On Housing Permits, Starts, and Completions

http://money.cnn.com/2010/12/16/real_estate/November_housing_starts/index.htm?source=cnn_bin

Much of the news this morning focused on the beat of expectations regarding housing starts, which some are viewing as an indicator of a recovery in the sector.

http://www.census.gov/const/newresconst.pdf

One issue with using the housing starts data to get a read on this sector is the wide margin of error.

“Privately-owned housing starts in November were at a seasonally adjusted annual rate of 555,000. This is 3.9 percent (±12.0%)* above the revised October estimate of 534,000, but is 5.8 percent (±12.0%)* below the November 2009 rate of 589,000.”

Housing completions suffer from a similar wide margin of error.

“Privately-owned housing completions in November were at a seasonally adjusted annual rate of 513,000. This is 14.1 percent (±10.9%) below the revised October estimate of 597,000 and is 39.6 percent (±8.6%) below the November 2009 rate of 850,000.”

A more reliable indicator of the market within this “facts on the ground” release is the housing permits data, as this data is taken from actual public record rather than surveys, and is a better metric for arriving at forward P/E’s for FIRE sector stocks with significant exposure to the cyclical portion of the market. 

“Privately-owned housing units authorized by building permits in November were at a seasonally adjusted annual rate of 530,000. This is 4.0 percent (±2.9%) below the revised October rate of 552,000 and is 14.7 percent (±1.7%) below the November 2009 estimate of 621,000.”

Note that the annualized rate of 530,000 stands in sharp contrast to November 2005, where the rate stood at 2,155,000.

http://www.census.gov/const/newresconst_200511.pdf

This is important to keep in mind as you’re back testing your valuations.  For example, Toll Brothers (TOL):

http://www.finviz.com/quote.ashx?t=TOL&ty=c&ta=0&p=m

KeyBank recently put them at $22, Barclays had them at $21 back in January, and JPM had a target of $29 back in September 2009.  They were trading in the 35 range back around November of 2005.  The permits data indicate that the opportunities to build have dropped 75% since that time, which would suggest a valuation (assuming similar corporate performance) of 8.75.  Obviously there are other factors at play here, but the fact that their past 5 year earnings per share has dropped 78.55% suggests that market size does matter.