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The government released its report on New Home Sales in the US on Wednesday, and the numbers were dismal. After all that we’ve been through the past two years with the housing market falling from grace, I assumed that as the economy started to improve, we’d see the housing market pick back up. Friday’s upward revision of the latest quarterly GDP to 3.1% made me wonder how these two macroeconomic indicators interact. Imagine my surprise when I plotted US GDP growth against New Home Sales using HiddenLevers' economic comparative charting:

Charts created using Hidden Levers app'

That’s a pretty significant tale. New home sales had actually been decreasing FAR EARLIER than the start of the global financial crisis. As a matter of fact, the economy was doing pretty darn well at the time new home sales started taking a dive. And furthermore, now that the economy is picking back up, new home sales are STILL in the toilet! (It makes me wonder how Bloomberg could be surprised at “unexpected” all-time new home sales lows!)

So, what gives? Are Americans reversing the trends and leaving the suburbs to return back to metropolitan areas where renting is more common than owning? Or maybe people would just rather not purchase a new home and actually prefer buying an existing home because the inventory is there and existing homes are generally cheaper? Maybe those new homes are so underwater from earlier bad mortgages that many people no longer qualify for new homes? Well, whatever the reason, I feel like I was duped into thinking that new home sales particularly is a sure-fire indicator of how well our economy is doing. Clearly, that’s bollocks - we can see our economy emerging from near collapse but the new homes market shows no signs of correlating recovery; nor would we expect it to do so. Just look at the graph - the numbers don’t lie.

Looking at this from an investor’s standpoint, I’d think it would be wise to approach with caution, any stocks that are heavily correlated with new homes sales. In the HiddenLevers Economic Data Center, I see that Wholesale Building Materials is one of the stock groupings determined to be highly linked with New Homes Sales.

COMPANY MKT CAP
BEACON ROOFING SUPPLY INC (NASDAQ:BECN)
676M
BLUELINX HOLDINGS (NYSE:BCC)
129M
HEADWATERS INC (NYSE:HW)
222M
INTERLINE BRANDS INC (NYSE:IBI)
663M
JAMES HARDIE IND ADR (NYSE:JHX)
2B

The two smallest companies in terms of market cap - Blulinx (BCC) and Headwaters (HW) - historically underperform new homes sales, while larger companies in the industry such as Beacon Roofing Supply (BECN), Interline Brands (IBI), and James Hardie (JHX) outperformed new homes sales.

So even if companies are highly correlated to an industry, we can still figure out which ones can buck the underlying macro trends and help you gain. A light at the end of a dismal new home-building tunnel, perhaps.

>> Continue to Part II

Source: Housing and GDP - What's the Real Story?