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


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.


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.


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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
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Yes, but it will take even  longer than it did in the US, and the delay will have a negative political impact