Summary
There are signs that support a growing return of cautious optimism among homebuilders. Surveys of builders, including the just reported National Association of Homebuilders/Wells Fargo Housing Market Index, show measurable improvement in their confidence level. Although this is strongest among single family homebuilders with moderately priced communities, traffic counts are up at many communities. In Florida, the markets I am most familiar with, builders in many communities in Tampa and Orlando report traffic of primary buyers are up 50% or more for moderately priced family oriented locations. Since markets improvement often shows up first among the primary buyers this is encouraging. It supports positive comments last week from Fed Chairman Bernanke on stabilization on the demand side of housing. The current slump seems to be finding its floor, but the improvement will be slow and the improvement likely won’t be apparent until 2008.
Analysis
The NAHB/Wells Fargo Housing Market Index (HMI) rose to 40 in February up from 35 in January. This appears to be an outgrowth of several factors. First, builders in many markets are seeing improvement in the quality and quantity of traffic (prospects) at their models. Second, new home supply has dropped nationally to under 6 months from over seven months in July, although still have a long way to go to get back to a more normal 3-4 months of supply. Third, average sales prices, which jumped 30% or more in the last three years, have fallen and are driving renewed homebuying interest and improved affordability in markets that continue to have solid job growth. Affordability was at a 15 year low nationally at the end of 2005. Fourth, cancelation rates appear to have stabilized although they are still at a very high 30% or more in many markets.
This will be a slow improvement in home sales. Builders still have excessive inventory and permits and new home construction will continue to fall in the first six months of 2007 even as sales slowly improve. In addition, the improvement won’t be in all segments. Moderately priced single family homes will lead the way, multifamily, second home and condo markets may not see improvement until much later this year or into 2008. Investors and less credit worthy buyers won’t be around to help either.
To conclude, there are solid reasons for builders to feel more optimistic. The reality, however, is that any improvement in earnings won’t appear until later in 2008 as builders rebuild backlog and adjust to the lower margins that are the new reality of the business.
