(IND) Builders’ Sentiment Drops

The February NAHB/ Wells Fargo Housing Market Index fell 10 points to 46 from the January level. The decline is the largest in the 30 year history of the index. The next largest monthly drop was October 2001 at 9 points. The February index is below the tipping point of 50 where more builders rate the market as good rather than poor for the first time since May 2013.

The three components of the index fell significantly as well. The index for current sales fell 11 points, also the largest decline in that component in history. Expectations for future sales fell the least at 6 points and the traffic index fell 9 points, tying the previous worst decline in October 2001.

The drop is a result of several forces falling at once. Unusual weather across much of the US reduced consumers’ shopping and buying. That impact can be seen in the differences in regional index changes. The three month moving average for the West where weather has been dry but not unusually cold or wet did not change. The Northeast where average temperatures have been significantly below average saw the greatest decline and the South suffering from unusually wet and cold also saw a larger decline. Weather effects also depressed retail and auto sales, which in turn depressed consumers’ desire to shop or purchase homes if their livelihood depended on those sectors.

Finally, shortages of labor and lots have also begun to have a real effect on builders’ ability to build and sell homes. As shortages become more severe, builders are faced with the possibilities that they will not be able to build up their exceptionally low inventories in anticipation of the spring selling season.

Shortages and cost increases for labor, lots and building materials have caused builders problems with appraisals as comparable existing home prices are not subject to the same forces. Consumers are reluctant to accept the higher prices and shift to an existing home purchase. As a result, those prices have risen by double digit rates. The feedback effect will eventually raise home prices to meet the cost of building but that may take some time.

NAHB remains positive about construction and sales in 2014 as pent up demand and an improving economy will bring home buyers back into the market.

Source: eyeonhousing.org