Housing Starts Offer Tepid Catalyst For Homebuilders

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Includes: DHI, KBH, PHM, TOL, XHB
by: Markos Kaminis

The Department of Housing and Urban Development reported on Housing Starts for the month of August Wednesday. The report offered tepid news, versus the undeniably positive report on Existing Home Sales, also released Wednesday.

Housing Starts, which are registered at the start of construction, rose 2.3%, to a seasonally adjusted annualized run rate of 750K. However, economists surveyed by Bloomberg were looking for a pace of 768K on average. In the past, we have noted a leaning in starts toward multi-family projects. We have expressed concern that these projects more likely reflect a shift from the American dream of home ownership to a renter nation. In fact, we colorfully called it "George Bailey's Worst Nightmare."

This month, single family starts rose 5.5% to an annual rate of 535K. Starts for multi-family units of 5 or more actually decreased in August by 2.8%. That said, you can see the disturbing trend in the year-to-year changes. Single-family starts are up 26.8%, which is impressive in and of itself, but multi-family projects are higher by 36.8%. Regionally speaking, starts were strongest in the Midwest (+20.7%), and they were up 3.7% in the South. However, starts were lower by 12.6% in the Northeast and 4.3% in the West.

The overall news flow has the shares of major homebuilders sharply higher Wednesday.

Security & Ticker

Wednesday's Change

SPDR S&P Homebuilders (NYSEARCA:XHB)

+1.8%

PulteGroup (NYSE:PHM)

+4.3%

D.R. Horton (NYSE:DHI)

+3.9%

Toll Brothers (NYSE:TOL)

+3.3%

K.B. Home (NYSE:KBH)

+3.5%

Click to enlarge

Yet, given new question about the domestic economy, investors in these shares will soon be asking what have you done for me lately. Looking forward, investors can look to the Housing Permitting data within the same report for guidance. In that regard, privately owned housing units authorized by permits declined by 1.0% in August, to 803K. However, that was about in line with economists' views, and it was still 24.5% over last year's pace. Permits authorized for single-family projects inched up 0.2%, to 512K. Permitting for multi-family projects of 5 units or more were actually down by 3.0% monthly. Regionally speaking, there was again strength in the Midwest, with growth of 7.9%. The South marked an increase of 0.7%, while the Northeast fell by 7.7% and the West dropped by 6.4%.

As you can see, the news here was not quite as positive as the data found in the Existing Home Sales Report. Thus, some question remains about the state of new construction today. There are definitely housing shortages in the Sand States, and real estate is certainly stabilized on a pricing basis. Moving forward, though, we will have to contend with a sluggish if not contracting domestic economy, stubborn unemployment and geopolitical shock, in my view. The cyclical housing stocks must succumb to such pressures if events are realized or even if they just threaten, though the publicly traded builders continue to benefit at EPS reporting time from their market share gains against smaller competitors. So, you can expect volatility up or down on any given day.

Disclosure: I 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.