Builders Less Confident, But Still Happy to Be Here

By Robbie Whelan and Nick Timiraos

Home-builder optimism slipped in April, according to the latest survey released Monday by the National Association of Home Builders.

The index dropped for the first time in seven months to a seasonally adjusted reading of 25, down from 28 in March and February. The scale runs from 0 to 100, and any reading under 50 indicates that builders with a negative outlook on the market outnumber those with a positive one.

This month’s reading comes as a surprise, as the index has been building momentum since September. Last month’s reading had been a five-year high, and analysts had predicted the index would continue on its upward trajectory.

Research firm Raymond James & Associates, for example, upgraded a half-dozen public home-building companies Monday morning. And to boot, the NAHB’s Improving Markets Index, which counts local housing markets that are showing positive signs of a turnaround, grew to 101 in April.

So what’s happening, exactly?

The main take-away from Monday’s survey is that buyer traffic at new-home developments has been off to a strong start this year, but those would-be buyers haven’t been signing on the dotted line to close deals, at least not yet. If this continues, it could set us up for a rerun of last year’s disappointing spring season.

“What we’re seeing is essentially a pause in what had been a fairly rapid build-up in builder confidence that started last September,” said NAHB Chief Economist David Crowe in a news release. “This is partly because interest expressed by buyers in the past few months has yet to translate into expected sales activity,” because of tight credit, competition from foreclosed homes and “problems with obtaining accurate appraisals.”

But a few economists have posited an alternate explanation: maybe builders have been optimistic because they’re still in business. Economists Ethan Harris and Michelle Meyer at Bank of America Merrill Lynch made this point in a January research note:

In our view, the growing gap — with builders seeing an improvement in sales, but overall sales flat — is consistent with consolidation in the industry. Single family home building is picking up, as long as you are still in business.

Mr. Harris co-authored a paper in February that elaborated on this point:

Before we break out the champagne, however, the improvement in home builder expectations probably reflects the rationalization of the industry. Many builders have dropped out of the business or have merged, leaving the market to bigger builders that have the financial wherewithal to withstand the recession. This explains why the home builder views of sales have improved, but actual aggregate sales have not.

Housing starts appear to have hit a bottom, as do new-home sales, which were up by 10% and 11% from their year earlier levels in January and February, respectively. But whether that leads to month-over-month gains depends on buyers taking the plunge, and with foreclosures continuing to provide stiff competition, it’s still an open question how builders will fare this spring.

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