Tuesday, February 17, 2015

Slight Decline in Housing Market Index Attributed to Weather

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) was released this morning, and showed a slight decline from last month's release.  Builder confidence for newly built single family homes dropped to 55, measuring a two-point decline.  The drop, however, is being attributed to the unusually high amount of snow that has blanketed much of the nation for the past month.

Despite the decline, expectations remain very optimistic for a robust building market in the US, once the weather situation improves.  Sales expectations for the next six months remained steady at 60, and it has been hovering in that range for some time.

Interestingly, the Home Construction sector has apparently reached that same plateau.  Take a look at the weekly chart of the sector:

Notice that it formed a wedge with a very slight upward bias starting in the spring of 2013.  The Sector is currently trading at its highs, at least through this decade, but it's showing no signs of attempting to penetrate that channel pattern.

I don't share the optimism being expressed in the Index.  Interest rates are currently low, but they will be increasing this year.  Home Construction appears flat to me, not increasing, and it's not showing any signs that it's ready to do so.  The question is what will drive those projected sales for new home constructions, since current behavior does not support the optimism.  The share of new homes being purchased by first-time buyers is at its lowest level since 1987.  Given the job market, lack of salary increases, and tight capital constraints being imposed on banks, don't expect this behavior to change anytime soon.

What is growing is the construction of rental apartments and condos, and its to those that first-time buyers are going and it's also where the aging home owner is going.  When you look at the number of homes for sale, and in this area the number of For Sale signs in each neighborhood is astonishing, it's quite apparent that there's a significant migration within the current housing market.

Now, that's not all bad news for the housing sector, nor is it bad news for the home suppliers and construction companies.  Whether or not a home is new, a buyer moving in immediately wants to put their touch on it. That's great news for companies like Home Depot and Loews that do well whenever homes change ownership.

The point is, don't rely on New Home Sales numbers to gauge the health of the construction business.  There was a time prior to the housing bubble when that was a significant measure of the sector, but the behavior of the consumer has changed and we, as traders, must therefore adapt.  A better measure would be New and Existing Home Sales, published monthly by the National Association of Home Builders (NAHB).  I also really like the Remodeling Market Index, which is also produced Monthly. This report is a great indicator of how the consumer is behaving, and it drives the performance of a number of industrial and cyclical corporations.

We are in a new post-housing bubble market, and the metrics we used prior to the bubble bursting no longer apply.  As traders, we need to adapt to the behavior of the consumer, and at present, that consumer is moving into condos or rental apartments, not necessarily new homes.  There's profit to be had here if we're willing to adapt to the new metric.

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