Are Homebuilders Losing Confidence in the Housing Recovery?

Source: Thinkstock

Source: Thinkstock

While real estate agents and home sellers are feeling optimistic about the upcoming home buying season, builder sentiment remains cautious as many consumers are still waiting until they feel more financially prepared to purchase a home.

The National Association of HomeBuilders/Wells Fargo’s index of builder confidence declined 1 point to 45 in May, compared to a downwardly revised April reading of 46. That is the lowest reading in one year. In fact, the index has now declined or held steady since last December. “After four months in which the HMI has shown little signs of fluctuation, it is clear that builder sentiment is becoming more in line with the market reality of a continuing but modest recovery,” said NAHB Chair Kevin Kelly in a press release.

The results were worse than expected. On average, economists expected the index to reach 49 this month. Any reading below 50 indicates that builders in general hold a negative view on sales conditions. In the five years before the Great Recession, the index averaged 54, and hit an all time low of 8 in early 2009. The index has now been below 50 for four consecutive months.

Although the recession technically ended in the summer of 2009, Americans are still trying to recover from the worst financial crisis since the Great Depression. “Builders are waiting for consumers to feel more secure about their financial situation,” said NAHB Chief Economist David Crowe. “Once job growth becomes more consistent, consumers will return to the market in larger numbers and that will boost builder confidence.”

The NAHB/Wells Fargo Housing Market Index (HMI) gauges builder perceptions in three areas of the real estate market, which were mixed in May. The reading for current sales conditions declined 2 points to 48, while sales expectations for the next six months increased 1 point to 57. The component gauging buyer traffic rose two points to 33.

Sentiment has been weak across the country in recent months. Looking at the three-month moving averages for regional HMI scores, the South rose 1 point to 48, but the Midwest fell 1 point to 47. The West dropped 4 points to 47, while the Northeast was unchanged at 33.

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