Even after Tuesday’s weaker than expected NAHB sentiment report, the residential housing market in the US has been a bright spot in the economy. On Wednesday, the Census Bureau will publish the October release of Housing Starts and Building Permits. Housing Starts are estimated to come in at a seasonally adjusted annualized (SAAR) rate of 1.16 million while Building Permits are forecast to come in at a rate of 1.147 million. For Housing Starts, the consensus expectation is down from September, whereas Permits are forecast to rise slightly.
Obviously long terms trends in residential housing data are an important metric for the performance of home builder stocks. What is pretty amazing, though, is just how closely the performance of home builder stocks has followed trends in Housing Starts. The chart below compares the performance of the iShares Home Construction ETF (ITB) since 2007 to Housing Starts over that same period. While there are instances where the two series have diverged for a few months, overall they are practically the same pattern. In fact, over the time period shown, the correlation coefficient between Housing Starts and ITB has been +0.91. It’s hard to get more positively correlated than that! It is often said that the stock market looks out ahead six months, but in the case of home builder stocks and housing starts it seems as though the market doesn’t look very far ahead at all.