Business & Finance
Business and Finance
Business and Finance
Thu, September 23, 2010
Wed, September 22, 2010 Berkshire Hathaway, Weyerhaeuser, USG, Fortune Brands and Lennar
CHICAGO--([ BUSINESS WIRE ])--Zacks.com Analyst Blog features: Berkshire Hathaway (NYSE: [ BRK.B ]), Weyerhaeuser (NYSE: [ WY ]), USG (NYSE: [ USG ]), Fortune Brands (NYSE: [ FO ]) and Lennar (NYSE: [ LEN ]).
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Here are highlights from Tuesdaya™s Analyst Blog:
Housing Starts Surge
Overall, I would have to rate this report as being a big positive for the economy, at least in the short run. Residential investment, the largest part of which is new home construction, is normally what pulls economies out of recessions. Take a good hard look at the chart above and the relationship between the bottom in housing starts and the blue recession bars if you have your doubts about that.
Each house that is started generates a huge amount of economic activity. For starters, it puts people to work actually building the house. The construction industry has been particularly hard hit in this downturn, accounting for about one in every four jobs lost. Those are relatively high paying jobs for people who do not have a lot of formal education.
Most of the building materials used in housing are produced domestically (in part because they tend to be heavy, and thus shipping costs are a big issue) so the increased demand for bricks, roofing materials, lumber, sheetrock and plumbing fixtures leads to increased employment at Berkshire Hathaway (NYSE: [ BRK.B ]), Weyerhaeuser (NYSE: [ WY ]), USG (NYSE: [ USG ]) and Fortune Brands (NYSE: [ FO ]), not just increased employment at Lennar (NYSE: [ LEN ]). With jobs and hence money in their wallets, those construction workers then go out and spend, further increasing aggregate demand and employment.
The uptick in housing starts is very good news in that regard, particularly if it can be sustained. Per unit, single family homes tend to consume more materials and labor than do condos, so it would be better if the surge were coming from the single-family side. On the other hand, the glut of excess inventory of used houses (including the shadow inventory of foreclosed, or soon to be foreclosed houses) is so great that one has to be aware of the dark cloud that comes with this silver lining.
Eventually, demographics are going to dictate a rise in housing starts. The population is rising, and they are going to need somewhere to live. During the recession, though, the rate of household formation has plummeted. In other words, even though there are more people, there are not as many households. Kids dona™t move out of mom and dada™s house if they dona™t have a job that will pay the rent. When people lose their homes to foreclosure, often they move in with relatives rather than renting or literally being on the street.
If the pick up in construction activity results in more people getting jobs, then that dynamic can start to be reversed. It is not going to take very heroic levels of housing starts to generate very large percentage increases. A doubling in total housing starts would still result in a level of starts that until now would have been considered deeply depressed and recessionary, even with the much smaller populations of the time.
The Importance of Housing Activity
The lack of housing activity is the single most important reason that this recovery has been so sluggish relative to most other economic recoveries. On the other hand, the previous two recoveries were also very sluggish. The 2001 downturn did not really see a sharp decline in housing starts and starts just continued on their merry way higher as the bubble inflated. The recovery after the 1991 downturn did have a sharp housing rebound, so the sluggish recovery after that one is harder to explain.
Given that the Great Recession was caused by the mother of all housing meltdowns, and the big overhang that housing still represents for the country, the fact that we got out of the recession at all starting in June 2009 is sort of remarkable. It is very hard to pull a train forward when its biggest locomotive is derailed.
Now, perhaps -- just perhaps -- that locomotive is back on the tracks. If so, that is very good news for the economy. Just how big a problem the additional supply will be for the overall housing market will be, in part, answered on Friday when the new home sales figures come out. If new houses are being bought, then this is good news, if they are just sitting in inventory, well then, aHouston, we have a problem.a
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