The Zacks Analyst Blog Highlights: D.R. Horton, Plum Creek Timber, Fortune Brands, Berkshire Hathaway and Wal-Mart
Posted on May 18, 2011 at 09:30 AM EDT
CHICAGO, May 18, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: D.R. Horton (NYSE: DHI), Plum Creek Timber (NYSE: PCL), Fortune Brands (NYSE: FO), Berkshire Hathaway (NYSE: BRK.B) and Wal-Mart (NYSE: WMT).
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Here are highlights from Tuesday's Analyst Blog:
Housing Starts (or Stops)
Housing Starts fell in April to a seasonally adjusted annual rate of 523,000 from 585,000 in March, a decrease of 10.6%. However, the March numbers were revised sharply higher, from 549,000, so it is possible to see the decrease as 26,000, or 4.7%. Relative to a year ago, they are down 23.9%.
It's not that things were going great guns for the homebuilders last year, but sales were goosed by the end of the homebuyer tax credit. Thus the year-over-year decline is off of a relatively tough comp.
If one looks at only single-family houses, the picture was not quite as bad, but still not pretty. Single-family starts fell to 394,000 from 415,000 in March, a fall of 5.1%, and down 30.4% from a year ago. March starts were revised down from 422,000, so single family starts are down 6.6% from where we thought they were last month.
The volatile multi-family (Apartment, Condo and Co-op) sector plunged by 28.3% to an annual rate of 114,000 from 159,000. Year over year, multi-family starts are up 5.6%. The first time buyer tax credit was really not a factor in the multi-family starts a year ago. The total starts number was well below consensus expectations of a 565,000 annual rate.
In any absolute sense, the level of housing starts is just plain awful. The extremely weak rate of new home construction is a major drag on the economy. It is the principal reason that this recovery feels so anemic. The silver cloud is that fewer starts means that there are fewer houses added to the inventory of houses looking for buyers.
We still face an inventory glut, so a weak homebuilding industry is a key part of the repair process for the housing market. The inventory glut is concentrated in the used home segment of the market, and that is also where the "shadow inventory" resides. New home inventories are actually near historic lows in absolute terms. Used homes are pretty good substitutes for new homes, so that is a bit of a distinction without a difference.
Housing Starts peaked in June of 2006 at an annual rate of 2.273 million. We are thus 77.0% off of the peak levels. Single-family starts are 78.5% below peak levels.
The decline this month will speed the adjustment process, but also means more economic weakness over the next few months. On balance, I have to see the increase in starts as being a bad thing. We need the economy to get moving again, and add more jobs. With more jobs will come a higher demand for housing. However, we don't want to see housing starts rise without new home sales also rising, otherwise we will just be exacerbating the overall inventory problem.
Housing Hugely Important
It is hard to overstate just how important housing starts are to the economy. Yes, at this point, residential investment has declined to the point where it looks almost insignificant, just 2.21% of GDP in the fourth quarter, down from 6.34% of GDP at the height of the housing bubble. However, historically, residential investment, of which new home construction is the largest part, has always been the main locomotive in pulling the economy out of recessions.
Take a good hard look at the first graph below (from http://www.calculatedriskblog.com/) and the relationship between when the lines bottom and the light blue recession bars. If you want to know why this recovery seems so anemic, look no further than this graph. Even the 2001 recession, which was not caused by a housing downturn, saw a sharp acceleration in housing starts as the recession came to an end.
Of course, since starts were jumping but were not starting from a depressed level, that boom later became known as the housing bubble that put us in this mess to begin with. Every other recession was preceded by a sharp fall in housing starts, every other recovery saw housing starts lead the way.
This is no coincidence. Each new home built generates a huge amount of economic activity. It put construction workers back to work, and construction workers have been particularly hard hit in the Great Recession, accounting for over 25% of the total jobs lost, even thought they were less than 6% of the total workforce when the recession started. That is just the direct construction jobs, but lower building activity also means fewer jobs in the factories that produce building materials, which are counted as manufacturing jobs.
Clearly jobs in mortgage finance are also affected by the housing slowdown. They are not included in that "one out of four jobs lost" figure. As they and the construction workers go back to work they are also going to have more money to spend, perhaps even go out to eat, thus creating jobs for cooks, waitresses and busboys.
Housing starts are not just about profits and jobs at D.R. Horton (NYSE: DHI) and the other homebuilders, but about jobs and profits at firms as diverse as Plum Creek Timber (NYSE: PCL), Fortune Brands (NYSE: FO) and Berkshire Hathaway (NYSE: BRK.B). Indirectly, it even helps Wal-Mart (NYSE: WMT).
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