Housing Market Index Drops to 2nd Highest Level of 2016

The Housing Market Index (HMI), a measure of home builder confidence in the new home market, gave back a bit of its September surge this month. The National Association of Home Builders (NAHB)/Wells Fargo index dropped 3 points from September to 63, exactly the consensus prediction of analysts surveyed by Econoday.

The HMI had gained an unexpected 6 points in September, rising to 65 after orbiting in a narrow range of 58 to 61 for 10 months.  The September index tied with October 2015 for the highest index value since the housing bubble in the mid-2000s.

The HMI composite index contains three components each gauging home builder responses to a survey that NAHB has been conducting for 30 years.  Builders are asked to give their perceptions of current single-family home sales and their expectation for the sales over the next six months as "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.

"Even with this month's drop, builder confidence stands at its second-highest level in 2016, a sign that the housing recovery continues to make solid progress," said NAHB Chairman Ed Brady. "However, builders in many markets continue to express concerns about shortages of lots and labor."

Two of the three HMI components posted losses in October. The component gauging current sales conditions dropped two points to 69 and the index charting buyer traffic, which consistently and significantly lags the other two measures, fell one point to 46. Meanwhile, the index measuring sales expectations in the next six months rose one point to 72.

"The October reading represents a mild pullback from a jump in September, and indicates that the housing market continues to make slow and steady gains," said NAHB Chief Economist Robert Dietz. "Moreover, mortgage rates remain low and the HMI index measuring future sales expectations has been over 70 for the past two months. These factors will sustain continued growth in the single-family market in the months ahead."

Looking at the three-month moving averages for regional HMI scores, the West increased two points to 75 while the Northeast, Midwest and South each posted one-point gains to 43, 56 and 65, respectively.