Markman: It’s Still All About Housing

One of the big economic news data points of the past few weeks came last week on the real estate front when we learned that new home sales fell 16.9% month over month in February to 250,000, a record low. Yet it is hard to impress investors with anything negative on the housing front, so homebuilders’ stocks still rose. Goldman Sachs actually added  Pulte Homes  (NYSE: PHM ) to its conviction list, which does not sound like a good thing these days. All investors need to care a lot about homebuilding, even though it seems like we’ve heard nothing but bad news. It is so important, because this is the black hole into which so many good-paying American jobs have fallen — kids who graduate high school and don’t go to college, kids who go to junior college or trade school, dads and moms who are lightly skilled and worked as carpenters apprentices, or dry-wallers or mason apprentices during the last big advance for home construction. These are the jobs that cannot be outsourced to India, and these are the jobs that have disappeared. It’s not some evil plan by a Mumbai-based Dr. Evil that has stolen so many construction jobs and whisked them to India. It was a period of overbuilding and over-leverage that resulted in too many houses being built back in the mid-2000s, and now we are paying the price in low employment as those workers have had a hard time finding equivalent employment.  Forget about Libya and Japan for a minute, and just focus on the open fields and urban streets of the U.S., where we used to hear the clang of hammers. The lack of noise is more deafening than a Mirage jet flying over Benghazi. It’s hard to even grasp how bad new home sales are now, which is probably why Goldman took a flier on Pulte. However, I think we have heard that “it can’t get any worse” for two years now, and it keeps getting worse.  About the only construction stock that I have recommended of late is the amazingly resilient construction supplies wholesaler  Fastenal  (NASDAQ: FAST ). It’s good to go on its recent dip even though sales in the Northeast fell to only 15,000 annualized last month, or little more than 1,000 a month, in a region that has a population of 55 million souls! The wipeout in new home sales over the past few years has been much more severe than the fall in existing home sales. According to analysts at Capital Economics, the main reason for the discrepancy is that existing home sales are being boosted by the turnover in distressed sales of foreclosed homes that are sold at a significant discount, often by cash buyers or investors.  Distressed sales accounted for 39% of existing home sales last month. With as many as 4.5 million homes in the foreclosure pipeline, demand for new homes is likely to suffer for several more years unless builders are willing to compete by slashing prices.  With new home sales at a record low, and prices falling by 8.9% over the past year, and excess supply rising again, CapEcon analysts note that there is no incentive for builders to build more homes. If anything, it looks like residential construction will continue to be a drag on economic growth this year. That is going to be tough not just for builders but for furniture retailers, swimming pool makers, landscapers and construction workers.  In sum, the home-building depression is a much bigger problem for the U.S. than Libya and Japan combined. For more guidance like this, check out Markman’s daily trading service, Trader’s Advantage, or his long-term investment service, Strategic Advantage.
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