Distressed Inventory Dampens Builder Confidence

There are a lot of reasons why the nation's homebuilders continue to feel skittish about the housing market according to both the Chairman and Chief Economist of the National Association of Home Builders (NAHB.) 

The two commented on the NAHB/Wells Fargo Housing Market Index (HMI) for April which showed builder confidence for April has slipped back into its previous rut after improving slightly last month. The overall score was 16, down one point from the March figure.  The Index has registered a read of 16 in five of the last six months. 

Chairman Bob Nielsen and Chief Economist David Crowe both cited the continued high level of foreclosures and distressed properties on the market as factors in the downturn and said builders also fear that recent legislative and regulatory proposals could make it harder to get a mortgage.   

Crowe said, "While pockets of improving activity are appearing in some markets, the best sales activity appears to be happening in the lower price ranges, where first-time buyers have greater flexibility than repeat buyers who must sell their current home."

The HMI is derived from a monthly survey that NAHB has been conducting for more than 20 years.  Builders are asked to report on their perceptions of current single-family home sales and sales expectations for the next six months as "good," "fair" or "poor" and on current buyer traffic as "high to very high," "average" or "low to very low." Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor. The HMI has not reached above 50 since late in 2006.

Each of the three questions is used to construct a component index.   The sales outlook for the next six months fell three points to 23, the lowest score since last October, while the current sales component fell one point to 16.  Perceptions of buyer traffic, however, improved and that index rose a single point to 13.

“While builders in some areas are starting to see a pickup in traffic of prospective home buyers, many consumers remain skittish about the health of the housing market and overall economy, particularly in view of recent legislative and regulatory proposals that could make it much harder to get a mortgage,” noted NAHB Chairman Bob Nielsen, a home builder from Reno, Nevada. “At the same time, builders are competing against a large number of foreclosed and distressed properties on the market, which are holding down prices and appraisals and making it tough for potential clients to sell their existing homes.”

The news was a little better on a regional basis.  Builders in the South were particularly pessimistic; the overall index for that region dropped four points to 15. As this is the region with the largest representation in the index it had a strong influence on the national figure.  Two of the regions, Northeast and Midwest each gained two points to 20 and 14 respectively. The West was unchanged at 17