Housing Construction Still Playing Catch-Up

 | Nov 26, 2013 | 6:30 PM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

phm

,

dhi

Building permits hit a five year high in October and that's good news for the economy. At 1.03 million units the report beat expectations handily. Most economists had been forecasting a number around 930 thousand so it's nice to see it come in above that.

The Commerce Department postponed release of the Housing Starts and Completion data until Dec. 18, citing data collection issues related to the government shutdown.

In many ways the building permits number is a more important number because it gives an indication of future starts and clearly the signs are looking more upbeat. This is particularly good news because things were starting to look a little shaky at the end of the second quarter and recently there have been heightened concerns inasmuch as mortgage applications remain weak with year-over-year data now on the decline.

Some may want to criticize the building permits number as being mainly due to apartment construction, but my response is, why does that matter? Surely we'd like to see more mortgage lending and home purchases, but people have to live somewhere and after five years of deeply sub-average construction it is important to see work on the nation's housing stock resume. The type of unit (single family homes, apartments) may not really matter as much now since we now seem to be moving away from a long-held public policy goal of universal home ownership. Witness the desire to "wind down" Fannie Mae and Freddie Mac, two structures that supported this goal.

However, even at the five-year high rate, the pace of building permits is still about 30% below where it should be. That's because building permits averaged 1.4 million units over the past 50 years even when the extremely depressed activity of the past four years is included.

In the 1970s, for example, when the U.S. population was only 200 million we averaged nearly 1.6 million units annually. Now the population is more than 100 million higher and we are averaging about 40%  fewer permits (and starts).

The nation needs to turn over its housing stock every so often. On average it's been about every 75 years that the housing stock is completely turned over (rebuilt), however, at the current pace it'll take about 125 years. That's too slow. It suggests that, unless we play catch-up very soon, we are going to be looking at large swaths of America where all you will see is blighted and dilapidated residential real estate. It won't be pretty and sadly, in some places it's already happening.

Despite the slow recovery I believe that housing construction will continue to rise albeit a lot will depend on income and employment where trends have been sluggish. Over the summer the market may have been spooked by the back-up in rates and fears that the Fed may taper its quantitative easing program: however, those fears are likely to subside soon. Indeed, we may already be witnessing that.

Some companies that are likely to benefit from the building recovery will be PulteGroup (PHM) and DR Horton (DHI), which are two of my favorites. Both are financial strong with low price-to-earnings ratios and pay decent dividends.

Columnist Conversations

Market posting decent day considering Ebola getting headlines again. Believe investors have learned not to pa...
I do not yet own any shares of Lumber Liquidators but I started shorting some LL Jan. 2016, $35 and $40 strike...
I'm treating today's sell-off in Valmont (VMI) as a gift. I've been adding shares and selling puts while the s...
Bristol-Myers is surging this morning following its pre-open Q3 earnings report. The stock is up just o...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.