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Analyzing May's housing starts, sales, prices, and permits

Part 2
Analyzing May's housing starts, sales, prices, and permits (Part 2 of 5)

Building permits, a critical indicator, dip below 1 million units

Building permits are a critical predictor of future homebuilder sales

Building permits and housing starts data are released jointly by the Census Bureau and the Department of Housing and Urban Development. Analysts use the information to anticipate the future production for homebuilders, the future demand for raw materials, and labor costs. This data will even affect the forecasts for home-related retailers, like Lowe’s (LOW) and Home Depot (HD). Building permits cover the number of privately owned housing units that were issued permits in a given period.

Building PermitsEnlarge Graph

Multi-family permits collapse while single-family permits increase

Permits for single-family residences rose to 619,000, while multi-family permits fell to 347,000. In April, single-family permits totaled 597,000 and multi-family permits totaled 436,000. Geographically, permits increased in the Northeast and the Midwest and fell in the South and West.

Implications for homebuilders

Homebuilders like Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL) have been reporting near-record gross margins, as they have been able to increase prices and costs have remained contained. That phenomenon is likely to be short-lived.

The builders are beginning to hit constraints with skilled labor and land. Skilled labor is becoming a big issue for them and wages are increasing rapidly for electricians and plumbers. Buyers are beginning to balk at prices, however, and it looks like the spring selling season is turning out to be disappointing. If it turns out that the builders have raised prices as far as they can, they will have to pump out volumes in order to report increasing revenues. That could actually mean good things for the builders in that it will provide the economic elixir the economy has been lacking, which should drive hiring and may even bring back the first-time homebuyer. This would begin the virtuous cycle in the economy and would be the catalyst to push GDP growth and employment to normal levels. Investors who want to invest in the entire homebuilding sector should look at the S&P SPDR Homebuilder ETF (XHB).

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