The Home Buyer's Korner

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August 24th, 2015

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Home Builder Confidence

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Home builder sentiment rose to its highest level since November 2005 last week, reflecting growing confidence in a steadily improving U.S. housing market. The National Association of Homebuilder’s Market Index showed confidence in new single-family home sales rose one point to a seasonally adjusted level of 61 in August.

The current-sales component of the index rose this month to 66 from 65 in July. Expectations for sales over the next six months stayed steady at 70. A measure of traffic from prospective buyers rose two points to 45.

The three-month moving average of the builders gauge by region posted gains in August in three out of four areas from the prior month’s revised figures, and the Northeast stayed constant at 46. The West and Midwest each gained three points, to 63 and 58, respectively. The South rose by two points to 63.

A reading over 50 means most builders generally see conditions as positive. The index stood at 60 in July and June and most economists expected a reading of 61 in August.

The index has been positive for the past year and analyst point to builder confidence as an indication that single-family housing is making slow, but steady progress.

The overall message from the survey was very upbeat and most economists saw no reason to change their view that a real recovery in the housing market is finally under way.

Yet, newly built single-family home sales fell in June by 6.8 percent to their lowest reading since November 2014 and the index level is similar to its level in early 2006, when single-family housing starts “were running at over a 1.5 million unit rate, or more than twice what it are now.

Home Sold

Looking at the facts and comparing them to the index, leads one to believe there’s a big disconnect between what home builders are saying and what they are actually doing, or has the dynamics changed?

What’s the deal? Are builders hopelessly optimistic?

First, part of the disconnect may have to do with the fact that many smaller builders have either gone out of business or sold themselves to larger suitors during the downturn. Those that remain—having survived the bust—could generally be more optimistic.

Second, even though a reading of 50 implies favorable market conditions (September’s reading came in at 59), there’s no explicit definition of favorable conditions. After what builders have lived through during the last few years, favorable conditions in 2014 may be quite a bit different from favorable conditions in 2006.

Finally, there’s another group of developers who have plenty of reason to feel good. Multifamily construction is running at its highest level in 25 years, as our plutocrats and Wall Street turns Americans from home homes to renter.

Consider: Single-family housing starts through July, using a three-month moving average, are around 64 percent below their level at the end of 2005, which is the last time the home-builder confidence survey was this strong. But multi-family starts are running slightly above that level.

Charting both the change in single-family and multifamily starts since the end of 2006 tells an interesting story. During the crash, home-builder sentiment was closely tied to what was happening in the single family market. But since 2012, it has been a more reliable gauge of what’s happening in the multifamily market.


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