Homebuilders may be too optimistic about how quickly they can revive the single-family housing market.
In a note on Wednesday, Capital Economics examined the relationship between single-family housing starts and homebuilder confidence.
There’s an inventory crunch in lower-priced starter homes, caused in part by builders who shifted production towards more expensive properties after the financial crisis. Builders realised that the crisis burned first-time buyers the most, and shifted their focus appropriately in the years that followed.
Although housing starts have risen from the troughs of the Great Recession, homebuilder confidence has rebounded even more.
The National Association of Homebuilders (NAHB) publishes a monthly housing market index based on a survey that gauges how its members rate single-family home sales now and in the next six months. In June, it climbed to the best level of this year.
That bullishness among builders suggests that building activity is set to take off, alleviating the inventory and affordability crunch we’ve dubbed the ‘new housing crisis.’ Low mortgage rates and gradually easing credit conditions should assist, too.
However, Capital Economics’ Matthew Pointon and team say builder confidence may need to fall first.
They wrote (emphasis added):
Thanks to both bank caution and a host of new regulations there is no chance of a return to the very loose credit conditions of the mid-2000s, which helped drive the construction boom. So, although starts will increase towards confidence, we also suspect confidence will fall back towards starts. Indeed, there have been a couple of occasions in the past when the NAHB measure rose well above starts — in the mid-1990s and early 2000s. But in both cases it was a fall in confidence which restored the relationship, rather than a rise in housing starts [as the chart below shows.]
The argument is basically twofold: using the currently high level of builder confidence as a forward-looking indicator of housing starts would likely lead to overshooting. And, several constraints, not limited to tighter post-crisis lending standards and land-use laws, could put a lid on how many single-family homes builders believe they can construct.
Still, there are some signs that starter homebuilding is already on the rise. These include a drop in the median price of new single-family homes on a six-month rolling average basis, which evens out some of the month-to-month volatility.
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