Your weekly JL Davis update: Housing has often led recoveries….is it happening again?

This Week's Quote:
“Home is a name, a word, it is a strong one; stronger than magician ever spoke, or spirit ever answered to, in the strongest conjuration.”~ Charles Dickens

One of the most exciting pieces of recent news is the recovery in housing; a sector that has been a leading indicator in any number of past U.S. economic recoveries.

Year over year, the sales of existing homes are up 9%. New home sales are up 25%. Housing starts are up 29%. If you’d like the data backup, “Case-Shiller” and “FHFA” are both up the last six months at around a 7% annual rate.

Even with that, the number of existing homes for sale in the U.S. is roughly the same as it was in 2004. Since then though, the US population has increased by 8%. But percentagewise, fewer of us own homes. That may mean that with the number of buyers coming on line in 2012, there is a potential shortage of homes.

The market for new homes may be even more pent up in terms of demand; there are now fewer new homes for sale than there were in the US back when Elvis and the Beatles were topping the charts in the 60’s. Today’s home values may be some of the best in the last 60 years, too. Data from the Federal Reserve and Commerce Department indicates that home prices have averaged nearly 16 times annual rent, while in 2012, they are closer to 14.

Versus “replacement cost”, homes are about 16% below the average of the last three decades. With mortgage rates at 50 year lows, one might just think the American consumer will respond to the relative bargain.

One other important note: “scrappage”. That’s a term for older homes that will meet the end of their normal lifespan, or fall victim to fires, floods, tornadoes and the like. Estimates are that just to keep up a growing population and “scrappage”, home builders would need to start over 1 ½ million homes this (and every) year, including owner-occupied homes and rentals. Builders have been building at only half that rate recently.

All this adds up to a compelling case. Outstanding value, low monthly mortgage costs, every increasing demand and as of now, limited supply. We think the homebuilding and home buying elevators are stuck on “UP” at present and for years to come.**

Sources: CNBC, Wall Street Journal, U.S. Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, Federal Reserve Board, Haver Analytics


Market Week: September 24, 2012

The Markets

Equity markets paused to digest the strong gains of the previous two weeks, but still managed to remain close to multiyear highs. Small caps, which had seen the biggest gains recently, gave back the most.


Last Week's Headlines
• The housing market continued to strengthen. The National Association of Realtors® said August sales of existing homes were up 7.8% for the month and were 9.3% higher than last August. Also, the NAR said August was the sixth straight month in which prices were higher than the year before.
• Another encouraging housing report came from the Census Bureau, which said housing starts were up 2.3% in August from the month before and were almost 30% higher than August 2011. And though building permits were down 1% from July, they were still almost 25% higher than a year earlier.
• Manufacturing news was somewhat mixed. The Federal Reserve's Empire State manufacturing survey for September hit -10.4, its second straight negative monthly reading. However, a similar survey for the mid-Atlantic region, while still negative (-1.9), showed strong improvement in August after several consecutive months of declines.


Eye on the Week Ahead

As the end of the quarter approaches, housing and manufacturing data as well as the final estimate of the nation's Q2 gross domestic product will highlight domestic news. Spain will likely continue to dominate European news. The government is expected to release both its latest financial reform package and the results of stress tests on Spanish banks, and could also make a formal bailout request.


Key dates and data releases: home prices (9/25); new home sales (9/26); final estimate of Q2 gross domestic product, durable goods orders (9/27); personal income/spending (9/28).

Data sources: Includes data provided by Brounes & Associates. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.


The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2012