Homebuilder Confidence Rises to Six Month High

Good news for the homebuilding industry came earlier this week when the National Association of Homebuilders/Wells Fargo released the housing market index. Its numbers showed that homebuilders’ confidence rose to 49 points, which is just one point shy of an index that indicates favorable home-selling conditions and the highest reading since last December. The 49 point number is a pleasant surprise considering that economists polled by MarketWatch expected the June index to only reach 47.

Generally, an index above 50 suggests that homebuilders view home sales conditions as more favorable than not. Despite the positive jump, the index is still far short of last year’s peak of 58. In fact, the index has been below 50 points since February 2014, while for the eight months prior to February, it had been above 50 points.

There are several possible reasons that may explain why the index has not increased to its pre-February numbers:

1. Lack of Experienced Crews: Builders have experienced a difficult time finding and retaining construction crews that they can count on. Builders have more optimism when they know they are using crews that will complete a house on schedule.
2. Volatile Job Market: Many potential home buyers may be hesitant to purchase new homes until they have greater job security. The chief economist for the National Association of Homebuilders noted that, “[c]onsumers are still hesitant, and are waiting for clear signals of full-fledge economic recovery before making a home purchase.”
3. Strict Lending Conditions: Tighter credit conditions and federal standards have been put into place to prevent another housing crisis similar to 2004-2008. Tighter credit standards make it difficult for many potential homebuyers to purchase homes.
4. Lot Shortages: The process of zoning, preparing and developing a lot for home construction can take years. A lack of financing for land developers has led to a shortage of lots for homebuilders to build on.

Notwithstanding lingering effects, the circumstances that have been contributing to a lack in homebuilder confidence are slowly beginning to improve. Job creation has increased nationwide for several consecutive months, which should in turn promote confidence in job security and increase homebuyer purchasing power. Lending conditions are also slowly improving. Generally speaking, homebuilder confidence is on an upward trend indicating positive signs for the 2014 housing forecast.