Builder Confidence and Housing Starts

The NAHB/Wells Fargo Housing Market Index is at its highest level in almost 8 years. The July level of 57 was up 6 points from June and 16 points from April. The index has been on a fairly steady rise since wandering in the teens through almost all of 2011. In percentage terms, the HMI has more than doubled between April 2012 and June 2013.

Single-family housing starts, on the other hand, have risen but not as substantially. In the same 14 month period, single-family starts are up 17% from April 2012 to 2013. During that period, starts were as high as 29% above their April 2012 level.

 
The HMI is designed to track current and future single-family housing starts. At least theoretically, the same group who responds to the HMI questionnaire is the group that actually builds the homes tracked in the starts survey conducted by the US Census Bureau and sponsored by US Departments of Commerce and Housing and Urban Development. The HMI is driven by the responses to three questions: an assessment of current sales, of expected sales over the next six months and traffic in the sales model or office. The HMI is the weighted average of the three components and the weights were chosen to best track single-family housing starts out to six months in the future.

Figure 1 shows the historic relationship between the HMI and single-family housing starts, scaling the graphs so the peaks are roughly aligned. Sympathetic trends are obvious throughout much of the history.

So, the logical question is why has the HMI been increasing at a faster pace than starts recently? The only other significant housing recovery cycle within the history of the HMI is the recovery of 1991-1992. The index did not exist in the 1982 recovery and the mild recession of 2001 did not involve housing.

 
From January 1991 to March 1992 (14 months) the HMI increased from 20 to 46 or 130%. During that same period, single-family housing starts increased 71%. The early stages of the 1991 housing recovery showed an even larger difference in the rates of increase between the HMI and housing starts. Between January and May 1991, the HMI doubled from 20 to 40 while single-family housing starts increased 39%. A comparison of change in percentage terms for the HMI and starts during the two 14 month periods is shown in Figure 2.

Another 14 month period in the late 1990s saw a similar but smaller diversion in movement between the two indexes. Between September 1997 and November 1998, the HMI increased 31% while single-family starts increased 15%. Single-family starts eventually reached over 1.5 million, which was the highest to date since the mid-1970s. An article on NAHB’s web site shows statistically that the HMI retained its ability to help predict starts during the late 1990s (as well as before and after).

 
Why the apparent differences during some periods? Housing recoveries are dynamic periods when futures remain uncertain and reassembling the housing industry’s infrastructure can be erratic. After a run of poor housing demand and just as buyers return to the market, builders begin to see the potential that existed before the collapse. While the recession of 1990-1991 was mild compared to the recent Great Recession, it was the worst the industry had seen in almost a decade and the recovery appeared and was proven ultimately to be very robust. Single-family starts did double but it took two and a half years.

 
Similarly, the delayed housing recovery from the Great Recession has taken longer to take hold and has yet to see dramatic changes. Nonetheless, single-family starts have increased 67% from the trough and are expected to double from their low point by mid-2014. The early improved confidence exhibited by home builders in the HMI is a signal just as it was in the 1991 recovery that the market will continue to improve as the infrastructure of the industry recuperates and repairs itself.

 
Builders are experiencing difficulty hiring the necessary workers with the worst shortages in framing crews and carpenters. Developed lots are in short supply, particularly those in the locations where buyers are shopping. The land development process ceased during the downturn and restarting the several-year procedure takes time. Building material prices spiked earlier this year as starts moved up but producers of building supplies took time to add capacity, workers and raw materials. Capital remains in short supply as the banks that usually lend to builders repair their balance sheets and regulators continue their clamping down on lending to the residential sector. Builders are coping with these head winds but it has slowed actual production from meeting builders’ expectations.