Keeping an Eye on Builder Confidence

How is the housing market doing? If you’re hoping to hear that things are improving, don’t ask builders.

At least, that’s the picture painted by the National Association of Home Builders/Wells Fargo builder confidence index, released this week, which didn’t offer much more industry hope.

And with good reason. Last year, the index averaged around 27; in June, it hit 18–the second time the index has reached that low point (the first was in December).

In May, the index measured builder confidence at 19.

Forecasts had placed the June index at about 19, according to Bloomberg–the surprise drop may not have been much, but it was more than had been expected.

But the confidence reading wasn’t the only low. Builders’ take on single-family home sales remained at 17, another all-time low; builder sentiment also declined in two of four U.S. regions:

  • In the Northeast, the index fell
    to 12 from 18.
  • In the West, it dropped to 16 from 20.
  • The index rose from 12 to 17 in the Midwest.
  • And in the South, the index remained the same, holding steady at 22.

That’s all alarmingly low: Anything under 50 implies respondents don’t feel great about the market.

But aside from not being very confident about the market, builders also said that buyer traffic–a key indication of future sales–also dropped in June, falling from 18 in May to 17 this month.

And it doesn’t look like builders are being overly pessimistic. The government report released today found single-family home starts had hit a 17-year low in May–falling 1.3 percent from April.

Housing starts aren’t–at least for now–likely to improve much in the coming months. Building permit applications fell last month to a seasonally
adjusted annual rate of 969,000  from a revised 982,000 April
rate–less permits; less plans to build.

Unlike consumer confidence, which can really influence and affect the market, builder confidence is more of a reflection: Knowing that developers and builders are down about the status of housing isn’t likely to increase or decrease sales, but it provides a good snapshot of how the market is doing.

If people aren’t looking for new homes–and, as Nancy Keates pointed out in yesterday’s Wall Street Journal, there are reasons it makes sense to build one–builders are the first to know about it.

If we’d paid more attention to builder sentiment as demand began to drop off at the start of the housing slump, we might have been able to correct the amount of homes being built, reducing the housing supply and, in effect, shortening–or altogether preventing–the decline.

But we didn’t. And now, as Bloomberg said, as foreclosures add more homes to the market and financing to buy housing becomes increasingly harder to get, demand is likely to shrink even more–making builders all the more wary.

Knowing that isn’t going to do much for us now. But paying attention to builder confidence readings once the market does improve–and it will–is an absolute imperative.

But do you think the industry will? Tell us what you think by posting your take.