Economy Watch: How to Put Homebuilding Back on Track

Homebuilders aren't pessimistic these days, but they aren't overly optimistic about the state of their business either.

Homebuilders aren’t pessimistic these days, but they aren’t overly optimistic about the state of their business either. Builder confidence in the market for newly built, single-family homes in February fell two points to 55 on the National Association of Home Builders/Wells Fargo Housing Market Index released on Tuesday. That’s a little lower than the upper-50s, where the index hovered during most of 2014. Two of the three index components dropped: current sales conditions down by a single point to 61, while buyer traffic fell five points to 39, or in genuinely pessimistic territory (then again, many parts of the country were dealing with blizzards, which slows everything down). The gauge tracking sales expectations in the next six months held steady at 60.

The homebuilders have reasons for a tepid attitude. Even though the latest new home sales numbers weren’t bad—compared with all the sales numbers since 2007—the market for new homes still hasn’t really recovered from the recession. The December 2014 sales pace (the most recent available from the Census Bureau) was an annualized 481,000 units. Healthy years since the 1970s typically see 600,000 to 800,000 new units sell, and that during decades when the population of the United States was smaller. Since 2007, the annualized sales pace has hovered around 400,000 units—essentially the bottom of most recent decades.

Single-family and multifamily housing, while not directly part of the commercial world, are nevertheless linked to it in a number of ways. Generally speaking, the healthier the residential side of things, the better for the commercial side. After all, an axiom of the business is that commercial development, retail and then office, follows rooftops. This isn’t the Eisenhower era, so many of those rooftops aren’t developed in greenfield suburbs anymore (though many are—in exurbs, at least). But even infill “rooftops” in downtowns or other urban areas in which Millennials and not-yet-elderly Baby Boomers want to live can be harbingers of various kinds of commercial growth.

What’s needed to turn homebuilding around? Sterne Agee chief economist and managing director Lindsey Piegza tells MHN that a heightened ability to finance home purchases is the necessary ingredient for inspiring the lackluster housing market to improve. “Either a further, significant decline in home prices, or an increase access to credit and financing options,” would be the spur that puts homebuilding on a more robust track, she says.