Builder Confidence At 10-Year High

By Mark Lieberman

Managing Director and Senior Economist

Highlights:

  • July Housing Market Index held firm at 60, its highest level since November 2005;
  • June HMI, revised up to 60 from 59;
  • Two of the three components of the index – outlook for current sales and sales six months out – improved while buyer traffic slipped;
  • Current sales index also rose to high since November 2005;
  • Outlook for sales six months forward hit 71 the highest level since October 2005; and
  • Index improved in three of four census regions

Image result for new home building

Builder confidence remained at a near 10 year high in July according to the Housing Market Index (HMI), a monthly survey of the National Association of Home Builders (NAHB).The soaring reading of builder sentiment either corroborate or are corroborated by recent data showing improvements in permits, housing starts, completions and new home sales.

While the feel-good atmosphere means more work for construction trades, whether the level can be sustained remains to be seen. Indeed, with the Federal Open Market Committee poised to hike interest rates, this could be a case of the FOMC removing the punchbowl just as the party was getting started as then-Federal Reserve Chairman William McChesney Martin describe an FOMC rate hike 60 years ago.

“If we fail to apply the brakes sufficiently and in time, of course, we shall go over the cliff,” Martin said in a 1955 speech to investment bankers. “The Federal Reserve, as one writer put it, after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Savvy homebuyers could be inflating the housing numbers by rushing into the market to get that last sip of punch and home builders are trying to satisfy the demand.

The HMI month is built on a survey conducted in conjunction with Wells Fargo, measures builder perceptions of current single-family home sales and sales expectations in the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor. NAHB began the national index in 1985. It hit a record high of 78 in December 1998 and fell as low as 9 in January 2009.

The improvement in the index in July (the survey is conducted in the first 10 days of the month so more accurately reflects the prior month’s reality) was widespread. The index jumped five points in the Northeast to 52, the highest since March 2006. The index hit 59 in the Midwest and 63 in the West but in both regions had been hovering that statistical neighborhood since the beginning of the year. The index was 60 in the Midwest in March and the reading for the West was 64 in February. The index actually slipped one point in the South to 62 which was the second highest reading among the regions.

The FOMC is not expected to take any action with respect to interest rates when it meets in two weeks but an increase in the fed funds rate is expected in September. The prospect of an increase in the fed funds rate – the interest rate banks charge each other for overnight borrowing – could be the reason for a spurt in housing as buyers and builders rush to lock in loans before rates increase.

Whether the more upbeat attitude among builders translates into actual activity for Julye will be reflected in the report on housing permits and starts for that month to be issued by the Census Bureau and Department of Housing and Urban Development in mid-August. Census and HUD will report tomorrow in permits and starts for June when the builder confidence index rose six points, the largest month-month

Hear Mark Lieberman every Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:20 am Eastern Time. Follow Mark Lieberman on Twitter at @ foxeconomics.

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