Builder Sentiment Steady

April 15, 2014

The March NAHB/Wells Fargo Housing Market Index rose one point from a one-point downwardly revised February to 47. This is the third consecutive month with the index below 50, the point where more builders see the market improving rather than getting poorer. Two of the three components of the index remained unchanged; the current sales index was at 51, the same as the one-point downwardly revised February index and the traffic index was 32, which is the same as the one-point downwardly revised February component. The heaviest weighted sub-index is the expectations for the next six months, which was up four points to 57.

The essentially unchanged index is the result of builders waiting on expected spring demand while holding any further optimism until actual sales occur. Many of the individual comments mentioned stronger traffic or more serious buyers but the interest has yet turned into contract signings. Builders continue to meet some supply constraints as buildable lot supply either is not available or is priced beyond what the builder feels can be recaptured in a sale.

Access to credit continues to be a concern across all parts of the country as builders search for credit to buy land and build homes and consumers apply for mortgages. A recent NAHB survey of builders found some improvement in builders’ access to capital and FDIC quarterly reports finally show some increase in bank holdings of AD&C residential credit. Lot supply will take longer to solve but access to credit is a critical first step. The housing recovery is likely to be hindered by these limitations just as demand begins to resurge.

NAHB expects 1.1 million housing starts in 2014 primarily driven by the pent up demand of existing home owners. The first-time home buyer will return more gradually as mortgage credit standards become more rational and young adults’ incomes stabilize and grow.

Single-family Starts and NAHB


Builders’ Confidence Remains Same

March 17, 2014

The March NAHB/Wells Fargo Housing Market Index held roughly the same at 47, which is up one point from the unrevised February level of 46. The past two months have the same message: unusually cold and wet weather over much of the US combined with increasing concern among builders that the supply chain cannot keep up with the expected spring rebound.

Weather continued to limit builders and buyers ability to get to construction sites. At the same time, the continued limited supply of buildable lots and skilled labor has held back builders’ ability to resupply a very low inventory of new homes for sale. The January months’ supply of new homes dipped below 5 months and the absolute level remained at 184,000 compared to an average of 320,000 throughout 1990 and early 2000s.

HMI components were mixed with current sales index up one point to 52 and traffic up two points to 33. Expectations for the next six months dropped one point to 53. Regional indexes reflected the degree of weather disruption with the three month moving average down four points in the South, three points in the Northeast and Midwest and two points in the West.

Builders’ comments continued to concentrate on the unusual weather with greater frequency in the March report than the February report. The most mentioned supply chain problem continues to be lot availability followed by labor supply and cost.

New Home Sales and Builder Sentiment


Builders’ Sentiment Drops

February 18, 2014

The February NAHB/ Wells Fargo Housing Market Index fell 10 points to 46 from the January level. The decline is the largest in the 30 year history of the index. The next largest monthly drop was October 2001 at 9 points. The February index is below the tipping point of 50 where more builders rate the market as good rather than poor for the first time since May 2013.

The three components of the index fell significantly as well. The index for current sales fell 11 points, also the largest decline in that component in history. Expectations for future sales fell the least at 6 points and the traffic index fell 9 points, tying the previous worst decline in October 2001.

The drop is a result of several forces falling at once. Unusual weather across much of the US reduced consumers’ shopping and buying. That impact can be seen in the differences in regional index changes. The three month moving average for the West where weather has been dry but not unusually cold or wet did not change. The Northeast where average temperatures have been significantly below average saw the greatest decline and the South suffering from unusually wet and cold also saw a larger decline. Weather effects also depressed retail and auto sales, which in turn depressed consumers’ desire to shop or purchase homes if their livelihood depended on those sectors.

Finally, shortages of labor and lots have also begun to have a real effect on builders’ ability to build and sell homes. As shortages become more severe, builders are faced with the possibilities that they will not be able to build up their exceptionally low inventories in anticipation of the spring selling season.

Shortages and cost increases for labor, lots and building materials have caused builders problems with appraisals as comparable existing home prices are not subject to the same forces. Consumers are reluctant to accept the higher prices and shift to an existing home purchase. As a result, those prices have risen by double digit rates. The feedback effect will eventually raise home prices to meet the cost of building but that may take some time.

NAHB remains positive about construction and sales in 2014 as pent up demand and an improving economy will bring home buyers back into the market.

February HMI


Builders Sentiment Holds Steady

January 16, 2014

The January NAHB/Wells Fargo Housing Market Index dropped one point from a one-point downwardly revised December level to 56. This is the eighth consecutive month above 50, the point where more builders rate the market good rather than poor. The December index, originally reported at 58, matched the recent high in August before the mortgage rate spike and the federal government shutdown softened buyer and builder confidence. The January level demonstrates builders’ general positive attitude toward the current and future market but with some continued attention to the headwinds affecting the industry.

Builders continue their frustration over low appraisals that do not reflect the added value of more energy efficient equipment, higher costs for land, labor and building materials and the differential between high maintenance existing homes and low maintenance new homes. Low appraisals kill sales since very few buyer are able to make higher down payments to cover the equity required by lenders using inaccurate appraisals.

The three components of the index fell as well: the current sales index fell one point to 62, the expected sales index fell two points to 60 and the traffic index fell three points to 40. By region, the three-month moving average in the Northeast and West increased four points, fell one point in the Midwest and remained level in the South. The severe cold and icy weather in the South in December may have led to a seven point drop in the month-to-month trend.

In separate comments, builders did foresee a promising spring buying season as more of their customers have demonstrated greater commitment recently and the builders expect more lookers to become buyers.

HMI actual and trend


Builders Confidence Grows

December 17, 2013

The December NAHB/Wells Fargo Housing Market Index rose four points to 58 as builders recovered from hesitancies in October and November. The increase puts the index back up to the peak it reached in August before the rise in mortgage rates and the uncertainty caused by the debt and deficit debate cooled confidence. This December index is 37 points above the December 2011 level.

All three of the components also showed significant increases with current sales rising 6 points to 64, the highest since December 2005. Expected sales increased 2 points to 62 and traffic increased 3 points to 44.

The three-month moving averages for the four Census regions were down in three regions as the left over effect of the declines in October and November overwhelmed the most recent increases. The Northeast, Midwest and West each fell 1 point to 38, 59 and 59 respectively while the South increased 1 point to 57.

Builders expressed confidence in buyers returning to the market as competition from foreclosures and distressed sales continued to slacken. Several builders commented on an increase demand as they announced price increases and buyers decided to buy now to preempt any further increases. While mortgage rates have risen slightly since late October, the builders are more concerned with buyer access to credit than the cost of credit.

The return in builder confidence aligns with the Census and HUD reports on October new home sales and the September and October housing permit reports. New home sales were up 25% in October over an unusually low September and back to levels established in early 2013. October housing permits were over one million for only the second time since 2008 with single-family permits back to early 2013 levels and multifamily the highest since August 2005. NAHB expects housing production to continue to improve as buyer confidence returns and the economic adds jobs.

December HMI.docx


Builders Hold Steady in November

November 18, 2013

The November NAHB/Wells Fargo Housing Market Index held steady at 54 from a one-point downwardly revised October level. The index has remained above 50 for six consecutive months, the first time since early 2006. Of the three components, current sales remained unchanged at 58, expectations for future sales declined one point from a one-point downwardly revised figure and rests now at 60 and above 50 for the 10th consecutive month. The traffic component was at 42, down one point from a one-point downwardly revised 43.

The index leveled off in September and dropped one point as interest rates finally took their toll on builder and consumer confidence. The residual of the October government shut down and game of chicken in Washington took a more dramatic toll on builder confidence as the HMI fell three points from September to October. The survey is taken in the first 10 business days of the month so the October shut down was in effect as most of the responses were collected. The one-point downward revision to October reflects the continued concern from late submissions even as the government crisis was postponed.

November brings a continued concern over the functioning of the federal government as well as uncertainty about mortgage rates and a relatively slow economic recovery. Builders remain modestly optimistic as the index remains above 50 (more builders rate the market good as opposed to poor) but express their continuing concerns about rising costs of land, labor and building materials. The underlying improvement in employment remains the primary factor that will lead to continued growth in the housing market and NAHB expects that to continue.

HMI Nov


Builders Absorb Consumer Concerns

October 16, 2013

The October NAHB/Wells Fargo Housing Market Index fell two points to 55 from a one-point downwardly revised September level of 57. The decline was broad based with a two-point fall in all three components: current sales from 60 to 58, expected future sales from 64 to 62 and traffic from 46 to 44. The index has remained above the tipping point of 50 for five consecutive months.

The survey is taken in the first 10 days of the month when Washington remained mired in complete disagreement over the debt and budget deadlines. Consumer confidence indicators and builders’ comments in this survey suggest that the uncertainty has caused buyers and builders to pause until these deadlines are settled.

Builders continue to be slowed by higher costs of building materials, building lots and construction labor while confronting downward price pressures from low appraisals. Consumers continue to have difficulty obtaining a mortgage. In a recent survey, 57% of builders said they had lost a sale because the buyer could not qualify for a mortgage.

The Census Bureau and HUD remain closed so a housing starts estimate for September will not be delivered at 8:30 am on October 17 as scheduled. NAHB has produced a monthly estimate for September starts based on our knowledge of the industry, the results from the HMI and our daily contact with builders. NAHB’s estimate for September starts is between 875,000 and 900,000. Single-family starts showed some new life in August after a pause that began in April before interest rates spiked. Single-family starts should remain in the August range of 620,000 to 630,000. Multifamily starts bounced around in 2013 in a monthly seesaw effect typical of the more volatile series. NAHB expects multifamily to range at the lower end of this years’ span at between 255,000 and 270,000.

October HMI


Housing Starts vs Builder Sentiment – Some Perspective

September 19, 2013

Are home builders more confident than they should be? There has been some discussion suggesting that the relationship between the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) and single family housing starts is broken, or at least strained lately. Let’s take a look.

The HMI and starts track together well, no question. But they don’t move in lockstep, that’s clear throughout their history. So how much and when should they differ?

blog hmi 2013_09_1

The gap between the HMI and starts appears widest at turning points and throughout the most recent boom/bust/recovery cycle. But absent a systematic method of comparison conclusions are in the eye of the beholder.

One way to think about the relationship is to first examine how each series moves over time relative to its own long term average. This normalization is a standard method to compare the dynamics of economic (or non-economic) variables that may vary greatly in scale. Converting the data to deviations from the mean allows a more meaningful comparison. The chart below shows the HMI (red) and starts (blue) normalized by dividing each month by the series average (1985-current).

Since these deviations from the means are just dividing by a constant, you get patterns very similar to the original levels. The green line is HMI deviations minus starts deviations.

blog hmi 2013_09_2

Prior to 2005 the deviations track most of the time but the HMI tends to overstate deviations in starts at turning points (91, 94, 95, 98-01 was a long turning point). During the most recent boom, bust and recovery the HMI over-overstates the downturn and similarly over-overstates the recovery. Or, the magnitude of overstating is in proportion to the change in starts (not 1 to 1, but proportional). Given that the recent cycle was more extreme in both its rise and fall, we would expect the divergence between the HMI and starts to be greatest during this period. This proportionality is the point that seems to be missed in the arguments that the HMI is “getting ahead” of starts.

The HMI isn’t broken during the divergences. Starts and builder sentiment track but don’t move in lockstep. It’s just that changes in builder sentiment occur at a higher octane than starts at turning points.

The HMI is currently telling us what it has told us in the past: after falling faster than starts during the downturn it is now rising faster in the recovery. The important point is that the HMI isn’t broken or misleading getting ahead of growth in starts, that’s what it always does.


Builders Hold Steady

September 17, 2013

The September NAHB/Wells Fargo Housing Market Index held steady at 58, the same as the one-point downwardly revised August level. The three components moved in different directions. Current sales remained the same at 62; future expectations declined to 65 from 68 in August and traffic rose one point to 47 from an upwardly revised 46.

The pause in sentiment in September is the result of continued head winds hunting for labor and lots and little improvement in credit access for builders and buyers. The added uncertainty of a spike in mortgage interest rates added to the uncertainty for buyers and builders.

At 58, the index is tied with August for the highest since November 2005. The HMI has risen steadily with a few backward moves since December 2011. Builders continue to expect continued expansion since the index passed above the 50 mark in June 2013 when more builders see improvement rather than not.

Housing starts have not moved as fast as the index in the past year, but that same disconnect occurred in 1991 when home builders’ sentiment doubled in four months while single-family starts rose by one-third. Currently, the HMI is about 50 percent greater than it was last year and single-family starts only 15 percent ahead of one year prior. Eventually, starts do catch up with builders’ sentiment if history is any indication.

September HMI


Builders’ Sentiment Continues Rise

August 15, 2013

The NAHB/Wells Fargo Housing Market Index for August increased to 59, the highest in almost 8 years as builders continue to see a positive future for home building.  The index ranges from 0 to 100 and 50 is the tipping point where more builders are experiencing a good market than those seeing a poor market.  The overall index has been above 50 since June.

HMI AUG13

The component measuring current sales increased three points to 62 and the component measuring expected sales increased one point to 68, both the highest in almost 8 years.  These levels are also the levels the index reached in 2002 as the market was rising but before the boom that raised the overall index to 72 in mid-2005.

Even with the recent rise in mortgage rates, builders see customers recovering from the fears of the early stages of the recovery when house price movements were uncertain and more comfortable with the expected positive trends housing has exhibited in the past 6 months.  Pent up demand is coming forward and the limited supply of new and existing homes has generated additional motivation to buy sooner rather than wait.

Regional indexes increased for three of the four regions by 6 points in the Midwest to 60, by 4 points in the South to 54 and by 6 points in the West to 57.  The Northeast remained at 39 and has been lagging the rest of the country during the recovery.  Job creation has not been as strong and population growth has been less than the country indicating out-migration in the Northeast.

Housing production is expected to continue to rise as builders attempt to meet the pent up demand while continuing to face supply constraints in labor and land especially.

You can read more on the connection between the HMI and housing starts here.


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