Homebuilder Confidence Falls to a 17-Month Low

National Association of Home Builders/Wells Fargo Housing Market Index
National Association of Home Builders/Wells Fargo Housing Market Index

The U.S. housing sector took another hit this month according to the National Association of Home Builders' Housing Market Index, which unexpectedly fell to 13 in August -- a 17-month low -- as homebuilder confidence continued to drift lower following the end of the federal homebuyers tax credit this spring.

Economists surveyed by Bloomberg had expected the index to rise to 15 in August from 14 in July. The index was at 17 in June. It hit a cycle-low of 8 in January 2009 and an all-time high of 72 in June 2005. Index levels over 50 indicate that more builders view sales conditions as good than poor.

Two of the index's three components fell in August. The component gauging current sales conditions dipped to 14 from 15 in July, and the six-month sales expectations component declined to 18 from 21. Traffic of prospective buyers component was unchanged at 10.

However, the report did offer one modest bright spot: Though the housing market index fell in three of the four U.S. regions, results for the Midwest region held even in August at 15. Regional indexes declined 1 point in the South and West, to 13 and 8, respectively; and plunged 6 points to 18 in the Northeast.

Excess Inventory Weighing on Builder Sentiment

NAHB chief economist David Crowe said the attitude of homebuilders reflects a sector that's still trying to come to terms with the large inventory of unsold homes stemming from a smaller U.S. workforce and a large increase in foreclosed homes.

"Today's report reflects single-family home builders' concerns about current and future economic conditions and about the increasing hesitancy they are seeing among potential home buyers," Crowe said in a statement. "It also reflects the frustration that builders are feeling regarding the effects that foreclosed property sales are having on the new-homes market, with 87% of respondents reporting that their market has been negatively impacted by foreclosures."

Still, Crowe said the NAHB continues to expect improving housing market conditions in the second half of 2010, compared to the first half. Modest job growth, historically low mortgage rates, and pent-up demand will ensure a better housing market in the second half of the year, he said.

Earlier Gains Were Tax-Credit Dependent

Although not as telling as housing starts and new/existing home sales data, 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.

August's homebuilder confidence report confirms a housing sector that's moving sideways at best, if not retrenching. Investors can now add falling this measure to rising inventories of new homes and existing homes to the housing sector's concerns. Taken together, the metrics, which have reversed roughly in sync with the end of the homebuyers tax credit, indicate that a considerable fraction of home sales and builder activity was dependent on the credit, and that employment gains and low mortgage rates haven't bee enough to extend the housing sector's recovery.

Absent substantial job growth, a tax credit renewal or some other stimulus, the U.S. housing sector is likley to remain sluggish in the quarters ahead.