The highest return among stocks in the Standard & Poor’s 500 index for the year so far is Pulte Homes, the major homebuilder; as of Wednesday morning it had returned investors 195 percent. No. 6 on the list is Lennar Corp., a Pulte competitor. S&P’s overall index for the homebuilding industry is up 59.4 percent this year, and across the homebuilding industry, sentiment rose to its highest level since the middle of 2006, the National Association of Homebuilders said Tuesday.
Housing may be finally coming back, if the stock market has it right. (REUTERS/Kevin Lamarque)
“The quality of the traffic is superb and visitors are very serious about buying,” said Douglas Yearly, the chief executive of major homebuilder Toll Brothers, in a conference call with analysts earlier this month.
The question now is not whether housing is coming back; new data out Wednesday show that November housing starts were up 21.6 percent from a year earlier. The question is what will the housing recovery look like. Will it be strong enough to pull the rest of the economy with it, even amid potentially tighter fiscal policy and international economic turmoil.
Housing should, by all rights, be an afterthought for the overall economic picture. In normal times, the work of building, renovating and selling homes is around 4 percent of the overall economy, and right now it is closer to 2 percent. But housing is almost always the engine pulling the train of the broader economy, both dragging the nation into recession when things turn bad and pulling out toward recovery.
It would be particularly welcome now, as the homebuilding sector employs workers in some of the pockets of the economy where unemployment is highest. The overall jobless rate may have been 7.7 percent in November, but that rate is 12.9 percent among construction and extraction occupations.
Which is all a long way of saying, if 2013 is going to be a decent year for the U.S. economy, we really need housing to start pulling that train. Housing got us into this thing. It’s now on housing to get us out.
There was some bad news in Wednesday’s Census report, however: Starts actually fell 3 percent in November from October. The number of housing permits issued, which is less susceptible to weird fluctuations due to weather and more reliable statistically, rose, however, up 3.6 percent.
But while that kind of growth is nice to have, and sure beats the steep declines of the not-too-distant past, it is coming off of an extraordinarily low base. That means that for 2013 to be a genuinely good year, we need to see something truly remarkable. To be a true engine of growth that can make up for the ill effects of higher taxes and cuts to government spending, the growth in housing needs to be explosive, not merely adequate.
In calculations for gross domestic product, for example, to counteract a 1 percent drop in government spending, residential investment would need to rise by 8 percent (both add up to about $31 billion in economic activity).
Policymakers have thrown a lot at the housing downturn, including ultra-low interest rates from the Federal Reserve and efforts to make lending standards more reasonable. Demographics would seem to favor a housing boom. For five consecutive years, homebuilders have been constructing fewer houses and apartments than the nation’s demographics would suggest are needed. Part of that was due to the overhang of homes built during the boom years, but part was likely due to fewer households being formed amid the weak economy—young adults living at home with their parents, for example, or retirees moving in with their children. As those people doubling-up find jobs and want to move out, it could signal more demand.
So the stars would seem to be aligned for housing to be a source of a new boom. Stock prices for homebuilders indicate investors are betting on a brighter future. Now we can all hope that the sector lives up to its potential and brings the rest of the U.S. economy along for the ride.