More Housing Pain Reinforces This Bullpen Decision
September housing starts miss, but there is more to the margin pressure story.
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On Tuesday morning, we learned that total September Housing starts fell 5.2% compared to August to a seasonally adjusted annual rate of 1.221 million, missing the 1.3 million market consensus, with the closely watched single-family housing starts down 4.6% to 859,000.
That September single-family housing starts figure is the lowest one so far this year, and should come as no surprise given the uptrend we’ve seen in mortgage rates and rising inflation pressures on consumers. That same uptrend in mortgage rates also explains why September Pending Home Sales fell 7.3%, a far stronger fall than the 0.5% dip the market was expecting.Â
Walking through the September Housing Starts report, we also see another leg down in the number of new privately owned single-family housing units completed to 840,000. This is also the lowest level this year and one that is down 11% year over year, and for those that track the data, the year-over-year comparisons are poised to get even worse in October and November. Those figures and frozen demand also explain why the number of new private-owned single-family housing units under construction continue to post year-over-year declines. This suggests the housing headwind construction and related equipment companies, including former Portfolio holding United Rentals (URI), is going to worsen. That means it poses a downside risk to the guidance they are poised to issue when they report their quarterly results.Â
Here’s the thing: When we’ve seen this in the past, homebuilder have moved to finish up existing construction projects and that means cutting prices. And that’s what we’re seeing.Â
Per the latest monthly survey of the National Association of Home Builders published on Monday, with buyer traffic to newly built homes at the lowest level since April 2012, 43% of home builders are cutting prices in October. The report also pinpointed that the average price cut was 6% for the seventh month in a row, and 65% of builders were also using incentives to boost sales.
Simply put, that reinforces our recent decision to punt the shares of Builders FirstSource (BLDR) from the Bullpen.
The likely question is: What would it take for us to revisit BLDR, a homebuilder or other related play for the Bullpen? Most likely a first look would come when we start to see homebuilder backlogs bottoming and firmer pricing in those backlog levels. Those factors along with a more dovish Federal Reserve, waning inflation pressures and solid job creation would be other steps in the right direction.Â
