NAHB Index: Canary in a Coal Mine--or Not?

Posted by: Dean Foust on June 19, 2007

Does housing drive the economy? Well, to a small extent, yes. Does it help drive the stock market? Good question. Some market pundits have been opining that if home values decline, foreclosures soar and homeowners in general feel pinched and stop consuming, that the economy will tank and take the stock market down with it. Buttressing their argument is the seeming correlation between the National Association of Home Builders’ NAHB Home Builder Index—a proprietary measure of the level of homebuilding activity—and the stock market, as represented by the Standard & Poor’s 500-stock index. (Routine disclosure: Standard & Poor’s is, like BusinessWeek, owned by The McGraw-Hill Cos.) The correlation, of course, isn’t real time, since it takes time for the housing problems to feed through the economy and, in turn, the stock market.

Admittedly, if you were to look at the correlation between the NAHB Home Builders Index and the S&P 500 since 1995, you’d be inclined to agree that there’s a sharp correction looming in the S&P index. Looks pretty convincing—and scary—no? (FYI, the blue line is the NAHB Index, the red line the S&P 500.)

NAHB1.png

But as economists love to say, correlation is not always causation.

The principals at Bespoke Investment Group, Paul Hickey and Justin Walters, just did a nice piece (click here to read it) showing that if you trace the correlation between the NAHB Index and the S&P further back, there was no correlation between housing and the stock market back in the 1980s.

NAHB2.png

Me? I’m kinda torn on the question. Yeah, I do think there’s a day of reckoning in the housing and mortgage markets that hasn’t fully played out, both economically and to a degree in the markets. But I also think that as the economy becomes more global, the large multinationals that comprise indices like the S&P 500 aren’t solely dependent on the U.S. economy, much less the housing market. Case in point: Coca-Cola Co., which now derives about 80% of its operating income from outside the U.S. But readers, feel free to weigh in here with your thoughts.

Reader Comments

Shaun McLane

June 20, 2007 6:35 AM

Boy, that first chart shows a bit of doom and gloom in the forecast. I think we'll see the red and blue lines follow closely (not exact), and I feel the S&P will be taking a slight drop soon - probably not as drastic as the NAHB, but still a drop.

Per Bullsen

August 20, 2007 4:47 PM

What is incredible is, shortly after this article was written the S&P 500 started taking a huge dive, which is right on schedule according to the correlation.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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