Home Builders See End of Homebuyer Tax Credit Hurting Confidence

After reaching a three-year high last month, homebuilder confidence was down for the first time in two months in the June National Association of Home Builders (NAHB)/Wells Fargo (WFC) Housing Market Index (HMI). Confidence in the market for newly built, single-family homes fell back to levels last seen in February, before the upward swing experienced leading up to the contract deadline for the homebuyer tax credit. The HMI was at 17 in June, down five points from a value of 22 in May. The confidence index results come on the heels of a report by the Joint Center for Housing Studies of Harvard University, which found that new housing permits are also off sharply, suggesting that starts will remain below normal levels for some time. “The home buyer tax credit did its job in stoking spring sales and we expected a temporary pull back in the builders’ outlook after the credit expired at the end of April,” said NAHB chairman Bob Jones, a home builder from Bloomfield Hills, Mich. “However, the reduction in consumer activity may have been more dramatic than some builders had anticipated, which resulted in their lower confidence levels.” The index is derived from a survey of builders’ perceptions of current single-family home sales and sales expectations for the next six months, categorizing them as “good,” “fair” or “poor.” In addition, the survey asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” The scores for each component are used to calculate the index. A reading more than 50 indicates that more builders view conditions as good than poor. NAHB’s chief economist David Crowe said some softening in the market following the expiration of the homebuyer tax credit was expected. “In the coming months, an improving economy, rising employment, low mortgage rates and stabilizing home values should help the housing market move forward,” Crowe projects. “But as today’s HMI data shows, builders still remain very cautious and are aware that several factors could impede the nascent housing recovery, including serious problems in obtaining financing for the production of housing, faulty appraisal practices and competition from short sales and foreclosed properties.” In addition to the overall index value, the index for current sales conditions was at 17, down five points from May. The index for sales expectations was down four points to 23, the lowest its been since March 2009. The index for prospective buyer traffic was down two points to 14. Regionally, the Northeast — a smaller region subject to volatile shifts — dropped 17 points to 18, after increasing 14 points in May. The West experienced a four-point decline to 15, while the Midwest and South both experienced three point declines, putting the regional indices at 14 and 19, respectively. Paul Dales, a US economist at the Toronto-based Capital Economics said the confidence index decline supports the view that homebuilders got ahead of themselves by extrapolating forward the surge in demand generated by the tax credit. Dales added the declines in projected business are a wake-up call to the fact that the market will struggle to stand on its own two feet without the tax credit. “Although this survey does not have a very close relationship with the data on actual home sales, it does nonetheless suggest that sharp falls in the latter are imminent,” Dales wrote. “Overall, the double-dip in both activity and prices that we have been expecting for some time appears to have begun.” Write to Austin Kilgore. The author held no relevant investments.

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