dshort.com
Housing Starts and Permits:
Euphoria May Be Premature
By Lance Roberts of Streettalk Live
October 17, 2012
Advisor Perspectives welcomes guest contributions. The views presented
here do not necessarily represent those of Advisor Perspectives.
____________________________________
_"The Most Bullish Development On The Entire Globe"_
(http://www.businessinsider.com/housing-is-the-most-bullish-trend-in-the-global-economy-2012-10)
- this was the always bullish Joe Weisenthal's headline this morning
following the release of the New Home Starts and Building Permits data this
morning. "It's hard to think of a bigger bullish trend right now, at least in
the short term," he stated.
That is indeed a very bullish statement about a sector of the economy that
is still running at very recessionary levels of activity. However, the
reports for September showed that on a seasonally adjusted basis new home
starts surged to 872,000, a 15% gain for the month, and a rise of 34.8% from a
year-ago. While it was once again the multifamily component which jumped
25.1%, the single-family component also improved, gaining 11.0%. Housing
permits also jumped 11.6% in September to an annualized pace of 894,000 which
was up 45.1% from a year-ago. This is good news, however, it is not quite
worth the euphoria that Mr. Weisenthal attributes to the report. However, I
have never known Mr. Weisenthal to be anything BUT exceptionally bullish. An
in the famous words of Jerry Seinfeld: "There is nothing wrong with that."
However, let's analyze the data beyond the headline to determine what is
really occurring.
As we have discussed so many times in the past, it is not the monthly data
point that matters but rather the trend of the data that is much more
important. The chart below shows new housing starts and permits. Clearly,
while
the data has ticked up in recent months, we are still a very long way from
calling it a recovery.
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Housing-Starts-101712.PNG)
_Click for a larger image_
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Housing-Starts-101712.PNG)
Secondly, the seasonal adjustments, as we saw with the _retail sales,_
(http://www.streettalklive.com/daily-x-change/1263-retail-sales-not-as-strong-as-
headlines-suggest.html) were exceptionally large in September. The series
is highly volatile to begin with so seasonal adjustments are used to
smooth the data. However, in the most recent month, the seasonal adjustment was
larger than normal and the entire trend has been diverging from historical
norms. The chart below shows the Seasonal versus Non-Seasonal Housing Starts
data going back to the peak of 2006. Just for the record the number of new
home starts in September, on a non-seasonally adjusted basis, was 79,000
up from 70,100 in August.
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Housing-starts-SA-NSA-101712.PNG)
_Click for a larger image_
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Housing-starts-SA-NSA-101712.PNG)
Housing starts tend to peak around June of each year and then trail lower
through the end of the year. More importantly, the seasonal adjustment in
September is normally lower than, or roughly equal to, the June adjustment.
That is until the last two years of the "housing recovery" where the
seasonal adjustments have been pushing the data higher. The seasonal
adjustment
for September, on a percentage change basis from August, was the largest on
record at 15.28% going back to 1959.
While it should be expected that by now we should be seeing some pickup in
housing - the majority of the activity is still occurring in the lower end
of the price spectrum. The problem going forward remains the economy.
The underlying fundamentals, especially in the 25-35 cohorts, are simply
not in place to create a sustainable upturn in housing. This is particularly
the case as consumer liquidity remains severely impaired by high
unemployment, stagnant wages and negative real income growth. Furthermore,
there is a
disconnect between new home starts and real-estate related loan activity
at commercial banks. The change in lending from August to September was up a
mere 0.2% and is only up 1.6% from a year ago.
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Home-RealEstateLoans-101712.PNG)
_Click for a larger image_
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Home-RealEstateLoans-101712.PNG)
Of course, that data represents all real-estate related lending and covers
both existing and new homes, however, the level of activity is still well
shy of something that would support such a rampant increase in the latest
month's data. Furthermore, when it comes to new home sales in particular,
there are many exogenous related factors that can skew the data in the short
term such as requirements on builders to maintain lines of credit, unusual
weather patterns as we saw at the end of 2011, shifts in lending
requirements, over anticipation of demand by builders which leads to excessive
spec-home building and contractual requirements on developers.
One of the areas that we would expect to have seen increase sharply at this
point would be residential construction workers. The mainstream media has
been touting the housing recovery for well over a year now yet residential
construction has remained stagnant.
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Home-Residential-Construction-101712.PNG)
_Click for a larger image_
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-Home-Residential-Construction-101712.PNG)
The disconnect between the housing data and the real demand for
construction workers is important and suggests that the demand for new homes
has not
yet reached a level where builders are forced to take on more full time
labor. One of the reasons why home construction has historically been very
important to the economy is the impact of the multiplier effect from
construction. Without employment turning up the "multiplier effect" remains
muted.
This is why the impact from housing on GDP is questionable. While the
upturn in housing does have some effect on the overall economy the impact has
been greatly reduced in recent years as the economy has shifted into the
global marketplace. Today, total private construction spending makes up less
than 2% of GDP where it was greater than 5% at the 2006 peak.
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-GDP-TotalPrivateConstruction-101712.PNG)
_Click for a larger image_
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-GDP-TotalPrivateConstruction-101712.PNG)
Since the turn of the century globalization has changed the drivers of the
domestic economy. While the economy was once driven by domestic
manufacturing and housing - today it is driven by expenditures on equipment
and
software and exports to our trading partners. The drive for higher profits
while
delivering cheaper products to consumers required companies to invest
heavily into productivity, outsource manufacturing and aggressively cost cut
to
maintain profitability. At the same time the globalization of the market
place made exportation of products and services a much greater percentage of
overall domestic corporate profits. Expenditures on equipment and software
currently makes up more than 8% of GDP as exports comprise more than 13% of
the economy.
The recession in Europe and slowdown in China, as witnessed by reports from
many international companies including Caterpillar, Norfolk Southern,
FedEx, UPS, Intel and IBM, is impacting the domestic economy. The slowdown in
exports is likely to be a more substantial headwind to economic growth than
the roughly 2% contribution from residential investment can offset.
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-GDP-Not-Your-Fathers-Economy-101712.PNG)
_Click for a larger image_
(http://advisorperspectives.com/dshort/charts/index.html?guest/2012/LR-GDP-Not-Your-Fathers-Economy-101712.PNG)
The bottom line here is that the recent months reports are certainly good,
and welcome, news in an otherwise fairly weak and stagnant economy.
However, let's not get the "cart in front of the horse" in assuming that the
economy is about to come roaring back to life. The protracted stagnation in the
housing market which remains at recessionary levels well into its fourth
year of activity gives little to be excited about. The current activity falls
well within the bounds of normal volatility, and we will likely see
revisions lower in the coming months ahead, as seasonal variations began to
negatively impact the data towards year end.
The important point, however, is that while the housing data on the surface
is showing improvement the more important components to sustainability
from employment to lending are not. As stated above - the impact on the
economy from the recessionary drag in Europe and slowdown in Emerging Markets
is
likely to have a far greater impact on the domestic economy today than
housing can offset.
--
Centroids: The Center of the Radical Centrist Community
<[email protected]>
Google Group: http://groups.google.com/group/RadicalCentrism
Radical Centrism website and blog: http://RadicalCentrism.org
