Housing starts have moved back to six-year highs. The 1.089 million units reading in December was just slightly below the reading of 1.092 million in October and the 1.098 million near-term peak we saw last July. Results were pretty good, given seasonality and weather. My guess is we could see new, multi-year highs in starts come the spring. There was particular strength in the Midwest and the West. Building permits, on the other hand, were a little weaker than expected, but again that might be dismissed as weather related.
Overall, housing starts are still about 30% below their 50-year average of 1.5 million units annually. Demographics may explain some of this. For example, we're experiencing lower family formation, slowing immigration and, of course, stagnant income growth. The latter has been acutely evident over the past seven years.
Yet despite all this there's still likely to be upward pressure on new home construction, simply to keep pace with demand and the need to replenish the nation's existing housing stock, much of which is falling into disrepair. The National Homebuilders Association recently predicted that new, single-family housing starts are expected to increase by double-digit percentages this year.
For this reason I continue to favor the homebuilders. The SPDR S&P Homebuilders ETF (XHB) has come back nicely from 2009 lows, but is still beneath the peak achieved in 2007 and therefore I think it has more to go.
When considering individual stocks, I will throw in a bit of near-term caution and simply say that there could be some volatility going forward as we have seen some negative earnings announcements and weaker forward guidance. There have been reports of pressure on margins.
One such stock that took it on the chin recently is KB Home (KBH). The stock has dropped 30% in the past two weeks on a series of negative earnings announcements and/or guidance revisions. Some analysts are recommending selling it, but I think that at the current price of around $12 per share and given the decline in price that the stock has already witnessed, a lot of the bad news is already priced in. I would be buying on weakness.
My bullish housing theme for 2015 also fits with my overall growth scenario. As I have been saying, I see growth staying strong or accelerating due to the recent acceleration in government spending -- the first such acceleration in four years. There's one caveat, and that is, Congress must raise the debt ceiling when it becomes necessary sometime in March or shortly thereafter. If not, then all bets are off. No, let me restate that: all short bets are on.
Getting back to my homebuilder selections, another choice that I like is Ryland (RYL). Valuations are quite attractive, but the thing I like most is that it's an oblique play on President Obama's "boost the middle class" theme that he talked about in his State of the Union address last night.
Ryland builds "starter homes," which are less expensive homes for people who are just starting out. That segment has been the weaker segment of the housing market over the past six years. But the president's new goals of getting some relief to the middle class via tax cuts and increased spending could end up turning Ryland into a nice winner.