Housing starts, existing home sales, mortgage applications, and the earnings reports of companies like Toll Brothers (TOL), PulteGroup (PHM), or Simon Property Group (SPG) are examples of some of the data points investors look to when attempting to gauge the health of the real estate market. Moreover, investors might also look at the performance of ETFs like the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Real Estate ETF (IYR) for clues as to the health of the broader real estate market. After all, plenty of investors believe that equity prices do a good job pricing in changes in fundamentals before those changes become apparent to all. In this article, I would like to throw another, lesser followed report into the mix.
The American Institute of Architects (AIA) publishes a monthly report called the AIA Architecture Billings Index (ABI), a diffusion index derived from a survey of principals or partners in AIA member firms. The ABI is advertised as a leading economic indicator of nonresidential construction, but it provides a monthly data point for residential construction as well (multi-family units). What exactly does the ABI measure? Simply put, it measures whether billings increased, decreased, or stayed the same from one month to the next.
From June 2012 through February 2013, the ABI was in a strong uptrend, moving from 45.9 to 54.9, the post-2008 high. A level of 50 represents the dividing line between billings decreases and billings increases. In February 2013, the AIA inquiries index also hit a post-2008 high at 64.8. Since February, however, the ABI index has plunged. Roughly, 70% of the gains that took eight months to achieve were erased in just two months. In March, the ABI dropped to 51.9, and in April (the latest reading) it dropped again, this time into contractionary territory at 48.6. The next report, due for release on June 19, will give us the data for May. During the same time, inquiries pulled back strongly, although still remaining in growth territory in the upper 50s.
When breaking down the April 2013 data (released in May) by region, we find that the Midwest and Northeast are seeing billings decreases (index levels of 49.4 and 48.2 respectively), and the West is essentially flat at 50.7. The only region still experiencing noticeable growth in billings is the South at 52.6. The monthly ABI report also breaks down the data by sector into Commercial/Industrial, Institutional, and Residential. In April, Commercial/Industrial turned negative at 49.2, and Institutional barely kept its head above water at 50.1. Residential is still hanging onto positive territory at 52.0, but it has absolutely plunged over the past two months from February's level of 60.9.
I recognize that a national level of 48.6 is not incredibly far into contractionary territory. But it is now negative, and, perhaps more importantly, the speed with which the decline has occurred over the past two months is noteworthy. Moreover, the last time the ABI moved from above 50 to below 50 (March into April 2012), it coincided with a peak in the stock market. Prior to that, the last time the ABI spent a significant amount of time in negative territory was from April to October 2011. During that time, the ABI only poked its head above 50 once, at 50.5 in August 2011. You will perhaps remember that the April 2011 to October 2011 time period was also not a good one for stocks.
Of course, just because the ABI's last two times in negative territory were also two periods of time in which the stock market did not perform well does not mean it will happen again. This time around we have QE-forever and a belief in the "Bernanke Put" that has only strengthened with time. We also have a market that has ignored several quarters of stagnant earnings and a whole host of lackluster economic data in recent months. S&P 500 operating earnings have grown a whopping 0.2% over the past four quarters, from $98.12 to $98.32 (data through 5/17/2013). Despite this, the S&P 500 (SPY) was able to rally nearly 20% during the same time period. In other words, in recent quarters, market participants seemed to care very little about actual earnings growth.
With that said, given that the ABI's dip into negative territory was quite correlated with weak broader-equity-market performance the last two times it occurred, investors should at least take note of the recent ABI decline below 50. I don't for a second think the ABI is widely enough followed for investors to directly react to it. And in today's stock market reality, fundamentals, in my opinion, don't matter a whole lot. But I remain hopeful that one day the fundamentals of the economy and actual earnings or realistic earnings expectations (rather than the consistently too high S&P 500 earnings expectations we get from analysts) will once again become the main driver of stock prices. If today is not that time, then investors (especially institutional investors) can continue their focus on central bank liquidity as the primary determinant for whether to buy the broader market. But when the time comes for the fundamentals to once again matter, the ABI will quite possibly be a canary in the stock market's coal mine. For now, however, it remains, at a minimum, a canary in the real estate market's coal mine. While it doesn't necessarily mean to abandon ship, it does mean that real-estate-focused investors should be more vigilant and cautious for the time being.