Economy Watch: Homebuilders Feeling Optimistic

By Dees Stribling, Contributing Editor

Homebuilders are feeling chipper these days. Is it justified? Maybe so. Builder confidence in the market for newly built, single-family homes in July hit 60 on the National Association of Home Builders/Wells Fargo Housing Market Index, which was released on Thursday. The June reading was also revised upward one point to 60 as well. The last time the index reached that high was in November 2005, which was a period of irrational exuberance for the industry, puffed up by the housing bubble of the time. Since there’s no housing bubble now, the fruits of the slow but steady recovery of the housing market probably account for homebuilder optimism.

Two of the three index components posted gains in July. The one gauging current sales conditions rose one point to 66, while the component charting sales expectations in the next six months increased two points to 71. On the other hand, the component measuring buyer traffic dropped a single point to 43, making it the only one below the optimism-pessimism threshold of 50. NAHB chief economist David Crowe chalked the good numbers to “stronger sales in both the new and existing home markets, as well as continued job growth.”

Those are short-term reasons for builder optimism. Also Millennials might be more interested in homeownership than the conventional wisdom gives them credit for, which would definitely be a good for the homebuilding industry in the long run. At least, that was the conclusion of a survey by the Collingwood Group that shows that a sizable number of people aged 24-34 say they’d give up certain parts of a modern lifestyle (such a cell phone, cable, or even Starbucks) to finance a home purchase.

If true, that would indicate that Millennials are every bit as interested in buying dwelling places as their parents, and would buy (mostly) in the lower reaches of the market as soon as they could. That, in turn, would support new housing, as people trade up. Much now depends on the job prospects of Millennials and how much they’re paid. If the U.S. economy continues to bifurcate into a smallish number of high earners and a largish number of low earners, the wishes of many Millennials to buy houses will be frustrated. If incomes go up more evenly, that baneful outcome for the housing industry might yet be avoided.