Home builders said the housing market went from dead to deader in early June. The NAHB’s present conditions index fell from 15 (revised down) to 13 (on a scale of 0-100, with anything below 50 being negative). Model centre prospective buyer traffic fell 2 points to 12 (on a scale of 100).
These numbers are atrocious, dropping to near the lowest levels of the past 21 years. Weak traffic foreshadows weak sales, and traffic remains nearly nonexistent. The traffic index would need to rise above 18 to signal a meaningful increase in potential demand.
The NAHB home builders survey is a diffusion index on a scale of 0 to 100. The index has 3 components—current sales, model home sales traffic, and builder expectations for 6 months hence rated on the basis of good, fair, or lousy. A reading below 50 means that more builders rate conditions as poor or very poor, rather than good or very good. I consider traffic to be the most important indicator because it reflects future sales.
The chart illustrates the deficiencies of a diffusion index like the NAHB survey index. Due to the zero bound at the lows, the index cannot reflect the fact that the market may remain in a downtrend. It also does not take into account the fact that the number of survey respondents has dropped precipitously over the past 4 years because they have gone out of business. That being said, the fact that the indexes remain near all time lows speaks for itself. Nearly non existent demand got worse this month. This foreshadows another downturn from yet another lower seasonal high in the Commerce Department’s new home sales report later this month.
While this does not bode well for individual home builders, their weighting in the XHB home builder ETF is nominal. That ETF is loaded with retailers and building products suppliers and trades more like a retail index. They’re not looking so hot right now either.
When Commerce Department posts its data on new home sales I will post an updated chart in the Wall Street Examiner Professional Edition Housing Report. We’ll know that the housing market is beginning to recover when all 3 indexes begin to move up together.
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