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Follow on Google News |  Zacks Analyst Blog Highlights: Weyerhaeuser, Masco Fortune Brands, D.R. Horton and Beazer HomesZacks Investment Research features the following stock picks: Weyerhaeuser , Masco , Fortune Brands , D.R. Horton and Beazer Homes .
Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://www.zacks.com/ Here are highlights from Tuesday’s Analyst Blog: Housing Starts Sink Again In June, the number of Housing Starts fell by 5.0% to an annual rate of just 549,000. That level is 5.8% below the already dismal level of a year ago. The silver lining is that most of the decline was due to the extremely volatile apartment and condo segment of the market. Starts in buildings of five or more units plunged 19.3% to an annual rate of 88,000 in June from 109,000 in May and 8.3% lower than in June of 2009. Starts of single family houses edged down by 0.7% to an annual rate of 454,000 in June from 457,000 in May. However that is still 4.6% below the 476,000 level of a year ago. It's not like the housing construction industry was booming a year ago either. The decline in housing starts since the bursting of the housing bubble has been long and steep. Why New Home Construction is Important Historically, new home construction (residential investment) is one of the most important forces in pulling the economy out of recessions, and a decline in home construction is one of the most important forces in putting the economy into recessions. New home construction is normally extremely sensitive to interest rates, and that is why it plays such an important role in economic cycles. Each new home built creates a huge amount of economic activity. Lots of labor -- and generally labor that pays very well for those that do not have a lot of formal education -- is used in constructing a house: people like framers, roofers, electricians and plumbers. Those are all jobs that cannot be outsourced and sent to China or India. Beyond that, each house built means more business for lumber companies like Weyerhaeuser , and more employment of lumberjacks and mill workers. It means more business for firms like Masco and Fortune Brands which make plumbing fixtures and kitchen cabinets, and also means work for their employees. Construction Hit Very Hard The construction industry has been extremely hard hit in the Great Recession, accounting for about a quarter of all jobs lost in the economy since the recession started, even though it accounted for only about 6% of the workforce when the recession started. That does not count the non-construction jobs that are linked to housing (mortgage brokers, lumberjacks, and factory workers making construction materials, for example). As the graph shows, normally housing starts, particularly single-family starts, start to increase significantly before the recession officially ends, and continue to rise sharply in the early part of recoveries. Now we have a huge inventory overhang of existing homes (which are very good substitutes for new homes), especially if one counts the shadow inventory of houses that are in -- or about to go into -- the process of foreclosure. Thus, even though mortgage rates are at extremely low levels, housing starts are still going down. While we are a little bit off the worst levels hit in late 2008 and early 2009, the level of housing starts is still below the worst levels on record prior to the Great Recession. Numbers May Be Even Worse Than They Appear Keep in mind that the population has grown steadily over the period shown in the graph, and more people should need more places to live. Part of the problem is the low level of household formation. Because there are so few jobs around, people in their late teens and early 20’s are not moving out of their parents' houses into places of their own. If they do move out, they have to have more room mates in the places they rent than people did in the recent past, simply because they cannot afford to get their own place. The unemployment rate for teens is 25.7%, and the unemployment rate for recent graduates is not that much better. No job means living in mom’s basement. In addition, many of those who have lost their homes to foreclosure have had to move in with friends or relatives. Thus, even though there are more people than ever in the country, there is less demand for housing. On the other hand, it is demand for housing that creates a large number of jobs. Egg meet chicken, chicken say hello to egg. Eventually we will work off the supply overhang, and population growth will force the need to start building more houses, but that is not happening yet. From current levels, on does not have to make very heroic assumptions about the eventual level of housing starts to generate some very big percentage gains. Just getting total housing starts back to where they were at the bottoms of previous deep recessions would be about a 65% increase. Numbers by Region Regionally, the worst-hit area was the Northeast, with starts down 11.3% on the month and off 20.3% year over year. The Midwest saw starts fall 6.9% for the month and 10.5% year over year. In the West, they fell 5.9% for the month and are down 11.2% yea over year. However in the South, which is by far the largest region, starts were down just 2.4% for the month and are up 2.6% year over year. Dixie was responsible for 51% of all housing starts in June. Building Permits Looking forward, the best indicator of future housing starts is Building Permits. They provide a little bit of a silver lining. They rose 2.1% on the month to an annual rate of 586,000 and are down just 2.3% from a year ago. Still, like housing starts, it is not like the year-ago level of building permits was very robust. Some of the decline this month in housing starts is probably related still to the hangover from the end of the homebuyer tax credit. Since new homes sales are recorded when the contract is signed, most of the housing starts related to it happened in March or April, and May and June have suffered the hangover. Some of that hangover might be wearing off next month. On the other hand, what strength there is in Building Permits is all in the multi-family area, which is just as volatile when it comes to permits as it is when it comes to starts. Single-family permits fell 3.4% to an annual rate of 421,000, and are down 6.7% from a year ago. Apartment and condo permits rose 20.9% on the month to an annual rate of 20.8% and are 16.9% above a year ago. Regionally The permits data looks very different from the starts data. The Northeast saw permits rise by 32.3% on both a month-to-month and a year-over-year basis. Out West, permits were up 9.7% on the month and up 5.1% year over year. Worst hit for the month was the Midwest, which suffered a 10.8% decline, and is off 8.1% from a year ago. In the South, permits fell 3.1% from May and are down 10.4% from a year ago. The permits data suggests that things should get a little bit better next month, but don’t expect any miracles. The major homebuilders like D.R. Horton and Beazer Homes have been surviving only because Congress threw them a huge bone and let them deduct their losses against profits going back five years, and thus collect BIG tax refunds. Even that well will eventually run dry. On the other hand, those big builders are probably in a lot better shape than many of the Mom and Pop builders that have already gone under. Want more from Zacks Equity Research? Subscribe to the free Profit from the Pros newsletter: http://www.zacks.com/ # # # About Zacks Zacks Investment Research is an investment research firm that provides institutional and individual investors with financial news, analytical tools and services. Zacks.com is a property of Zacks Investment Research, Inc., which was formed in 1978 by Leonard Zacks. As a PhD in mathematics Len knew he could find patterns in stock market data that would lead to superior investment results. Visit http://www.zacks.com/ Follow us on Twitter: http://twitter.com/ Join us on Facebook: http://www.facebook.com/ Disclaimer: Past performance does not guarantee future results. Investors should always research companies and securities before making any investments. Nothing herein should be construed as an offer or solicitation to buy or sell any security. End
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