Some welcome strong data on the housing market today. The Pending Home Sales Index came out stronger than expected. This leading indicator is particularly welcome given the recent weak numbers in existing and new home sales. The strongest region was the Northeast, which has had the weakest home price appreciation of the 4 regions over the past 3 years, around 10%. The West region was the weakest in the March reading, but this region has had almost 40% price appreciation over the last 3 years, so some hesitation on the part of buyers might be expected. The West has also had the best job gains by far of any region. The low mortgage rates surely helped to get some contracts signed in March!
So I have been out of my housing related stocks, Acuity Brands AYI and Apogee APOG, due to the weak housing data. This Pending Home Sales number could be an outlier or it could be the start of a string of stronger data leading into the spring selling season. I think I am going to take a wait and see approach to find out if it will be followed up by some more strength. AYI has recently made several acquisitions, and these have reduced their ROIC. If I get back in to a housing stock, I'll go with APOG.
A terrible durable goods report came out today. March orders were weaker than expected against downwardly revised February orders. The market hasn't paid much attention, focusing on earnings and FOMC meeting instead. This report confirms the manufacturing recession, and the recently weaker USD has done nothing to reverse the manufacturing weakness so far. The strength in the industrials sector seems based mainly on the weaker USD and higher oil prices in hopes they will translate into stronger orders. The durable goods report is in stark contrast to this view.
New home sales came out weaker than expected. This report does not paint a picture of a strengthening housing market to me. This report does not change my view that housing related stocks should be avoided. Sales of new single-family houses in March 2016 were 511,000, a 1.5% decrease from the February rate of 519,000.
New homes for sales continue to increase to 246,000 from 241,000, a 2.1% increase.
Months of supply also continue to increase to 5.8 months from 5.6 months in February.
The median sales price for new houses in March was $288,000 a 3.2% decrease from the February median price of $297,400.
Initial jobless claims reached a new cycle low last week of 247,000.
Last week is the sample week for the April non-farm payroll report, so expect another strong NFP number. A tight labor market is a good environment for the staffing business. I still like RHI, which reports earnings Tuesday AMC. I expect a strong report from RHI due to the strong labor market, stabilization in the oil patch, and strength in Protiviti, their consulting business.
The FHFA home price index increased by 0.4% in February. This data shows a continuation of a housing slowdown that began late in 2015. The year-over-year increase was 5.6%, but this is likely to continue it's decent unless the rate of change in home price growth turns positive after 3 months of slowing growth. I have reduced my positions in housing related stocks, AYI and APOG. I am hopeful growth will firm up again, but I'll wait until the housing data improves before rebuilding these positions.
Existing home sales came out stronger than expected today, but still up only 1.5% y-o-y. The March number, up 5.1% m-o-m, partially reverses the weak February number.
I still like the construction related stocks, AYI & APOG. This report doesn't change my view. If home sales weakens further, I will have to reassess this positioning, but for now I am staying bullish on construction as a growth driver.
Mediocre housing starts data released yesterday.
Weak permits as well.
Michael Grove, CFA