Are Homebuilder Stocks Pointing To A Declining Housing Market?

As an afterthought to yesterday’s post on the upbeat home price forecast I thought I would point out another indicator that has recently turned down and could be seen as a negative indicator of the state of the housing market. It’s the S&P Homebuilders ETF (XHB), which basically tracks the S&P Homebuilders Select Industry Index. As the name implies this index includes a lot of companies involved in homebuilding.
The graph below shows the value of this index (blue line) over the last 5 years compared to the value of the S&P 500 (green line). As you can see these stocks have been on a tear over the last 2+ years – until recently. It’s hard to see in the graph below but right around July 7 they started dropping off pretty fast.
So what does this mean? Well, from the graph above it looks to me like these stocks got ahead of the rest of the economy and were just waiting for some bad news to come along and knock them down. That “bad news” has been building in the last few months in the form of lower housing start numbers, shown below. As you can see in the graph from the Federal Reserve Bank of St. Louis, after recovering strongly in the last few years these numbers have finally started to slow down – but still at a level quite a bit below historic norms.
housing starts
I think it’s this slowdown that has spooked the homebuilder stocks and it could be a warning sign about the future of the housing market. Then again new construction is really a small part of the overall housing market and strong competition from existing homes just might be keeping a lid on the enthusiasm.
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