KEY DATA:  Starts: +4.3%; Permits: +14.4%

IN A NUTSHELL:  “The housing market is setting up to be the leading force in the recovery.”

WHAT IT MEANS:  One of the first sectors that was allowed to reopen was construction and we are seeing the positives of the decision to do that.  If you just looked at the construction numbers, you might not come to that conclusion.  Housing starts rose moderately in May, led by a major recovery in the West and a solid gain in the Northeast.  However, weakness persisted in the South and Midwest.  It was expected that starts would rise more, so this was a bit of a disappointment.  Indeed, if you compare the level of starts in May to February, you see a nearly 38% decline.  So why am I so upbeat?  Simple, housing permit requests are soaring.  They were up sharply in May and have are now about 15% below the February level.  That seems large, but it can be made up reasonably quickly.  More importantly, for the last three months, permits were running over fourteen percent above starts.  Builders are not wasting money on permits and the big gap points to a strong increase in construction over the next couple of months. 

Adding to the belief that the home construction and housing in general will be solid going forward was a report by the Mortgage Bankers Association.   As noted, “Purchase applications increased to the highest level in over 11 years and for the ninth consecutive week. The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence”.  That is very good news for builders, who seem prepared to meet the growing demand.    

IMPLICATIONS: The home construction segment still has a long way to go to get back to the pre-virus pace of activity.  But while other sectors, such as restaurants or manufacturing, may take a very long time to get there, the indicators are mounting that housing will be one of the first segments to recover.  Unfortunately, the depressed April and May starts numbers point to home construction restraining second quarter growth significantly.  On the other hand, if the permits/starts gap gets narrowed during the summer as expected, the sector could add greatly to third quarter growth.  The markets have rallied on what I call false positive reports.  Those are numbers that look great, but only because they started from such a low level.  With housing, while the levels remain lower than hoped for, supporting data argue for a major comeback that could get us within range of the February standard of comparison in a reasonable time period.  But it is really not clear that the economic data are the major drivers of the markets.  The Fed is buying just about anything that is being sold and that includes individual corporate bonds.  Mr. Powell has made it clear he doesn’t want to give up the gains – even as he claims he doesn’t target the equity indices.  Really?  It is best to watch what the Fed does, not what the Fed Chair says, as he doesn’t want to appear to be supporting the equity markets, which of course he is doing.  About the only thing he admits he cannot do is to get money into the hands of specific household groups.  So, he has strongly suggested that Congress get busy doing that.  Let’s see: The Fed is supporting the equity and bond markets and the government is supporting businesses and households.  Isn’t capitalism great?