The latest take of builder confidence indicates it remains in the doldrums, despite recent anecdotal evidence otherwise. We suspect the difference is due to the inclusion of many small builders in the survey, and so the data here should not reflect some of the traffic pickup larger builders have reported.
The National Association of Home Builders (NAHB) issued its monthly Housing Market Index (HMI) for February. The HMI stuck at 16 for the fourth month in a row, which is confounding if you have been following the chatter from the large builders. However, I think I understand why there is a variance between the two.
The NAHB surveys builders of all sorts, including large and small. Well, there is a big difference between the large builders and the small ones, and that is access to capital. Large publicly traded homebuilders like Toll Brothers (TOL), K.B. Home (KBH), D.R. Horton (DHI), Beazer Homes (BZH), Hovnanian (HOV) and others can raise money in the capital markets. Thus, these larger builders have more flexibility than the smaller private firms, who rely almost solely on banks for important construction loans. This limitation, given the current real estate environment, is a significant disadvantage for small builders. I expect that this is the reason why they are reporting back about a harsher operating environment than the news we hear from the big builders, which have noted improvement.
The HMI has three component indexes, and two of the three showed improvement through the February recording date. Current Sales Conditions was noted better, with that component index up two points to a mark of 17. The reading that measures builders' sales expectations for the next six months also gained in February, rising one point to a mark of 25. The component that measures traffic of prospective buyers stayed put at 12. Small builders do not see traffic because they are less likely than large builders to have active sample homes in the current environment, and they are going to have fewer of them, which could also be skewed to poorer markets. Something certainly does not add up. Last week, even as Beazer Homes reported a poor fiscal first quarter, its CEO still noted a 50% sequential month increase in new home orders in January, and said the rate was about equal to the prior year.
Some of the commentary reported by the NAHB is telling as well. One respondent complained that, "... an extremely tight lending environment continues to make it almost impossible to obtain credit for viable new and existing projects, and most do not see that situation improving anytime soon." While certainly true, this illustrates the composition of the NAHB survey, and its significant inclusion of small builders.
Therefore, the NAHB survey's HMI Index should lag in showing the recovery that larger, publicly traded builders will report first. Since we can only trade the shares of publicly traded companies, this report gets in the way of our trading profits. It blurs the reading of the situation with noise and knots up decision making, which might lead investors to miss the recovery in those shares.