By Stephen Percoco, CFA :
Single-family (( SF )) starts not seasonally adjusted (( NSA )) were up 6.9% year-to-date cumulatively through March, but the monthly year-over-year increase decelerated during the quarter. March's seasonally-adjusted annual rate (SAAR) of 867,000 units was up 5.2%, year-over-year. The three-month SAAR average of 889,000 was down from January's peak of 897,000, but up 6.0% year-over-year. Although there has been a modest deceleration in SF starts since the beginning of the year, the longer-term trend remains up.
Single-family permits: The March SAAR of 840,000 units was up 1.7% year-over-year but down 5.5% from February's 889,000 units, which was a peak for the current recovery (since 2009). NSA SF permits were up 5.5% in 18Q1. That's the slowest quarterly percentage gain since 16Q3 and slowest first quarter gain since 14Q1. Here too, there has been a recent deceleration in the rate of growth, but the trend is still up.
Completions. NSA SF completions increased 9.1% in 18Q1. On a rolling 12-month basis, the rate of increase in SF completions has decelerated from 15.0% in Jan. 2017 to 7.4% in March 2018. March's SAAR of 840,000 units was down 4.7% from February but up 3.7% over the prior year. Despite the longer decelerating trend, SA SF completions were up in 18Q1 vs. 17H2 levels; so there has been a modest pick-up in SF completions in 2018. The long-term trend remains up.
New home sales: SA March new home sales were clocked at a 694,000 unit annual pace, up 4.0% from Feb. and up 8.8%, year-over-year. The March SAAR was a new high for the current housing recovery. NSA new home sales increased 9.6% in 18Q1. The year-over-year percentage increase in new home sales has been picking up with each successive month in 2018; but the rate of increase is not as strong as in 2013, 2015 and 2016. As with starts and permits, the long-term trend in NHS remains up. The faster pick-up in new home sales in recent months should begin to show up in starts and permits soon.
Although the supply of new homes for sale has increased steadily since bottoming in 2012, the months' supply of inventory has remained between 5.0 and 6.0 months since 2013.
Existing Home Sales: The SA pace of existing home sales has inched higher with each successive month in 2018, but the March pace of 5.6 million units was down 1.2% from a year ago. The pace of EHS has mostly been flat since 2016. However, inventories of existing homes available for sale have declined from about 2.3 million units in May 2015 to 1.7 million units in March 2018. With flat sales and declining inventories, the months' supply of inventory has fallen from 5.2 in May 2015 to 3.6 in March 2018. (The March figure is actually up from the low of 3.2 months' supply recorded in January.)
The National Association of Realtors, which produces the EHS data, says that the decline in inventory has restrained home sales and been a primary contributing factory in the rise in house prices over the past few years. Year-over-year increases in existing home prices have averaged 5.9% since 2015.
S&P/Case-Shiller House Price Index: S&P CS's national house price index has shown year-over-year increases of slightly above 6.0% in recent months (through February 2018). That is up from the average 4.0%+ year-over-year gains recorded in 2015.
Mortgage Rates: Since the beginning of the year, the average 30-year mortgage rate, according to Freddie Mac, has risen about 55 basis points to 4.55%. So far, the pace of both new and existing sales has not been affected by the increase. New sales are up. Flat existing sales have been attributed to inventory constraints. It is possible that the recent moderation in single-family housing starts and permits may be attributable to caution by builders as a result of the most recent bump in mortgage rates. However, the modest acceleration in new home sales this year should alleviate those concerns, at least temporarily.
Mortgage rates could rise by another 50 basis points or so this year, if the FOMC follows through on its plan to normalize interest rates. So far, however, the recent gains in employment, personal and household income and high consumer confidence have offset the negative impact of mortgage rates on housing affordability.
Homeownership and Vacancies: With the steady increases in single-family sales and production, the homeownership rate has risen a bit since bottoming out at 62.9% in 16Q2. The rate for 18Q1 was reported to be 64.2%, flat with 17Q4. Rental vacancies have been holding around 7%, which is somewhat surprising and is probably due to quirks in the way that the Commerce Dept. reports the data. I would have expected to see a higher rental vacancy rate with the pick-up in homeownership. Owner vacancies ticked down another notch to 1.5% from 1.6%. The owner vacancy rate is down from a peak of 2.9% in 2008; but it is now below average levels recorded before the 2008 financial crisis. Yet, a significant number of vacant homes remains off the market.
Wells Fargo/NAHB Housing Market Index: The HMI, a measure of homebuilder sentiment about current and future sales, slipped another notch to 69 in April and is down from a post-financial crisis peak of 74 set in December 2017. Since December, the greatest declines in the HMI components have been in current sales and traffic, but builder sales expectations over the next six months are holding close to their December peak level.
Publicly-traded Homebuilder Unit Sales Data: Average gains for nine of the publicly-traded builders that I track (and that have reported results so far) show that unit closings were up 9.9% in 18Q1, while net new orders were up 12.9%. This was the second consecutive quarter of double-digit year-over-year gains in new orders. The increase in orders was greater than, but generally consistent in direction with the increase in national new home sales. Some builders benefited from recent acquisitions. Average prices for both closings and orders were up between 3.0%-3.5%.
In 18Q1 homebuilder earnings reports, the CEOs attributed recent gains primarily to the success of their individual strategies for growing sales and profits. They do, however, acknowledge the support from continuing strength in housing market conditions, which they generally attribute to continuing job and wage growth and low housing inventories that have offset the negative impact of rising house prices and mortgage rates.
With the high single-digit increase in home closings and, for some builders, the boost from acquisitions, 18Q1 revenue gains ranged 6.5% to 27.5%. Earnings generally rose on average by a much greater percentage, ranging from 17.1% to nearly a four-fold increase for Lennar. Beazer Homes reversed a prior year loss. KB Home posted a loss due primarily to the impact of the new tax law.
Homebuilder Share Prices and Valuations. After rising at a near-parabolic rate in the 2017 fourth quarter, homebuilding stocks sold off sharply in January and have been struggling to find a bottom since. Year-to-date (through May 4), the Lark Research Homebuilder stock index is down 8.7%, worse than the 0.4% decline in the S&P 500 and the 2.0% gain in the Russell 2000.
Despite the run-up since the February 2016 market bottom, homebuilding stocks remain cheap to the overall market. According to my calculations, the average homebuilding stock now trades at 10.3 times anticipated 2018 earnings and 9.2 times projected 2019 earnings. That compares with forward multiples of roughly 17 and 15 for the S&P 500.
Although the homebuilders have historically traded at a discount to the market, it is still possible for the group to outperform. Assuming no change in forward multiples, homebuilding share price returns will equal the rate of growth in earnings. Consensus estimates anticipate that homebuilder earnings will grow on average by more than 40% in 2018 and by nearly 20% in 2019.
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