| Builder Attitudes Sink to New Lows |
| Written by Jonathan Smoke | |
| 11.20.2008 | |
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Discuss this article on the forums. (0 posts) Given the overall funk that the entire world economy is going through at present, it is no surprise that the primary gauge of homebuilder sentiment hit new lows for its November reading. The National Association of Home Builders reported earlier this week that “[b]uilder confidence plunged in November as worsening problems in the financial markets, job market weakness and overwhelming uncertainty about the economy continued to negatively impact consumer behavior.” The reading of the Housing Market Index hit a new recorded low of 9. For a frame of reference, since the survey series began in 1985, the HMI number had never been in the teens until this year. Now we hit number 9. The one comforting factor I can see in the data is that while the underlying measures of traffic and current market conditions plummeted 40%, the sentiment about the next 6 months was unchanged at 19. That may sound like lemonade being made, and it is, but I would be even more worried if the view of the future didn't look somewhat better. The index and its components have historically revealed that builders are almost always more optimistic about the future than present in both good times and bad. So you’d think that means that builders are perennial optimists, and that optimism is why the industry can get caught with too rosy projections when the market is going well so that prices spent on land can get out of hand and too much land is put into the pipeline. Take a look at the above chart where I’ve plotted the overall HMI measure (blue) and the measure for current traffic (purple) on the left axis and plotted new home sales (orange) for the same months on the right axis. It’s interesting to note—and it’s what I’d expect—that in the last national housing downturn of 90-91 all three measures trended down at the same time and converged to the same relative levels. So, builders didn’t feel good because traffic was down and indeed traffic was not delivering a good volume of sales. Also note that the level of sales was always relatively lower than the builders’ sentiment and perception of traffic until we reached this decade. Also with few exceptions the traffic reading bobbed along with new home sales—until this decade. Starting in 2000, sales became relatively unhinged from these sentiment readings. Until looking at this I never would have guessed that builders’ attitudes peaked in the 1990s and not at the height of the 2005 boom and bubble. Clearly we had some areas of the country not experiencing the boom, for example the Midwest was already hurting from declines in the automotive industry and manufacturing, so that may be part of the reason. But there seems to be more going on in this shift than a tale of two types of markets this decade. Does this mean that builders have been relatively less optimistic this decade? Does it now take more to make them feel good about the market? Another possibility for the divergence is that the representation of builders in the survey may not be what it was in prior decades. After all, the large private and public builders have been growing in market share each decade. Regardless of the reason, it is fascinating to note that while the total level of sales is higher now than the lowest point in 1990, builders feel far more negative about the market. 
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