It occurred again Wednesday. Once a month, as regularly as the swallows returning to Capistrano, those with an interest in the housing market drop all other activities to await the Commerce Department's rendering of housing starts and building permit issuances for the prior month. February's numbers were disclosed Wednesday, and as usual, those numbers revealed little about the current state of housing in the U.S.
To be sure, the overall start number was relatively strong, coming in 9% above the prior month. Further, start activity in the South was up by 18%, which was impressive, but not as strong relatively as the 26.4% jump in the West. But new starts fell by 29.7% in the Northeast, the biggest one-month decline in more than a decade and a half. And the Midwest tacked a 14.4% decline onto January's 16.4% drop. You'll recall that overall, January was down a substantial 14.3% from December.
Builders' applications for new permits again dipped by 2.5% to an annual rate of 1.532 million units. As such, February marked the 12th decline in the past 13 months for permits.
So what does this latest regurgitation of numbers by Commerce mean? I think that while they're insufficient to permit a diagnosis of housing health, there are several factors that should be borne in mind as one looks at the numbers:
First, in any single month -- particularly in winter -- starts are as much a weather report as they are an assessment of the health or direction of housing. Note the pullback in the Northeast and the Midwest, contrasted with strength in the West and South.
Second, I can't buy the notion propounded by some that the Federal Reserve might lower rates more quickly than it otherwise would just to prop up the housing industry. I'm convinced -- and you can't see it, but I'm now wearing my graduate economist's hat -- that the Fed will only nudge rates lower when it is completely satisfied that the nation's inflation beast has been tamed.
Third, keep in mind that the monthly housing numbers bear a very high margin for error. For instance, that margin on February's 9% overall gain may be as great as plus or minus 10%.
And fourth, with continuing high inventories of unsold homes -- both new and pre-owned -- in most regions of the nation, I'm not totally nonplussed by soft permit numbers. Obviously, the more quickly we can get those inventory numbers tamped down, the more quickly housing will return to its prior health.
Finally, what does all this mean for Foolish investors? I've said in the past that those with an eye toward making money in the homebuilding sector should possess a somewhat longer-than-normal investment time horizon. Given the extra confusion now being unleashed by concerns about some of the mortgage lenders, a housing recovery is unlikely to occur until much later in the year -- perhaps not until 2008.
Having said that, I believe there will ultimately be money to be made from investing in certain of the stronger builders. My favorites for the longer term continue to be well-managed national builders Centex (NYSE:CTX) and Ryland (NYSE:RYL), along with the nation's largest luxury homebuilder, Toll Brothers (NYSE:TOL).
For related Foolishness:
- Can Florida Save Its Homebuilders?
- Eagle Materials Hovers Until Homebuilding Recovers
- Taking a Toll on Homebuilders
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Fool contributor David Lee Smith owns shares in Centex, but not in the other companies mentioned. He welcomes your questions or comments. The Fool has a disclosure policy.
