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.
Masonite Worldwide (
Sherwin Williams (
Scotts Miracle-Gro (
Fortune Brands Home & Security (
Amer Woodmark (
Home Depot (
XHB and ITB are residential construction ETFs.
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.