Throughout the bust and the ensuing recovery in residential housing, the performance of homebuilder stocks has closely tracked the trend in Housing Starts and Building Permits. Below, we highlight this relationship by comparing the iShares Home Construction ETF (ITB) to the three-month moving average of Housing Starts and Building Permits. The relationship between the two is so strong that the correlation coefficient between monthly Housing Starts and the closing prices of ITB is 0.89, while the correlation of ITB with Building Permits is even stronger at 0.91. For the sake of reference, a perfect correlation would be a reading of +1.
While the historical relationship between the two has been strong, we would note that in the last year both Starts and Permits have been drifting lower even as homebuilder stocks have surged. In 2015, we saw a divergence in the opposite direction where Starts and Permits outpaced the gains in homebuilder stocks. In that period, the homebuilder stocks eventually caught up, so perhaps we are just seeing the opposite pattern now. The two haven’t always tracked each other step for step, but the fact that the builders have rallied so much this year even as Starts and Permits have declined should be monitored for any signs of that weakness finding its way into the homebuilder stocks.
