PETALUMA, CA
In recent weeks investors have received some positive signs for the housing market in the form of new home sales, housing starts and existing home sales for the month of May, but as most people know one month does not a trend make .
Given the drag that the housing has been on the domestic economy due in part to the ripple effect it has on a number of industries -- construction, furniture, appliances and retail-- many have been watching and waiting if not praying for a turn in the U.S. housing market.
The two questions to be asked are 1) whether or not the modestly positive May housing data is sustainable given the slowing domestic economy and 2) are the moves in the housing stocks -- Toll Brothers (TOL), D.R. Horton (DHI), KB Home (KBH), M.D.C. Holdings (MDC) and Lennar (LEN) -- vulnerable to a pullback?
All of the May housing indicators were better than expected, but while that data marks an improvement compared to readings over the last several months the reality is it was not as robust as headlines would have one think. Consider that existing home sales in May rose to a seasonally adjusted annual rate of 369,000 homes, well below the 700,000 homes that economists consider healthy.
While apartment construction fell in May, starts for single family homes rose to 516,000 units in the month up 3% from April to the best reading yet in 2012. That combination resulted in total housing starts of 708,000 on an adjusted annual rate basis May. Not only did that fall month over month vs. April, but it fell short of the median forecast of 77 economists surveyed by Bloomberg News that called for 722,000 in housing starts for May. It seems that better housing data may not have been as great as first thought.
As we enter the second half of the year and kick off 3Q 2012, we have to recognize that recent housing data is a rear view mirror look at things. A more real time look at the economy paints a much weaker picture. Over the weekend, data from Markit and HSBC point to continued slowing in both China and the Eurozone.
On Monday, the ISM manufacturing index for June slipped below 50 for the first time since July 2009. Breaking down the ISM index, the orders component fell sharply vs. May and reinforces the notion that the domestic economy is slowing. That view is reinforced by the weaker than expected readings for the Chicago Purchasing Managers’ Index (PMI), Richmond Fed Manufacturing Index, and the Philly Fed Manufacturing Index that we received last week. I’d note the latter two contracted in June. Not good.
Weekly jobless claims over the last several weeks have been back above the 380,000 level and that has many concerned about this Friday’s June Employment Report from the Bureau of Labor Statistics (BLS). Many think that low mortgage rates spur the housing market, but the reality is that the housing market is influenced far more by the job market.
Even so, while some may point to the weekly mortgage applications volume as reported by the Mortgage Bankers Association as reasons to be hopeful on housing, the underlying data speaks otherwise. First, weekly mortgage applications fell more than 7% last week, but more to the point more than 80% of mortgage applications have been for refinancing activity as existing homeowners look to take advantage of extremely low mortgage rates.
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As mentioned above, weekly jobless claims are back at lofty levels and job creation has slowed considerably steam in recent months. The risk is that housing stocks are now “priced to perfection” with lofty expectations vs. may what may actually happen in the coming weeks and months.
In the last three months, at best only 246,000 nonfarm jobs were created in 2Q 2012 (using the June consensus forecast of 100,000 nonfarm jobs) compared to 677,000 nonfarm jobs created during the first three months of 2012 according to BLS data. Keep in mind that forecasters have been far more optimistic about job growth in recent months and that expectations have been far higher than the number of jobs actually created.
Worse yet, the labor force has continued to shrink over the last several months with more than 2.3 citizen exiting the labor force over the last 12 months. Mortgage rates may be very low, but with job creation waning, we have to wonder who is buying new homes these days and if it can continue to improve month over month.
Factor in a number of housing stocks encroaching on over bought territory on a technical basis, such as Toll Brothers, D.R. Horton, and PulteGroup, and prudent investors should be taking profits in the housing stocks. Based on the number of earnings pre-announcements, 2Q 2012 earnings season is likely to be less than stellar and that could offer an opportunity to revisit the better positioned housing stocks.
