Taking numbers. Stocks rose to new new highs on Friday on positive economic data and raw bullishness. Builders are building more leaving investors wondering if that is good news or something to be concerned about.
N O T E W O R T H Y
Bubblicious. Builders are investors at their core. Sure, they make money by building new things and hopefully earning a profit on the land, labor, and materials when the project is done. But really it’s a bit more complicated than that. If you consider the amount of time it takes from the start of a project to its completion a developer must take into account lots of economic factors. It usually starts with the acquisition of land and zoning permits to develop. At that point interest rates are a factor as most projects are financed with some form of debt. Low interest rates such as we have in the current environment lower the developers’ cost of carry. Once permits are issued, and that is not a quick process, ground can be broken and the building process begins. This involves the purchase of raw materials. Think of commodities like lumber and steel. Steel has been relatively stable but lumber has increased in price and is currently at levels not seen since 1993. Labor becomes a factor at this point in the process as well and a tight labor market such as we have today means skilled workers may come at higher prices. Once the building is under way, marketing begins with the hopes that a buyer or lessee will be ready to take possession as soon as the building is complete and gets final approval. Hopefully at that point prices and rents have either gone up or remained stable. At this point, interest rates become a factor once again as low rates help buyers get more for their money and ensure healthy demand. OK, I know that I have overly simplified the process, but you can see that a typical building project takes many months if not years and its success as an investment requires many economic factors to fall into place. Real estate developers therefore, need to be savvy investors and must focus heavily on financial markets. It is because of this that many economists watch the housing market so carefully. When builders are building we can assume that they expect economic conditions to remain strong throughout a project. If construction of a single family home takes 6 to 12 months and then several more for the project to be marketed and sold, a builder is counting on a strong market around 18 months after building has begun. On Friday, the US Census Bureau announced that 1.608 million new privately owned housing units were started. That seasonally adjusted annual rate has been growing steadily after hitting a low in wake of the financial crisis. Housing Starts, as it is more commonly referred to, have not been at this level since December of 2006. So based on my overly simplified example above, we can assume that builders are bullish on the near term economy. Low mortgage rates and low unemployment are big factors in the industry’s success and for now, those appear to be cooperating.
THE MARKETS
Stocks climbed to another new high on Friday on strong housing numbers, capping off a strong week of gains. The S&P500 climbed by +0.39%, the Dow Jones Industrial Average traded up by +0.17%, the Russell 2000 slipped by -0.33%, and the NASDAQ Composite Index advanced by +0.34%. Bonds eased a bit and 10-year treasury yields climbed by +2 basis points to 1.82%.
NXT UP
– Billionaires and world leaders will converge on Davos, Switzerland for the World Economic Forum. Starting today, expect a steady stream of soundbites from the likes of young climate activists, world leaders, and titans of industry and finance.
– This morning Halliburton missed earnings estimates and we will hear from Netflix, IBM, United Airlines, and Capital One after the bell.
– The week ahead will feature some more housing numbers, regional Fed reports, Leading Economic Indicators, and Markit manufacturing and services PMI’s. Lots of earnings this week with 43 S&P500 companies reporting amongst many others. Please refer to the attached economic and earnings calendars for details.
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