Builders’ Index Over 50

The NAHB/Wells Fargo Housing Market index passed the tipping point of 50 in June to top out at 52, the highest level since April 2006 and the largest monthly increase since 2002. The renewed confidence was spread across all three components, with the expectation for the next 6 months rising to 61, the highest in seven years.

 
The index compares the share of builders who believe the market is better with those who believe it is poor. The index flipping over 50 means builders seeing a better market outnumber those judging it as poor. In the 29 years of the HMI, it has been at 50 or more 58 percent of the time but for never longer than three years until this most recent seven year run below 50.

 
The causes are several. Builders are seeing more serious buyers, some coming from the existing home market because that inventory is so low. Some of the head winds weakened, particularly building material prices have some back from peaks that were near the peaks in the boom when building was twice as large as it is now. While mortgage rates pop about one-half a percentage point, they remain low by historic standards. Existing home prices are rising providing buyers with greater comfort that a purchase will sustain its value.

 
Regional three-month moving average indexes were up one point in the Northeast, three points in the Midwest and four points in the South. The West was down one point.

 
The rise in the HMI is consistent with the NAHB forecast for a 29 percent increase in housing starts in 2013 over 2012 and the first year to pass the one million mark since 2007.

 

Builder Squeeze

The NAHB/Wells Fargo Housing Market Index dropped two points to 42 in April. This is the third monthly decline from a peak of 47 in December and January. Two of the three components pulled the composite index down; the current sales component fell two points to 45 and the normally lower traffic component fell four points to 30. The expectations for future sales component increased three points to 53, tied for the highest level since February 2007.

 
The mixed signals appear to be a squeeze in the distance between costs and sales price along with underlying positive housing market conditions. Builders are facing increased cost of building materials such as lumber, wood panel, and drywall. At the same time, revving up the building industry is causing shortages and rising costs for labor and lots. In a recent NAHB survey, over half the builders reported shortages in framing crew subcontractors and over 40 percent reported shortages in their own framing and carpenter crews as well as carpenter subcontractors. As a result, over half the builders are paying more for these crews and raising prices on their homes.

 
At the same time, low appraisals relying on distressed sales and inadequately accounting for newer technology and energy efficiencies knock out new home sales and depress the price home builders are able to charge if the buyer is borrowing. Over half the builders reported an appraisal below the cost of production. Consumers also expect extra low prices because of past distress they witnessed in the housing market.

 
Against these pricing pressures, home builders are seeing pent up demand arriving at their models after waiting for several years to make their move. Consumers’ attitude toward a home purchase as measured by the Thomson Reuters/University of Michigan consumer sentiment index is at the same levels it was in late 2004 and early 2005. Mortgage interest rates remain at historically low levels and house prices have started to revive giving confidence to purchasers that they will not lose their investment.

 
The bumpy housing ride is likely to continue but with an upward trend as the industry’s infrastructure struggles out of the worst downturn in over 70 years.

Builders Continue Pause

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.

One Point in the HMI Eventually Means 37,000 Jobs

Every month, the NAHB/Wells Fargo Housing Market Index  (HMI) provides an overall measure of builder confidence in the strength of the single-family housing market.

Also every month, the U.S.  Bureau of Labor Statistics (BLS) produces estimates of employment in residential construction  (or at least it has since 2001, when it began to split jobs in the various trades into residential and non-residential categories, a move strongly endorsed by NAHB at the time).

Previous research has shown that the HMI has ability to predict single-family housing starts out to about 6 months in the future.  Now we can ask—is there any similar relationship between the HMI and the BLS measure of employment?

The answer is yes.  In fact, there is a positive correlation between the HMI and future residential employment.  The correlation is particularly strong (above .9) between the HMI and employment about 18 months in the future.  This tendency of the HMI to move in advance of employment is fairly evident in the following graph:

A substantial lag between a change in the HMI and employment seems reasonable, given that the HMI tends to move in advance of starts, and it usually takes awhile for a change in the starts rate to translate fully into a change in the number of homes under construction at any one time.

A simple statistical estimate based on the above data shows that a one point increase the HMI leads to an increase of about 18,700 jobs in residential construction 18 months later.   But the employment effects of home building are broad-based—supporting jobs not only in construction, but also in the industries that manufacture building products, transport and sell building products, and provide broker, legal, accounting, architectural, engineering, and other professional services to builders and buyers.

NAHB research has shown that, when a home is built, the number of jobs generated in these other industries is about the same as the number of construction jobs.  So, as a general rule, a one point change in the HMI leads to a change of 37,000 jobs one and a half years later—about half the jobs in construction, the other half in industries like manufacturing, trade, transportation and professional services.

Builders Pause

The NAHB/Wells Fargo Housing Market Index (HMI) continued its pause in February with an index value of 46, down one point from the December and January level of 47. Builders remain just shy of the 50 mark where a majority of builders are optimistic versus those that are not. Nevertheless, the index was rising consistently from April to December 2012 as builders saw more serious buyers in their models and offices. The plateau in the most recent three months reflects consumers rechecking their own economic outlook and discerning their ability to pay a mortgage over the next 30 years.

 
The individual components within the HMI varied in movement. Expectations for future sales increased one point to 50 while current sales declined one point to 51; both remaining above 50. The traffic component dropped four points to 32. Two regions advanced and two declined; the Northeast and West rose three and four points respectively while the Midwest and South dropped two points each. All the regional indexes are based on a three month moving average.

 
While the housing market has seen substantial improvement over the past year, there are a number of hurdles remaining that will keep the recovery from accelerating. NAHB expects single-family construction to advance at about the same rate in 2013 as it did in 2012, or about a 23 percent gain year-over-year. Consumers still find obtaining a mortgage difficult as underwriting standards remain restrictive and home sales continue to be squashed because of low appraisals inaccurately driven by distressed sales. A more consistent economic and job recovery will also add to consumer confidence and help move those on the fence to a purchase.

Confidence in New 55+ Home Sales Posts Another Year-Over-Year Gain

Builder confidence in the 55+ housing market improved the fourth quarter of 2012 compared to the same period a year ago, according to NAHB’s  latest 55+ Housing Market Indices (55+ HMIs).

There are separate 55+ HMIs for two segments of the 55+ housing market: single-family homes and multifamily condominiums.  Each 55+ HMI is based on a survey that asks if market conditions are good, fair or poor. An index number below 50 indicates that more builders view conditions as poor than good.

Although both 55+ HMIs remain below 50, both have improved significantly from a year ago.  The single-family index increased 10 points to a level of 28, the fifth consecutive quarter of year over year improvements.  Although multifamily condos remain the weakest segment of the 55+ housing market, the 55+HMI for condos also showed a substantial year-over-year increase, of six points to 19.

Meanwhile, the 55+ multifamily rental indices, which had already recovered substantially in 2011, remained relatively stable in the fourth quarter, although there was a slight pullback due to uncertainty about the low-income housing tax credit—the financial driver behind a significant portion of apartments built for this segment of the market. Present production dropped three points to 31, expected future production dipped one point to 34, current demand for existing units dropped four points to 38 and expected future demand fell five points to 39.

Like the overall housing market, the 55+ segment of the market is undergoing a slow but steady recovery, but there are some obstacles to a continued and stronger recovery.  While problems with tight credit conditions for buyers and obtaining accurate appraisals are still lingering, new problems like spot shortages and rising costs for labor, materials and lots are beginning to emerge.

For more information about NAHB’s 55+ HMI survey see www.nahb.org/55HMI

Builders Hold Steady in January

The first indicator of builders’ sentiment for 2013 held steady at 47, the same level as December 2012. The three subcomponents of the NAHB/Wells Fargo Housing Market Index changed in every direction possible; the current sales index remained the same at 51, the index for future sales fell one point to 49, and the index for traffic rose one point to 37.

 
Builders and home buyers took a breath in December as the political agenda remained cloudy up to January 2nd. In addition, builders’ confidence has been rising steadily for eight consecutive months and the uncertainty of taxes, government spending, potential cuts to housing tax incentives and the on-going weak economy had to finally slow the advancing builder index. While the survey took place after Congress agreed to a tax regime, the uncertainty damage had already done a job on consumers’ confidence and the builders’ pause is the result.

 
Regional indexes smoothed with a three-month moving average increased for all regions. The Northeast and Midwest increased two points to 36 and 50 respectively. The South index rose 3 points to 49 and the West was up four points to 51. This is the first three-month moving average regional index at or above 50 since 2006 and the first time for the Midwest since 2005.

 
Extremely low mortgage rates, recovering house prices in most markets and pent up demand will provide forward movement in home building and home buying in 2013. NAHB expects housing starts to rise about 20 percent in 2013 over the likely end result of 775,000 starts in 2012.

 

Builders’ Sentiment Up Again

The NAHB/Wells Fargo Housing Market Index rose for its eighth straight month to 47, a two-point increase from the revised November level of 45. Both sales component indexes, present and expected, are above the 50 tipping point where more builders see a better market than see a poorer market. The December index is at the highest level since April 2006.

 
On a three-month moving average basis, three of the four census regions also rose to levels last seen five to seven years ago. The Midwest index is 48 and the highest since July 2005; the South is at 46 and the highest since July 2006; the Northeast is at 35 and the highest since May 2007. The West index was unchanged at 47.

 
Builders continue to express difficulties with buyers’ obtaining mortgage credit, with appraisals under the contract price and with competition against distressed sales. Builders also expressed concern over the ‘fiscal cliff’ consequences. Emerging issues include lot and labor shortages and price spikes on some building materials.

Year over Year, Confidence in the 55+ Housing Market Continues to Improve

Once again, builder confidence in the 55+ housing market showed significant improvement, according to NAHB’s 55+ Housing Market Indices (55+ HMIs) for the third quarter of 2012.  The  55+ HMIs and their components are based on survey questions that ask builders if market conditions are good, fair, or poor (high/very high, about average, or low/very low for the questions on traffic).  The indices all lie on a scale of 0 to 100, where 50 is a break-even point that occurs when equal numbers of builders report good and bad conditions.

There are separate 55+ HMIs for three segments of the 55+ housing market: single-family homes, multifamily condominiums and rental apartments. In the third quarter, the 55+ HMI for single-family housing tripled year over year from a level of 12 to 36, which is the highest third-quarter reading since the inception of the index in 2008.  (Because the 55+ HMIs are not seasonally adjusted, they need to be compared year over year.)

Although multifamily condos remain the weakest part of the 55+ HMI, builder confidence improved there as well.  The 55+ HMI for condos had a significant increase of 13 points to 23, which is the highest third-quarter reading since the inception of the index in 2008.

Meanwhile, the 55+ multifamily rental indices, which already recovered substantially last year, showed continued but more modest increases in the third quarter.  For example, present production climbed six points to 31.

Like other segments of the housing market, the market for 55+ housing is improving steadily as conditions get better in some parts of the country.  Although all 55+ HMIs are improving, all still remain below the break-even point of 50, indicating that there are still many places where builders consider the market for 55+ housing to be only fair to poor.  So, at the national level, there is considerable room for further improvement, assuming that the housing recovery can expand into other parts of the country.

For more information about NAHB’s 55+ HMI survey see www.nahb.org/55HMI

Builders’ Sentiment Continues to Rise

The NAHB/Wells Fargo Housing Market Index for October increased one point to 41, the sixth consecutive month for an increase.  Two of the three components to the index remained the same, current and expected sales, while the traffic index rose five points to 35, the highest in over six years.  The index, however, remains below the tipping point of 50 where an equal number of builders see better conditions as see poorer conditions.

Comments of concern continue around tight credit conditions for borrowers and builders as well as appraisals below the contracted price.  Some markets are also beginning to feel the pitch from little or no development taking place for five or six years.  The inventory of buildable lots is declining rapidly and the supply of new lots is still some years off as the development and approvals must start up again while credit remains tight for this kind of activity.  As lot prices increase, builders are being squeezed by higher input costs, including some building materials, but only slight increases in housing prices.

The slowdown in builder sentiment is appropriate given the uncertain future of tax and government spending policy.  Until elementary federal spending policies are settled, buyers and builders are appropriately cautious and a full housing recovery will have to wait for more clarity on these issues.