Saturday, November 04, 2006

Does the National Association of Home Builders Buyers Confidence index measure future Stock Market Pricing?


I just read this article in Yahoo Finance that references the graph here. This graph was created by Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. It is a comparison graph of the National Association of Home Builders' Housing Market index (a monthly measure of builder confidence) against the S & P 500 stock market index, with a one-year delay.

It is an amazing fit, at least since about 1994. (I wonder why the start of the line before '94 was not a good fit at all?) Anyways, as you can see, the start of 2006 shows a severe slide of confidence, and according to this article, the worst slide in housing ever.

According to Warren Brussey's (who wrote the book "The Second Great Depression") November Amazon BLOG entry:
"To keep selling homes, builders have reduced prices nearly 10% in the last year, the largest drop in 35 years. Existing home prices have dropped 2.5%, the largest drop in history; but they still are not selling."
The one year delay may make some sense, not only because (as the Yahoo Article notes):
"Housing downturns happen in a fairly slow-motion way, and I really think we're just at the beginning of the impact on the market and the economy."
Another interesting comment I came across in this Merriman Capital Podcast dated November 3rd was that there was a lot of money fleeing the housing market right now, and going into stocks. They wondered if this might might be what is currently driving the market up right now and if this rise might continue just a little longer until either the money is all in play, or housing gets better. (this might be the reason for the typical 1 year "delay")

In searching for others who might have beat me to this story, I found two people who already BLOGGED about this very thing. Larry Nusbaum's BLOG describes a 79% correlation between the two plots since 1994.....but even Larry references WCW's BLOG that shows that before 1994, there was very little correlation. (so who knows what kind of connection there really is.....or what other factors are also involved)

Just as a somwhat related aside, here is another page guy (
Nouriel Roubini is a professor of economics at the Stern School of Business at NYU and chairman of Roubini Global Economics, an economic consultant group.) who believes the rise in prices since about 1997 have had no economic reason behind them....except perhaps a speculative run-up. He notes that this bubble is now popping.

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