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 weve
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 dont 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. Its 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. Its 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 cant 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 ). Its
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 Markmans daily trading service, Traders
Advantage, or his long-term investment service, Strategic Advantage.