Where to house your funds: Let the Housing Market Index guide you

Market Realist

Must know: This week's releases and the upcoming FOMC meeting (Part 3 of 8)

(Continued from Part 2)

The Housing Market Index

The Housing Market Index (or HMI), released monthly by the National Association of Home Builders (or NAHB) in association with Wells Fargo (WFC), is a weighted average of separate diffusion indexes. These include the present sale of new homes, the sale of new homes expected in the next six months, and the prospective buyers’ traffic in the new homes sector.

The index is useful in determining the demand for housing. It also helps in gauging the economic momentum.

As per the February release, the HMI for February fell by a record 0.10% to level of 46, which is the lowest reading since May last year. This was much attributed to the traffic of prospective buyers in new homes component. The regional breakdown showed the Northeast region as the weakest, while the West remained the strongest region.

Popular real estate ETFs like the Vanguard REIT ETF (VNQ) with holdings in Simon Property Group Inc. (SPG) and Public Storage (PSA), the iShares Dow Jones US Real Estate Index Fund (IYR), and the SPDR Dow Jones REIT ETF (RWR), reflect the performance of the housing market in their returns.

Housing starts

A housing start is registered at the start of the construction of a new building intended primarily to be a residential building. The start of construction is defined as the beginning of excavation of the foundation for the building.

As per the February release, housing starts in January were hit by extreme cold weather as they plunged 16.0%. Starts in the South, which is by far the largest region for this report, fell 12.5%; the West, the second largest region, showed a 17.4% decline.

Investor’s takeaway

Since much of the decrease was due to the extreme cold weather, one can expect the housing starts to bounce back in the coming months, as weather conditions stabilize.

Home builders usually don’t start a house unless they are fairly confident it will sell upon or before its completion. Changes in the rate of housing starts tell us a lot about demand for homes and the outlook for the construction industry. The economic ripple effect can be substantial, especially when a hundred thousand new households around the country are doing this every month.

The bond market will rally when housing starts decrease, but bond prices will fall when housing starts post healthy gains. A strong housing market is bullish for the stock market because the ripple effect of housing to consumer durable purchases spurs corporate profits.

Continue to Part 4

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