Housing Starts Soften; Builder’s Bear Market?

signs were appearing that Housing was cooling back in August. More recently, there was also a comprehensive front page WSJ article on the subject.

The evidence is now readily visible, and its no big surprise to us: Housing Starts (seasonally adjusted) faded quite a bit in October –

Wsj_20051117090841WSJ:   "The Commerce Department said housing starts decreased 5.6% to a seasonally adjusted 2.014 million annual rate — the largest decline since a 17.7% drop in March. September starts, originally seen at 2.108 million, were revised upward to 2.134 million. Building permits, an indicator of future construction activity, fell 6.7% to a 2.071 million annual rate in the steepest drop since a 7.2% fall in September 1999.

Builders appear to be dialing back new construction amid growing inventories and signs of slowing demand. The estimate of new houses for sale at the end of September climbed to 493,000, a supply of 4.9 months at the current sales pace, according to an earlier report from the Commerce Department. The stockpile had gone up 3.1% from August and was 20% higher than a year ago. Meanwhile, new-home sales in September were 0.1% below last year’s level."
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There’s not a whole lot to argue with there. But the more interesting question was raised by Justin Lahart today:  Are the home builders in a bear market?

Lahart observes:

"Going by the rule of thumb that says stocks are in a bear market when they have fallen 20% below their peak level, home-building stocks are in a bear market.

Since hitting its peak in July, the Dow Jones U.S. Home Construction Index has fallen 21%. Some components have fared much worse."

That’s an interesting take. Let me confess here that I  have not owned any Home Builders this run. I have missed the huge ruun, on the basis of my macro risk/reward analysis  (No one ever said full disclosure was fun).

JL gets to the really damning testimony later in his column:

"It isn’t the only bout of selling that home-building stocks have seen in recent years, but this downturn may have more significance. As the stocks pushed toward their peaks this summer, management teams, founders and other insiders were steadily selling shares — often a sign that business is peaking."

Good stuff.

The last housing related piece was a terrific article in the Personal Journal on the flattening (and possibly inverting) Yield Curve. The main takeaway was to note that as Long and Short Rates converge, there are good reasons to avoid bank and housing stock. Here’s the money quote:

LONG AND SHORT

The flattening yield curve — when the gap between short-term and long-term rates narrows — is generally bad news for small investors. Here’s why:

• It often signals an economic slowdown, which can lead to lower corporate profits and a stock-market decline.

• If the economy contracts, corporate bonds could also suffer, especially riskier high-yield issues.

• For conservative investors who prefer to keep their money in cash, though, rates are close to long-term bond yields.

NOTE to Editors:  I’m guessing this wasn’t in the Money & Investing section cause of yesterday’s Bonds Signal Challenges Ahead for Economy (just curious)

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Flattening Yield Curve

Wsj_20051115200030

courtesy of WSJ

 


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UPDATE: November 20, 2005 8:56am

Interesting chart showing the Homebuilders Index Returns for the past 5, 3 and 1 years:

Wsj_20051118180026

chart via WSJ


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Sources:
Housing Starts Declined 5.6% In October; Permits Also Slid
WALL STREET JOURNAL ONLINE NEWS ROUNDUP
November 17, 2005 9:43 a.m.
http://online.wsj.com/article/SB113223255579300111.html

AHEAD OF THE TAPE: Razing the Roof?
JUSTIN LAHART   
WSJ, November 17, 2005; Page C1
http://online.wsj.com/article/SB113218968417399646.html

A Message in the Bond Market
As Long and Short Rates Converge, Advisers Push Cash but Shun Bank and Housing Stocks
By MARK WHITEHOUSE, ELEANOR LAISE and RUTH SIMON
THE WALL STREET JOURNAL, November 17, 2005; Page D1
http://online.wsj.com/article/SB113219045297799668.html

Bonds Signal Challenges Ahead for Economy
MARK WHITEHOUSE
THE WALL STREET JOURNAL, November 16, 2005; Page C1
http://online.wsj.com/article/SB113206858024297634.html

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What's been said:

Discussions found on the web:
  1. David L Singer commented on Nov 17

    I heard Tony Crescenzi on one of those new Bloomberg radio Podcasts talking yield curve….

    What he said was that the general comparison you normally hear is on the relationship between the 2 and 10 year bonds…

    However, the more important relationship is the three month bill and the 10 year bond, which has a much larger spread then the 2 and 10 , that has narrowed even more dramatically in the past week or so…

    Anyone ?

  2. David L Singer commented on Nov 17

    I heard Tony Crescenzi on one of those new Bloomberg radio Podcasts talking yield curve….

    What he said was that the general comparison you normally hear is on the relationship between the 2 and 10 year bonds…

    However, the more important relationship is the three month bill and the 10 year bond, which has a much larger spread then the 2 and 10 , that has narrowed even more dramatically in the past week or so…

    Anyone ?

  3. calmo commented on Nov 17

    Greenspan has let it be known that the inverted yield curve is obsolete as a leading indicator of a recesssion.
    Yes, Estrella and hundreds of other economists that have published work on this correlation over that past decade are just…irresponsible.
    Its the Global economy that does it.
    Ok maybe when you get to be 80yrs old the mere sound of “flexible and resilient” conjurs up magic that can fix anything.

  4. Larry Nusbaum, Scottsdale commented on Nov 17

    There’s not a whole lot to argue with there. But the more interesting question was raised by Justin Lahart today: Are the home builders in a bear market?

    Lahart observes:

    “Going by the rule of thumb that says stocks are in a bear market when they have fallen 20% below their peak level, home-building stocks are in a bear market.

    REALLY? GREAT TIMING! THEY WERE ALL UP ABOUT 5% TODAY, ALONE. And, REITS have sprung back to life as well.

  5. nate commented on Nov 17

    the stat for today may be on the cover of today’s chicago tribune

    median IL household income, adjusted to 2004 $s

    year 1999 – $52,515
    year 2004 – $46,132

    see for yourself.

  6. calmo commented on Nov 18

    Ok nate you figure that’s a fair year, 1999, to use as a baseline or about as fair as those well turned ankles of the bride compared to her mother’s?

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