Monthly Supply of New Home Sales ($XHB) was reported at 4.8mos. This continues to signal that housing demand remains strong. This level reflects stronger sales activity from last month’s level of 5.3mos which in this report was revised to 5.1mos. In the chart below the Monthly Supply of (new) Homes for Sale is plotted to show the correlation and the estimated Supply/Demand benchmark of ~6.2mos.(Residential Construction Employment vs. Monthly Supply (new) Homes for Sale) When the Monthly Supply falls below the benchmark, demand is strong enough to raise Residential Construction Employment levels and stimulate economic activity.
Since home buying mostly occurs through the use of borrowed funds, i.e. mortgages, backed by future earnings of the borrowers, new home construction has a large positive impact on economic activity when the cycle is positive and is similarly a large negative when in decline. Purchasing a new home is the same as spending 20yrs+ of earned income in less than 12mos. When many people do this the economic upsurge is dramatic and the impact on stocks equally so. It pays great dividends if investors understand how the housing cycle works and even more importantly if they have the tools to judge roughly when the cycle turns. In my opinion, the relationships shown in the charts below are very useful for gauging housing turns and turns in the equity markets.
We also have a historical level of the number of new single-family housing starts as a guide in the NAHB/Wells Fargo Housing Market Index(HMI) and New Single-Family Starts chart below. With the historical annual demand at the 1.2million starts level, the current 733,000 pace has some way to go before single-family housing demand is satisfied having only begun this uptrend in the Fall 2011.
Home Data
Expecting another 5yrs of rising single-family starts is not unreasonable at the current slow pace. Economic trends suggest that the economy, employment and equity markets can continue to rise for several years.
