Homebuilder Perceptions May Be Better, But Conditions Are Really Worse

“U.S. Homebuilder Confidence Rises in March to Highest Level in 10 Months,” screamed the Bloomberg headline this morning. It left out the fact that the readings were barely above 20 year lows.

This is one of the most important indicators of the housing market because it represents the perceptions of direct market participants and because it has far less lag than most housing data. I give it significant weight in analysing the housing market. The problem for the casual observer is that the press release and news reports usually present an inaccurate and misleading picture of the data. What else is new?

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) has 3 equally weighted components- builder expectations of the market 6 months hence, current sales, and current model home traffic. Only the last two mean anything. Builders have no better idea of what the future holds than media pundits, that is to say, no clue. So you can discount the fact that the HMI rose from 16 to 17 because builder expectations rose 2 points from 25 to 27. Both indexes are meaningless.

The HMI is a diffusion index that asks opinions of the surveyed builders about the 3 components. The respondents are asked to rate current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” Respondents are asked to rate buyer traffic “high to very high,” “average” or “low to very low.”The scale is from 0 to 100. 50 is neutral. Any index reading below 50 is negative. The farther below 50 the reading, the greater the number of responses of “poor”, or low to “very low”.

The current sales reading came in at 17, unchanged from last month and up 2 points from a year ago. The record low reading was 8, set in December 2008. Prior to that the record low was 19, set in January 1991 at the bottom of the last real estate depression.

The most important component of the index is prospective buyer traffic. That has to turn up before sales can increase. Right now that index is lagging the uptick reported in sales. That throws suspicion on the current sales reading. The buyer traffic index reading was 12 in March, unchanged from February and up just 2 points from March 2010. The all time low was 7, set in December 2008. The last previous record low was 17 set in January 1991.

When the media screams at you that the housing market is showing improvement, recognise that headline writers and business reporters live in a different reality than you and I do, and that the expectations of the survey respondents may have changed more than the actual conditions.

It would be difficult for these readings to get worse since they are bound at zero. The improvement from the 2008 lows could simply be an artifact of the fact that fewer builders have survived the collapse and are taking part in the surveys, and that those who do survive have adjusted their expectations. The actual sales numbers from the Commerce Department show that the market has gotten worse in recent months. The only differences in the market are perceptual. In that context, these numbers are no cause for optimism.

This chart should give you some perspective. The market is worse, but it’s been this way for so long, it just doesn’t seem that way for the few surviving builders.

chart

Photo: The Wall Street Examiner

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