Home-Builder Confidence Plunges After Tax Credit Expires

Home-builder confidence plunged in June, as builders became more reserved after the home-buyer tax credit expired on April 30, the National Association of Home Builders said. The NAHB's housing market index plummeted to 17 in June from 22 in May.

Readings over 50 indicate that the number of builders who view sales conditions as "good" exceeds those who view sales conditions as "poor." The index has been below 50 for 50 consecutive months. It hit an all-time low of 8 in January 2009, and an all-time high of 72 in June 2005.

All three of the index's components fell in June. The current sales conditions component fell to 17 from 22; the six-month sales expectations component declined to 23 from 27, and the traffic-of-prospective-buyers component dipped to 14 from 16.

In addition, the housing market index in June dropped in every U.S. region: from 18 to 17 in the Northeast; from 17 to 14 in the Midwest; from 22 to 19 in the South; and from 19 to 15 in the West.

Drop in Index Was Expected

David Crowe, NAHB chief economist, said the association expected a decline in the index, due to the end of the federal government's home-buyer tax incentive.

"We expected some softening in the market following the expiration of the home-buyer tax credit and this report seems to verify this assumption," Crowe said Tuesday in a statement. "In the coming months, an improving economy, rising employment, low mortgage rates, and stabilizing home values should help the housing market move forward."

If Crowe is correct regarding improved economic fundamentals, brighter days will be ahead for home builders and other housing-sector participants. However, so far the economic fundamentals have sketched a less-clear picture: An uneven expansion with significant headwinds. True, mortgage rates remain comparatively low, but lender qualification requirements are high, reducing the pool of potential home buyers. Home prices show signs of stabilizing in numerous metropolitan areas, but they could quickly soften if home-buyer demand dips, with employment gains setting the tone for both home prices and the pace of sales.

And regarding employment gains, May's poor, non-farm payroll report, which indicated that fewer than 50,000 private sector jobs were added in the month, has provided more evidence for the economic bears, who argue that job growth is inadequate to sustain the expansion.

Add a potential, general U.S. economic slowdown on reduced sales to Europe, due to its debt crisis, and one can see why builders' confidence would dip on the heels of the tax credit's end: The tax credit may have been the strongest "economic" fundamental in the batch -- something Capitol Hill policy makers may take note of. Perhaps a third installment of the tax credit would be worthy of consideration.