Reacting to what they perceive as increasing consumer uncertainty regarding the market for new single-family homes, builders tempered their views on current and expected sales activity in the Wells Fargo/National Association of Home Builders Housing Market Index (HMI) for August. The HMI declined seven points to 32, its lowest level since February of 1991. This was the seventh consecutive month in which builder confidence, as measured by the index, has fallen.
"Two big factors are coloring builders' perceptions of the market right now--rising sales cancellations and substantial growth in inventories of both new and existing homes," said NAHB Chief Economist David Seiders. "These factors are largely the result of an increasing number of potential buyers adopting a 'wait-and-see' attitude because of uncertainty about where the housing market is headed, and record-high energy costs also appear to be weighing on housing demand. We're also seeing an anticipated withdrawal of investors/speculators from the market, following a major influx in 2004-2005."
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 homes 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 declined in August. The component gauging current single-family home sales fell seven points to 36, while the component gauging sales expectations in the next 6 months and the component gauging traffic of prospective buyers both fell six points, to 40 and 21, respectively.
Regionally, the HMI recorded a three-point decline to 34 in the Northeast, a five-point decline to 15 in the Midwest, a nine-point decline to 41 in the South and a 10-point decline to 42 in the West.
"It's important to recognize that home sales and housing production are subsiding from record levels a year ago, and those levels clearly were unsustainable," noted Seiders. "We expect the erosion in market activity to continue through most of this year before stabilizing in 2007." Seiders also noted that, historically, builder sentiment tends to contract by a greater margin than actual sales and production activity.
"On the bright side for consumers, the economy continues to be in fundamentally good shape, mortgage rates remain near historic lows, house price gains are decelerating, and builders are offering substantial buyer incentives to keep their inventories down. Such favorable market conditions certainly are reason for optimism among those in the market to buy new homes," Seiders said.
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