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Monday, May 18, 2015 12:44 PM

Home Builders Optimistic Despite Decline in Traffic; Housing Market Index Declines

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The National Association of Home Builders' Housing Market Index once again reveals positive builder sentiment even though new home sales are weak. The HMI is Derived from a monthly survey that NAHB has been conducting for 30 years.

The index gauges builder perceptions of current single-family home sales and sales expectations for 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.

Index Lower Than Expected, But Positive

A new release came out today and although the index was positive, the Bloomberg Consensus Number was lower than any economist's forecast.

The housing market index has long been signaling strength in the new home market that has yet to appear, but the signal is less strong in May. The index fell 2 points from April to 54 which is below the low-end Econoday forecast.

Weakness in traffic has been a major feature of this report, underscoring the lack of first-time buyers in the housing sector. A plus in today's report is a 1 point gain in future sales, a component that is well out in front at a very strong 64.
Traffic vs. Expectations

Traffic is weak, but future expectations are very strong. The disconnect suggests more than a little bit of builder overoptimism. Let's dive into the actual report for a closer look.

The NAHB reports Builder Confidence Falls Two Points in May.
“Despite this month’s slight dip, builder confidence in the new home market remains above the 50-point benchmark,” said NAHB Chairman Tom Woods, a home builder from Blue Springs, Mo. “Overall, the second quarter of 2015 is shaping up to be very solid.” 

“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.

The index’s components were mixed in May. The component charting sales expectations in the next six months rose one point to 64, the index measuring buyer traffic dropped a single point to 39, and the component gauging current sales conditions decreased two points to 59.
NAHB Housing Market Index

If you ask the builders, sales conditions are very good with a score of 59. Sales expectations rose to an excellent score of 64. Meanwhile, actual lookers score a very poor 39.

Average it all together and you get the totally useless chart above.

Mike "Mish" Shedlock

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