How can the market rally when we get a pathetic housing start number for the month of February, 1.16 million, down 8.7%, a year and a half low and substantially below expectations?
First, we know from every retailer that weather was terrible throughout the country, a very rare occurence. If you go listen to Home Depot (HD) you will know how terrible the weather was, meaning it wasn't conducive to housing.
Second, housing starts are now bumping up against zoning, very restrictive zoning throughout the country. The big growth areas, like the San Francisco Bay Area, have made it prohibitive for most builders which is why you find starter homes valued typically at north of $1.2 million
Third, the deduction of state and local taxes from your federal return is gone and that can be a deciding factor.
Fourth, student debt is ridiculously high which often leads to kids staying at their parents' house long after the older generations might have done. It was up and out for me. I had to pay rent if I stayed one more month and my mom made my room into a den to accentuate the point.
Finally, fifth, housing's no longer affordable as it was even a few years ago. That's why we could be building as many homes now as in 1960 when there were 180 million people instead of the current count of 320 million.
So should we panic after this weak number? Is it a pending sign of recession, the so-called canary in the coalmine that so many like to talk about it?
I am offering an emphatic no. Here's why.
While I was warning Jay Powell endlessly to be careful about raising rates the Fed chairman did do one thing with the hike: he cooled housing to the point where it is both more affordable on a price basis and a mortgage basis. The decline in the 10 year Treasury's yield has been a godsend. I bet we get much stronger numbers in the month of March.
Because of rates going lower, and because raw materials have come down faster than housing prices, I remain a believer in both Lennar (LEN) , the largest homebuilder, with a stock up 25% for the year, and D.R. Horton (DHI) , the most affordable home builder with a stock that has advanced 18%. They remain incredibly cheap on a price to earnings ratio and could be a huge beneficiary of pent up demand post bad weather.
The numbers are pressuring the stocks of big box retailers associated with housing, Home Depot and Lowe's (LOW) . Once again I totally disagree with the market's negative judgment. Tis the season to own these two stocks, the outdoor season, which is the Christmas time for these two. Home Depot's the best run and the charitable trust has a position in the stock which you can follow along by joining the Action Alerts PLUS Club. The company historically has done well when rates are down or when housing prices are going up. Lowe's is a turnaround led by the terrific Marvin Ellison who is doing a remarkable job digitizing the company - it has been woefully behind in every aspect of customer relations management and changing the culture, which had become lackadaisical and complacent. He's re-energizing the stores one at a time and has a fantastic hand on what needs to be done to get more competitive with the Depot.
So don't be afraid of the housing start number. And be aware that this is a natural decline that will be followed by an advance you can profit from as housing endures its annual spring rebound.
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