Home Builders are ebullient

Home builder confidence jumped to 71 in March, up from 65 in February and vs expectations of no change. This is the highest level since June 2005 when this figure peaked at 72. Of course the level of activity today is nowhere near the level then and again reflects that these sentiment numbers only measure the direction of change. Present conditions rose by 7 pts to 78 and the Outlook was higher by 5 pts to 78. Also of note, Prospective Buyers Traffic was higher by 8 pts to 54 and the best level since July 2005. The NAHB is pointing to the hoped for regulatory relief as the main catalyst for this survey rise. “Builders are buoyed by President Trump’s actions on regulatory reform, particularly his recent executive order to rescind or revise the waters of the US rule that impacts permitting.” That would be great but here are the caveats and the core fundamental supply/demand drivers of the industry: “Builders continue to face a number of challenges, including rising material prices, higher mortgage rates, and shortages of lots and labor.”

Bottom line, it’s great to see this level of confidence but when we see extreme reads on confidence, it typically doesn’t last and says nothing accurate about future activity and is thus more coincident in nature. In the late 1990’s expansion, new home sales peaked in November 1998 and the level wasn’t exceeded until August 2002. In the mid 2000’s, it peaked in July 2005. The late 1990’s NAHB builder survey peaked in December 1998 and did so again in June 2005. I’m not trying to be a Debbie Downer here but just wanted you not to get too carried away with confidence numbers as indicators of home building to come. Hopefully it will happen of course but just wanted to put things into perspective as I always like to do.

Here is a chart of this sentiment index (in white) vs new home sales (in orange):