NAHB Housing Index vs. The S&P 500

There’s an interesting analysis at MarketWatch you might want to check out.

Why?

Because it has this interesting chart:

What’s so interesting about this chart?

Note that the S&P 500 is lagged by twelve months, which basically implies it takes a year for the S&P 500 to imitate the variation in the NAHB Housing Index. Correlation & causation aside - what’s important is that variation in the NAHB Housing Index can explain some or most of the variation in the S&P 500.

So, we can see the NAHB Housing Index currently hovering around the 600 range, and in a year, if this 10-year correlation holds, the S&P would theoretically fall from today’s 1298.92 to around 600 as well.

Via Reuters:

Birinyi Associates, a research and money management firm in Connecticut, said there is a “very high correlation” between the National Association of Home Builders (NAHB) index, a measure of sentiment in the industry, and the S&P 500’s < .SPX> performance on a one-year lagged basis.

The dramatic weakness in the NAHB index — whose builder confidence measure sank to 32 in August from 39 in July to hit the lowest level since February 1991 — is likely to be followed by a “significant decline in the stock market,” said analyst Paul Hickey of Birinyi.

August was the seventh consecutive month in which the builder confidence index has fallen.
Birinyi said the correlation between the NAHB and S&P is 0.79 and covers the last 10 years. A correlation of 1.00, whether it’s positive or negative, is a perfect correlation.

Interesting stuff - keep your eye on the housing market in the US - things are about to get interesting.