1/16/2008

Breaking Down the NAHB/Wells Fargo Housing Market Index
By David Urani

Shares in the homebuilding sector were up a cumulative 5% January 16 with a little help from the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). If you haven’t heard of the HMI before, here’s the skinny: it is a numerical summation of survey conducted by the National Association of Home Builders (NAHB), which attempts to measure home builders’ market sentiment and outlook.

Investors embraced the recent report as a result of what it implies for the future.  After a downward revision to 18 from 19 on December’s reading, the index increased a mere point in January to 19.  This is still a minor victory considering it had been declining for ten consecutive months. The brightest spot of the report was the component that projects traffic over the next six months, which is at its highest level since August 2007.

So what does this reading say about the state of homebuilders? Overall, it means America’s homebuilders appear to be feeling just a little better about the fundamentals of the market going forward. In the grand scheme of things, the report may not give us much insight into what is actually happening in the housing market currently, but the positive reaction by homebuilders’ stocks is fairly meaningful.

The aggregate increase in homebuilders’ stock values, which ranged from 1% to 12% on the day, didn’t entirely result from the report. Also of significance to homebuilders’ stocks was a drop in oil prices and the strengthening of the dollar in the same day. These developments, combined with a disappointing report on industrial production from the Federal Reserve, hint at the possibility that the Fed may easily have room and reason to cut interest rates by 50 or even 75 basis points.

Perhaps the best lesson to learn from Wednesday’s movement in housing stocks is that even the smallest amount of news can send them flying (or sinking). It is remarkable what a little renewal in investor confidence can do, so it will be interesting to see what happens when the actual home sales results for December are released later this month. The Census Bureau’s report on housing starts and permits for December set for release on January 17 will have some effect, but investors should not rely on this data too much. Homebuilders have virtually stopped production on new homes in an effort to clear out excess inventory, so the data will give little insight on how homebuilders are fairing at the present time. The numbers to look out for are December existing home sales, set for release on January 24, and December new home sales, scheduled for January 28.