2003 Housing Construction Best Since 1978

[adios]

Housing constuction numbers way higher than expected for December of 2003. Housing sector remains strong. Fed has all but said they're on hold for 2004. Also bond market determines yield curve shape form 2 years on out as it's based on inflation expectations. Carry trade (borrow short, lend long) should be a winner for 2004 and my crystal ball only sees one year ahead at most and then it always seems to have plenty of cracks [img]/images/graemlins/smile.gif[/img].

2003 Housing Construction Best Since 1978
13 minutes ago

By JEANNINE AVERSA, Associated Press Writer

WASHINGTON - Residential construction activity picked up in December, helping to make all of 2003 the best year for home builders in a quarter-century and underscoring the critical role the sector played in the economy's resurgence.


The Commerce Department (news - web sites) reported Wednesday that housing construction increased by 1.7 percent last month from November — ending 2003 on a high note. For all of last year, the number of housing units that builders broke ground on totaled 1.85 million, up from 1.70 million in 2002.


The total for 2003 marked the strongest performance since 1978, when housing construction came to 2.02 million.


"There is no doubt about it — housing is the shining light in the recovery," said Susan Wachter, a real estate professor at the University of Pennsylvania's Wharton School.


December's performance, meanwhile, was a lot better than analysts expected. They were forecasting a nearly 6 percent drop in activity.


The housing market — powered by low interest rates — was one of the main forces supporting the economy last year. The sector's strength contributed to the blistering 8.2 percent growth rate in the economy in the third quarter of 2003 — the best performance in nearly two decades.


"The only complaint I heard from builders last year is that they can't get enough land. We only get that complaint when things are really good," said Michael Carliner, economist at the National Association of Home Builders.


But on Wall Street, the report failed to cheer investors. The Dow Jones industrial average was off 10 points and the Nasdaq was down 23 points in morning trading.


Economists believe the housing market probably will slow a bit this year — but still register healthy activity — based on expectations that long-term mortgage rates probably will creep higher later this year.


Builders expressed less optimism about sales' prospects for January as well as in the next six months, according to a monthly survey by the National Association of Home Builders.


Rates on benchmark 30-year mortgages sank to a four-decade low of 5.21 percent in the middle of June and have bounced around since then. Last week, rates on these mortgages stood at 5.66 percent, a six-month low.


With signs that the economy is gaining ground, analysts expect Federal Reserve (news - web sites) policy-makers to hold short-term interest rates at 1 percent, a 45-year low, when they meet next week. Some economists believe rates will stay where they are for the rest of this year and into 2005 because inflation is low and the labor markets still need time to heal. Others, however, believe the Fed could start nudging rates up later this year if the economy goes gangbusters.


In another encouraging sign, housing permits — a good sign of current demand — increased by 3.3 percent in December from the previous month. For all of 2003, permits totaled 1.86 million units, the highest since 1972 and up from 1.75 million in 2002.


Economists believe the economy slowed to a rate of around 4 percent to 5 percent in the fourth quarter of 2003 as the stimulative impact of the President Bush (news - web sites)'s third round of tax cuts and a refinancing frenzy faded. Bush in his State of the Union address on Tuesday evening called on Congress to make the tax cuts permanent in an effort to make the economic recovery lasting.

[AceHigh]

I think housing stocks should be strong for the forseeable future.

FWIW, the IBD 100 until recently was about 20% or more housing stock, recently it has been around 5%. So I guess IBD disagrees with us.

[adios]

I think demographics, low mortgage rates, lots of liquidity in financing, and the tax advantages of home ownership will keep this market strong for as far as my crystal ball can see. IBD rankings do incorporate reletive strength so if the perception that housing will slow takes hold housing stocks display poor relative strength. If this perception is wrong then earnings will still come through and when the perception changes relative strength improves. Everybody and their brother has stated that interest rates will rise this year. IMO many believe that since interest rates will rise this year the housing sector will have to slow down. Well interest rates have fallen so far in 2004. Today the bond market is rallying as I write with the 5 year treasury trading at less than 3%, ten year at less than 4% and 30 year way south of 5%. Mortgage rates continue to fall, lenders are heading up with some hitting new highs as well as Fannie Mae hitting new 52 week highs.

[GeorgeF]

Home construction is good if you are in that business or want to buy a new home. I am not sure if this is good news if you own an older home in a luke warm market. Remember home builders will keep building until sale prices fall to building plus land costs. People who expect to get income from their properties will be disappointed as anyone with an income can get a nothing down home loan these days.

[AceHigh]

I agree. I don't think rising home interest rates hurt the home builders until they really start to rise. People who want to buy new homes will continue to purchase them.

[squiffy]

Well, you were absolutely right about CFC. It turned out to be a huge money making opportunity, if you had the courage to buy in at 70 or so and sell yesterday at about 83 to 84. I bought about 10 contracts of the 2 year puts at strike price 80. I am hoping that after 3-4 good years, housing will eventually start to cycle downward over the next year to year and a half and associated mortgage and mortgage insurance companies will drop downward.

Of course, since it could continue like this for another year or so, I didn't put in all that much money, maybe about 12 or 13K.

I am hoping CFC drops back down to 40 or 50 over the next 2 years. Am looking at MTG, which seems much more volatile than CFC and also much more likely to go down.

BUt there hasn't been a spike up in MTG, as in CFC so hard to find a time to buy in.

[squiffy]

Whenever something is the best in 30 years. It is often a peak. You need to consider some countervailing factors. People can only buy so many homes. One, two at the most if they are buying a vacation home. I suppose some wealthy people may buy 10 or more to speculate.

But note that in California the percentage of people who are using ARMS has gone from 30% of mortgages to about 60% of mortgages. This is very risky.

If our economy starts to improve and heat up, which seems to be happening based on profit reports from major companies, interest rates will rise as companies compete for credit and as the Fed raises rates to combat inflation.

Many of these people who have bought homes, may have bought too much home. And may not be able to make mortgage payments as interest rates rise. If they are forced to sell their homes or go into bankrupcty, home prices may drop in many areas, or at least not rise at the same rate we have seen in the past 3 years.

This has been going on for 3-4 years now. While it might go on for 10, with each succeeding year that home sales and home prices post new highs, it becomes more and more likely that that will be a peak.

Home prices may have very long cycles, but they have cycles. And as sure as there is a high, there will ultimately be a low.

Demand for housing is simply not unlimited. I think a huge percentage of people who want a home and can afford a home have bought one. Demand has got to slow down eventually.

Analogously with computer and car purchases you see cycles. Once you have a computer, it is good for 3-4 years, or longer if you are on a tight budget. Then eventually you have to buy a new one.

It's not like coca-cola where people can always drink many more extra cokes. You won't see every family buying 5 homes. With every record set of home purchases, that much demand is now off the market.

And even if builders are being careful not to overbuild and not to build too many homes on spec, this time the big problem is overlending.

No money down. No PMI. 5% down 10% down. Very dangerous so long as credit is cheap. But if you have an ARM, your payments will eventually rise.

[squiffy]

Also for any good or commodity there tends to be a natural supply and demand cycle. Right now demand is high. Unemployment is remarkably low at about 5-6% or so. That means 96% of people who want to work have jobs, despite the recession and downturn in the economy.

And homes are cheap because financing is cheap.

So a huge percentage of people who want to buy homes and can afford to buy homes, have bought homes. So people buy tons of homes. This drives the price of homes UP.

And as the economy heats up interest rates will rise, making financing home purchases more expensive.

If home prices are high and interest rates are high, fewer and fewer people can afford to buy homes. And eventually home sales will slow and home prices will either decline or increase more slowly.

Of course, this dynamic is hugely different from locality to locality. Lose or gain one major employer in your city or county and you could have a huge rise or huge drop in local prices.

So the shorter your investing time frame the more attractive home builders and mortgage lenders are. The longer your time frame, the less attractive.

[squiffy]

Of all the major home builders, which are the worst -- lowest quality contruction, most heavily in debt, slowest housing markets, most volatile stock price, etc.

Any thoughts?