structures (single family residences) in order to screen-out the construction of apartment buildings.

You'll notice that private housing starts tend to rise for 5 to 6 months and then pull back for 6 to 7 months. In the rising months, homes are permitted and built; and in the back half of the year they're sold. First the starts, then the sales; then the starts again the following year. The trend is what you are looking for, not the monthly up and down movement of housing starts. FRED allows you to mine this data to find specific markets where growth is ramping.

Here is a table of select metropolitan areas (taken from approximate data in FRED charts).

1-unit Housing Structures, per Month
City 10/1/2011 6/30/2012
Austin, TX 400 800
San Antonio, TX 325 425
Houston, TX 1600 2800
Phoenix, AZ 500 1300
Las Vegas, NV 250 700
SF Bay Area, CA 120 342
Los Angeles, CA 250 490
San Jose, CA 80 120
Riverside, CA 200 460
Sacramento, CA 150 290
Denver, CO 250 590

As you can see, housing starts have risen steadily in these locations for the last eight months, and in some cases they have doubled, even tripled. And yet available housing inventories continue to fall. If these builders have got it right, there should be an explosive rise in their sales and backlog as we move into the back half of this year. The recent sentiment of homebuilders (HMI Index) shows they are very bullish on this prospect. Credit Suisse's monthly anecdotal on-the-ground interviews also support this view.

KB Home (NYSE:KBH), Pulte (NYSE:PHM), Standard Pacific (SPF) and Lennar (NYSE:LEN) are four builders opening new communities in these locations. I especially like KB Home because it isopening new communities in each of these locations, and they have a heavy concentration in California and Texas. KB Home is also beefing up its sales and land development teams in preparation for a busy year ahead.

Because of the four-month lag between permitting, building, and closing a new home purchase, sales of these homes will show up as revenues in the Q3 and Q4 earnings reports when this surge in starts turns into sales.

If this housing recovery is afoot for good, we may have some softening in housing starts during the months ahead as new home inventory is absorbed by buyers, but that will not affect the sales, backlog and earnings from these builders in the back half of this year. In fact, that pause may only be a consolidation in profits before another surge in housing starts begins next year.

There is a saying that "He who laughs last, laughs best of all." For the builders in these communities, it will be those with the land and the lots.

Disclosure: I am long KBH.

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