Fall Housing Report: Builders Lose Confidence as Washington Squabbles

With key government data on the economy unavailable for more than two weeks due to the federal government shutdown, privately-generated indicators of economic conditions have been especially valuable. The October 16 release of the latest figures from the NAHB/Wells Fargo Housing Market Index provided one of these much-needed windows into the latest conditions for the fall housing market. Unfortunately though, the news was not good.

So far in 2013, the housing market has been a bright spot for the economy, but the government budget crisis may have put a strain on the real estate recovery. This is not the first challenge housing has faced this year, but the key question going forward is whether housing can put these challenges behind it, or whether a recent downturn in the NAHB/Wells Fargo Housing Market Index is the shape of things to come.

Signs of Weakness in Builder Confidence

The NAHB is the National Association of Home Builders, and they have compiled a Housing Market Index for 25 years. The NAHB/Wells Fargo Housing Market Index surveys builders about current and prospective conditions in residential housing. An index reading above 50 means that most builders are optimistic about conditions, while a reading below 50 means that pessimists outnumber optimists.

Thus, this index can provide two primary types of insight into what builders are seeing in the marketplace - whether most perceive conditions as favorable or unfavorable, and whether the trend is towards a strengthening or weakening of those conditions.

NAHB Chart on Home Building Report

Unfortunately, the overall NAHB/Wells Fargo Housing Market Index slipped by two points in October, to a level of 55. The silver lining is that with the reading still safely above 50, most builders still see conditions as positive. This continuing optimism is a significant departure from recent years. When the index crossed above 50 this past June, it was the first time it had been in optimistic territory for over seven years.

Building conditions have far-reaching implications for the fall housing market. Housing prices, such as those reported by the S&P/Case-Shiller Home Price Indices, measure what people are paying for houses, but home price information tends to be on the back end of market activity. What builders are seeing in the marketplace can provide some indication as to where home price trends may be heading. Most notably, the NAHB/Wells Fargo Housing Market Index dropped below the crucial 50 level just three months before housing prices peaked in 2006.

In turn, housing prices affect not just home buyers and sellers, but also existing home owners who are contemplating a home equity loan or want to refinance a mortgage. As of now, the level of the NAHB/Wells Fargo Housing Market Index does not suggest a downturn in prices is imminent, but the weakening trend bears watching - October was the second consecutive month in which the index declined.

Outlook Bleakest in the Northeast

Of course, national figures can only tell so much about actual conditions because real estate is highly localized. Regional breakdowns of the NAHB/Wells Fargo Housing Market Index tell markedly different stories from one part of the country to the next.

Regional readings for the index range from a high of 65 in the Midwest to a low of 31 in the Northeast. The South and West readings each came in above 50, at 54 and 58, respectively.

What may be most disturbing about that weak reading in the Northeast is this region also experienced the sharpest single-month drop in October, plummeting 13 points (rarely a lucky number!) from the September level. In short, builders not only see conditions in the Northeast as the weakest in the nation already, but they also seem to be deteriorating most quickly.

For residents of the Northeast, anyone looking to sell a home or refinance a mortgage might take this as a sign to get a deal done quickly. In contrast, prospective home buyers in the region might be inclined to bide their time and drive a hard bargain.

Leaving Twin Challenges Behind

The fading optimism among builders may have something to do with the government shutdown and debt ceiling debate. This would not be the first challenge the housing market has faced this year. 30-year fixed mortgage rates rose by more than a full percentage point in just eight weeks between early May and late June of this year, according to mortgage finance company Freddie Mac. Despite that, housing prices and builder optimism continued to grow during this period.

Since then, mortgage rates have settled down. Now, with the shutdown temporarily resolved, the question becomes whether the housing market can put this latest challenge behind it, or if the uncertainty involved has set a downward trend in motion. The next release of the NAHB/Wells Fargo Housing Market Index may provide an early clue as to what the answer is.

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