Housing starts jumped to a nine-year high of 1.32 million units in October. This shows three things. First, forecasts for an economic recession are premature. I don't know why anyone would even make that call right now with the stock market surging to new records and when you have a newly elected president promising to do some major fiscal stimulus in the form of higher spending and tax cuts. That's bullish.
Secondly, the drop in homebuilding activity that we saw in August and September was related to weather, not lack of demand. Hurricane Gaston and then Hurricane Matthew, along with other bouts of really inclement weather along the East Coast and through the South, caused builders to halt activity. That's over and we are seeing a welcome and normal snapback due to lots of pent-up demand.
Third, housing starts are still below where they should be, which means they will continue to go up. Activity will rise. I have been saying this (correctly) for a long time. We cannot even consider a peak in building activity until starts get over 1.5 million units annually and we probably need to get well above that number to ensure sufficient supply.
The reason I say this is because 1.5 million annual starts has been the historical average for the past 40 years. You need that just to keep up with demand from a growing population and to have the normal turnover of the nation's housing stock.
At the depth of the Great Recession, housing starts slid to 475,000 units annually. At that pace, it would take 225 years to turn over the nation's housing stock when 75 years is the amount of time it usually takes. If building activity continued at the abysmal rate we saw in 2009, that would have meant America would become a nation of run-down, dilapidated and blighted cities and neighborhoods.
Thankfully, that's not going to happen, yet it's probably taken longer than it should have because of many folks' difficulties in getting a mortgage. More stringent requirements, higher down payments, etc., have kept demand lower than it was prior to the housing bust. This has hurt first-time homebuyers and the working poor and contributed to the spread of income and wealth inequality. It has also led to skyrocketing rental costs, which again hurts people at the bottom of the economic ladder.
From an investment standpoint, the building trend has important implications. I have been bullish on homebuilder stocks for a long time and I still am. They are among the most undervalued stocks out there right now. I like PulteGroup (PHM) , Lennar (LEN) , Toll Brothers (TOL) , KB Home (KBH) and, if you want a flier, Beazer (BZH) , which has a very high trailing P/E, but looking forward with improved earnings this year, the stock could do quite well if it hits its targets.
There's also the S&P Homebuilder ETF (XHB) . I would call that "fairly valued" at present, but it could still run higher on the general macro trend of stronger activity. Personally, I like the individual stocks better because they pay dividends and are undervalued. I think they give better bang for the buck.