Please ensure Javascript is enabled for purposes of website accessibility

Is the Roof Falling on Housing?

By David Smith - Updated Nov 15, 2016 at 1:06AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The housing activity level for January was the lowest in almost a decade.

It was not particularly surprising to most housing market observers that January starts fell from their December levels. But what did have the market abuzz was the magnitude of the drop. With a 14.3% decline to a seasonally adjusted rate of just 1.408 million units -- versus December's revision to 1.643 million units -- the housing activity level for the first month of 2007 was the lowest in nearly a decade.

Not since August 1997 has construction been begun on fewer haciendas in the United States. Indeed, the magnitude of the drop-off has more than a few observers questioning whether the nation's current housing slump actually will last longer than recently has been anticipated.

And the January numbers were released into a climate of gradually increasing concern about a higher mortgage foreclosure rate, especially among subprime borrowers, who have taken out adjustable-rate mortgages -- ARMs -- about 80% of the time, and almost as frequently have piggybacked a first and second mortgage to obviate the need for a down payment. Perhaps as a result, in 2006 the foreclosure rate among mortgaged U.S. households rose more than 40% over the prior year. And, in something of a spillover effect, last week ResMae Mortgage Corp. became the 20th subprime lender to file for bankruptcy.

The obvious concern is that something of a reverse wealth effect will take hold in the nation, as people feel less sanguine about the values of their homes, and therefore become more cautious spenders. With consumer spending constituting by far the largest sector of the economy, such a situation could constitute a real drag on economic growth.

So does all this seeming doom and gloom signal a soft housing market for all of 2007? And should investing Fools avoid the homebuilders as a result?

I have a couple of admittedly cautionary responses to these questions. First, I urge you to hearken back to the latter months of 2006, when the weather across much of the U.S. was unseasonably temperate. At that time, the higher-than-normal thermometer readings resulted in a few more starts in most regions than would have occurred had more normal temperatures prevailed. In January, the combination of colder temperatures and a sizable number of homes still in their early stages likely put the brakes on starts. Further, I would not read too much into the concern about subprime mortgage defaults. At this time, subprime loans constitute only about 6% of total U.S. mortgages, and so foreclosures in that area would need to escalate significantly to materially affect overall economic activity.

Finally, as I have said to Fools in the past, homebuilders' stock prices and housing start numbers are seldom in sync with one another. Since July, most of the U.S. builders have seen their share prices climb significantly. And Friday's release of the January start numbers did not materially affect the prices of the major builders. As such, I continue to urge Fools, particularly those able to invoke a somewhat longer-than-normal investment time horizon, to continue to keep an eye on such builders as Centex (NYSE:CTX), Toll Brothers (NYSE:TOL), and Ryland (NYSE:RYL).

For related Foolishness:

Got an opinion on homebuilders' stocks? Bring it to CAPS!

Fool contributor David Lee Smith does own shares of Centex, but not of any of the other companies mentioned. He welcomes your comments or questions. The Fool's disclosure policy lives in a van down by the river.

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Toll Brothers, Inc. Stock Quote
Toll Brothers, Inc.
TOL
$49.49 (-0.44%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.