Housing Market Index: Building Up Success

If you've seen or read "The Big Short," you know precisely why people should be skeptical of the U.S. housing market. Yes, even 8 years after the fact, it pays to raise an eyebrow every time something good is announced concerning real estate. Nevertheless, it helps to see where and how housing trends are being conveyed so you know for yourself what is considered positive or not. My favorite measurement for housing market health is the monthly report from the National Association of Home Builders (NAHB) and it's Housing Market Index (HMI). (Details courtesy of Bloomberg Economic Calendar.) 

What is the "Housing Market Index" & why should I care?

The Housing Market index provides us with a gauge of not only the demand for housing, but the economic momentum. Obviously, families and individuals have to be quite comfortable and confident in their own financial position before buying a house. Furthermore, this narrow piece of data has a powerful multiplier effect through the economy, and therefore across the markets and your investments.

By tracking economic data such as the housing market index, investors can gain specific investment ideas as well as broad guidance for managing a portfolio. Whether the housing market index reflects new home sales or home resales, once a home is sold, it generates revenues for the realtor and the builder. It brings a myriad of consumption opportunities for the buyer. For example, refrigerators, washers, dryers and furniture are just a few items home buyers might purchase.

The economic "ripple effect" can be substantial especially when you think a hundred thousand new households around the country are doing this every month. Since the economic backdrop is the most pervasive influence on financial markets, home sales have a direct bearing on stocks, bonds and commodities. In a more specific sense, trends in the existing home sales data carry valuable clues for the stocks of home builders, mortgage lenders and home furnishings companies.

Analysis of This Month's Data:

In September 2016, new home sales have been strong and home builders are reporting more of the same, in fact the best conditions of the year. The housing market index is up a very sharp 6 points to a reading of 65 for the best reading since October last year. The present sales component is up 6 points to 71, a level last matched in October last year, while future sales are up 5 points and are also at 71 which for this component is the best showing since all the way back in October 2005. The reading for traffic, up 4 points to 48, was last matched in November last year and last exceeded, once again, in October 2005.

At an enormously strong composite score of 82, strength is concentrated in the West which is a focused region for home builders. The South, which is the largest region for home builders, follows at 68. The Midwest is at 56 with the Northeast, which is by far the smallest region for home builders, lagging badly at 43. Aside from the Northeast, there's nothing at all lagging about this report, one that points to an accelerating second-half contribution from housing.