Tuesday, July 19, 2011

Builder Optimism Misplaced


Homebuilder Confidence in U.S. Rises More Than Estimated, NAHB Index Shows trumpeted the Bloomberg headline this morning. But the component numbers tell a different story.

The Wells Fargo/NAHB Housing market index is a regular component of my regular housing market reports to subscribers of the Wall Street Examiner Professional Edition. Housing, though far less significant a component of US economic activity is still a critical element, if not the most critical, to the health of the US financial system. Bloated financial institution balance sheet asset values have yet to reflect the full extent of the carnage to collateral values. As long as the housing market remains moribund, the pressure on the system will remain constant, if not increasing.

This is why the US housing market remains a crucial element in my research on market liquidity- that and the fact that I spent 15 years spent as a commercial real estate appraiser including performing market studies and appraisals of residential developments. I have a very clear picture of the direct connection between the value of the collateral and the value of the paper that it is backing. I know from first hand experience that a big part of the supposed assets backing our bank deposits are is worthless crap, and I see no sign of that changing any time soon.

With that happy thought as a preface, here's a quick rundown on the latest data from the NAHB. The NAHB home builders survey uses "a diffusion index on a scale of 0 to 100, based on a survey of builders. The index has 3 components--current sales, model home sales traffic, and builder expectations for 6 months hence rated on the basis of good, fair, or lousy. The most important of these is traffic, which reflects future sales. Anything below 50 means that more builders rate conditions as poor or very poor, rather than good or very good." Housing Indicators Show Lower Seasonal Peak

The HMI rose from 13 in June to 15 in July. That's the "good" news, but there was a catch. As bad as that was, the gain was based mostly on a big jump in the expectations component which surged from 15 to 22. Now I ask you, how would a builder have any clue what conditions would be like 6 months from now? Right. They don't. True, the present conditions index rose from 13 to 15, but that is not material in the overall scheme of things. The key number is still traffic, because without traffic you can't have sales, and weak traffic foreshadows weak sales. Traffic was unchanged at 12. Just so you can keep the big picture in perspective, here's what it looks like.
NAHB Housing Market Index and Traffic of Perspective Buyers- Chart- Click to enlarge

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