Using the NAHB housing market index to determine builders rationality

The National Association of Home Builders releases survey results once per month, trying to capture the overall housing market outlook amongst home builders. The series first started in 1985 and I think it is a great metric that is a leading indicator to many other economic events. One comparison that I have seen the metric made to is consumer spending. Consumer spending and the index are highly correlated, as could be reasonably expected, since the builders index is a survey and many of the forecasts and data that the home builders see is based on consumer spending.

That said the comparison has gained attention in recent years because the 2 series have been in disconnect since the 2001 recession. This can be seen here:



There are two explanations for this. One is that home builders have been too bullish in recent years, and another is that consumer spending has been too low in recent years. I do not conclude either of these (but others do).

I don't think any meaningful conclusion can be drawn from the NAHB index vs consumer spending metric without further investigation. It is hard to get a grasp on why this is because the problems are small and independent of each other. Here are, in my opinion, the top 3:

1. The NAHB index is based on survey, which as careful as they are, is always prone to homoskedastic error. No matter how hard they try there is no way the sample population they are surveying (even if the population is all of their members) is staying consistant.
2. The cause of the high correlation leading up to 2001 is very unclear. How much of the homebuilder's survey answers are being affected by the consumer spending index numbers themselves? It could be as low as 1% and as high as 50%. Consumer spending affects many other metrics and 50% is not unreasonable.
3. Assuming we even can say the NAHB survey has been consistent for 20 years and assuming we can nail down the causality significance, there are still lurking variables that can't be determined without another 20+ years of data. 1985 - 2006 covers 2 recessions and last time I checked it is pretty tough to develop a confidence interval with only 2 data points. I could easily argue that consumer spending always declines below the index around and shortly after a recession. There are only 2 data points after recessions and we just don't know.