1/19/2012
By David Urani, Research Analyst

Once again, optimism in the housing sector is picking up and the January NAHB/Wells Fargo Housing Market Index rose up to a reading of 25 versus 21 the previous month and the 21 consensus estimate. The most striking aspect of the report was that it's at its highest level since June 2007, after increasing for a fourth month in a row. It reflects an ongoing perception by homebuilders of more traffic, and improving chances of making sales in the months ahead. Caution is still required, however, given that buyers can't always get mortgages and projected home prices aren't always worth the construction costs.

Perhaps the most critical use of the Housing Market Index is it's predictability for housing starts. Over time it has held a relatively strong relationship, and therefore the recent jump in the index is a good omen. It's more than likely that there has been a meaningful increase in construction activity in the past four months.

December housing starts came in soft on the headline reading this morning with 657k annual units, down from 680k in November and below the 678k consensus. However, the always-volatile multifamily unit reading was down 28% month to month, skewing the headline downward. What is most important is that single family units were up 4.4% for the month to 470k from 450k. That puts single family units at their highest level since April 2010. Permits for single family starts were up 1.8%. Following up on the strong homebuilder confidence index, it was always going to be hard for the starts data to make a splash. Considering the Housing Market Index is a month ahead, the outlook continues to look good for home construction going through January. Not only is that an indicator that home demand is strengthening, but it also foreshadows some potential re-hiring for construction jobs, which crashed to the range of 5.5 million from a peak of 7.7 million in 2006 and have barely budged from the bottom.

Then there was the report on industrial production which was just slightly below estimates at a 0.4% increase month to month. No surprises here really, and typically not a big market mover. That being said, I think there is something to be taken away from the capacity utilization aspect. Similar to construction employment, the percent usage of production facilities fell steeply during the recession. However, at 78.1% utilization, factories are back up to running as hard as they were in mid-2008 right as the economy was beginning to falter. For some of the stronger companies including major automakers, factories are beginning to run at full capacity and that means more construction may be necessary in the industrial sector as well as in housing.

For me, it's starting to look like 2012 could be the year that the construction labor market makes its big comeback.

David Urani
Wall Street Strategies