Highlighted stocks include D.R. Horton (DHI), Bank of America (BAC) Wells Fargo (WFC), Weyerhaeuser (WY) and Masco (MAS).

First, let’s start with the good news. Nationwide, housing starts fell to a seasonally adjusted annual rate (SAAR) of 466,000 in January, down 16.8% from a 560,000 rate in December and down 56.2% from a 1,064,000 rate a year ago. We are currently faced with an unprecedented glut of houses for sale, and building more of them simply does not make any economic sense.

Building permits also fell, but not as sharply, to a 521,000 rate from 547,000 a year ago and 1,052,000 a year ago, drops of 4.8% for the month and 50.5% on a year-over-year basis. The higher level of permits might indicate a little bit of a rebound in starts in the coming months, but nothing very dramatic.

The excess housing supply is like a cancer on the economy, and falling housing starts is like chemotherapy. Like chemo, it can be very painful, and instead of hair falling out, jobs fall out. This is the bad news of the decline in housing starts — it means that fewer framers, carpenters, plumbers and electricians will have jobs. Construction has consistently been one of the areas that have suffered the biggest job losses so far in this recession and it does not look like it will stop anytime soon.

Housing completions are also falling very sharply, but remain far above the level of starts. They fell to a SAAR of 776,000 in January from 1,024 in December and are off 41.7% from a SAAR of 1,331,000 a year ago. As houses get completed, and there are fewer starts to replace them, people get laid off, or at the very least have far few hours of work and much lower incomes.

With commercial real estate construction starting to go off the cliff, it will be adding to the problem, not ameliorating it as it has for most of the last 18 months. At this point, the only hope for those folks is work-related to the recently passed stimulus bill. That will help some of them, but far from all of them.

Housing starts declined sharply in all four regions. The worst hit was the Northeast, which is the smallest of the 4 regions. Starts there fell an eye-popping 42.9% for the month and are down 73.7% year over year. It’s not exactly like housing starts were booming a year ago either. The next hardest hit area was the Midwest, which was down 29.3% for the month and is off 66.0% from a year ago. The South, which is by far the biggest and most important region for housing, posted a 12.8% decline for the month and a 53.7% drop on a year over year basis. The West held up best, posting “only” a 6.4% drop for the month and down “just” 45.4% year over year.

The level of housing starts was again the lowest on record, and those records go back to 1959. Keep in mind that the population of the country is now much higher than it was in any previous housing decline, so on a population adjusted basis, nothing in history even comes close (data is not available for the 1930’s or during WWII).

We are starting to make some progress on the housing front. How much progress will be seen when the new home sales numbers come out next week. A pick up in new home sales, or at least a slowing of the decline there, would be very good news.

However, the problems on the employment front are likely to continue to get worse for the foreseeable future. This will have a feedback effect into the housing picture, which means the bottoming process in housing might take a while, but at least we are probably closer to a bottom in housing starts and sales than we are to the top. It might be a broad and flat valley, but perhaps, just perhaps, we don’t have that much further to fall.

That being said, I would continue to avoid anything housing or mortgage related, including homebuilders like D.R. Horton (DHI), big mortgage lenders like Bank of America (BAC) and Wells Fargo (WFC), lumber companies like
Weyerhaeuser (WY) and building products companies like Masco (MAS).

Read the full analyst report on DHI

Read the full analyst report on WFC

Read the full analyst report on MAS

“MAS” Free Stock Analysis: Buy? Sell? Hold?
“BAC” Free Stock Analysis: Buy? Sell? Hold?
“DHI” Free Stock Analysis: Buy? Sell? Hold?
“WFC” Free Stock Analysis: Buy? Sell? Hold?
“WY” Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Last 5 posts by Dirk Van Dijk

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