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Homebuilder Growing Pains – Why Builder Confidence is Slowing Down

by Peter Thomas Ricci

For the third straight month, builder confidence, as measured by the NAHB, has stalled; should we be worried about homebuilding in 2013?

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Builder confidence for the newly built, single-family home market waned yet again in March, with the National Association of Home Builders/Wells Fargo Housing Market Index falling two points to an index reading of 44.

That’s the third straight month of flat/negative growth for the Housing Market Index, after eight consecutive months of superlative growth, and as Rick Judson, the current chairman of the NAHB, explained it, the reason for builder confidence tapering as it has is a simple one: the radical growth in homebuilding in 2012 has run into a market-induced ceiling.

“Although many of our members are reporting increased demand for new homes in their markets, their enthusiasm is being tempered by frustrating bottlenecks in the supply chain for developed lots along with rising costs for building materials and labor,” Judson said. “At the same time, problems with appraisals and credit availability remain considerable obstacles to completing deals.”

A Tale of Two Housing Market Indexes

And indeed, the specific components of the Housing Market Index do tell an interesting story:

  • The component measuring current sales conditions, as can be expected by Judson’s comments, declined four points to 47.
  • However, the components measuring sales expectations in the next six months and traffic of prospective buyers both posted gains, rising one point to respective levels of 51 and 35; any measure over 50 indicates that more builders see conditions as good than bad, and builders’ positive sales expectations no doubt explain yesterday’s strong homebuilding stats from the Census Bureau.
  • Regionally, the West posted the strong Housing Market Index, rising four points to 58; the Midwest and the South both fell a point to 47 and 46, respectively, and the Northeast was unchanged at 39.

So, what does all this mean? As the NAHB’s economic whiz, Chief Economist David Crowe, framed it, the homebuilding sector had lots of space to grow in 2012, but things may be a bit more bumpy and gradual in the coming months.

“In addition to tight credit and below-price appraisals, homebuilding is beginning to suffer growth pains as the infrastructure that supports it tries to re-establish itself,” Crowe said. “During the Great Recession, the industry lost homebuilding firms, building material production capacity, workers who retreated to other sectors and the pipeline of developed lots. The road to a housing recovery will be a bumpy one until these issues are addressed, but in the meantime, builders are much more optimistic today than they were at this time last year.”

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