The chart below shows the new privately-owned housing starts from January 1959 to May 2009. The chart reveals two things at a cursory glance: (1) We're in an unprecedented downturn and (2) There's no real sign of a bottom yet.

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Not Quite There Yet
New data released last week showed May housing starts coming in at 532,000 - above consensus estimates of 500,000. This 'green shoot' had analysts and TV pundits (namely CNBC) primed and ready to call a bottom in housing.

On Jim Cramer's show he emphatically declared (does he do it any other way?) a bottom in housing, saying this number was "off the charts." His show is great for entertainment, and he gets paid to make bold calls, but heed his advice with a couple teaspoons of salt.

The only thing I see that is "off the charts" with housing starts is its incredible collapse to the downside. Keep in mind that in May 2008 housing starts came in at 971,000. A lot more inventory has to work through the system before we can see a bottom in housing and a meaningful increase in housing starts.



Figure 1: Housing Starts
Source: U.S. Census Bureau


Market Reaction
Initial reaction to the housing data caused homebuilder stock like Toll Brothers (NYSE:TOL), KB Home (NYSE:KBH), Beazer Homes (NYSE:BZH), Lennar (NYSE:LEN) and D.R Horton (NYSE:DHI) to pop up during premarket - but cooler heads prevailed and those stocks essentially ended flat for the day. People began to realize 532,000 housing starts is still a horrific number.

The Bottom Line
If you're a speculator and you feel this is the bottom, by all means jump in with both feet - but for investors like myself I'm going to sit on the sidelines and wait for more tangible signs of a recovery. There's farther to fall before this recession is over. (Read Buy When There's Blood In The Streets, to learn how contrarian investors find value in the worst market conditions.)

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Tickers in this Article: LEN, DHI, BZH, KBH, TOL

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