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Ask Not For Whom The Toll Toils

The good news about housing is that it has fallen so far that a contraction in that sector doesn’t have the same impact it once did. Today New Home Sales for February were reported at 250k (annualized, seasonally adjusted), yet another record low (see Chart below).

A new record low for New Home Sales. Construction won't be adding to GDP yet.

Keep in mind that this is with mortgage rates that are as low as they have been in a couple of generations at least. Now, some of this is caused by the fact that there are still plenty of distressed sales in the market for Existing Homes. Some of it may also be due to the fact that the actual inventory of new homes that are for sale has also fallen to near-record lows, and are easily at new lows when population-adjusted (see Chart below).

...but someday, Construction will add to growth again. Inventories are already very low!

Say what you will about the crazy overbuilding in the mid-2000s; the homebuilders have cut back on new building drastically, which is a precondition for the sector’s eventual recovery. It would almost be worth taking a look at home building stocks, if TOL wasn’t trading at a P/E of 3,382:1 (only 294:1 on estimated earnings!). (It’s trading at 2.3x sales; at its peak in 2005 it was only 1.9x. Now, you may say “sure, but keep in mind right now you’re at trough sales.” Fair enough, but revenues are down 75% from their 2006 level, and there won’t be another boom like that one for a long time. Suppose sales double from here. You’re still paying 1.65x sales, which is more expensive than the company has been since 1994, with the exception of the bubble top. And it’s by no means assured that home construction is going to boom in the short run, especially when interest rates start to rise again. (There are surely better shorting candidates, don’t get me wrong: I just mention this because I was looking at it thinking it might be a buy candidate. It’s not).

Besides the Home Sales data, there was little news out. There was nothing new from Portugal. Crude oil rallied 1.7% (now $105.75/bbl) and industrial metals jumped 2.3%. 10y note yields rose 2bps to 3.35% and are seemingly stabilizing now that the last frightening week or two is behind us. TIPS yields rose for the fourth day in a row; the 10y now stands at a still-slender 0.95%. Don’t read too much into the selling of TIPS here and the selloff in 10y inflation swap rates from 2.87 to 2.66 over the last couple of weeks. There is an $11bln reopening of 10-year TIPS tomorrow, and some of what we are seeing is dealers trying to set up for that auction. There is concern in some quarters that the low yields will make it hard for the government to sell $11bln TIPS. Remember, though, that the level of rates also indicates the supply/demand balance. TIPS yields are low because there is no net supply from the Treasury (thanks to the Fed, and there has been ample demand to push yields down this far. It may be that this auction pukes, but it has been difficult for a while to bet that inflation-linked bonds were going to sell off for any appreciable period. There is positive net demand as money continues to flow into inflation-linked bond funds, and no net supply. I wouldn’t be short TIPS here except to set up for the auction (indeed, one dealer pointed out that the current 10y TIPS are actually “on special” in the repo market, which almost never happens in TIPS and suggests there is actually a short base).

Also tomorrow, the Feb Durable Goods report (Consensus: +1.2%, +2.0% ex-Transportation) is due out. Remember the last one was disappointing and led to some downward revisions to Q1 GDP estimates as a result. Initial Claims (Consensus: 383k) will also be announced.

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