October Housing Starts Down, Permits Up: Should You Invest?

A string of housing data released last week clearly indicates that the housing recovery is well on track in the latter half of the year.

While housing starts declined in October, building permits and sales of existing homes improved.

Data released by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau on Nov 19, showed that housing starts declined 2.8% sequentially in October to an annualized rate of 1.08 million units.

Nevertheless, housing starts improved 7.8% year over year, suggesting that the broader housing trends are very much in place. Moreover, single-family housing starts rose 4.2% in October, clearly indicating that the drop in housing starts in the month was driven by a slide in multi-family construction — a rather volatile sector.

Building permits — a gauge of future constructions — improved for the second consecutive month in October. After improving 1.5% in September, building permits grew 4.8% in October.

Sale of existing homes rose 1.5% in October for the second month per data released on Nov 20. Interestingly, sale of existing homes rose 2.5% from the same month last year — the first year-over-year increase since Oct 2013.

The median existing-home price rose 5.5% in October but it was much less than the 11.5% increase seen in October last year. New homes inventory for sale declined 2.6% to 222,000 units in October. This is a 5.1-month supply at the current sales pace, higher than last year.

Home builders are also becoming more optimistic as demand for new homes increases with the improving job market and growing consumer confidence. Homebuilders’ confidence, as indicated by the National Association of Home Builders (:NAHB)/Wells Fargo housing market index, rose 4 points to 58 in November – a relief after a drop of the same magnitude in the number last month.

Stabilizing mortgage rates this year, improving job market, moderating home prices and rising inventory levels have paved the way for a steady recovery in the housing sector in the second half after a slump at the beginning of the year. The housing market momentum is expected to continue in 2015 as well.

Though higher than the average rate in 2013, mortgage rates in 2014 are still below historical levels, making housing affordable. According to the Freddie Mac mortgage survey, the 30-year fixed mortgage rate has gone down from 4.43% in January to 4.04% in October.

Moreover, though home prices have been rising in 2014, the rates have moderated since the last year.

A report from the S&P/Case-Shiller home price data through August showed a persistent slowdown in price increases this year. The year-over-year reading for the 20-city index showed price increase of 5.6% in August, softer than the 6.7% increase in July.

Homebuilder stocks rose on Friday, Nov 21, following the upbeat housing data. While Lennar Corp. (LEN) and DR Horton, Inc. (DHI) rose less than 1%, Toll Brothers, Inc. (TOL) Ryland Group, Inc. (RYL), KB Home (KBH) and PulteGroup Inc. (PHM) witnessed more than a 1% rise.

However, what keeps us concerned is the probability of a rise in short-term interest rates in 2015 as the Fed ended its six-year long quantitative easing program in October, assuming that the economy will not need any meaningful assistance at the current level

Though the Fed has reaffirmed that the key interest rate will be kept at the record low level for a ‘considerable time,’ investors have started speculating about the timing of the planned rate hike.

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