U.S. Homebuilders Gain a Little Confidence in February

More encouraging news on the housing front, as the National Association of Home Builders Housing Market Index -- boosted by the federal homebuyer tax credit -- unexpectedly rose to 17 in February from 15 in January -- the first gain in five months for the index. This measure gathers builders' perceptions of current single-family sales, sales expectations for the next six months and traffic of prospective buyers. Readings over 50 indicate that more builders view sales conditions as good than poor.A Bloomberg News economists survey had expected the index to rise to 16 in January. It was 16 in December and 17 in both November and October. A year ago, in February 2009, it was 9, and it hit a cycle low of 8 in January 2009.

"Builders are just beginning to see the anticipated effects of the homebuyer tax credit on consumer demand," NAHB Chief Economist David Crowe said in a statement. "Meanwhile, another source of encouragement is the improving employment market, which is key to any sustainable economic or housing recovery. That said, several limiting factors are still weighing down builder expectations, including the large number of foreclosed homes on the market, the lack of available credit for new and existing projects and inappropriately low appraisals tied to the use of distressed properties as [comparable sales]."

Further, two of the index's three components rose in February. The current sales conditions component increased 2 points to 17, and the six-month sales expectations component rose 1 point to 27. The component gauging traffic of prospective buyers was unchanged at 12.

A Window Into Builders' Perceptions

Although not 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, the NAHB index gets attention from economists and market analysts because of the information on builder sentiment it provides. Essentially, it offers a window into builders' perceptions and confidence levels -- clues that have predicted increased/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 each of which is good news for the economy and bullish for the U.S. stock market.

The pessimist will cite that home sale increases from the federal homebuyer credit are distorting the market and that they don't represent organic sales gains, because they are merely "advancing" home sales that would have occurred later, to the present -- the period with the federal tax credit.

Maybe This Spring

But look at it from home builders' standpoint: They view the federal tax credit as providing a bridge until the U.S. economy is strong enough to propel sales increases -- and by extension, builder activity -- on its own. The hope is that the resumption of job growth in the spring will be enough to at least maintain demand to both reduce inventories and inspire new home construction.

To be sure, the U.S. economy is a long way from robust monthly job-growth conditions, but the incremental strengthening of the expansion in the past three months is encouraging.
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