Is Latest Bad Housing News Good News?

The news on the US housing front continues to be bad from the standpoint of overall residential investment.  However, this may be a case where bad news is actually good news.

With far too much inventory still on the market, the last thing we need is more new homes adding to the glut. This is just a simple collerlary to the first law of holes:  When you find yourself in one, stop digging.  In this case it is literal, as in stop digging new foundations.  Still, this does mean that unemployment will continue to rise in the construction industry.  In the official statistics the effect will be muted, since so many construction workers are independent contracters (1099) rather than employees (W-2).

In October, housing starts fell to a seasonally adjusted annual rate of 791,000, down 4.8% from September (828,000, revised up from 817,000) and down 38.0% from a year ago.  By region it was a mixed picture, though, with starts plunging 31.0% in the Northeast, and down 13.7% in the Midwest on a monthly basis.  Starts actually rose 7.5% in the West and were up 1.5% in the South.

Last month, however, the Northeast was unusually strong, so some of the decline there looks like payback for that.  On a year-over-year basis, the Northeast is also the weakest, down 51.6%, followed by the West (-39.1%), the Midwest (-38.2%) while the South was realatively the strongest, if you can call down 33.9% strong.

The extreme weakness in the Northeast this month appears to be tied to the multifamily market, as single family starts were actually unchanged.  I suspect the weakness on Wall Street is starting to affect the condo market in New York City and Boston.

The best indicator of future housing starts is building permits, and they were even softer than the data for starts.  In October, they fell to a seasonally adjusted annual rate of 708,000, down 12.0% for the month (from 805,000, revised up from 786,000 origionally reported) and are down 40.1% on a year-over-year basis.

All regions of the country were weak, but the Northeast was by far in the worst shape, falling 23.7%, followed by the South (-13.5%) and the West (-8.8%).  The Midwest was relatively strong on a monthly basis, down just 3.7%.  On a year-over-year basis, the Northeast is once again the weakest, down 51.0%, followed by the West (-48.0%).  On a relative basis, the South (-36.3%) and the Midwest (-39.5%) were the least weak (can’t really call down 36.3% “strongest”).

Avoid the homebuilders — they serve NO economic function at this time, nor are they likely to do so for the forseeable future.  I am frankly amazed that we have not seen more of the big publicly traded homebuilders like D.R. Horton, Inc. (DHI), Standard Pacific Corp. (SPF) or Beazer Homes USA, Inc. (BZH) file for Chapter 11 yet.  I would not consider buying any of them until they are trading for pocket change prices (well under $1 per share).

Stick with large non-cyclical firms with super solid balance sheets instead, like Pfizer Inc. (PFE) or McDonald’s Corporation (MCD).  Nobody needs to have stocks like the homebuilders in their portfolios.  If you want cyclical exposure, there are much better choices in some industrial names like Joy Global Inc. (JOYG) or Honeywell International Inc. (HON).

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