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THE NAHB/WELLS FARGO HOUSING MARKET INDEX

http://www.nahb.org/generic.aspx?genericContentID=529

NAHB produces the Housing Market Index (HMI), a weighted, seasonally adjusted statistic derived from ratings for present single-family sales, single-family sales in the next six months and buyers traffic. The first two components are measured on a scale of "good" "fair," and "poor," and the last one is measured on a scale of "high," "average," and "low."

A rating of 50 indicates that the number of positive or good responses received from the builders is about the same as the number of negative or poor responses. Ratings higher than 50 indicate more positive or good responses. For more insight, see additional details about the Housing Market Index.

WHAT IS THE NAHB-WELLS FARGO HOUSING MARKET INDEX (HMI)? Printer Friendly

An Overview


The Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the housing industry, especially the single-family industry. The survey asks respondents to rate general economic and housing market conditions.

The HMI is a weighted average of separate diffusion indices, calculated for three key single family series in the survey: Present Sales of New Homes, Sale of New Homes Expected in the Next 6 Months and Traffic of Prospective Buyers in New Homes.
The first two items are rated on a scale of Good, Fair and Poor and the last is rated on a scale of Very High to High, Average and Low to Very Low. Each diffusion index is calculated by first applying a multiplicative seasonal adjustment procedure to the Good/High and Poor/Low series. Then the formula (Good/High - Poor/Low +100)/2 is applied to the seasonally adjusted numbers.
This formula puts each diffusion index on a convenient scale. If all respondents answer “Good/High” then the index is 100. If all respondents answer “Poor/Low” then the index is 0. If equal numbers of respondents answer “Good/High” and “Poor/Low” then the index is 50.
Although the Federal Reserve calculates the diffusion index in a slightly different way (subtracting Poor from Good and then applying an additive seasonal adjustment model), there appears to be no practical difference between the two methods.
The weights for the HMI are 0.5920 for Single Family Detached Sales at Present Time; 0.1358 for Single Family Detached Starts in Next 6 Months; and 0.2722 for Traffic of Prospective Buyers. The weights are chosen by applying a simple 8-equation model to the data. One of the equations defined the HMI as a latent (unobserved) variable that is a linear combination of the 3 diffusion indices with coefficients constrained to sum to 1. The other 7 equations regress current and future single family starts on the latent variable. Thus, correlation with current and future starts determine the weights for the HMI.
The diffusion index for Single Family sales at Present Time (calculated by either the NAHB or Fed method) correlates slightly better with current starts and starts one month in the future than the HMI. For starts 2 to 6 months in the future, the HMI performs slightly better than any of the 3 component diffusion indices.