I have previously mentioned on this site that I am a holder of homebuilding stocks. I am adding to positions. I have been working on an article to explain why – mostly demographics, affordability, private surveys of the housing markets, and builder confidence.
I’ll post this soon, but let’s I have been interrupted by a cloud of negativity. Several people whom I follow seem determined to find the bearish side of any data release on housing. My colleague, Eric, is competing with David Rosenberg on this front. Let’s take a deeper look.
I recommend a step back and a consideration of first principles. Instead of beginning with data and finding a method to prove what we already believe, let’s begin with a hypothesis and some relationships that make sense.
- Today Eric warns of a negative wealth effect because one measure of home prices rose only 3.7% year-over-year. Please consider that. If that was your home price increase, with inflation running at 2%, would you feel less wealthy? And by the way, are you tuning in to the Case-Shiller news or checking your home value on Zillow?
- If there is a current wealth effect, it relates to stock prices, not home values. And wouldn’t we expect a home value effect to show up in consumer confidence reports. These are hitting new highs? And BTW, the consumer confidence surveys are later data than the Case-Shiller reports.
- Pretend for a moment that you had not read anything else on this topic. You are just seeing data for the first time. Here are some helpful charts. These are not second-derivative (a change in the rate of change for those who are struggling to remember their calculus) but because of the log scale they are an accurate visualization of percentage changes over time. Please note that the series is not truncated to emphasize a particular period. First, let’s look at the NSA series.
The current flattening in the curve is what some find alarming. I have inserted some arrows at each point where the NSA growth flattened out, as it is doing now. These would represent the prior “false positives” from emphasizing the rate of deceleration in this indicator.
The seasonally adjusted version shows little current change,
Let’s truncate to the last few years, even though that leaves out the possible false positives in the method.
I really can’t see anything disturbing, and certainly not worse than three or four past periods, even in the abbreviated period. Can you?
Calculated Risk, widely recognized as one of the leading authorities on housing issues, likes to adjust home prices for inflation. Here is his most recent chart.
We are roughly back to 2004 levels. He looks at price-to-rent ratios and sees the same thing.
- Let’s think about inconsistent interpretation of indicators. Is a lower rate on the ten-year note good or bad for housing? When rates were higher, many of those on my list of dependably bearish commentators said that made housing less affordable. Now that rates are lower, taking mortgage rates with them, the commentary has switched away from affordability. If you are seeking confirming evidence, there is always a way to find it.
The most important series on housing data is new home sales. New construction has the biggest impact on the economy. Do you know that new home sales just made a new high for this cycle? The headline on the April data was the decline from March. This blunder paid no attention to history nor revisions. The heavily revised prior months resulted in a new cycle peak. Calculated Risk, who has provided a sophisticated analysis of housing using a wide array of sources, expects further improvement. It requires builders to cooperate in aiming at the new-entry market.
With so many tailwinds for housing stocks, they remain one of my favorite choices. In the next installment I will dig more deeply into the positive case and provide a few ideas.