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May 17, 2010 - Builder confidence in the market for newly built, single-family homes rose for a second consecutive month in May to its highest level in more than two years, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. The HMI gained three points to 22 in May, its highest point since August of 2007.

“Builders surveyed for the HMI at the beginning of May were undoubtedly reacting to the heightened consumer interest they had just witnessed as the deadline for home buyer tax credits arrived at the end of April,” said Bob Jones, Chairman of the National Association of Home Builders (NAHB) and a home builder from Bloomfield Hills, Mich. “Builders are also hopeful that the solid momentum that the tax credits initiated will continue even now that those incentives are gone.”

“The really encouraging part of today’s HMI is that sales expectations for the next six months continued to gain, despite the expiration of the home buyer tax credits at the end of April,” said NAHB Chief Economist David Crowe. “This means builders are more comfortable that the market is truly beginning to recover, and that positive factors for buying a new home – low interest rates, great selection, stabilizing prices, and a recovering job market – are taking the place of  tax incentives to generate buyer demand.” 

Crowe was quick to point out, however, that while builder confidence has improved from the depths of the housing downturn, it is still quite low by historic standards. “Obviously we still have a long way to go, and it’s worth repeating that continued challenges such as the critical lack of project financing, inappropriate appraisal procedures, competition from short sales and foreclosures, and the soaring costs of some building materials are major obstacles on the path to a healthier housing market and economy,” he said.

Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “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.

Each of the HMI’s three component indexes posted three-point gains in May. The component gauging current sales conditions climbed to 23, its highest level since July of 2007. The component gauging sales expectations in the next six months rose to 28, its highest point since November 2009, and the component gauging traffic of prospective buyers improved to 16, its best showing since September 2009.

The HMI also posted gains in every region in May. The Northeast, which has the smallest survey sample and is therefore subject to greater month-to-month volatility, rose 14 points to 35, its highest point since June of 2007. The Midwest posted a two-point gain to 17, while the South registered a one-point gain to 22, and the West posted a seven-point gain to 20.

National Association of Home Builders Press Release (04/17/2010)

U.S. home construction posted a bigger-than-expected gain in April thanks to the extension of a tax credit, but the plunge in permits suggests the housing sector will remain a weak spot in the economy.

Housing starts rose 5.8% to a seasonally adjusted 672,000 annual rate compared to the prior month, the Commerce Department said Tuesday.

Economists surveyed by Dow Jones Newswires expected starts to rise 3.8%. March starts, originally seen up 1.6%, were revised to an increase of 5.0%.

 However, building permits decreased 11.5% to a 606,000 annual rate, suggesting a slowdown in construction over the next several months as demand is expected to wane. Economists had expected permits to drop by only 0.4%.

The housing sector was hit hard by the recession and still has a long way to go to recover. Low house prices and mortgage rates, coupled with the government's tax benefit, are helping the industry drift higher from very low levels. But another setback may occur once the tax incentive--which was extended to include deals inked by April 30 and closed by June 30--expires.

"Normally, the U.S. economy needs to construct over 1.5 million housing units a year to meet underlying demand. This will not happen until 2012," said Patrick Newport, U.S. economist at IHS Global Insight, in a research note.

Builders are cautious because of a surplus of unsold homes, including a so-called "shadow" inventory made up of property withheld from the market because of low prices.

Reported by Wall Street Journal (05/18/2010)