The housing market bulls could have the story dead wrong
And for the bulls, it continues to be a bright spot in an otherwise slowing US economy in a slowing global economy.
But in a chilling 88-page industry note, Barclays analyst Stephen Kim warns that the bullish tale spun by his peers is more of a fairy tale.
"At this point, it has become hard to overlook housing's dismally slow pace of recovery," Kim wrote.
"And yet, over the past several months, we have become increasingly concerned about the way many analysts are portraying the industry's current weakness as a strength," he continued. "To us, this seems perilously Pollyannish and a risky oversimplification."
Kim, Barclays' US building products and homebuilding equity analyst, is speaking in the context of stock recommendations for clients. However, his view of the industry is very sharp and one that we just cannot ignore.
To say "housing has lagged" and that demand is "slow and steady" is a dangerous assumption
Sure, home prices are back to historic highs and housing market activity continues to pick up, many important aspects of the housing market are pretty depressed.
"The housing recovery hasn't lived up to expectations so far; this is something about which housing bulls and bears can probably agree," Kim said. "Indeed, 10 years after the last peak, single- family starts (which matter most for public builders) are at traditional trough levels, and total starts aren't much better."
Indeed, it's hard to dispute what's going on in single-family housing starts.
Optimists interpret this as an opportunity.
But not Kim. In fact, he finds the optimists' arguments troubling.
"Particularly alarming to us is when we hear that 'housing has lagged' the economy, or that housing demand is 'slow and steady'," wrote Kim. "Call us cynical, but last we checked, housing doesn't lag anything - it's a leading indicator; and just because housing is slow doesn't make it more steady or less cyclical, it's just slow."
Kim explains.
Two realities we need to come to grips with
"There are two realities that we think investors still need to come to grips with," he said. "First, pent-up demand can stay pent up for a long time, and second, housing probably isn't early-cycle anymore."
Pent-up demand
Pent-up demand is the idea that there are buyers in the pipeline, waiting to pull the trigger. But when can you expect them to pull the trigger? Here's Kim (emphasis and hyperlinks added):
Mid-cycle
So not only is everyone getting it wrong on the housing recovery, but Kim says it may fall apart before it can even get going.
In this environment, Kim like building products companies over homebuilders, and he suggests staying away from companies that depend on the housing market accelerating.