XHB - Despite Surprise Starts Housing Remains In Trouble

2023-06-20 17:47:26 ET

Summary

• Housing is a critical sector in the U.S economy.
• The connection between housing starts data and lumber prices is crucial to understanding the dynamics of the housing and lumber market.
• The Fed isn't finished until housing is finished.

Home is the place where, when you have to go there, they have to take you in. - Robert Frost.

Housing is a critical sector in the U.S economy, having a significant impact on the banking ( KRE ), construction ( ITB ), and real estate ( IYR ) industries. Housing starts provide insights into builders' willingness to invest resources in new projects, reflecting housing demand, risk appetite, and consumer sentiment. Thus, the trend in housing starts can offer valuable insights into the health of the economy.

Key Points about Housing Starts

• A housing start is recorded as soon as construction begins on a new residential unit.
• Each unit in a multifamily housing project is counted as a separate housing start.
• The data for housing starts is seasonally adjusted to account for variations caused by different times of the year.
• Housing starts data is divided into three categories: single-family homes, multi-family housing of two to four units, and multi-family housing with five or more units.

Data Collection for Housing Starts

The U.S. Census Bureau estimates housing starts based on a representative sample of building permits issued by local permitting offices. The survey counts all housing starts with five or more units and samples about 2% of nationwide starts for housing with one to four units.

According to YCharts, "US Housing Starts MoM is at 21.72%, compared to -2.90% last month and -14.42% last year. This is higher than the-long term average of 0.34%." Perspective is needed here, however, given that history has shown such month-over-month rates of change tend to not persist.

The Impact of Lumber Demand and Prices on Housing Starts

The connection between housing starts data and lumber prices is crucial to understanding the dynamics of the housing and lumber market. Housing starts data provides a forward-looking metric to gauge the economy's outlook, with lumber prices often serving as an early indicator of housing starts. The average home has about 16,000 board feet of Lumber. As Lumber goes, so too typically does the entire housing market.

The housing market is likely still in trouble due to high mortgage rates. Additionally, the inventory dynamics may not remain tight for much longer, potentially further impacting the housing and lumber market. It's worth noting that strong housing starts data released earlier today was indeed anticipated by the behavior of Lumber prices in advance.

Conclusion - Housing's Bear Market is Likely Early

The expected drop in inflation and interest rates could potentially stimulate a resurgence in the housing market. However, I remain unconvinced. I fully respect that there appears to be the potential for some re-acceleration, but the question is if the recent upturn in the Case-Shiller Home Price Index peaked, or if what we saw was a minor correction overall prior to making higher highs.

I've been colorful on Twitter in the way I refer to housing because I'm skeptical of narratives, and inventory gets solved by just a little bit of fear by overleveraged 2nd, 3rd, and 4th home Airbnb-type landlords. And if the Fed is intent on keeping rates higher for longer, it's only a matter of time until unemployment rises, rental income drops, and suddenly supply of new available homes for sale is released.

Besides, the Fed isn't finished until housing is finished. Housing needs to be finished to really break inflation. Homebuilder stocks clearly have been on a tear, disconnected from the message of Lumber. Trend intact? Sure. But I suspect conditions favor a reversal fairly soon in XHB.

For further details see: