After a number of years of reckless overbuilding, the homebuilders are getting it right. The evidence was right there this morning: they are showing restraint, and be it forced by market demand or due to their own realization and acceptance, it is a very good thing.

Why am I happy? Because the two housing datapoints released this morning were both far, far below expectations. Housing starts came in under 950K against expectations of more than 1M, and permits were under 930K against expectations of 975K. The Homebuilder ETF (XHB) is up about 3% as I write this, off its highs mid-day.

It is crucial that those two numbers continue to remain depressed, because excess inventory needs to keep getting worked off. Consider the chart below of single family housing inventories, which goes back to mid-1982:

As I said, inventory overhang will continue to be a problem for some time. Better for the homebuilders and everyone who supplies them to take their lumps hard and upfront, rather than defer them and remain stuck in a situation with oversupply and zero pricing power indefinitely.

A quick check of three companies I follow that are levered to homebuilding - Weyerhaeuser (WY), USG, and Sherwin-Williams (SHW) - shows all are up modestly on the day. I continue to like Weyerhaeuser and own USG, and while Sherwin has been showing some life of late, I continue to be cautious on that one. Estimates have come way down for the first half of this year, but numbers for the back half remain untouched. Sherwin announces earnings next week (the same day as USG, in fact), so if they don’t inspire with a good second half outlook, more pain - or at least stagnation - could be in store there.

Also on the housing front, I found this article to be a worthwhile read.

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