There's more to November's strong housing numbers than meets the eye says Daniel Alpert, founding Managing Director of Westwood Capital.
Markets took off on Wednesday on the Census Department's data that suggested improvements in the U.S. home building sector and others. Good numbers are strongly connected with job growth in the construction industry; so many may think America can breathe a little easier now.
Wrong, says Alpert, if you were to dig a little further in the data, you may find it raises more concerns than relief.
Here's the data: "The numbers were quite good on both the starts and permits side, showing annualized, seasonally adjusted volume of 685,000 and 681,000, respectively. Actual, unadjusted, starts in November were 51,800 for the month. 50,400 permits were drawn in November. This is up, in both cases, by about 10,000 units (20%) from November 2010."
Here's the catch: A third of starts and permits were multifamily rental units, and all of the increase over November 2010 is attributed to multifamily construction. Single-family units were lower than the starts in November 2010. This could be indicative of increased poverty in America.
Here's the data: "There has been a significant drop off in the visible inventory of existing homes available for sale. Nationally, the number of such homes has fallen over the past year by 21.3% to 2.01 million units. There is some variance in the degree of decline regionally, but it is pretty much across the board and there is some measurable correlation between improvement in new home starts and the markets in which inventory has contracted the most."
A drop in home inventory is considered a good thing right now, as it brings supply closer to demand. It also triggers demand for newly constructed units.
Here's the catch: Alpert argues the visible existing home inventory numbers are down for the wrong reasons. "It is down because of the enormous backlog in the aggregate 'shadow inventory' of homes that are either in foreclosure, or are heading in that direction."
The foreclosure process is much slower process than it used to be. But as they are processed over the next 32 months, it's estimated 8.3-10.4 million foreclosed or liquidated homes will be added to the visible existing home inventory numbers.
With more existing homes available, newly constructed homes face a greater challenge in the market. The changes in the supply/demand dynamic don't bode well for the construction industry either.
Alpert concludes that even if visible existing inventory has declined and there was improved demand for newly constructed units, it's probably temporary.
Is this extreme pessimism justified? Which housing stocks are worth a closer look?
For ideas, we collected data on insider transactions, and identified a list of housing stocks that have seen significant insider buying over the last six months.
Theoretically, insiders know more about their companies than anyone else. So if they're using their own cash to buy the shares of their employers, you better pay close attention.
Insider executives are optimistic on the outlook of these companies and the broader housing market -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)
3. Texas Industries
4. PennyMac Mortgage Investment Trust
5. Campus Crest Communities
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
List compiled by Eben Esterhuizen, CFA. Kapitall's Eben Esterhuizen and Rebecca Lipman do not own any of the shares mentioned above.