Housing Provides Shelter From Market Storm
Home builders have gone from being at the epicenter of the financial crisis to a haven in the latest bout of turbulence.
By Spencer Jakab
A Lennar Corp. construction site in Florida. Photo: Mark Elias/Bloomberg News The economic crisis made a mockery of the phrase “safe as houses” and turned the adjective “contained” into a financial punchline.
These days, though, investors in home-building and related industries are the ones laughing all the way to the bank amid a new set of global growth worries. As of midday Monday, a popular exchange-traded basket of residential construction stocks was beating the S&P 500 by more than 10 percentage points in the year to date. That lead has mostly materialized in the past month.
One reason home builders are seen as a safe harbor in this turbulent market is that the industry stands to benefit from any delay or slowdown in Federal Reserve rate increases. That suddenly looks more likely given global growth concerns. Another reason is that despite making a dramatic recovery from the latest recession, it is hard to describe the housing industry as red-hot.
Earlier this month, the U.S. government reported that housing starts reached a seasonally adjusted 1.206 million units a year in July—the highest since October 2007. To understand why housing construction likely has a long runway ahead of it, independent of the rate and affordability angle, put that number into some perspective.
Since 2008, housing starts have averaged 791,000 on an annualized basis. Adjusted for population, that is less than half the amount between 1990 and 2007. That period encompassed the housing boom but also two recessions.
Even the latest figure is just two-thirds of that pace on a population-adjusted basis. In other words, there is both significant pent-up demand from a long construction slump and still a significant gap between today’s level and historical norms.
The latest indicator of housing industry health will come on Tuesday with the closely watched S&P/Case-Shiller Home Price Index. The 20-city gauge was seen rising by 5% in June compared with a year earlier, according to a survey of economists conducted by The Wall Street Journal. Much like the pace of housing starts, that doesn’t suggest a runaway market based on cheap money. Prices still are down by 14% from their April 2006 peak. Meanwhile, the homeownership rate, which peaked over a decade ago, recently hit a 48-year low.
A market storm may be brewing, but housing’s foundations look pretty solid.
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