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The latest Housing Starts Report has reinforced George Bailey's worst nightmare as a renter nation replaces the American dream. New data reported Thursday indicated a pickup in planned residential construction, but the type of construction indicates shovels will most likely be used to build up Mr. Potter's rental slums.

The annual pace of Housing Starts actually slipped in July to a pace of 746,000, down 1.1% from June's pace of 754,000. The rate of starts was also short of the economists' consensus for 750K. Why all the enthusiasm about the report then?

The SPDR S&P Homebuilders (XHB) surged 3.7% Thursday because Building Permits increased 6.8% in July to 812K. The data measuring privately-owned housing units authorized by building permits offers better insight into future construction activity. That news offered widespread support to housing industry shares Thursday.

Company & Ticker

Thursday's Gain

Beazer (BZH)

+7.4%

PulteGroup (PHM)

+7.0%

K.B. Home (KBH)

+5.8%

Hovnanian (HOV)

+5.6%

Toll Brothers (TOL)

+5.6%

D.R. Horton (DHI)

+4.4%

Lennar (LEN)

+3.6%

While overall permitting was up 6.8%, permits for new single family home construction only rose 4.5% in July. Instead, the gains were seen in planned buildings of 2 to 4 units (+19%) and structures of 5 or more units (+10.5%). Permitting was hot in the hotbeds of the Northeast and the West, but once again, in multiple unit structures. Permits for those were up 12.2% in the Northeast and 14% in the West.

Perhaps telling, the shares of companies which invest in mortgage-backed securities, like Annaly Capital Management (NLY) and American Capital Agency Corp. (AGNC), were each down sharply Thursday, dropping 1.5% and 1.6%, respectively. The shares of apartment REITs would make for better use of capital under current circumstances, in my view. Many of the stocks participating in that segment were higher Thursday, but not as significantly as the builders.

Company & Ticker

Thursday's Change

Equity Residential (EQR)

+0.3%

Avalonbay Communities (AVB)

+0.7%

Camden Property Trust (CPT)

+1.1%

Colonial Property Trust (CLP)

+0.4%

Associated Estates (AEC)

+0.3%

UDR (UDR)

-0.1%

Essex Property Trust (ESS)

-0.3%

I continue to warn against investment in the builder stocks (though I favor real estate investment), given economic deterioration and the cyclical nature of the industry. Vacancy rates are going down across major Metropolitan Statistical Areas (MSA), and rental rates are rising. Such is the state of the housing sector, in an environment in which major mortgage lenders like Bank of America (BAC) are reducing their mortgage loans outstanding and exercising caution in the issuance of new loans. Such is the environment in which adult children have moved back in with their parents, exhausting the resources of handcuffed pensioners after losing their own to risky bets. Somewhere out there Mr. Potter is smiling with his arms folded around his belly and George Bailey is waking up in a cold sweat.

Source: George Bailey's Worst Nightmare