Like a building that survives a storm with some wear and tear but still standing soundly, the National Association of Home Builders/Wells Fargo Housing Market Index (HMI) came through the government shutdown with some bad marks, but still generally intact.
The HMI is an important indicator of where housing prices may be heading. It surveys the optimism of homebuilders and compares how the overall level of optimism has changed over time. Whereas housing price indexes such as the S&P/Case-Shiller Home Price Index give valuable information on how home prices have already been affected, the HMI is more of a glimpse into the future. Homebuilders see the housing market -- figuratively as well as literally -- from the ground up, reacting to changes in local demand and looking ahead to adjust their plans to changing conditions.
Glass Half Full or Half Empty?
On November 18, the National Association of Home Builders reported that the national HMI scored a reading of 54 for November. The HMI is a measure of builder optimism, and how you interpret November's reading may itself be a function of whether or not you are an optimist or pessimist.
The optimistic view is that November's reading is unchanged from October's, and any level for the HMI that is over 50 means that more builders are optimistic than pessimistic. So, a level of 54 suggests that optimism is still the prevailing mood among builders.
The pessimistic view is that the only reason the November level of 54 did not represent a decline in the HMI is that October's original reading was revised downward, from 55 to 54. Also, the current level of 54 is now 4 points lower than the recent peak reached this past August, and considerably lower than the all-time high of 77 reached in 1998 and 1999.
The Northeast Lagging but Improving
This good news/bad news view of the national number could also be applied to the regional HMI figures. The bad news regionally is that the Northeast continues to lag the other regions, and that the HMI for the Midwest fell pretty steeply in November, from 62 to 54.
The good news regionally is that while the Northeast remains the only region win an HMI reading below 50, at least it improved considerably in November. The Northeast HMI jumped from 30 to 44, equaling the highest level it has been since 2006. With that leap forward plus a more modest improvement in the South, two of the four regional HMI readings improved in November.
Two significant economic developments in early November may help boost builder confidence going forward. The Bureau of Economic Analysis announced that GDP growth accelerated in the third quarter, and the Bureau of Labor Statistics announced that new job creation was unexpectedly strong in October.
The only downside to those developments is that a strengthening economy tends to send interest rates higher. According to Fannie Mae, 30-year fixed mortgage rates jumped by 25 basis points in the first two weeks of November. Even so, current home loan rates are still lower than they were in August, and it should be noted that the national HMI managed to peak during that same month, despite higher mortgage rates.
In short, existing home owners might be willing to accept slightly higher mortgage rates if rising home equity levels give them a wider range of home loan options, such as refinancing or home equity loans. The good news/bad news nature of this month's HMI release leaves the future direction of housing prices up in the air. Home owners with an eye on their home equity levels should watch to see if the HMI can build on recent economic momentum and head in a more decidedly optimistic direction next month.