One of the most important indicators that investors rely on to gauge the health of the housing market is the new home sales report. Released at the end of every month by the U.S. Census Bureau, the new home sales report showcases the number of new single-family homes that were sold during the previous month.
Because new home sales spur demand for many other goods and services, this data release is considered to be a leading economic indicator and is closely watched by many. For example, a new home sale triggers demand for furniture, appliances, and other professional services that are associated with facilitating that transaction [see also How the S&P 500 Reacts to Unemployment Reports].
In light of the most recent financial meltdown, this data release has come under great scrutiny, and understandably so; the health of the housing market was at the root of the problem. Each and every month, economists forecast what the number of new home sales will be, and the market reacts depending on whether or not the actual figure comes in above or below these estimates. So how does the homebuilders industry actually react to this release?
SPDR Homebuilders ETF (XHB) vs. New Home Sales
We took a look at the performance of the SPDR Homebuilders ETF (XHB) on the day of the release of every new home sales report since the start of 2007 through July of 2014. We then recorded XHB’s performance for the day as well as the actual versus the forecasted figure. Consider the findings below:
| Metric | Value |
|---|---|
| Performance Range | -7.24% - 9.43% |
| Beats/Misses | 44/56 |
| Average Movement | +0.24% |
| Average Absolute Movement | 1.66% |
| Average Absolute Forecast Error | 6.69% |
First, our forecasting ability regarding this data release is surprisingly accurate. When considering this sample of 100 data releases, we see that the actual figure beat estimates less than 50% of the time, although the estimates themselves were off by only about 7% (either above or below) from the actual number [see also How Well Do Defensive ETFs Actually Work?].
Secondly, despite having more “misses” than “beats”, sentiment surrounding the homebuilders industry has been improving overall; since the broad market bottom on March 6, 2009, through June 1, 2015, XHB has returned a stellar 265%, beating the S&P 500′s gain of nearly 179% during this same time frame.
Lastly, the most noteworthy observation is XHB’s performance on the day of new home sales data releases. The fund’s performance has ranged from as low as a loss of 7.24% to as high as a 9.43% gain, although the average return comes out to a much flatter 0.24%; in other words, the positive and negative (over)reactions have evened out over time, resulting in a slightly positive return on average.
Even more important than the average movement is the average absolute movement since it showcases the fund’s volatility on the day of the data release. Each time there is a new home sales report, XHB has moved by an average of 1.66% in some direction (be it positive or negative), making for quite the single-day swing for this ETF.
Below, we recap some of the best and worst trading days for XHB following new home sales data releases:
The Best Reports
- 11/26/2008: Analysts were expecting for 445,000 new home sales, although the figure actually came in lower than expected at 433,000; interestingly enough, the surprisingly positive reaction to the “miss” turned out to be XHB’s strongest performance following a new home sales data release.
- 1/28/2008: Buying pressures unexpectedly hit XHB after investors embraced January’s report; new home sales were expected to come in at 645,000, but instead the figure came in at 604,000.
- 4/24/2009: Buyers swarmed in after new home sales came in at 356,000 versus the projected 340,000; this positive reaction came a little more than one month after the broad U.S. stock market had bottomed out in March of 2009.
The Worst Reports
Below are the three worst XHB performances following a new home sales report:
- 1/29/2009: The worst reaction came less than two months before the broad market bottomed out; selling pressures hit after new home sales data came in at 331,000, falling way short of the projected 395,000 figure.
- 3/26/2008: Surprisingly, the second worst reaction came after the release exceeded expectations; in March of 2008, new home sales came in at 590,000, compared to the projected figure of 578,000.
- 10/28/2009: On this day, selling pressures prevailed as new home sales were expected to come in at 443,000, but instead the figure stood at 402,000.
Strange Reactions
XHB posted surprisingly tame returns during the two trading sessions that saw the biggest forecast error regarding the new home sales figure:
- 6/23/2010: The ETF gained 1.18% even after the actual data missed analysts’ forecasts by 29%; new home sales were expected to come in at 424,000, but instead they slumped to 300,000.
- 4/23/2010: The ETF gained 1.71% even after the actual data exceeded analysts’ forecasts by 26%; new home sales were expected to come in at 326,000, but instead they jumped to 411,000.
The Bottom Line
Predicting the new home sales figure is difficult, and attempting to gauge which direction XHB might swing after the release is arguably even more uncertain. There are instances when upbeat news goes ignored and there are also instances when bad news results in a surprisingly positive reaction. The ultimate takeaway here is to trade carefully if there is an important data release coming up since it may welcome volatile trading. And as always, use stop-loss orders to protect yourself from adverse losses.
Follow me on Twitter @SBojinov.
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Disclosure: No positions at time of writing.
