Home Builders' Confidence Index Dips Again in March

The housing market is taking a detour from bad back to worse, based on the opinions of the U.S. home builders: The National Association of Home Builders announced Monday that its Housing Market Index fell to 15 in March from 17 in February. The NAHB Housing Market Index measures builders' perceptions of current single-family home sales, sales expectations for the next six months, and the traffic of prospective buyers. Index levels over 50 indicate that more builders view sales conditions as good than poor.

The consensus of economists surveyed by Bloomberg News had been for the index to remain unchanged in March; the index was at 15 in January and 16 in December. In February 2009, the index was at 9, and it hit a cycle-low of 8 in January 2009.

"Unusually poor weather conditions certainly had a negative effect on builders' business in February," NAHB Chairman Bob Jones said, in a statement. "At the same time, the continual flow of distressed properties priced below the cost of production is having an adverse effect on new-home appraisals and also making it tough for builders' customers to sell their existing homes."

All Three Components Drop

All three components of the index fell in March, reversing February's across the board gains. The current sales conditions component declined 2 points to 15, the six-month sales expectations component fell 3 points to 24, and the component gauging traffic of prospective buyers declined 2 points to 10.

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

Further, economists follow U.S. housing activity because the sector does not exist in a vacuum. When people buy homes, they tend to buy durable goods and big ticket items as well: furniture, appliances, landscaping equipment, home care supplies, etc. -- and positive trends in those sectors are good news for the economy and bullish signs for the U.S. stock market.

March's disappointing home builder sentiment suggests a housing sector in a young, fragile recovery. Builders are understandably cautious, given the large supply of unsold new and existing homes, the still-too-high foreclosure rate, and credit markets that are in the process of healing. Further, while the top line March stat of 15 is an improvement from March 2009's level of 9, it still reveals a sector deeply in need of demand from all sources, including those home purchases prompted by the federal government's tax credits for home buyers. (The program, which offers an $8,000 credit for first-time home buyers or a $6,500 credit for repeat buyers, expires April 30, 2010.)