The housing market hit a bit of a snag this week with a 16.5% drop in housing starts in April announced Thursday. It was difficult to spin that data, because even after removing the more volatile multifamily data, the numbers still were down slightly from March for single-family homes.
But this month-over-month cooling is not the final word or even the beginning of the end. The fact is there’s much to be excited about in housing.
Remember, just like the general improvement in the unemployment rate, it is highly unlikely we are going to see housing go steadily higher in every data point. Investors have been lulled into thinking this in part because housing has snapped back more dramatically than the job market, but also because there is a hard investing thesis to be had behind housing trends.
In addition to the dollars and cents of simply buying real estate, there are soaring homebuilders like Toll Brothers (TOL) and PulteGroup (PHM), home improvement stocks like Home Depot (HD) and Lowe’s (LOW), and building materials companies like Sherwin-Williams (SHW) and Lumber Liquidators (LL).
Every single one of these stocks is up more than 40% in the past 12 months.
It’s natural to fret about housing, because it has a hard connection to your investments — and the fear that the run might be over after big-time gains.
But that worrying is very much uncalled for, even after the starts data this week.
First, looking beyond the month-to-month comparisons, single-family housing starts were actually up 20.8% year-over-year in April, proving the longer-term trend is soundly higher.
Furthermore, permits hit their highest levels in five years — so while starts themselves were soft, permits for future housing starts are flying out the door. Remember, the idea of watching housing starts is to gauge future supply (and hopefully demand) trends. Whether it’s an actual start or a permit in anticipation of a start, the idea of future growth is the same.
Earlier this week, Bill McBride over at Calculated Risk posted some great info from economist Tom Lawler about the continued decline in distressed sales: “In every area that has reported distressed sales so far, the share of distressed sales is down year-over-year — and down significantly in many areas,” McBride writes.
The fact remains that more houses are going up, sales are brisk and distressed properties are becoming less common.
That all adds up to a housing recovery, even if the recent starts numbers disappointed.
- Remember, real estate is all local — and some local housing markets are red hot. (Bloomberg)
- Case in point: Hard-hit Southern California sees its hottest median prices in five years as April sales hit their fastest rate since 2006. (DataQuick)
- Check out three ways to play the housing recovery. (InvestorPlace.com)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.