CHART OF THE DAY: Homebuilder Sentiment Is Decoupling From Reality

The NAHB’s measure of homebuilder confidence was unchanged at 58 in September , the highest level since November 2005.

Homebuilder confidence used to be considered a good leading indicator for housing starts. But in recent months confidence has gained momentum while housing starts have failed to keep up.

Paul Diggle at Capital Economics has previously explained that “the NAHB index has a habit of over-exuberance during rebounds.” This he said is because of the way the housing market index (HMI), the gauge for homebuilder confidence, is constructed.

“If all survey participants thought that conditions were ‘good’, even if only marginally so, the index would report a value of 100. But that extremely strong reading would not be a great reflection of actual market conditions.”

Here’s an updated chart from Calculated Risk. We highlighted two previous instances when homebuilder confidence decoupled from housing starts.

Cotd homebuilder confidence and housing starts