Home Builders' Confidence Index Plummets to Lowest Point Since April 2009

Economic difficulties, tight consumer credit, and end of tax credit push index down

The National Association of Home Builders (NAHB)/Wells Fargo housing market index showed builders' confidence in the newly built, single-family housing market dropped to its lowest point since April 2009, down two points to a reading of 14 in July, according to the index released Monday, July 19.

Analysts had expected the NAHB housing market index to hold steady at 16 in July, the same as its revised reading of 16 in June. Index readings above 50 indicate that home builders are optimistic about their prospects.

Economic difficulties, tight consumer credit, and the end of the federal tax credit program were blamed for the drop in confidence.

"We continue to see a lull in home buying activity following the expiration of the federal home buyer tax credit program, as many of the sales that would have occurred this summer were likely pulled forward to meet that program's deadline," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Michigan, in the July NAHB index release. "In addition, builders are reporting continuing consumer hesitancy regarding home purchases due to uncertainty in the overall economy and job markets."

Further, the lower index reflects underlying market conditions such as hesitant home buyers, tight consumer credit, and continuing competition from foreclosed and distressed properties that are priced below the cost of construction, said NAHB Chief Economist David Crowe.

"The pause in sales following expiration of the home buyer tax credits is turning out to be longer than anticipated due to the sluggish pace of improvement in the rest of the economy," Crowe explained. "That said, we do believe that favorable factors such as low mortgage rates, affordable prices, and demographic trends will help revive consumer demand for new homes this year, and that new-home sales will improve by 10% in 2010 from 2009."

In a preview of this week's economic data, Bank of America Merrill Lynch said that the housing market will take center stage this week as builder sentiment, housing starts, and existing home sales are all released. "With the homebuyer tax credit pulling sales forward into the spring, we expect the general tone of the data to be weak," the analysts said in a note. "Home builders continue to face severe headwinds: the months' supply of new homes for sale remains elevated, new home sale prices are at a large premium to existing home sale prices and finally, credit remains tight for the new home buyer as well as the new home builder. These adverse conditions are not expected to ease anytime soon."

Each of the NAHB index's component indexes recorded declines in July, including current sales conditions, sales expectations for the next six months, and traffic of prospective buyers.

Majestic Research analysts in a July 15 second-quarter preview also pointed to the glut of housing inventory this summer: "Existing homes continue to pile onto the market, new home standing specs are higher than anticipated, and some states will see mortgage resets send more product back into the market as distressed or 'motivated' sales," they wrote in an analyst note.

Regionally, the index results were mixed in July, the NAHB index showed. The Northeast, which has a smaller survey sample and therefore is prone to greater monthly volatility, posted a seven-point increase to 23 this month, while the Midwest posted a one-point improvement to 15. The South and West each posted five-point declines to 14 and 9, respectively.

Read a story about June's NAHB/Wells Fargo housing index from the archives of InvestmentAdvisor.com.

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