Builders exhibited continued caution in March as the NAHB/Wells Fargo Housing Market Index fell two points to 44. All of the decrease was in the current sales component that declined four points to 47, while expectations for the next six months rose one point to 51 and traffic of prospective buyers rose three points to 35.
The index peaked in December at 47, remained level in January then fell one point in February and another two points in March. The primary hesitancy appears to be continued scarcity of home buyer credit. The single largest concern in the added notes was about credit conditions, followed closely by appraisals below the agreed upon contract price. Builders have been concerned about these two factors for over a year but the combined effect of several new worries is likely the reason for some small drop in confidence.
In addition to tight credit and below-price appraisals, the industry is beginning to suffer growth pains as the infrastructure of the residential construction sector tries to come alive again. During the Great Recession, the industry lost home building firms, building material production capacity, workers to other sectors and the pipeline of developing lots. As demand returns, particularly the pent up demand from households waiting for positive economic and housing market signals, home buyers have returned but home building continues to reconstruct itself. The road back will contain occasional dips like the March HMI.
The HMI is seasonally adjusted to account for the cyclicality of home purchases and building seasons. The recovery from the deepest housing recession since the Great Depression has disrupted some of the seasonality so it is possible that the slight drop is also a product of seasonal adjustment that may be overreacting to past early spring revivals. Finally, the index has almost doubled in the past year while single family housing starts are up 20 to 25 percent. The index calming is also a builder realization of actual progress versus the long awaited turn that clearly has taken place.