An index that gauges home builders’ confidence fell seven points in August to its lowest level since February 1991.
The Wells Fargo/National Association of Home Builders Housing Market Index, which is derived from a monthly survey by the home builders’ trade group, is based on builder ratings of current and expected single-family home sales as “good,” “fair,” or “poor.” The survey also asks builders to rate the traffic of prospective buyers as “high to very high,” “average” or “low to very low.”
Scores for each component are used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.
The HMI reached 32 in August, marking the seventh consecutive monthly drop for the index.
“Two big factors are coloring builders’ perceptions of the market right now — rising sales cancellations and substantial growth in inventories of both new and existing homes,” said David Seiders, chief economist for the builders’ group, in a statement.
“These factors are largely the result of an increasing number of potential buyers adopting a ‘wait-and-see’ attitude because of uncertainty about where the housing market is headed, and record-high energy costs also appear to be weighing on housing demand. We’re also seeing an anticipated withdrawal of investors/speculators from the market, following a major influx in 2004-2005.”
All three component indexes declined in August, according to the NAHB announcement. The component gauging current single-family home sales fell seven points to 36, while the component gauging sales expectations in the next six months and the component gauging traffic of prospective buyers both fell six points, to 40 and 21.
Regionally, the HMI recorded a three-point decline to 34 in the Northeast, a five-point decline to 15 in the Midwest, a nine-point decline to 41 in the South and a 10-point decline to 42 in the West.
“It’s important to recognize that home sales and housing production are subsiding from record levels a year ago, and those levels clearly were unsustainable,” Seiders stated. “We expect the erosion in market activity to continue through most of this year before stabilizing in 2007.” Seiders stated that builder sentiment historically tends to contract by a greater margin than actual sales and production activity.
“On the bright side for consumers, the economy continues to be in fundamentally good shape, mortgage rates remain near historic lows, house price gains are decelerating, and builders are offering substantial buyer incentives to keep their inventories down,” Seiders said.