Seven Years Since Housing Starts Peaked

Carrying over some of the thoughts from the January investment letter about the economic cycle starting to get up in age, it's hard to believe that it's now been seven full years since the housing market started to show signs of peaking.  For comparison it was six years between the peak of the NASDAQ and the housing peak.  Some other seven-ish year cycles: intra-depression 1930-1937, and the 1970s economic cycle went peak to peak 1973-1980.

Housing vs. Equities

Case Shiller was reported this morning up 1.2% y/y for July.  The datapoint serves as confirmation that housing prices are recovering.

Below is a chart of Case Shiller vs. the S&P 500 since 2000.  It shows that even though housing prices may be starting to turn, they still have quite a ways to climb.  Also it highlights that even despite the housing bubble burst, housing prices have still risen since the turn of the century and have thus outperformed equities.

Toll Brothers Market Cap Per Housing Starts

With growing consensus that the housing market has finally turned from the bottom, home builder Toll Brothers' stock has seen a huge rally of late.  Year to date TOL is up 62% and its market cap is now $5.5B.  That's still $3B below its peak in 2005, but housing starts also peaked at over 2 million back then.  Today housing are only 746k.

Below is a comparison of TOL's market cap relative to aggregate housing starts.  The analysis ignores changes in market share, but should give a rough sense of what the stock is forecasting.  For TOL's market cap/housing start ratio to go back to the $800 it was at in 2002, housing starts would mathematically have to rise to nearly 7 million, which is definitely not happening.  If housing starts returned to 2 million, which is also far-fetched, TOL would sell for ~$2,750 per aggregate start--still above where the ratio held in 2002-2004.

Has Any Asset Ever Had a Longer Streak of Positive Annual Returns Than Gold?

This year, gold bears' favorite statistic is that gold has been up 11 years in a row, but no asset class has ever been up 12 in a row.  How does that compare to the longest winning streaks for other assets?

Below is a chart of the longest winning streaks for gold, housing, bonds and equities as well as some individual stocks.  While gold is currently tied with housing for the most consecutive years of positive returns, neither asset class can beat the string of returns put together by MSFT, KO or WMT, which posted positive returns for 14, 16 and 17 years respectively.  A shareholder of Walmart didn't see a negative annual return between 1977 and 1993!

More Confirmation that the Housing Market May be Turning

In the Federal Reserve Senior Loan Officer Survey released yesterday, there was a good sign for the housing market in that more banks are reporting increasing demand for mortgage loans.  The bad news is that while the demand is picking up, banks are still not loosening credit standards much, and actually reported tighter standards last quarter.

Case Shiller Index Chart

Yesterday the latest Case Shiller data was reported for May, which showed that housing prices had risen 2% m/m but fell 1% y/y.  Still, the May data confirms the chatter that housing may finally be turning.  Housing is arguably the most important asset class in the US economy today.  If housing prices rise, not only does the banking system get a lot healthier, but the consumer's balance sheet becomes repaired too as debt/equity falls.  While housing prices may be rising slightly, there's still some way to go for anyone who bought a new home or refinanced in 05/06/07 to get above water.

How Does Housing Compare to the Tech Cycle?

Even though Bank of America is trading lower, today's quarterly release capped off what was a surprisingly good quarter for major US Banks.  In general, loans and deposits both showed growth, capital levels are extremely high and credit quality is significantly improved from where it was during the crisis.  Similarly, the housing sector has had some healthy reports as well recently (see previous post).

Seeing as how housing and banking were at the epicenter of the previous crisis, what does the fact that the two sectors are recovering say about where we are in the current economic cycle?  To try to help discern how this cycle compares to previous cycles, below is a chart comparing the performance of housing (ITB) and Financials (XLF) in this cycle to Technology (XLK) in the last one.  The chart shows relative performance of ITB, XLF and XLK compared to the S&P 500.  ITB and XLF are shown from 2006 and 2012 and XLK is shown between 2000 and 2007.

After the sharp collapse of technology stocks relative to the S&P from 2000-2002, XLK languished on a relative basis for the next four years before finally starting to outperform in 2006.  Similarly, both XLF and ITB showed steep drops and have continued to be losers since.  Now, years later, they may finally be starting to show signs of a turn.  XLK continued to steadily outperform the S&P 500 through 2012.  However, by the time XLK turned in 2006, the general economy only had one year left before it began to contract.

Housing Starts Showing Signs of Life

Housing starts were reported this morning for June at the highest level since October 2008.  The housing sector may still be operating at a low level, but it looks for now like it has at least broken out of the range that it had languished in for several years.