The future looks bleak for homebuilders in one American region

Something is wrong in the Northeast housing market.

The National Association of Homebuilders’ Housing Market Index (HMI) has held steady for the last four months at 58. But in the Northeast, sentiment has been falling off a cliff.

The monthly HMI is based on a survey that collates how builders rate market conditions for the sale of new single-family homes.

Bespoke Investment Group highlighted in a post Monday that the index in the Northeast — with key cities like New York, Boston, and Washington — has fallen 16 points since October. It’s the biggest seven-month drop since 2006.

Back then, sentiment was falling across the country. But now, the Northeast is alone, as the chart below shows.

Looking at the three-month average of the regional indexes, which evens much of the monthly volatility, tells the same story.

In the Northeast, the HMI peaked at 50 in December and was down to 41 in May.

“My guess is that since it’s highly concentrated — the time period we’re looking at is the start of the year — that the stock-market declines that we saw at the end of 2015, maybe some of the erosion in corporate profits, are having a demand-side effect,” Robert Dietz, chief economist at the NAHB, told Business Insider.

The Northeast has a bigger share of higher-end and custom homebuilding, Dietz said. And so, based on his conversations with builders, he said it’s not a surprise market factors that impact homebuyers in that region would dent a measure of homebuilder confidence.

And looking at housing starts, the Northeast has had the lowest level among regions since at least 2010. Data out Tuesday showed that starts fell 3.5% in April in the region. They also fell in the West.

And after year-over-year gains in both regions, the declines could indicate the start of a downward trend, according to Ralph McLaughlin, Trulia’s chief economist.

McLaughlin added that the market for higher-end homes, which make up the majority of new homes in both areas, is slowing. And that could explain why starts are, too.

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