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Paul Hanly
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Paul Hanly, B.Comm, Ll.B., ACA, has 20 years in banking and finance. Paul has experience in major corporate workouts after 92 recession and commercial real estate bust in Australia.
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Thorts On Investing
  • US Housing in the New Normal 0 comments
    Aug 27, 2010 10:47 PM | about stocks: XHB, DHI, PHM, TOL, ITB, PKB, KBH
    Lets focus on new residential construction over the past 2 years to get a sense of what's happened at the end of the crash and technical recession.

    So many charts of housing starts show the period from say 2000 or 2004 with a huge fall to 2008 with the scale of the movements and the subtlety of the changes in the rate of change lost in the scale used in the chart that it is not helpful to a forward looking analysis.

    So while a chart of the housing starts from 1990 to 2010 gives a lot of context to the potential extremes of US housing, we need a chart that looks at housing in the "New Normal"

    My source data is Table Q1.  New Privately Owned Housing Units Started in the United States by Purpose and Design (Tab Q1, Column B from US Census Bureau in Excel).

    First, let's look at rolling 4 quarter totals for housing starts to get a sense of the smoothed trend in housing starts since the Q1 2008 (data included from Q2 2007).

    Four Quarter Total Housing Starts 2008 - 2010

    Looks like a bottom to me, even before the tax credit induced upturn, so even though we might expect a fall back to 400, that is probably the bottom. With 80% of the workforce fully employed, some people are just going to want to build a new house, eg a knock down and rebuild on the same block.

    But what about the quarterly level? What variations are being masked by this rolling 4 quarter total?

    Quarterly house starts

    Q1 2009 Looks like a bottom to me, but whether the direction and rate of rise in the uptick can be sustained for the couple of quarters after the tax credit finishes is another matter.

    So what is the housing starts market doing quarter to quarter? It is extremely volatile by quarter, creating lots of opportunity for excitement and argument about what is happening.

    Housing Starts Qtly Change

    So what is the overall takeout for investors looking forward?

    Go back to the top chart. Residential starts has probably bottomed. While unemployment is high and may even increase again, employment and hours worked have been stable to increasing and GDP has been growing, even after deduction of stimulus.

    A homebuilder with a comparatively strong balance sheet could be a worthwhile addition to a portfolio if you are confident their assets are not overstated.

    Which US Homebuilder do you think would be the best one to add to a portfolio taking into account both upside and ability to ride out the fluctuations we are seeing on a quarterly basis?


    Disclosure: 30% in stock market through emerging, commodity, Australian and international funds, 70% mixed bonds (plus Australian real estate exposure)
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