Tuesday, June 19, 2012

Confused About Builder Confidence Index

There is good news to report today...the NAHB's Builder Confidence Index is at a 5 year high!  It has climbed all the way up to 28.
Updated 6/20/12: U.S. home building slowed in May amid a pull back in multifamily construction, but new permits granted reached their highest level since 2008, suggesting future demand for new houses.
Home construction decreased 4.8% last month from April to a seasonally adjusted annual rate of 708,000, the Commerce Department said Tuesday. But compared to a year ago, starts were up 28.5%.
Construction of single-family homes ticked up 3.2% in May to a rate of 516,000, the highest level since December. Single-family building was up 26.2% from a year ago as builders get back to work after more than five years of extremely weak sales.

Meanwhile, multifamily homes with at least two units, tumbled by 21.3% in May. Keep in mind that this number is volatile and apartment developers continue their rush to deliver new apartment buildings to meet a growing demand for rental units.

The results indicate more housing is in the works. The number of new housing permits grew by 7.9% to annualized level of 780,000 in May. Record low interest rates and depressed housing prices luring buyers off the sidelines.
To be sure, this year’s home construction figures, while up from a low of 478,000 in April 2009, are still well below the historical average. Builders have started construction on about 1.5 million new homes per year since 1959. It will undoubtedly take several years – or more – before that level is reached again. Plus, lending standards remain tight and many homeowners continue winding their way through the lengthy foreclosure process.

But here is where the confusion starts to creep in.  By the NAHB's definition, if an index of 50 is where builders begin to feel good about housing starts then how can we as an industry get excited if the index hovers around the mid 20's for 5 years?  I read one report that stated this is proof that the economy is headed back to good health.  Huh????

The index is what it is but we all know the old saying about "blowin' smoke", so when is housing going to make its' turnaround?  Certainly not this year as Warren Buffet predicted and certainly not as fast as Obama hopes for in order to get reelected and definitely not fast enough to save some modular home factories and builders that have been living on the edge of going out of business for 5 years.

Maybe it's time to come up with a new index that starts after the housing crash and shows our industry as it really is in light of our new economic reality.  I could buy into an index that says that 600,000 new starts is the acceptable norm because I don't think I will see 1.5 million new home starts again for many years to come.


Anonymous said...

Well.....builders have to finally get a positive attitude and when they do the index goes up. What does the index mean - nothing, absolutely nothing. Just hopes and prayers and the light they see is not a fast moving freight train.

Chuck Owings, President: Shorthill Design and Construction, Ltd. said...

Unfortunately, the building industry, and society in general, is being forced to deal with the "NEW NORMAL". I am sure start-up businesses can structure their production to deal with the lower levels of production. The more established and larger companies have been the ones to suffer as their investment and overhead, based on the "old normal", has been unsustainable. Forced to downsize and adjust at these unprecedented levels can be too little too late as the current production levels cannot cover the debt load accumulated trying to keep things up and running when the light switch was turned off in '07-'08.