A quick look at a timely topic of interest – with a brief review of why it could matter to investors.

Chart of the Week

July 27, 2015

US Housing: Building on optimism
Homebuilder sentiment and building permits for new construction

chart

Source: Bloomberg, as of 7/20/15. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom line:

  • Does the recent surge in building permits mean homebuilders are ready to match their optimistic talk with optimistic action?
  • If so, it could go a long way in helping the economy move forward, especially given recent weakness in retail sales and ongoing sluggishness in business investment.
  • Homebuilder optimism, as measured by the National Association of Homebuilders (NAHB) Housing Market Index (HMI) held at 60 in July for the second straight month. That's the highest level since November 2005.
  • That said, it's been above 50 for most of the past two years—which reflects "good" conditions as reported by survey respondents.
  • Until recently, that generally positive sentiment has corresponded with a slow rise in building permits (legal authorizations for new construction).
  • But between March and June of this year, permits exploded, surging over 29%—by far the biggest 3-month increase since the bust in the housing market.
  • If actual construction now follows—so could improvement in other parts of the economy—employment, mortgage financing, home furnishings, etc.
  • Of course, buyers will ultimately have to emerge to sustain any homebuilding momentum, but with mortgage rates still low and 25-34 year olds (prime age for first-time buyers) now experiencing solid job growth the outlook for the housing market could finally be picking up a little.

The chart:

  • The chart shows the National Association of Homebuilders (NAHB) Housing Market Index (HMI) and the seasonally-adjusted annualized rate of building permits over the past 10 years.
  • The last data point for the HMI is a preliminary reading of 60 for July 2015; the last data point for building permits is a seasonally-adjusted annualized rate of 1,343,000 for June 2015.
  • Note that the HMI was above 50 for 22 of the 26 months since May 2013
  • In March 2015, the seasonally-adjusted annualized rate of building permits was 9% higher than it was in June 2013—given the increase since March it is now 42% higher.

Definitions:

A building permit is a type of authorization that must be granted by a government or other regulatory body before the construction of a new or existing building can legally occur.

The Housing Market Index (HMI) is based on a monthly survey of NAHB members, which asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes—the index is a weighted average of separate diffusion indices for these three key single-family series. An index reading above 50 reflects good overall conditions; below 50, poor conditions.

The National Association of Home Builders (NAHB) is a federation of more than 800 state and local associations and has more than 140,000 members of which about one-third are home builders and remodelers—the rest work in closely related specialties such as sales and marketing, housing finance, and manufacturing and supplying building materials.


IMPORTANT INFORMATION:

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice.

This material is for information only and does not constitute an invitation to the public to invest in any funds, securities, strategies or other products. You should be aware that the investment opportunities described should normally be regarded as longer term investments and they may not be suitable for everyone. All investments involve risk, including possible loss of principal. The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Past performance is no guide to future returns and may not be repeated. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. Unless otherwise noted the "$" (dollar sign) represents U.S. Dollars.

Please note that an investor cannot invest directly in an index. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed and is not a complete summary or statement of all available data. Individual securities mentioned are intended as examples of portfolio holdings and are not intended as buy or sell recommendations. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, or a guarantee of future results, or investment advice. The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.

This material is only for distribution in those countries and to those recipients listed.

All investors in the UK, professional clients and eligible counterparties in EU and EEA countries ex UK and Qualified Investors in Switzerland:
Issued and approved by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444.

All Investors in Hong Kong and Singapore:
This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

Qualified domestic institutional investors in the People's Republic of China (PRC), Distributors and existing investors in Korea and Distributors in Taiwan:
This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in the PRC and Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in the PRC, Korea or Taiwan.

All Investors in the Americas:
This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which may include Legg Mason International - Americas Offshore. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:
This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) ("Legg Mason"). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client's professional advisers.

FN1513232

Previous Editions

Click on a date to view that week's edition of charts.

Poll

When will the Fed raise the Fed Funds target rate?








Poll

When will the Fed raise the Fed Funds target rate?

June
(2%)
September
(32%)
November
(24%)
Not until 2016
(42%)



Previous month Poll

Will the current wave of central bank easing jump-start the world's economies?

No - The real issues are structural - real progress on labor reform and regulatory excess will have more impact
(32%)
No - Deflation is already taking hold, making monetary policy changes ineffective
(5%)
Yes - The US model shows that monetary easing can help economies heal in the medium term
(19%)
Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact
(44%)