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Must-know trends: June 2014's building starts, sales, and permits

Must-know trends: June 2014's building starts, sales, and permits (Part 1 of 4)

Housing starts crater in June, affecting builders like KB Home

Housing starts are a critical predictor of future homebuilder 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 homebuilders, 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 startsEnlarge Graph

Housing starts cover the number of privately owned housing units that started in a given period. For multi-family units, each individual unit is considered a housing start. If there’s a lot of multi-family construction happening, then housing starts can become elevated, and investors must take care not to read too much into the builders of single-family homes.

Both single-family and multi-family starts increase

Housing starts fell from a downward revised 985,000 to 893,000. Multi-family starts were 305,000 in June—a decrease from the 344,000 pace in May. Single-family starts decreased from 632,000 to 575,000. Single-family starts have been much more stable than multi-family starts and have shown a steady rise.

Starts fall in the south

Starts rose in the northeast (from 92,000 to 105,000), the midwest (from 171,000 to 219,000), and the west (from 189,000 to 194,000). Starts collapsed in the south (from 533,000 to 375,000).

Implications for homebuilders

Homebuilder earnings season is over. The builders generally increased their top lines by raising prices, not by selling more units. If anything, a typical report would be a 12% increase in ASPs (average selling prices) and a 10% drop in deliveries.

Most builders—like Lennar (LEN), Pulte (PHM), D.R. Horton (DHI), and KB Home (KBH)—noted traffic was beginning to decline as buyers experienced sticker shock, both with housing prices and interest rates

Generally, the industry is waiting for the return of the first-time homebuyer. As the economy improves, this buyer represents a tremendous amount of pent-up demand that will drive homebuilder earnings for years to come.

Investors who want to invest in the sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

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