Monday, January 21, 2008


In this posting from late 2006, I commented on an article in Fortune magazine entitled "Can the economy survive the housing bust?" Quoting the beginning of the November 2006 article:

Tucked away in the briefcase of Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., is a chart so scary she's hesitant to show it to investors. It plots the National Association of Home Builders' Housing Market index - a monthly measure of builder confidence - against the Standard & Poor's 500 stock market index, with a one-year lag.

It turns out that the mood of builders is a terrific stock market bellwether: The correlation between current builder confidence and future stock market returns over the past ten years is downright unnerving.

Not only did the NAHB index presage the start of the post-1994 bull market in stocks, but its decline starting in 1999 foreshadowed the equity market collapse that came the following year. Builder confidence rebounded in November 2001 - a year ahead of the stock market upswing that began in October 2002.

Why is Sonders worried now? Just look at the chart [Keith: see below]. Over the past year, the NAHB housing index plummeted 54 percent. Were stocks to follow suit, the S&P - 1400 in late October - would be trading below 700 this time next year.

Here's the graph:

So how are builders feeling today? According to a report from the AP last week, not well at all.

A reading of U.S. homebuilders' sentiment remained near a record low in January, as gloom engulfed the housing industry.

The National Association of Home Builders said Wednesday its housing market index, which gauges builders' perceptions of current conditions, interest from potential buyers and expectations for home sales over the next six months, came in at 19 in January — the second-lowest point on record.

The group also revised December's reading downward by one point to a new record low of 18, the lowest result since the index began in 1985.

Here's a graph of the NAHB Housing Market Index for January 2007 to January 2008:

The S&P 500 Index on January 18, 2008 was 1325.19, down 7.09% from January 18, 2007's 1426.37. Assuming Ms. Sonder's theory is correct, then the S&P 500 index should fall 48.57% by December 2008.

To be fair, there were a few boneheaded statements made in that Fortune article, at least from today's perspective.

"The effects of the housing correction will be entirely contained within the housing sector," says Mike Englund, chief economist of Action Economics.


Anonymous said...


Check out this article about the likely effects of the boomer retirement wave. [].

Anonymous said...

Internet bubble and aftermath of September 11th resolved by lowering interest rates and creating another huge bubble. This time there is no other bubble to create to solve this big bubble. Since there is no free ride, there will be some real suffering for the clear and obvious imbalances created during the bubble. Things won't get better until the imbalances, notably in the price of housing, are resolved.

How that will happen is the question: Low interest rates and inflation, depleting savings and having people do unproductive activities to keep their money, which could encourage its own speculation, or a tough recession. While a soft landing would be great, the fact that the fed chairman went to the hill to ask for help with a stimulus package seems uncharacteristic... If this was an execise reading the tea leaves, I would say the Fed sees major problems ahead...of course, since expectations are such a big part of economics, it can't come out and say that since that could induce some irrational panic and worsen the problem.

Anonymous said...

See this CNN/Fortune article which notes similarities to the stagflation of the mid-1970's when inflation was left unaddressed leading to a deep recession (in one opinion) later on to get rid of the inflation:

Will the cure be worse than the disease?
Politicians are scrambling to offer a stimulus package, and Fed Chairman Ben Bernanke is slashing interest rates. But they may be paving the way for a bigger calamity down the road.