Housing Warns a Top is Forming

Jason Leavitt  |

Per Sam Stovall, formerly of S&P Capital IQ, every recession since 1960 has been preceded by y/y double-digit decline in housing starts. The average is -25%. The smallest (-10%) occurred ahead of the shallowest economic contraction while the biggest (-37%) occurred before deepest recession.

"Year-over-year" is a long time. It implies tops take time to form, but this doesn't mean we can't look for early warning signs.

Here's a rundown of the housing group, mostly in terms of the companies that make the various aspects of a house.

Mohawk (MHK) does flooring - carpet, ceramic tile, laminate, wood, stone, vinyl and rugs.

Jeld-Wen (JELD) does interior and exterior doors and wood, vinyl and aluminum windows.

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Masonite Worldwide (DOOR) makes interior and exterior doors.

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Sherwin Williams (SHW) does paint and other coating products.

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Scotts Miracle-Gro (SMG) does lawn and garden care.

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Fortune Brands Home & Security (FBHS) does cabinets, doors, windows, tool storage, garage organization and safety devices.

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Amer Woodmark (AMWD) makes kitchen and bath cabinets.

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Home Depot (HD) and Lowe's (LOW) sell a wide range of building materials, home improvement products and lawn and garden products.

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XHB and ITB are residential construction ETFs.

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These charts speak for themselves. There's no question housing is weakening - there are headlines highlighting various metrics dropping in key markets almost every day. And if a negative wealth effect takes place and consumers pull back on their spending just a little bit, the economy, which is 70% consumption based, will take a hit.

These charts are our warnings signs. We don't have to wait for a y/y drop in housing starts to read what's in the pipeline.

A market top is forming. It'll take some time - possibly well into 2019 - but it's still forming, so have a plan in place to navigate it.

DISCLOSURE: At the time of this publication, the author did not have positions in any of the stocks discussed.

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