Home Builder’s Confidence at High

The Mortgage Corner

This is very big news. Builder confidence in the market for newly built, single-family homes rose for a fifth consecutive month in September to a level of 40 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This latest three-point gain brings the index to its highest reading since June of 2006.

It’s due in part to the extremely low new-home inventory, which is back to 1980’s levels, as well as the Fed’s announced intentions of maintaining rock bottom mortgage rates until mid-2015, if you believe the latest FOMC press release.

Graph: Econoday

Builder confidence rose across every region of the country in September. Looking at the three-month moving average for each region, the Midwest and West each registered five-point gains, to 40 and 43, respectively, while the South posted a four-point gain to 36 and the Northeast posted a two-point gain to 30.

"Builders across the country are expressing a more positive outlook on current sales conditions, future sales prospects and the amount of consumer traffic they are seeing through model homes than they have in more than five years," noted NAHB Chief Economist David Crowe. "However, against the improving demand for new homes, concerns are now rising about the lack of building lots in certain markets and the rising cost of building materials. Given the fragile nature of the housing and economic recovery, these are significant red flags."

Constructing spending is also stronger, as is new home sales, especially single family construction. New one-family structures rose 1.5 percent, following a 3.1 percent boost the prior month.  New multifamily structures advanced 2.8 percent after a 3.5 percent increase in June.  So, the recent uptrend in housing starts was not misleading.  Spending on new private residential structures continues to improve.

Graph: Econoday

Homebuilders are becoming more optimistic because new home sales were up 3.6 percent in July to an annual unit rate of 372,000. This is the best of the recovery outside of stimulus driven sales in the spring of 2010.

Graph: Econoday

The rise in total sales is drawing down supply, which explains the very strong readings in the monthly home builders' housing market index. Supply at the current sales rate is 4.6 months which is down from 4.8 months in June and compares with 6.7 months a year ago. Low supply of new homes points to increased building activity ahead and to gains for construction employment.

Lastly, it really looks like Ben Bernanke and his Board of Governors’ open-ended “QE3” $40 billion per month bond-buying program will give housing the boost it needs to finally take off with such low mortgage rates for years to come.

The FOMC press release said it very succinctly: “If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability.”

Harlan Green © 2012