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Investors can see more signs of emerging life in the U.S. housing sector with the release of May's NAHB housing market index, a survey of homebuilder confidence. The index rose to 29, a five-point increase over April. While that might not sound too spectacular, given that a reading below 50 points to more homebuilders viewing sales conditions as poor than good, it is the best reading in five years.

And, as a chart from Calculated Risk makes clear, there is a strong correlation between the NAHB index and actual homebuilding – meaning that building activity could be about to rise from deeply depressed levels.

That's the bet investors are now making. The S&P 500 homebuilding index – which consists of three stocks: DR Horton Inc., Lennar Corp. and PulteGroup Inc. – was up 3.5 per cent in afternoon trading on Tuesday, even as the broader S&P 500 was falling into negative territory. And over the longer term, the homebuilding index was been on fire: up 47 per cent this year, or about 40 percentage points ahead of the S&P 500.

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According to Ian Shepherdson, chief U.S. economist at High Frequency Economics, the NAHB index is consistent with new home sales rising above 500,000, up from 328,000 in March.

"The gap has to close sooner or later," he said in a note. "The key story here, we think, is improving access to mortgage finance, rather than the level of rates, which have been very low for a long time."

If improvements in the U.S. housing sector are indeed in the works, the foundation is only just being built. After all, the NAHB index hasn't been much above the 50-point threshold since 2006. And even a rise in new home sales to half a million is still well below sales of more than a million that persisted between 2002 and 2006.

However, the stock market tends to move early – and recent gains among homebuilding stocks suggest that this is no exception. Still, there is plenty of room for more gains ahead if housing data continue to point toward optimism: Even after recent gains, the S&P 500 homebuilding index, which was decimated during the housing bust, remains some 70 per cent below its peak in 2005.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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