Builder Confidence Back to 2005 (Peak!) Levels

Home builders are feeling more confident than they have any time since the (2005) peak of the housing market.  Builder confidence in the market for newly-built single-family homes jumped six points to a level of 71 on the National Association of Home Builders/Wells Fargo Housing Market Index (HMI). This is the highest reading since June 2005, which was a period when home prices were rising at double-digit rates and housing starts were running at an annual pace of more than 2.2 million.

Deregulation Plays a Role

The surge in builder confidence was driven in part by the relaxation of regulations that relate to home building, according to the builder group that administers the survey.  The chairman of the National Association of Home Builders, Granger MacDonald, said in their news release, “(b)uilders are buoyed by President Trump’s actions on regulatory reform, particularly his recent executive order to rescind or revise the Waters of the U.S. rule that impacts permitting.”

President Trump has expressed concern that an excess of regulation is impeding home builders’ ability to build homes fast enough and affordably enough to keep up with demand.  Mr. Trump explained his position in a press conference while signing the executive order to rescind or revise the Waters of the U.S. rule (WOTUS):  “If you want to build a new home, for example, you have to worry about getting hit with a huge fine if you fill in as much as a puddle — just a puddle — on your lot.”

High Confidence in Current and Future Sales

The HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months, rating them as “good,” “fair” or “poor.”  The survey also asks builders to rate “traffic” (the flow of prospective buyers through their sales centers) as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.  The new reading, at 71, demonstrates strong builder confidence, and, more significantly, a huge improvement in confidence since the election.

Home BUYERS are Confident TOO!

The HMI tracks current conditions, future sales expectations, and buyer traffic.  The component gauging current sales conditions increased seven points to 78 while the index charting sales expectations in the next six months rose five points to 78.  Meanwhile, the component measuring buyer traffic jumped eight points to 54, proving that it’s not all about regulations regarding wetlands; it’s also about greater confidence among home BUYERS!  More people in a positive equity position and more people with jobs means more people willing and able to move to a different home.

The challenges that are the most daunting for home builders are the shortage of lots in locations where they want to build (i.e., where there is proven demand), and the shortage of skilled tradespeople.  As I have discussed recently, these constraints will keep housing starts moving upward at a measured rate for the next few years.  Single-family starts go up about 12% this year in our latest forecast.

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