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NAHB/Wells Fargo HMI

5/15/2012

 
Kevin Spires, CFA, FRM

The NAHB/Wells Fargo Housing Market Indicator (HMI for short) is the best leading indicator of Housing Construction.  The HMI leads Housing Starts by 3-5 months, it is an able predictor of Median Home Price changes, and it is highly correlated with the relative performance of the XHB ETF (Housing Related Sector ETF) vs. the SPY ETF.  (Disclosure - Bellaire Capital Management, LLC is long XHB in client accounts)  Today's release of the HMI was 29 vs. last month's 24 (revised from 25).
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The HMI is highly correlated with and leads Single Family Housing starts.  The lead for the HMI over starts is about 3 months.  In the chart to the left, the HMI has been shifted forward by 3 months.  Given the increase in the HMI this year, Single Family Housing Starts should accelerate throughout the spring and early summer.  It should be noted that the normal reading of the HMI is 50 and this corresponds to a "normal" New Home Market where about 1.1+ Million new Single Family Homes are built each year.

A recovery in the Home Construction market is underway and the level of the HMI is implying Single Family Starts of around 700k - an increase of 48% over the average of the last 6 months of 472k.  This is definitely an outlier of a forecast, but it is what is implied by the data.  The actual Housing Starts will come in weaker than implied by the HMI, but will still probably grow at 10-15% above last year's levels.  This is real growth and is still much above the consensus for the Home Construction sector.  Tomorrow will see the release of Housing Starts at 8:30 am EST and we can see how much of the recovery in the HMI is being translated into actual activity.


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