Home Builder Confidence Dropped in June; Import Prices Fell in May

End of federal tax credit results in lax home sales as strong dollar raises risk of deflation

After two consecutive monthly gains, builder confidence in June for the newly built single-family home market fell back to February levels, before the beginning of the home buyer tax credit-related surge, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released Tuesday, June 15.

The HMI in June dropped five points to 17.

"The home buyer tax credit did its job in stoking spring sales and we expected a temporary pull back in the builders' outlook after the credit expired at the end of April," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Michigan. "However, the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels."

Each of the HMI's component indexes recorded declines in June. The component gauging current sales conditions fell five points to 17, while the component gauging sales expectations for the next six months declined four points to 23 (from a one-point downward revised index level of 27 in May) and the component gauging traffic of prospective buyers fell two points to 14. The HMI posted losses in every region of the country.

Analysts at High Frequency Economics (HFE) in Valhalla, New York, predicted that the pipeline of prospective buyers would dry up, judging from the "startling plunge" in mortgage applications in the weeks since the expiration of the tax credit on April 30.

Meanwhile, the NAHB's chief economist said the association had expected some softening in the market following the expiration of the home buyer tax credit, and this report verified that assumption.

"In the coming months, an improving economy, rising employment, low mortgage rates and stabilizing home values should help the housing market move forward," said Chief Economist David Crowe in a NAHB release. "But as today's HMI data shows, builders still remain very cautious and are aware that several factors could impede the nascent housing recovery, including serious problems in obtaining financing for the production of housing, faulty appraisal practices and competition from short sales and foreclosed properties."

In other economic news on June 15, the Bureau of Labor Statistics report on U.S. import prices showed a decline of 0.6% in May after rising 1.1% in April and 0.4% in March. The decrease was led by falling fuel prices, which more than offset a rise in nonfuel prices. In contrast, the price index for U.S. exports increased 0.7% in May following increases of 1.2% and 0.7% in April and March, respectively.

An effect of falling import prices is to put pressure on the price of all domestically produced goods that compete with imports, said HFE Chief U.S. Economist Ian Shepherdson in an analyst note. The greater the downward pressure on import prices relative to domestic inflation, the bigger the drop in domestic inflation, he added.

"Our concern now is that the impact of the strengthening dollar will make itself felt next spring, when we think core inflation will already be down to zero," Shepherdson said. "The U.S. does not need a stronger dollar right now, but in the face of existential threats to the euro, which are most unlikely to dissipate anytime soon, that's exactly what it will get."

Read a story about the May home builders report from the archives of InvestmentAdvisor.com.

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