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Builder Confidence Slips Again in July
Jul 19, 2006
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Increased concerns about interest rates and housing affordability caused builder confidence in the market for new single-family homes to slip three more notches to 39, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, reported.

"The HMI is down from its most recent cyclical high of 72 in June of last year, and reflects growing builder uncertainly on the heels of reduced sales and increased cancellations related to eroding affordability as well as an ongoing withdrawal of investors/speculators from the marketplace," said NAHB Chief Economist David Seiders.

"But just as concerning to many builders is the potential for more monetary tightening by the Federal Reserve that could drive interest rates, and thereby homeownership costs, even higher. Ironically, the Fed's inflation-fighting moves have helped firm up the rental market and raise the 'owners' equivalent rent' components of the core inflation measures that the Fed is seeking to contain," Seiders added.

Derived from a monthly survey that NAHB has been conducting for 21 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next 6 months as "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as either "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

All three component indexes fell in July. The largest decline was in the index gauging sales expectations for the next 6 months, which fell five points to 46. The index gauging current sales of new single-family homes fell four points to 43 and the index gauging traffic of prospective buyers fell two points to 27.

Builders in the West region, who have been the most optimistic in the HMI for some time, recorded the biggest dip in confidence this time around, with a nine-point decline to 51. Builders in the Northeast posted a five-point decline to 36, and builders in the Midwest posted a four-point decline to 21. The HMI for the large South region edged up two points to 50, although this measure still is down considerably from a cyclical high of 77 in June of last year.

"In terms of historical comparison, the HMI's movement is essentially in line with readings from the 1994-95 period when the Federal Reserve tightened monetary policy and a fairly orderly cooling-down process occurred in the nation’s housing markets," Seiders observed. "That is what our forecasts anticipate happening in the current period, provided the downside risks of rising interest rates and a bail-out by investors/speculators do not become too pronounced. With respect to interest rates, we expect the Federal Reserve to maintain the current 5.25 percent target for the federal funds rate for some time, and we're projecting only modest increases in long-term interest rates from current levels."

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