“Davidson” on Housing Starts

“Davidson” on Housing Starts

“Davidson” submits:

New Housing Starts were reported yesterday and this caused some investors to sell the market down on the news ignoring the very strong Durable Goods Orders data. New Housing Start data is volatile due to lumping in multi-family and single family data together. It is better to select only the New Single-Family Start data as this reflects the financial health of and the lending to individual consumers. By this measure New Single-Family Starts rose to 470,000 in Dec 2011 from Nov 2011’s 450,000 (adjusted from 447,000). Certainly this was not a negative. Best that can be said at the moment is that home building is roughly flat till enough data confirms a change in trend.

In the chart below the HAHB/Wells Fargo Housing Market Index reveals that home builder sentiment is up sharply and that it typically forecasts higher New Single-Family Starts by 3mos-6mos. My interpretation of the market reaction to this release is that it reflects too many traders trying to slice-dice data for precision which the data does not provide. With economic data it takes months for trends to form to reveal the true direction due to the choppiness inherent in the data itself. Identifying turns in an existing trend requires generally 4mos of data.

Nonetheless with the current report within the trend of the past 2yrs-3yrs, I expect that the HMI presages higher New Single-Family Starts, higher construction employment and a more rapid pace in the decline of mortgage delinquencies. The high unemployment level today is primarily the result of the weak single-family construction market. Once home building begins to gain momentum which it will, US GDP and employment should return to historical levels.

All the economic data continues to reflect economic recovery which has been in place since early 2009. Few seem to recognize this. Investors who do recognize the trends have a significant advantage to achieve investment returns in the years ahead over those who do not.

Capture446 624x270 Davidson on Housing Starts

About the Author

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a RealMoney.com contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.