Housing Starts

A strong case can be made that the fundamental supports of the housing market-- demographics, employment, creditworthiness and income--will not recover for a generation. It can even be argued that housing has lost its status as the foundation of middle class wealth, not for a generation, but for the long term. Let's begin by noting that despite the many tax breaks lavished on housing--the mortgage interest deduction, etc.--there is nothing magical about housing as an asset. That is, its price responds in an open, transparent market to supply and demand and the cost of money and risk. There are a number of quantifiable inputs that feed into supply and demand--new housing starts, mortgage rates and income, to name three--but there are other less quantifiable inputs as well, notably the belief (or faith) that housing will return to being a "good investment," i.e. rising in price roughly 1% above the rate of inflation. If this faith erodes, then the other factors of demand face an insurmountable headwind, for the most fundamental support of housing is the belief that buying a house is the first step to securing middle class wealth.

For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year. The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France. The bulls can exclaim somewhat firmer housing starts in February (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index five consecutive months of manufacturing contraction in China, and more recently, a 0.9% drop in US February existing home sales. Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance. It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012. Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.

Dumbfounded. That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system. We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one. With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc.  One man.

For months we have been saying that there is no housing recovery, and what little buying interest there was was driven purely by abnormally warm weather and still record low interest rates. Well, the seasonal aberrations are now over, and normalcy can return, but not before much demand was pulled forward (Cash for Caravans? Money for McMansions? Shekels for Shacks? Dough for Dumps?) to December-February courtesy of "April in January" and mortgage rates soaring to well over 4%, leading to a major tumble in MBA new home and refi mortgage applications (as noted here "So Long Housing - Mortgage Applications Collapse, And Sentiment Update"). So we won't repeat ourselves, intead we will give the podium to CNBC's Diana Olick who now finds empirical evidence of what we have been saying all along. From Olick:  "Housing was charging back. Spring sprung early. Sentiment among home builders doubled in six months. Any talk that the fundamentals might not be supporting the sentiment was met with harsh criticism. And then suddenly it wasn’t. A slew of new housing data last week disappointed the analysts and the stock market, and all of a sudden you started to hear concern that maybe housing wasn’t exactly in a robust recovery. From home builder sentiment to housing starts, to home builder earnings right through to sales of newly built homes, there was not one hopeful headline in any of it (except perhaps if you invest in rentals, as multi-family housing starts made more gains, but that is a contrary indicator to housing recovery)." And from the ground:"And then an email from a Realtor in New Jersey: “Just reviewed March buyer clicks, Google’s analytics on all the sites we monitor – March is turning out to be the weakest month since last October re: Buyer interest."

Back in early 2011, even as the global economy was at best flatlining, the one goalseeked explanation to justify a levitating stock market (which was rising solely due to the short-term effect of transitory QE2 liquidity), was soaring corporate profitability (which only lasted as long as companies could trim some residual SG&A fat; they have now cut into the bone in terms of layoffs). This time around, with corporate margins having peaked, there had to be some other validation to explain away the "narrative" of the latest bout of central bank infused stock market levitation: it just happened that this time it was once again that old faithful, and always wrong, justification - decoupling. After all one just has to listen to 5 minutes of CNBC to hear it taken for granted that the US economy is doing oh so swimmingly. Here is a newsflash for all the permabulls out there. It isn't. Not only that, but as David Rosenberg highlights, 11 of the 13 most recent economic indicators have missed consensus expectations, and one can demonstrate that the other 2 - car sales and jobs - have been simplistically manipulated into a favorable outcome. So now that the market is turning over, with Europe and China both solidly into contractionary territory, with Corporate profit margins turning over, and with US data missing virtually every print, how long until the permabullish validations all go up in smoke, and the one true source of stock market "nirvana" - cheap money - is once again in high demand from the central planning cabal. In turn, the Chairsatans of the world will do as requested, as they always do, however not with crude (the real one - Brent, not that Cushing-buffered substitate) at $125, and with the risk that Israel may attack Iran any day now, with or without the blessing of the Fed's Class A director.

While beset with foreclosures, short sales and ongoing distress housing soldiers on and builds momentum. Prices are now rising. Do not take lightly the impact of rising prices on the housing market.   

Housing remains a mess and recovery continues to be something found best in Disneyland at fantasy land (although not in Disney's movie-making business). The sector is showing only feeble growth as the American nightmare continues to chip away at the American dream. Or If every man's home is his castle, what am I doing in the moat,and why won't my banker lower the drawbridge?

Minutes ago, the US Census Bureau released the February Housing Starts data, which printing at 698K was a mild disappointment, as it was below expectations of 700K, and down from a revised 706K. However, as usual, the headline gives only half the story. Here is the reality: in February, only 48.1k homes were started (Not Seasonally Adjusted). This compares to 46.5K in January. However, of this number Single Unit houses, those which are relevant for actual housing demand, and not the 5+ units more relevant for rental purposes, declined from 33.0K to 31.5K. In fact, the 31.5K number was the weakest since December's 31.0K, and then all the way back to February 26.6K. What offset this? The surge in multi-family housing units, as usual, which rose from 12.3K to 16.1K. Recall that lately there has been a shift from owning to renting, and as such builders are focusing on this. All of this is summarized in the SAAR based (Seasonally Adjusted) chart below. It gets worse: looking at actual completions, far more important in this New Normal economy, where everyone is willing to take credit for a hole in the ground as "new housing" what really matters is the rate of completions. And in January, it was a meager 28.6K, a tiny rise from January, and lowest than any number in 2011, except for last February. Sorry - there is no housing bottom. If anything, true housing continues to creep along the bottom as can be seen in the chart below.

There are two main news updates dominating early newsflow: the first comes from BHP Billiton, after the world's largest miner raised concerns about the possibility of a sharp slowdown in demand from top metals consumer China. Per Reuters: "There is a slowing trend in China ... moving increasingly away from the growth model that they have had, which may be a little less metals intensive. This is not new, but recognition by big mining companies would have had an effect." Australian iron ore miners, key beneficiaries of China's modern-day industrial revolution, signaled on Tuesday demand growth was finally slowing in response to Beijing's moves to cool its economy. BHP Billiton said it was seeing signs of "flattening" iron ore demand from China, though for now it was pushing ahead with ambitious plans to expand production." That this comes just on the tail of JP Morgan warning of a hard landing in China is curious, and one wonder if the Federal Reserve Bank of JP Morgan is not fully intent on telegraphing that the next big center of QE will be the PBOC. The other news is that the perpetual crude "upside capacity" strawman Saudi Arabia 'has pledged to take action to lower the high price of oil, which has risen to around $125 a barrel, with laden supertankers set to arrive in the US in the coming weeks. ... Saudi Arabia said yesterday it will work "individually" and with the other petrol-rich Gulf states to return prices to "fair" levels. The country indicated earlier this year that $100 a barrel was the ideal oil price." There is one problem with this as expected Saudi attempt to help Obama's reelection campaign: as pointed out yesterday, it is very unlikely that Saudi Arabia has any realistic ability to do much if anything to push the price of crude lower, especially if and when the middle east hostilities flare up.

This week brings policy decisions in Taiwan and Thailand. The CBC decision will be very interesting to watch. The December statement at the time was surprisingly hawkish, only to be followed by a large upside surprise in inflation, and the TWD was subsequently allowed to appreciate. Given that the bank continues to view inflation as a major problem, according to quotes from Reuters, it will be very interesting to see how the bank weighs up concerns about hot money inflows vs the need to contain inflation risks. In particular, in the face of imported inflation pressures via higher commodity prices, many central banks may shift towards accepting the need for more currency strength. The week also brings some important central bank commentary. The RBA governor has an opportunity to opine on the recent slew of weak Australian data, as well as developments in the A$. There is quite a bit of commentary from Fed officials on the docket, including from Bernanke, which we will dissect for information on the further direction of policy. More dovish commentary than that of the FOMC last week, would arguably be a surprise and potentially dampen, if not reverse some of the moves of last week.

Back in early February, Zero Hedge was among the first to suggest that abnormally warm temperatures and a record hot winter, were among the primary causes for various employment trackers to indicate a better than expected trendline (even as many other components of the economy were declining), in "Is It The Weather, Stupid? David Rosenberg On What "April In January" Means For Seasonal Adjustments." It is rather logical: after all the market is the first to forgive companies that excuse poor performance, or economies that report a data miss due to "inclement" weather. So why should the direction of exculpation only be valid when it serves to justify underperformance? Naturally, the permabullish bias of the media and the commentariat will ignore this critical variable, and attribute "strength" to other factors, when instead all that abnormally warm weather has done is to pull demand forward - whether it is for construction and repair, for part-time jobs, or for retail (and even so retail numbers had been abysmal until the just released expectations meet). Ironically, while everyone else continues to ignore this glaringly obvious observation, it is Bank of America, who as already noted before are desperate to validate a QE as soon as possible (even if their stock has factored in not only the NEW QE, but the NEW QE HD), that expounds on the topic of the impact of record warm weather. In fact, not only that, but BofA makes sense of the fact why GDP growth continues to be in the mid 1% range while various other indicators are representative of much higher growth. The culprit? Global Warming.

Americans participating in a recent Gallup poll showed the highest level of confidence in an economic recovery in a year.  Sounds great, but you can’t ignore the nearly 13 million unemployed, the 46 million people on food stamps and the roughly 29% of the country’s homeowners whose mortgages are under water. They would find it hard to subscribe to the poll’s sunny conclusion. On the other hand, there’s no getting away from a bevy of seemingly increasingly favorable economic data, which, more recently, includes falling weekly jobless claims, four consecutive monthly gains in the leading economic indicators, somewhat perkier retail sales and a pickup in housing starts and business permits. Pounding home this cheerful view is the media’s growing drumbeat of increased economic vigor....Confused? How can you not be?

While one can discuss seasonal factors, such as abnormally warm weather, as a driver of today's beat in Housing Starts, a far less noted number for headline purposes is the other side of the equation - Housing Completions. Because after all, every house that is started has to be completed at some point. One look at the chart below, shows why completions is quietly ignored, as it presents a far less optimistic picture about the housing market. Indeed, printing at 530k seasonally adjusted annualized units, the completions number was just the second lowest in decades, better only than the 509K from January 2011. And where this becomes rather glaring is when looking at the relative, or percentage, spread between Starts and Completions: at 31.9%, this was the highest in, well, as far as our data series goes back to. Does this mean that homebuilders are merely "breaking ground" for book keeping purposes, just to "paint the tape" and then quietly fading away into the night? We will know for sure in February when we get at least one more data print to validate or deny the recent troubling trend, but for the time being, to paraphrase a famous Bill Murray movie, is there something here being "lost in construction?" Or, far more simply, is this merely the latest ploy to paint not the tape so much as the economy in an election year with the latest incarnation of "cash for clunking construction"?

The onslaught of 'favorable' jobs numbers continues with the latest initial claims printing at 348K, down from an upward revised 361K, on expectations of a rise to 365K. This was the lowest number since March 2008. As a reminder, the abnormally warm January and February weather as discussed previously by David Rosenberg is a key reason in the ongoing favorable impression of the economy that this data skew creates. Granted the self-delusion of employers is just as palpable as that of market participants: claims went from sub 400K in the days before Lehman to nearly 600K in the weeks after. Continuing claims printed at 3.426MM down from 3.526MM, on expectations of 3.495K. Those seeing the 99-week expire increased as 23K people dropped out of EUCs and Extended Claims. Expect to see this "favorable" trend reverse within weeks, as the groundwork for more easing has to be set (more on that shortly). Elsewhere, the headline PPI came below expectations of 0.4%, printing at 0.1%, up from -0.1% previously, while Core PPI, paradoxically, beat this time, rising from 0.3% to 0.4%, on consensus of a decline to 0.2%. Finally Housing Starts was a meaningless and noisy 699K on expectations of 675K, where it has been crawling along the bottom for years. Permits Missed Expectations of 680K coming at 676K.

Busy day in the economic headlines arena, with Housing Start, Claims PPI and Philly Fed all on deck. Goldman summarizes the expectations and the upwardly biased consensus.