Homebuilder Confidence Index Numbers: The Good And Bad

Homebuilder Confidence Index Numbers: The Good And Bad

The headline Homebuilder Confidence Index (HMI) ticked up this month from 44 in May 2013 to 45 this year. All three sub-indices (present conditions, traffic, six-month outlook) were also up year-on-year, but only six-month outlook has increased sequentially and the National Association of Homebuilders (which compiles the index) sees reason for concern.

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“May’s confidence index is a win for the bears,” write Sterne Agee analysts Jay McCanless and Annie Worthman in a May 15 report. “We believe there are reasons to remain positive on the housing sector, but tepid macroeconomic data thus far in 2014 along with nagging questions about affordability have not been supporting the bull case.”

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Home prices don’t cover construction costs in some markets

Such tepid annual growth in confidence would already be disappointing, and commentary from NAHB chief economist David Crowe warns that housing prices aren’t keeping up with construction costs in many US markets. He argues that homebuilders have already accepted the idea that volumes will be lower during this economic cycle than the last, and they are responding to the discrepancy between costs and sale prices by putting projects on hold. This means that many cities will have rising housing prices and shrinking supply, even though actual sales are quite low. Crowe expects this stalled market to continue until “buyers show more resilience and the overall economy improves.”

Homebuilders are already adapting

While McCanless and Worthman agree that the most recent HMI isn’t encouraging, they expect that most homebuilders who have survived since the 2007 housing market collapse are probably quite realistic about what to expect and have already adapted to a leaner market. After all, if they hadn’t adapted they wouldn’t have made it this far. While margins may be under severe pressure in some markets, one option that homebuilders have is to expand their offerings to include budget homes that make more sense in current market conditions, such as D.R. Horton, Inc. (NYSE:DHI)’sExpress Homes brand.

Of course the HMI and Crowe’s comments don’t take into account the recent comments from Federal Housing Finance Agency Mel Watt and policy shifts meant to encourage mortgage lending and maintain a liquid secondary mortgage market. It will be interesting to find out if HMI gets a spike next month based on his remarks or if homebuilders will need to see concrete changes first.

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Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.
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