The Fate Of Homebuilder Stocks Is Tied To This Data Point

The National Association of Home Builders on Tuesday published its latest sentiment report -- designed as a barometer for the single-family housing market. Even though results were weaker than expected, the Bespoke Team assured "the residential housing market in the US has been a bright spot in the economy."

The analysts highlighted another important data point out this week. On Wednesday, the Census Bureau will roll out 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," the Bespoke note stated. Consensus expectations point towards a month-over-month decline in Housing Starts and a small surge in Permits.

"Obviously long terms trends in residential housing data are an important metric for the performance of home builder stocks," the experts explicated. "What is pretty amazing, though, is just how closely the performance of home builder stocks has followed trends in Housing Starts."

Editor's note: USA Building Permits for October came out at 1.15 million; USA Building Permits month-over-month were 4.1 percent. USA Housing starts for October were 1.06 million.

The chart below offers a comparison between the performance of the iShares Dow Jones US Home Const. (ETF) ITB and Housing Starts since 2007.

While the series have diverged at times for a few months, Bespoke analysts pointed out, "overall they are practically the same pattern." Over the time period comprised by the graph, the correlation coefficient between Housing Starts and the ITB ETF has been +0.91; The correlation is almost as strong as it gets.

Source:Bespoke

"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," the note concluded.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.