Analysis: HD

Friday morning, before the opening bell, the U.S. Census Bureau reported that housing starts surged 18.6% month over month in January to a seasonally adjusted annual rate of 1.230 million, up from December's revised rate of 1.037 million, and outpacing expectations of a 10.86% monthly increase. With January's reading, housing starts were down 7.8% from January 2018.

Digging deeper, monthly single-family housing starts popped 25.1% to a seasonally adjusted annual rate of 926,000, above December's revised rate of 740,000, while housing starts for complexes with five or more units increased 4.0% month over month to a seasonally adjusted annual rate of 289,000. On an annual basis, single family housing starts are up 4.5%, while starts for complexes with five or more units are down 33.6% from the same time last year.

By region, on a monthly basis, total housing starts advanced 58.5% in the Northeast (+28.4% YoY), 13.8% in the South (+2.3% YoY) and 29.3% in the West (-31.9% YoY). However, marginally offsetting the advances elsewhere, starts fell 5.7% in the Midwest (-20.0% YoY).

Looking at single family homebuilding, which accounts for the largest share of the residential housing market, sales were up across the board, rising 66.0% in the Northeast (+33.9% YoY), 44.9% in the West (-6.6% YoY), 18.5% in the Midwest (-10.7% YoY) and 15.5% in the South (+9.9% YoY)

As for building permits, units authorized in January increased 1.4% month over month to a seasonally adjusted annual rate of 1.345 million, exceeding expectations of a 2.94% monthly decline. This follows a revised December reading of 1.326 million. With January's monthly advance, permits are down 1.5% from the same time last year.

Breaking the headline reading down further, on a monthly basis, permits for single unit homes ticked down 2.1%, while permits for complexes with two-to-four units increased 37.8% and permits issued for complexes with five or more units advanced 4.8% from the previous month. By region, on a monthly basis, total permits advanced 33.1% in the Midwest (+9.7% YoY) and 26.4% in the Northeast (20.9% YoY). However, working to offset those strong gains, permits fell 3.5% in the South (-4.7% YoY) and 8.9% in the West (-7.7% YoY).

All in, despite the solid results, as we noted in our nonfarm payroll analysis, one month does not indicate a trend. That said, given the pullback in mortgage rates and poor data in recent months, compounded by a positive December new home sales number earlier this week (here) and strong pending sales results in January (here), we do believe that a bottom could be starting to form in the housing market. We will continue to look for data in coming months to support this view and note that this is part of the reason for our initiation of Home Depot (HD) earlier this week. As we noted in the alert (here), "management expects [housing] most metrics to stabilize in 2019."

That said, while this is certainly an important reading and an inflection would be highly beneficial to U.S. economic growth, we continue to believe that, at least for the time being, negotiations on the U.S./China trade front remain the key to this market as global growth concerns will no doubt ease on any meaningful updates. Should a deal be reached, we could see a number of positive catalysts, including an uptick in business sentiment providing for increased business expenditures and hiring activity, a dynamic that would no doubt lead to a more confident consumer that can in turn approach the housing market with increased conviction.

Remember, as we've noted multiple times before, we believe housing (~10% of the economy) "punches above its weight" due to the impact positive home buying activity can have on the broader economy, the thinking being home buyers will look to make additional expenditures as they invest in their new home, be it in the form of home upgrades (an obvious positive for Home Depot) or via the initiation of new service contracts such as broadband, streaming services, gas & electric or any other services associated with home.

Members interested in digging even deeper can view the official release, here.