Housing Data Stumble Before the Fed

 | Jun 18, 2013 | 6:00 PM EDT
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Economists certainly got ahead of themselves before today's housing numbers. Housing starts climbed to an annualized rate of 914,000 units in May. That was up from a revised 856,000 annual rate in April. 

But -- and this is a key "but" -- economists surveyed by Briefing.com had expected that starts would climb to a 950,000 annual rate in May.

Building permits also disappointed economists. Permits fell to an annualized rate of 974,000 in May, down from a revised 1,005,000 annual rate in April. Economists had been projecting an annual rate of 983,000 permits.

Stocks in the homebuilding sector peaked, by and large, around May 14, as investors started to worry that rising interest rates for mortgages would cut into demand for new houses. For example, since that date, Lennar (LEN) is down 12.3%, and PulteGroup (PHM) is off 12.9%. In the last month, the yield on 10-year Treasuries, often used as a benchmark for mortgage rates, has climbed to 2.18% from 1.95%, an increase of 11.8%. U.S. banks have reported drops in mortgage originations in their first-quarter earnings reports. U.S. Bancorp (USB), for example, reported a 3% drop in mortgage originations in the first quarter from the fourth quarter of 2012.

The disappointment in building permits is likely to keep the downward pressure on. Today's building permits turn into tomorrow's housing starts, so a drop in the annualized rate of permits raises worries that future starts will be lower than expected.

All this feeds right into tomorrow's announcement from the Federal Reserve's Open Market Committee. One reason that mortgage rates have been climbing -- and a reason for worry about housing starts rising -- has been the market's anticipation that the Fed would end its $85 billion a month in purchasing of Treasuries and mortgage-backed securities earlier than expected. Because the mortgage market and mortgage rates have been explicit targets in the Fed's buying, thoughts that the buying might taper off soon have been enough to send rates higher.

It's hard to tell what the Fed makes of all this. I doubt that the members of the Open Market Committee are thrilled that mortgage rates have climbed, given all the work the Fed put in to lower rates. And I'd assume that a potential slowdown in the housing market would be one worry on the Fed's long list of concerns about the economy.

What's of interest to me at the moment is that although pure housing stocks peaked on May 14 and have trended down pretty steadily since, and although the shares of housing-related companies such as Lowe's (LOW) and Home Depot (HD), after having held up longer, eventually joined the group's movement, Lumber Liquidators (LL), which peaked along with the sector on May 15 at $89.91, has pretty much recovered all of its lost ground as of today, June 18; it closed at $88.40.

That's a reflection of a stronger growth story at Lumber Liquidators, as sales from new stores added to a relatively small store base. I'm not sure that I'd buck the sector trend to buy Lumber Liquidators now. But it would be one of my first buying candidates in the next retreat of the housing sector.

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