New home sales report shook up the street because it was pretty good...all things considered. The annual rate of sells in January came in substantially better than expected at 468,000. This was the best pace since July 2008, but there were other parts of the report that excite me and help to bolster the conviction in one of our main investing themes for 2014-The Year of Construction and Rebuilding.
Open ideas in this space include Vulcan Materials (VMC), Masco (MAS), Manitowoc (MTW) and Lumber Liquidators (LL) plus a couple of homebuilders. Most are already up huge and all are still open. In addition to a giant spike in construction jobs in an otherwise disappointing January employment report, there are additional signs this is still the space to be long. On that note, the wildcard is demand and access to credit.
New home supply has been improving, but it's currently at the 4.7 month supply, which is significantly less than its peak, which was above its 12 months supply in 2008. The actual peak in inventory for new homes was April 2007, where 548,000 homes sat ready for the rabid demand while existing homes peaked at 4,561,000 in June 2007. There are 184,000 new and 1,900,000 existing homes for sale now. A blip in demand could really send prices significantly higher.
If They Build It Will They Come?
Ironically, before we can have a demand driven spike in home prices those very same prices need to come down, and lately that's exactly what's happening. Toll Brothers offered guidance for the year that sees homes on the luxury end lower than the fourth quarter, while new home sales prices declined in January. Main Street has to step up, but a combination of lack of confidence and tough lending standards keeps people paying rents that are much higher than what a mortgage would cost.
The housing rebound has been an all-cash, all-investor phenomenon that has seen overseas investors buying the bottom while Americans fretted.
The last existing home sales report was a serious red flag as first time buyers dipped to 26% of total buyers, the lowest reading since the NAR began recording the measure in 2008. Somehow the number has to get above 40%. In the meantime, new flood insurance implemented last October has resulted in 40,000 cancelled or delayed closings, and mortgage insurance has also put a damper on an already reluctant public. But, it's reluctant banks that continue to pose the largest obstacle. Believe it or not, some banks are actually tightening credit standards on loans.
The tea leaves, also known as the Federal Reserve Senior Loan Officers Survey, show declining interest in getting a loan.
For me, jobs, housing, and confidence are all connected and must find a way to improve simultaneously. Forget the market rally, there is no "wealth effect" until Americans believe their new home prices are stable and demand picks up dramatically. With that said, all of the pieces are in place for an authentic rebound in housing that creates jobs and optimism.