Positive Housing Data Fueled Dow's Early Gains

If there's one thing investors have come to appreciate over the last few years, it's that a healthy housing market is critical for both stocks and the fundamental economy. This lesson was on demonstration again today, as independent economic reports confirmed that home prices are rising faster than anticipated. The Dow Jones Industrial Average (INDEX: ^DJI) initially gained on the news, though it has since taken a turn for the worse. As of 2:50 p.m. EDT, the index is down about 33 points, or 0.24%.

Home prices are on the rise
Data released this morning from the S&P/Case-Shiller Home Price Index (link opens PDF file), a leading measure of U.S. home prices, showed that in July, prices increased in 10 of the nation's largest metropolitan areas by 1.5% and by 1.6% when an additional 10 areas were included. It was the third consecutive month that housing prices in all 20 cities increased, and it would have been the fourth such increase had prices not fallen by 0.6% in Detroit back in April.

Case-Shiller Home Price Index: Composite 10 data by YCharts.

According to David M. Blitzer, the chairman of the index committee:

The news on home prices in this report confirm recent good news about housing. Single family housing starts are well ahead of last year's pace, existing home sales are up, the inventory of homes for sale is down and foreclosure activity is slowing. All in all, we are more optimistic about housing. Upbeat trends continue. For the third time in a row, all 20 cities and both Composites had monthly gains. Stronger housing numbers are a positive factor for other measures including consumer confidence.

These results were confirmed in a separate report (link opens PDF file) from the Federal Housing Finance Agency, an independent government agency that oversees Fannie Mae and Freddie Mac. The FHFA data showed that U.S. house prices rose 0.2% on a seasonally adjusted basis from June to July. On a year-over-year basis, moreover, prices rose by 3.7%.

The difference between the two reports is largely a function of methodology. Namely, the S&P/Case-Shiller index uses a three-month rolling average of home prices, while the FHFA index only includes data from one month at a time. Also, while the S&P/Case-Shiller index looks only at data from select cities, the FHFA index includes nationwide data on the purchase price of houses with mortgages owned or guaranteed by Fannie Mae or Freddie Mac.

As a final point, it's worth noting that these reports contribute to an already considerable chorus of evidence suggesting that a housing recovery has taken hold. Just yesterday, for example, the country's third-largest homebuilder by revenue, Lennar (NYS: LEN) , reported third-quarter earnings that blew away analysts' estimates. As my colleague Amanda Alix noted, Lennar's revenue increased by 34%, new orders were up 44%, and cancellations fell to 17% from 20% a year ago.

The day's biggest winners and losers
Given the news out of the housing sector, it's fitting that shares of Home Depot (NYS: HD) are leading the Dow higher, up nearly 2% in intraday trading. After a rough spell related to the bursting of the housing bubble, the home improvement giant has seen its stock skyrocket over the last year, more than doubling since last August alone. For the same reasons, moreover, the lending giant Bank of America (NYS: BAC) is watching as its stock is up by 27 basis points.

Leading the way down is Caterpillar (NYS: CAT) . While shares in the heavy-equipment manufacturer remain up since the beginning of September, traders sent it plummeting today by nearly 3% after the company cut 2015 forecasts. During a presentation at a mining convention in Las Vegas, Caterpillar's chairman and chief executive officer Doug Oberhelman said that the company expects to make between $12 and $18 a share in 2015 compared with its previous forecast of $15 to $20 a share.

Notably, our in-house industrial sector analyst Brendan Byrnes remains bullish on Caterpillar, noting in a recent in-depth report on the company that "Despite the current uncertainty in the macro economy, Caterpillar remains in prime position to take long-term advantage of high-growth markets and what could soon be bottoming developed markets." To read why this is so, download Brendan's in-depth report, which comes with a full year of updates on the company.

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