Silver Lining in Housing Numbers?

Housing is still the root cause of the financial troubles on Wall Street.  Today's report on New Housing Starts and Building Permits was ugly again, although it is this weakness that could be the seed of an eventual stabilization of the housing market. 

Nationwide, Building Permits fell 8.9% for the month in August and are down 36.4% year over year.  On a cumulative year-to-date basis they are down 33.4%.  Three out of the four regions were down -- the Northeast was hit the hardest on the month, plunging 21.0%, while the Midwest was actually up a slight 0.7%.  In between were the West, which was down 7.1%, and the all important South region was down 9.9% for the month.  Year-over-year declines ranged from down 24.9% for the month to down 48.7% for the West. 

Looking at Starts, the nationwide decline was 6.2% for the month and 33.1% for the year.  Cumulatively year to date starts are down 30.5%.  The Northeast was also the weakest on starts for the month, falling 14.5%, while the West actually saw an increase of 10.8%.  The Midwest was down 13.6% while the South fell 7.4%.  On a year-over-year basis, the Northeast was up a very sharp 56.1%, but then again, last year's number was anomalously low.  The Midwest was down 44.6% year over year, the South down 42.1% and the West was down 32.0%.  All of the regions are not created equal, with the South being far and away the most important, representing 45.3% of all starts in August, while the Midwest only represents 14.9%.

Why do I think this could be the seed of an eventual stabilization in the housing market?  Because of the first rule of holes: if you find yourself in one, stop digging -- in this case, new foundation holes.  This will allow the huge existing excess inventory of houses on the market to decline. 

In fact, I would argue that even at these levels, new housing starts are still too high, but at least we are moving in the right direction.  We still also have a bloated inventory of used homes that needs to be worked off, and housing prices are still way too high.  Based on long standing relationships between housing prices and incomes and of housing prices to rents, we are just about half-way through the decline in housing prices.  The rate of decline may slow, but the eventual destination has not changes.

Clearly though, this is not good news for the homebuilders, and I would continue to avoid names like Beazer (BZH), Pulte (PHM), Hovnanian (HOV), Ryland (RYL) and Standard Pacific (SPF).  Yeah, some of them look cheap on a book value basis, but the book value belongs on the fiction shelf.  I would also avoid mortgage related names like Washington Mutual (WM), Downey (DSL), National City (NCC), Comerica (CMA), Key Bank (KEY) and Wachovia (WB). 

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