Housing Not a Good Indicator for Stock Market

Investors’ eyes are turning toward the housing market for signs of economic stabilization. In recent weeks, however, housing has proven a confusing indicator. On May 18, the monthly …

Investors’ eyes are turning toward the housing market for signs of economic stabilization. In recent weeks, however, housing has proven a confusing indicator.

On May 18, the monthly National Association of Home Builders-Wells Fargo sentiment index was released. Running on a scale of 0 to 100, the index recorded a rise to 16 in May from 14 in April – the strongest score since 17 in September. According to NAHB, this indicates that one in six builders consider the new-home market to be good.

Buoyed by this news in addition to an optimistic profit report from Lowe’s as well as improving analyst sentiment about the banking sector, the Dow Jones industrial average jumped 235, with all major indexes rising about 3 percent.

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On May 19, the market turned choppy and worried as the Commerce Department released sobering new housing data. April saw applications for U.S. housing construction permits tumble to a record low of 494,000, a 3.3 percent drop from the previous month and more than a 50 percent drop from a year earlier. While overall losses were light – the Dow dropped about 29.23 points – it was clear that investors are still worried about the future of the housing market and the overall economy.

That said, the news out of the Commerce Department is not entirely negative, as many analysts believe a drop in construction will lead to trimming excess inventory. In addition, the department reports an increase in new single-family construction, though apartment construction is down.

Housing is historically seen as a key indicator for the stock market, since builders will not embark on new construction unless they are at least fairly certain that it will sell by completion. Construction also provides a ripple effect for the greater economy by creating jobs as well as homebuying-related consumer spending such as furniture, landscaping, and household items such as washing machines and refrigerators. An appetite for new construction can also indicate consumer confidence, another factor in a rising economic tide.

Single-family housing is considered a less volatile piece of the housing puzzle than multi-family construction, since it is a larger and generally less speculative endeavor. For its part, the multi-family sector is more prone to influence by speculation as well as tax-code fluctuations. As the economy continues to press toward stabilization, it behooves investors to keep a close eye on both parts of the housing puzzle.

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