Starts & Permits at Record Lows

Discussed in this post are D.R. Horton (DHI - Analyst Report), Pulte (PHM - Analyst Report), Weyerhaeuser (WY - Analyst Report), Masco (MAS - Analyst Report) and Whirlpool (WHR - Analyst Report).

In December, both Housing Starts and Building Permits fell to their lowest level on record, and those records go back to 1959. Furthermore, the figures are not adjusted for population growth, and there are a lot more people in the country than there were back when Ike was president, or even in the last major housing downturn in the early 1990's, or in the previous worst housing decline in the early 1980's.

From a big picture point of view, however, I see declines in housing starts and permits to be good news, since it will allow for the huge inventory overhang to be worked off. To put it another way, any new residential investment at this point is simply mal-investment.

However, I am sure that the vast majority of construction workers do not share my sentiments. Look for many more layoffs in the construction industry in the months ahead. It is not good news for the overall economy, note in the graph below (courtesy of http://www.calculatedriskblog.com/) that a rebound in housing starts is generally one of the keys to getting the economy out of recessions. The economy is unlikely to revive until we see a strong and sustained recovery in new housing, and I see little reason for that to occur anytime soon.



Turning first to Starts, nationwide they were off a sharp 15.5% to a seasonally adjusted annual rate of 550,000, and were off 50.6% from a year ago, and down more than 75% from their peak back in the beginning of 2006. These results were far worse than the consensus expectations of 605,000 starts.

However, November starts were revised up to 651,000 from the originally reported 625,000. The decline is accelerating, with starts down 33% since September.

Regionally it was a mixed bag in December, with Starts actually climbing 12.7% in the Northeast. Even with the increase, the region is still far and away the least important, accounting for only 11.3% of total housing starts. On a year-over-year basis, the Northeast is down 38.6%. The West also held up relatively well with a 2.2% decline on a month-over-month basis and down 38.5% for the year.

The South and Midwest were simply devastated, down 22.2% and 24.5%, respectively, on a monthly basis and down 49.5% and 41.6%, respectively on a year-over-year basis. The South is the 800-lb gorilla among the regions, still accounting for over half of all housing starts, even after this decline.

Building Permits are the best indicator of future Housing Starts, and they are not indicating any near-term turn around. Nationwide Permits fell to an seasonally adjusted annual rate of 549,000, a 10.7% decline from November and down 50.6% from a year ago.

The regional picture was somewhat different that the data on starts, with the South holding up best at just a 2.4% monthly decline, and down 49.1% on a year-over-year basis. The West and Midwest were the hardest hit on a monthly basis, down 21.1% and 19.4%, respectively. On a year-over-year basis, they are down 52.2% and 50.0%, respectively. On a year-over-year basis, the Northeast is the worst hit, down 54.5% and it is down 10.3% from November.

I know I sound like a broken record on this, but stay far away from the homebuilders like D.R. Horton (DHI - Analyst Report) and Pulte (PHM - Analyst Report). Also avoid suppliers to them like Weyerhaeuser (WY - Analyst Report) and Masco (MAS - Analyst Report). Major appliance firms like Whirlpool (WHR - Analyst Report) are also poorly positioned.

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Read the full analyst report on WHR

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