Builders’ Sentiment Stalled

May 15, 2014

Builders remained virtually unchanged in their attitudes toward the housing market as the NAHB/Wells Fargo Housing Market Index fell one point to 45 from a downwardly revised 46 in April. The stall has been in effect since February when the index dropped 10 points.

Builders had passed the tipping point of 50 on the 0 to 100 scale in June 2013. An index value over 50 means more builders see the market improving than see it getting worse. Even with a small deviation in the fall, the index remained above 50 for 8 months. The difficult winter and the fall in customers because of the weather dropped the index where it has remained in the 45 to 46 range for four months.

Of the three components, only the current sales indicator fell from 50 to 48 while expectations for the future increased 1 point to 57 and traffic increased 2 points to 33. Both of these components do bode well for future housing activity.

The realization that the housing recovery remains a modest one has begun to soften builders’ sentiment. As builders finally saw some real movement in buyers’ attitudes their outlook improved as well. Some of that lift was a false start and some was deflated by higher mortgage rates, an uncertain Congress as the October 1 deadline came and went and the mean winter. Builders have readjusted their outlook to correspond to the actual building activity.

Builders did continue to mention problems with labor, land, appraisals, credit access for them and their buyers and building material prices. The supply chain problems remain even with a relative slow return in demand and output at half of the normal market seen in the early 2000s.

Many builders do still remain concerned that an insufficient volume of motivated and qualified buyers will be in the market. Their concern about supplies is two-fold: can they afford to pay the prices and still sell the home at a profit and will the supplies be available when the market turns more positive. While existing home prices have increased, in many markets the new level is still insufficient to pay for construction of a new home. Paying more for labor and lots may be a way to increase an individual’s stock but if the ultimate home price cannot cover these increased costs, the builder cannot proceed. But as prices continue to rise and supplies of homes for sale get even tighter, will buyers still be willing to buy? Hence the stall until buyers show more resilience and the overall economy improves.


Builders Have Eased Use of Sales Incentives

November 4, 2013

One way many builders choose to bolster sales and/or limit cancellations is by providing incentives that sweeten the deal for home buyers.  The popularity of these incentives, however, is very much tied to the cycles of the housing industry.  A survey of NAHB’s builder members found that 36 percent are not offering any kind of special incentives in October 2013, a share that is 2.5 times larger than it was in December 2008 (14 percent) during the housing bust, but is closer to the 42 percent who offered no sales incentives in September 2005 in the midst of the housing boom (Figure 1).  The incentives questions are appended to the monthly survey that produces the NAHB/Wells Fargo Housing Market Index.

Offering options or upgrades at no or reduced costs is generally one of the most popular ways builders attract buyers.  In the latest survey, 37 percent of builders said they are currently offering such options, essentially the same share as in 2005 (35 percent), but significantly lower than the 67 percent who offered them in 2008.

Another way builders incentivize their prospective buyers is by offering to pay closing costs or fees.  Similar to offers of free or reduced cost options, the use of this incentive has eased to 2005 levels.  In the recent survey, 27 percent of builders report paying closing costs for their buyers, less than half the 59 percent who did so in 2008, and more along the 26 percent using it as an incentive in 2005.

Figure 1. Popular incentives used by builders to bolster sales and/or limit cancellations – History
(Percent of Respondents)

Graphs for Incentives Blog1

Discounting home prices or reducing margins, meanwhile, is still being done by 32 percent of builders to bolster sales.  Although this is a larger share than in 2005 (19 percent), it is nowhere near the 72 percent who were lowering prices at the end of 2008.  The 2005 survey did not ask builders if they were helping buyers sell their existing homes, but it became common enough to make it on the survey by December 2008 – when 29 percent of builders reported doing it.  By 2013, only 15 percent are still helping sell the buyer’s existing home.

Among those builders not currently using any special sales incentives, 37 percent indicate the reason for not doing so is because they “don’t advertise – only build custom homes and rely on word of mouth,” another 35 percent explain it is because the “market is now strong enough and no incentives are needed,” while 27 percent say it is because they “cannot afford to offer incentives due to rising construction costs” (Figure 2).

Figure 2. If not using special incentives, why not?
(Percent of Respondents)Graphs for Incentives Blog2

It remains to be seen if the use of these incentives continues on a downward trend or if their use reemerges once again.  The strength and pace of the housing recovery will determine it.  The full report on the survey about use of incentives is available here.

Video: NAHB Chief Economist Reports on Housing Starts and Builder Confidence

April 18, 2012

Video: NAHB Housing Market Index for March 2012

March 20, 2012

Builder Sentiment Up Again

February 15, 2012

The NAHB/Wells Fargo Housing Market Index (HMI) increased four points in February to 29, the highest level since April 2007. The increase marks the fifth consecutive month of an increase for a total of 15 points since recording a 14 in September 2011. All three components also recorded levels not seen since early 2007. The current and future sales components both increased six points to 31 and 35 respectively. The traffic component rose two points to 23. Three of the four regional indexes rose while the South indicator fell two points to 26.

The steady increase in the HMI supports other consistent positive advances in housing indicators including an eight consecutive month rise in three-month moving average housing starts, a similar steady climb in single-family housing permits, and a five month rise in the NAHB/First American Improving Markets Index.

The HMI closely tracks single-family housing starts over its history and NAHB expects single-family starts to rise slowly in 2012 to 500,000, a 16% improvement over 2011. The improvements will be scattered and strongest in markets where the mid-2000s crash did the least damage to the underlying housing and employment markets.