Builders, Realtors Differ on Home Sale Climate

While they were discussing different vintages, home sellers have a slightly more upbeat outlook on home sales then do the builders of those homes.  Lawrence Yun, Chief Economist of the National Association of Realtors® told Association members late last week that he expects this will be the best year for existing home sales since 2006 but the index measuring builder confidence about new home sales dropped this month.

The National Association of Homebuilders/Wells Fargo Housing Market Index (HMI) released today was down 2 points from April as new home builders expressed disappointment in both current sales condition and buyer traffic. The HMI composite was at 54 in May compared to 45 in May 2014 but it has been a roller-coaster year in which the index has varied over a 14 point range.

"Despite this month's slight dip, builder confidence in the new home market remains above the 50-point benchmark," said NAHB Chairman Tom Woods. "Overall, the second quarter of 2015 is shaping up to be very solid."

The HMI is derived from a monthly survey of NAHB's new home builder members in which they are asked to gauge three factors, current single-family home sales and sales expectations for the next six months each on a scale of "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The index's components were mixed in May. The component charting sales expectations in the next six months, typically the highest rated of the three factors, rose one point to 64, and the component gauging current sales conditions decreased two points to 59.  The index measuring buyer traffic, which has not broken through the 50 mark for 116 months, dropped a single point to 39.

"Consumers are exhibiting caution, and want to be on more stable financial footing before purchasing a home," said NAHB Chief Economist David Crowe. "On the bright side, the HMI component measuring future sales expectations has been tracking upward all year, mortgage rates remain low, and house prices are affordable. These factors should spur the release of pent-up demand moving forward."

It was buyer traffic that was cited by Yun in a presentation at the Realtors® Legislative Meetings & Trade Expo in Washington, DC as one factor contributing to his sales projections for 2015.  He said he expects existing home sales to end up around 5.3 million in 2015, a significant pick up from 4.9 million sales in 2014.  In addition to foot traffic through listed homes Yun said that sales in the first few months of the year, strong job growth, and continued low interest rates contributed to his optimism.

His projected 2015 volume still remains well below the recent high of 7 million homes reached in 2005 but Yun told a Wall Street Journal interviewer that the market is likely a decade away from hitting those levels again.  In 2006, sales fell to 6.5 million and since then have hovered around 5 million sales or fewer.

Speaking at the Realtor conference as well, Robert Dietz, vice president of tax and market analysis NAHB said that he anticipates that 2015 will be the first time during the recovery that the growth of single-family home starts will exceed apartment starts. That would be a significant shift for a recovery that has been driven by a boom in rental construction while single-family home construction has grown less robustly.

Yun noted sizeable pent-up demand for housing but said if interest rates or prices rise, making homes less affordable that could hold back sales.  This, he said, shows the need for more new home construction, something Dietz said was unlikely.  He estimated that new home construction will remain about half of normal production levels.  Home builders are being held back by the shortage of construction laborers, the difficulty of obtaining construction loans and the elusiveness of first-time home buyers, he said.

And apparently by builder sentiment as well.  NAHB's three month moving averages for regional HMI scores were mixed; the South and Midwest each rose one point to 57 and 55, respectively. The Northeast fell by one point to 41 and the West dropped three points to 55. 

It is hard to reconcile the two versions of the new home buying market that have been on display for many months.  The economists who make the forecasts talk about the need for more new home construction and how disappointing the slow rebound has been while at the same time builders, who are on the ground, consistently fail to perceive strong buyer demand.