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A Sign of Market Exhaustion?


Failure to react to positive housing news may signal shift in bias.

Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial). It's being shared here for the benefit of the Minyanville community.

Yesterday's housing data was clearly good news.

A 17.2% increase in housing starts is a hugely positive datapoint. This was led by a massive 62% gain in construction of residential apartments. And there was even a 7.5% rise in single family homes. And building permits, which are a reliable leading indicator of activity, were up significantly -- and for the third straight month.

Of course, naysayers can always think of some excuse to dismiss the data. However, it is my view that, under current circumstances, homebuilders like Pulte (PHM), Lennar (LEN), and Toll Brothers (TOL) are very unlikely to be building and applying for permits unless they're pretty certain about the final demand.

Many people will have trouble believing these numbers -- perhaps because many live in areas where there is no such normalization occurring in the housing market. And clearly there are many areas that are still in decline, especially in the bubble regions and the regions (e.g. the Rust Belt) that are in a longer-term secular decline.

There's no shortage of anecdotes that bears can cite in support of the view that things are getting worse, not better. However, anecdotes are anecdotes. People can cite anecdotes of contraction in various regions when the economy is growing at a gangbuster rate. That's irrelevant. The problem is that housing markets are local. And in many localities, things are normalizing. Indeed, across wide swathes of the country, there was never a housing bubble to begin with, so there's no need to recover from a crash.

For those who believe that national statistics are worth analyzing, it may be of interest to note that, for housing construction to have a positive impact of GDP, all that has to happen is for it to grow at 0%. Indeed, I estimate that 0% growth in housing over the next 12 months would translate into a 1% increase in GDP, which is huge. That occurs because the contraction of housing construction ceases to be a drag on growth. Today's numbers indicate that an even more optimistic outlook is possible.

Many commentators are talking about mortgage rates at 6% as being terrible for the economy. They exaggerate. Sure, 6% isn't as good as 4.7%. But it's very good in historical terms. And, with respect to the housing construction industry, if people's personal economies are stabilizing, as it appears that they are, 6% to buy homes or apartments that have declined sharply in value looks pretty good.

Rumors of the demise of the American dream are premature; indeed, you can't kill it precisely because it is a dream. The anecdote-driven speculation about a permanent change in psychology in the American populace is, for the most part, fantasy. Life goes on. Young people who have a job and feel relatively secure are looking to buy. They don't care if mortgage rates are at 6% or if they are at 8%. They want their own place. Period.
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