One of the sectors I review on a quarterly basis is housing, and it's time to do so again. My last quarterly review is here.
I continue to be negative on the sector as I've been all year. In this column, however, I'll discuss the situation a bit differently.
Buying a home is an aspirational purchase. It is not a need. Over many generations, homeownership has become ingrained in the U.S. consumer's psyche as integral to the pursuit of the "American Dream," and promoted as such by government regulation.
Consumers decide to purchase homes for only one reason, though. They believe they will have the stability of income necessary to meet mortgage payments over the next several years. However, this overall sense of income stability is not present now and hasn't been since the last housing bubble popped in 2007.
Traditionally, a precursor to this perceived stability of income is the confidence to form a life partnership, which is measured by household formations.
Household formations have increased substantially in 2014 from the record lows set last year. Nevertheless, I am still cautious on this as a sign of income confidence, as I believe it may instead be evidence of a perceived necessity to partner in order to pay the bills.
The reason for my caution is that real incomes, as determined by non-farm payroll tax receipts received by the U.S. government, have been declining.
Last week's jobs report for the month of October showed an increase of 214,000, with a decline in the U3 unemployment rate to 5.8%, from 5.9% in September. However, revenue received by the U.S. Treasury from employers as withheld payroll taxes continued to show the decline that's been in place for over a year now. I've written about this on many occasions.
Below is a chart, supplied by Mathematical Investment Decisions, of non-farm payroll tax receipts with the period covered by the Bureau of Labor Statistics (BLS) report highlighted in red.
The data are adjusted for seasonality, inflation and, most importantly, population. It is the single best indicator of what real income growth is -- and it is showing a decline.
Without perceived income security nothing else matters. This is important for investors to understand as many ancillary issues are being promoted by financial pundits as primary drivers and evidence of an imminent rebound in home purchase activity.
The current list of rationales for why home purchase activity is set to increase generally fall into two categories that I will refer to as fear and greed.
On the fear side, there is the issue of rising rents, as well as publicly advanced expectations for greater economic activity that will result in increases in mortgage rates, the Fed Funds rate and housing prices. This is also known as the take-away sale. If consumers are convinced that home prices and/or the debt to finance them will be rising, they may be convinced to act sooner.
As for greed, the issues advanced for an imminent increase in housing activity are: falling gas prices, increased job creation, the decline in mortgage rates this year, the rising stock market, the decline in the rate of foreclosures, expectations for looser mortgage underwriting guidelines, and the general sense that the worst for the economy, and especially housing, has passed.
Both fear and greed factors will impact the decision to purchase a home, but only after consumers are confident they will have the income to make mortgage payments. If that is not the case, then they are irrelevant. These issues may motivate a buyer to purchase a larger home or take out a bigger mortgage, but they will not cause a consumer with low confidence in income stability to take on the purchase of a home.
Still, these issues can and do cause traders to push up the stock prices of homebuilders and the related appliance manufacturers and mortgage companies. The mortgage lenders and homebuilders have been surging again over the past month as speculators anticipate fear and greed issues will cause home purchase activity to rise. The ebb and flow of these ideas is most evident in the performance of the SPDR S&P Homebuilders ETF (XHB).
The fundamental prerequisites of income growth and security are still not evident, though, and investors would be wise, in my opinion, to avoid the sector.