“Davidson” on Housing

“Davidson” submits:

Two headlines standout this morning:

• · Sales of new single-family homes in April 2012 were 343,000 at a seasonally adjusted annual rate, up 3.3 percent from March’s revised rate and up 9.9 percent from April 2011. Link: New Residential Sales (April 2012).pdf
• · Toll Brothers reports a surprisingly strong 2Q12. Link: http://www.globenewswire.com/newsroom/news_printer.html?d=257002&print=1

A reviving housing market is obvious in both the macro data (see chart below) and the micro data (see Toll Brothers’ Press Release). The history of the Monthly Supply of (New) Homes for Sale Trend Line indicates that home building accelerates as the monthly supply falls below the ~6mos level and slows above the ~7mos level. In the current period Toll Brothers’ 2Q12 report reflects the strong and positive business climate that they first described in August 2011. It is the coupling together of “Top Down” macro data with “Bottom Up” micro data that provides the basis for continued optimism at this time.

Residential Housing Market has continued unabated from August 2011 in spite of numerous panic inducing media reports. I have lost track of the number of times someone has called for our economy to plunge again into “Recession” or an outright “Economic Collapse” the past 3yrs. All along the economic data has steadily improved and the SP500 has risen over 100% from the lows of March 2009.

The economic data continues to reflect improvement. I expect the SP500 to remain correlated to this improvement over the long term as it has historically. Residential Construction Employment expansion, the final piece of the economic recovery/expansion process, should become much more visible in future months. The employment multiplier for related industries is a factor of 8 according to the Mortgage Bankers Assoc. and this does not count the added employment needed to provide services and retail sales to those newly employed in Residential Construction. As an indication of the wide ranging effect of accelerating US employment, last week Ford and Chrysler indicated that they were adding shifts and cutting back on the normal summer shutdown in order to meet demand. There is very good news where ever one looks if one wants to see it!!

Note: The economy moves slowly. It does not “Turn On” nor does it “Turn Off” throughout the year. The economic cycle begins slowly, gathers some steam as we move into expansion and then slowly matures before it corrects. By investing with this pattern in mind one does not try to trade the many periods of fluctuating market psychology which erupt and disappear unpredictably. In my opinion the better approach is to capture as much of the economic up-trend as one can identify and to avoid as much of the economic down-trend as one can.

Optimism remains warranted with this morning’s reports.