But if I knew how to manage my portfolio safer and smarter than most hedge fund managers, I could realistically grow my wealth.
Housing starts are a critical predictor of future home builder sales
Housing starts are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate future production for home builders, future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s and Home Depot.
Housing starts cover the number of privately-owned housing units that were started in a given period. For multi-family units, each individual unit is considered to be a housing start. If there is a lot of multi-family construction happening, then housing starts can become elevated and care must be taken not to read too much into the builders of single-family homes.
Multi-family construction drove the increase
If you look closely at the numbers, it was all multi-family (5+ units) that drove the decrease. Multi-fam starts were 376,000 in April and decreased to 234,000 in April. Single-family starts actually fell from 623,000 in April to 610,000 in May. Single family starts have been much more stable than multi-family starts.
Starts increased in the Midwest, from 138,000 to 153,000, while all other regions fell.
Right now, there is a boom for rental properties as institutional investors chase the high single-digit rental yields that are available. This is making life more difficult for young adults who find themselves most vulnerable in the job market and are competing with the likes of Blackrock (BLK) and Blackstone (BX) for starter homes. That said, the number of single family starts was more or less in line with December and January numbers.
While one million starts sounds like a lot, relative to historical numbers it is quite low. From 1959 to 2002, housing starts averaged about 1.5 million units a year. In fact, housing starts typically bottomed at a million units during recessions. The fact that we are just cracking the one million mark shows just how deep this housing recession was.
Implications for home builders
Today’s report had a negligible impact on the performance of the Home Builder ETF (XHB), which was up modestly with the market. This was undoubtedly due to the fact that multi-family drove the increase and not single-family homes. Home builders compete with rentals for new household formations, and as the supply of rental properties increases, rents should fall relative to house prices. This will negatively affect new home pricing at the margin. Home builders, like Lennar (LEN), KB Homes (KBH), Toll Brothers (TOL), and NVR, will feel the impact of an increasing supply of rental properties. Offsetting this effect will be the current low inventory level.
Right now, the difference between renting and buying is about the widest it has ever been. When one considers the difference between median house prices and median rents, purchasing is cheaper. Rock-bottom interest rates and low prices for starter homes are making home ownership very affordable. As the job market improves for younger adults, those that are currently renting will contemplate home ownership. The Obama Administration has been pushing banks to lend more and to use FHA loans for first-time home buyers. FHA loans require only 3.5% down, so they are perfect for the first time home buyer. This move from renting to purchasing will help home builders in the long-term.
© 2013 Market Realist, Inc.