Construction of a wood-framed house, courtesy of Wikimedia Commons user Jaksmata, CC BY-SA 3.0.
We’ve written numerous posts on how the housing market has rebounded since the Great Recession. Today home sales are on the rise, and they are pushing up prices as well. However, one group we haven’t examined much recently is the builders.
Builder sentiment, like the housing market, is on the move in the right direction. The Housing Market Index (HMI), managed by the National Association of Home Builders (NAHB) in partnership with Wells Fargo, is a benchmark measure of the new-home construction industry’s outlook for home sales in the next 6 months. This month, the NAHB/Wells Fargo HMI is now at a 9-year high of 61 after 2 months at 60. Readings above 50 indicate that the majority of builders believe the market conditions are favorable for new-home sales.
The index has been above 50 since 2014. In January 2009, the index plummeted to 8 as the financial crisis took full effect. The current 61 is still well below the peak of 80 the index reached in January 2006. However, with the housing market improving and home sales strong, home builder confidence could continue to push higher in the coming months.
Chart data from the NAHB/Wells Fargo Housing Market Index and the U.S. Census Bureau.
Builders have had plenty to be excited about so far this year. The unemployment rate has dropped significantly since the Great Recession, when it reached 10%. Today it hovers around 5.3% with strong job reports announced almost every month so far this year, which means we’re not too far from what most economists would consider full employment. With more people now working, more first-time homebuyers are looking to find the perfect house.
And this has been a banner year for home sales, as new-home sales through the first half of 2015 are up 21.2% from 2014. Mortgage rates are also helping to bring in potential homebuyers. Rates are still less than 4% for 30-year fixed mortgages at the moment, giving buyers some of the lowest rates ever.
New homes are a big draw, and as we mentioned in a previous post, buyers of newly constructed homes are often willing to spend more money to get a customized home. The median sales price of new houses sold in June 2015 was $281,800, compared to a median price of $236,400 for existing homes. However, according to NAHB, after controlling for quality, new home prices have risen less than existing home prices, and this trend will likely need to shift if supply is going to keep up with demand.
Builders are having some issues keeping up with the demand. A lack of both skilled labor and available lots to purchase have kept builder confidence from surging higher. Additionally, prices for supplies continue to rise, limiting the profit builders can get on homes. The Producer Price Index (PPI) from the U.S. Bureau of Labor Statistics showed that lumber and wood product prices increased for the second month in a row. Builders paid 2.4% more in July after a 1% increase the prior month.
Overall, builders are enjoying the housing boom and the strong summer housing market. Do you think builders will continue to see a strong push for new homes? Leave your thoughts in the comments.
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