Falling Housing Starts Is A Good Thing

In this feature, we discuss Lennar (LEN), D.R. Horton (DHI), Standard Pacific (SPF), Ryland (RYL), Beazer (BZH), Home Depot (HD), Lowes (LOW) and  Bed Bath & Beyond (BBBY).

This morning, the data on September housing starts and permits came out.  Both were down sharply.  I consider this to be very good news, even though it contributes to the near-term weakness in the economy.

There is still a massive oversupply of housing, and the only realistic way of getting the inventories down is to stop building more new houses.  Remember the first rule of holes: when you find yourself in one, stop digging.  In this case, new foundations.  Turning first to building permits, a solid indicator of future housing activity (all data is seasonally adjustable annual rates):

• Total building permits 786,000, down 8.3% from August, down 38.4% from a year ago
• Total U.S. single family permits 532,000, down 3.8% from August, down 38.9% from a year ago
• Northeast the strongest, up 13.4% on the month but down 32.6% year over year
• West was weakest down 12.7% on the month, down 44.6% year over year
• South down 9.9% for the month, 37.3% year over year
• Midwest down 9.8% for the month 37.1% year over year

Turning to Starts:

• Total U.S. housing starts 817,000, down 6.3% for the month, 31.1% year over year.  Lowest rate since 1991
• Total U.S. single family starts 544,000 down 12.0% for the month, down 41.9% year over year.  Lowest rate since 1982
• Midwest was strong up 5.6% for the month, but down 21.8% year over year
• South was also up 0.5% on the month, but down 32.5% year over year
• Northeast weakest for the month, down 20.9%, but strongest year over year, down only 18.2%
• West down 16.8% for the month and down 40.4% year over year

I still contend that the level of housing starts is too high.  Adding to inventory when housing prices are coming down — but still far above historic levels relative to both incomes and rents — is exactly the wrong thing to be doing.  America does not suffer from a shortage of houses, and building new ones is simply diverting resources from other needs on a macro economic level.

I would continue to avoid all of the home building stocks, like Lennar, D.R. Horton, Standard Pacific, Ryland and Beazer.  Also avoid housing related retailers like Home Depot, Lowes and Bed Bath & Beyond.

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