We got the news this morning that housing starts jumped to an eight-year high in April. The 20.2% increase pushed starts up to 1.14 million units on an annual basis, and while that is undoubtedly good news for the economy and for homebuilders, it's nowhere near a peak. Not yet, at least.
I've written about this several times in the past here on Real Money. For the past 40 years, the average annual rate of housing starts has been around 1.5 million units, and there were peaks that occurred in the early 1970s and in 2006 where starts climbed well above 2 million units annually.
When the economy hit the skids following the financial crash, the rate of housing starts dropped so low that it set back the normal rate of housing turnover by a ridiculous amount. Historically the nation's housing stock is "turned over" (replenished/rebuilt) every 75 years; however, when starts hit 478,000 units annually in 2009, that meant it would take 225 years to replenish the country's housing stock. That was clearly unsustainable. At a rate so low, we would have massive and widespread blight and decay. In some cases, that had begun to happen (Detroit), but once financial markets "un-seized" and demand started to return, rebuilding naturally commenced.
One of the reasons prices have been surging is because there was an undersupply of viable housing. (There are other reasons, too, but that is definitely one.) The market has reacted to this by slowly bringing more supply back and we are witnessing this in the monthly numbers. However, we are still far from what is historically "normal" given population growth and normal turnover of the national stock.
What this means is that the housing recovery will continue and construction trends will remain strong. I wouldn't be concerned about the durability of this recovery until the annual pace of starts gets well over 1.5 million units and probably closer to 2 million units or above on an annual basis. (The latter is more likely.) It is then and only then that we can anticipate a cooling-off because that is when supply would reach levels more consistent with demand.
Curiously, homebuilder stocks are all only modestly higher this morning. You'd think they would have been stronger on this news. I believe the market and investors are being far too cautious. Personally, I don't like buying a stock when there is bullish news as you're typically going to pay a high price, but the tepid bullish reaction to the number tells me you can buy names like Lennar (LEN), D.R. Horton (DHI) Toll Brothers (TOL), Pulte (PHM), K.B. Home (KBH), Hovnanian (HOV) and Beazer (BZH) and expect them to trade higher.
I believe the environment will remain strong for these companies and we'll have plenty of time in the future to worry about their earnings and the growth outlook when national rates of home construction get much higher. For the time being, however, we are still playing catch-up, and that suggests these stocks still have plenty of room to run.