Builders View Housing with Cautious Optimism

On the surface, it's a sign of strength in the housing market. The National Association of Home Builders/Wells Fargo Housing Market Index release for December showed a seasonally-adjusted gain of four points, allowing it to end a good year on a strong note. However, looking at the numbers a little more closely shows that the housing outlook may not be all wine and roses.

The National Association of Home Builders (NAHB) surveys builders of single-family homes to get their take on both current conditions and the near future. Any reading for the Housing Market Index (HMI) of more than 50 shows that there is more optimism than pessimism among builders. The HMI reading for December was 58, up from 54 in November. This indicates that builders are generally optimistic and are feeling better about things now than they were a month ago.

However, there are also signs of weakness in some of the numbers, from a suggestion that momentum is fading to signs of lingering regional weakness. The question remains whether the housing market has been wholly dependent on unnaturally low mortgage rates, or if it can sustain its recovery even as rates return to normal.

Moving forward, or treading water?

The improvement of four points in the HMI for December is a move in the right direction, as is the overall improvement of eleven points for 2013. However, virtually all of this year's improvement had already occurred by the end of the summer. December's HMI level of 58 is exactly the same as it was at the end of August.

Remember, these numbers are seasonally-adjusted, so the weaker performance of the HMI in recent months cannot be attributed to the cooling of the weather. Though the HMI is still squarely in optimistic territory, after four months it is a fair question whether the market is still making progress or is simply treading water.

Regional differences

Weak points in the housing market become even more apparent when you look at regional figures. The South is the only region where the HMI has improved since the end of July. Also, while the South, Midwest, and West all improved in December, the HMI for the Northeast declined by four points.

The Northeast has been a lingering problem for the housing market. Its regional HMI sits at just 40, and hasn't been in the over-50 optimistic territory since early 2006. Perhaps most disturbingly, the Northeast's HMI declined by one point overall in 2013.

The context of conditions

Looking at conditions over the past few months helps put the HMI numbers into context. According to Freddie Mac, 30-year fixed mortgage rates have been above 4 percent since late June, which may help explain why optimism about the housing market has plateaued. Meanwhile, the government shutdown and debt ceiling debate created an enormous amount of uncertainty in and around October, which may have further dampened housing activity.

The recent budget deal between Democrats and Republicans may remove some of the recurring uncertainty over government fiscal policy, though there have been fresh rumblings that the debt ceiling issue may raise its ugly head again early next year. If the government succeeds in getting out of the way of the economy, it will give the housing market the chance to prove it can continue to move forward even without the aid of record low mortgage rates.

The HMI will be a critical indicator to monitor to see whether the housing recovery can be sustained. This index last peaked in mid-2005, roughly a year before housing prices themselves peaked, according to the S&P/Case-Shiller Home Price Indices. So, if you are thinking of buying or selling a home and would like an advance clue as to where prices are heading, you may want to keep an eye on the HMI in 2014.

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