What The Stock Market Tells Us About Housing

They say that the stock and commodity markets provide some of the best forecasts available. I’ve heard that orange juice futures predict Florida weather better than the National Weather Service. So we should be able to look to these markets for some indication of what is going on with housing – e.g. home builder stocks and lumber futures.

Lumber futures are beyond me but I do understand stocks pretty well. Yesterday Toll Brothers (TOL) announced that contracts for new homes rose 42 percent in its fiscal fourth quarter. Their stock was up 16.4% today. Of course, that’s just one builder but the entire sector responded in kind. In fact, we can track the performance of this sector through the iShares Dow Jones US Home Construction ETF (ITB). In the chart below I compare ITB (blue line) to the S&P 500 (red line) over the last 2 years.

ITB

You can see a couple of things in this chart. First, the home builders bottomed out in March. Well, to be perfectly honest we don’t know for sure that they bottomed out because we don’t know if a lower bottom won’t be reached sometime in the near future. However, that’s the lowest point in the last 2 years and we’re well above that now.

Second, these home builders have tracked the S&P 500 surprisingly well over the last 2 years. And even though ITB hasn’t reached a 52 week high yet the S&P just did today.

I think these are just more bullish signs that the housing bust may have bottomed out. Don’t get me wrong. I still think there is a lot more pain coming in the short run but the light is at the end of the tunnel.

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