Housing Starts 11-20-12

TRADEX GLOBAL INTERNAL COMMENTARY

Housing starts skyrocket!!!  October’s starts were up 3.6% from September, and were the strongest since July 2008.  The 894k annualized rate was sharply higher than economists expected.  The multi-family sector was the biggest surprise, 300k vs 268k in September.  Single family starts dropped slightly.  The Western region had the sharpest monthly rise, 232k vs 198k in September.  The broad improvement in housing is a much needed boost for the slowing economy.  The sector has gone from most hated to most loved.  We have been focused on liquid real estate for the past few years and believe that we are entering the best risk/reward timeframe since we began that focus in 2010.  House prices inching up will help our investments in distressed RMBS; potential for higher interest rates will give a big boost to our IOs (interest-only strips of mortgages) as pre-payments will slow); and finally as the mortgage sector normalizes and the Fed stops manipulating the market, there will be a great opportunity to be short lower-coupon mortgages that have risen way too far in price!  This is a good showing for the sector and we expect more good news in the future.  Keep nimble and we hope you had a wonderful Thanksgiving - Michael Beattie

EXTERNAL RESEARCH COMMENTARY

Housing starts rose to their highest rate in more than four years in October, suggesting the housing market recovery was gaining steam, even though permits for future construction fell. The Commerce Department said on Tuesday housing starts increased 3.6 percent to a seasonally adjusted annual rate of 894,000 units -- the highest since July 2008. The report was the latest to show the broadening housing market recovery was now entrenched. Economists, who had expected groundbreaking to slow to an 840,000-unit rate, said the housing strength laid a foundation for faster economic growth next year. "The broad improvement in home prices, home equity, starts, and inventory clearing are key developments that position the economy for stronger growth next year, and beyond," said Eric Green, chief economist at TD Securities in New York. The housing market has decisively turned around after an unprecedented collapse that landed the economy in its worst recession since the Great Depression. The recovery, marked by rising home sales, prices and building activity is being driven by pent-up demand and record low mortgage rates. Homebuilding is expected to add to gross domestic product growth this year for the first time since 2005. Though home construction accounts for only about 2.5 percent of GDP, economists estimate that for every new house built, at least three new jobs are created. Last month's data led some economists to raise their fourth-quarter growth estimates. Even so, growth in the last three months of the year is expected to be soft, largely because businesses appear reluctant to invest given the prospect for deep government spending cuts and higher taxes next year. Fourth-quarter growth forecasts currently range between an annual rate of 1 percent and 2.2 percent. The Commerce Department said superstorm Sandy, which slammed the East Coast in late October, had a minimal impact on the data. Economists expected the storm to weigh on homebuilding in November, with rebuilding in the months ahead mitigating the impact. The upbeat homebuilding report buoyed housing-related shares on Wall Street, with PulteGroup Inc -- the second-largest U.S. homebuilder -- soaring more than 6 percent. The overall housing sector index was up 2.5 percent in early afternoon trade, outperforming a broadly weak shares market.

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