The slip in homebuilder confidence may not signal a wrong turn -- yet

In a modest setback on the housing front, the National Association of Home Builders' Housing Market Index fell to 18 in October from 19 in September, the group announced Monday. That's the index's first decline since June.

Economists surveyed by Bloomberg News had expected the reading to rise to 20. In October 2008, the index was at 14, and it hit a cycle low of 8 in January. The NAHB Housing Market Index measures builder perceptions of current single-family sales, sales expectations for the next six months and the traffic of prospective buyers. Readings over 50 indicate that more builders view sales conditions as good rather than poor.
In October, all three index components declined for the first time in about a year: the single-family present-sales component fell to 17 from 18 in September; single-family sales expectations for the next six months dropped to 27 from 29; and prospective buyers traffic declined to 14 from 17.

The NAHB index isn't as telling as housing starts and new/existing home sales data compiled by the U.S. Commerce Department or the S&P/Case-Shiller Home Price Survey, but economists and market analysts still monitor it because of the information on builder sentiment it provides. Essentially, it provides a window into the perception and confidence levels of builders -- clues that have predicted increased or decreased activity in the housing sector.

Further, economists follow U.S. housing activity because the sector doesn't operate in a vacuum. When homes are sold, homeowners tend to buy durable goods/big-ticket items for the new home: furniture, appliances, landscaping equipment, home-care supplies, etc. An uptrend in these areas is good news for the economy and bullish for the U.S. stock market.

What's more, October's NAHB index dip most likely will not be enough to change the narrative that the U.S. housing sector is stabilizing. That's partly because many economists say the federal government's $8,000 income tax credit for first-time home buyers and comparatively low interest rates have played a role in ending the worst housing recession in more than 25 years. Some potential home buyers who were considering buying next year have moved that purchase up to this year to take advantage of $8,000 tax credit, which ends Nov. 30.

With that expiration date in mind, the National Association of Realtors is lobbying for an extension of the program into 2010, arguing that the still-fragile U.S. housing market needs the program.

NAR Regional Vice President Joseph Canfora says the program is working, noting that 355,000 to 400,000 housing transactions are directly attributable to the credit, something the NAR believes has made a significant dent in housing inventories and has helped stabilize home prices.

Still, the largest factor in the housing sector's recovery remains market prices, many economists agree. Prices have dropped so much that home buyers with decent job security and good credit are calculating, given the slim chance of picking an absolute bottom for home prices, that now represents a decent time to purchase that home.

Even though the October reading is disappointing, investors should keep in mind that the decline was minor, it's for only one month, and the longer-term trend is still one of stabilization. Should the NAHB index continue to decline through the autumn, however, that would represent a concern. Bottom line: The U.S. housing sector is off life-support, but it's still a very weak patient -- one that could benefit from an extension of that first-time buyer tax credit, preferably through at least September 2010.
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