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Too Early For A Housing Bottom

Posted: Jun 22, 2009 14:59 PM by Joseph Nguyen

Tickers in this Article: TOL, KBH, BZH, DHI, LEN

The chart below shows the new privately-owned housing starts from January 1959 to May 2009. The chart reveals two things at a cursory glance: (1) We're in an unprecedented downturn and (2) There's no real sign of a bottom yet.

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Not Quite There Yet
New data released yesterday showed May housing starts coming in at 532,000 - above consensus estimates of 500,000. This 'green shoot' had analysts and TV pundits (namely CNBC) primed and ready to call a bottom in housing.

On Jim Cramer's show he emphatically declared (does he do it any other way?) a bottom in housing, saying this number was "off the charts." His show is great for entertainment, and he gets paid to make bold calls, but heed his advice with a couple teaspoons of salt.

The only thing I see that is "off the charts" with housing starts is its incredible collapse to the downside. Keep in mind that in May 2008 housing starts came in at 971,000. A lot more inventory has to work through the system before we can see a bottom in housing and a meaningful increase in housing starts.

Figure 1: Housing Starts

Source: U.S. Census Bureau

Market Reaction
Initial reaction to the housing data caused homebuilder stock like Toll Brothers (NYSE:TOL), KB Home (NYSE:KBH), Beazer Homes (NYSE:BZH), Lennar (NYSE:LEN) and D.R Horton (NYSE:DHI) to pop up during premarket - but cooler heads prevailed and those stocks essentially ended flat for the day. People began to realize 532,000 housing starts is still a horrific number.

The Bottom Line
If you're a speculator and you feel this is the bottom, by all means jump in with both feet - but for investors like myself I'm going to sit on the sidelines and wait for more tangible signs of a recovery. There's farther to fall before this recession is over. (Read Buy When There's Blood In The Streets, to learn how contrarian investors find value in the worst market conditions.)

By Joseph Nguyen

Joseph Nguyen is an analyst/researcher and contributing author at Investopedia. He graduated from the University of Alberta with a Bachelor of Commerce degree and specializes in financial analysis and research. Joseph has also passed the Level 1 CFA exam.

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