The National Association of Home Builders reported its NAHB/Wells Fargo Housing Market Index for December Monday. The NAHB reported the third straight improvement in the figure, marking the first such occurrence since the middle of 2009, when homebuilders thought stock market improvement might bring back the good old days for real estate. They were wrong then, and unfortunately, I believe they are wrong now.
The NAHB reported its index gained two points over the downwardly revised November mark to a December level of 21. Let me remind readers from the start that the dividing line between positive and negative sentiment is 50. The degree of current index discount to the watermark to positive sentiment should clearly signify how distant housing sentiment is from true good tidings. A significantly greater number of builders clearly view the current market negatively.
That said change of course matters. However, it matters more when it is a result driven change rather than a measure of hope. We’ve noted in the past that the change in this index has been mostly geared by its expectations component. The NAHB reported that the component index measuring sales expectations for the next six months improved one point to the level of 26 in December. That was the best of the three component readings, thus driving the index once again in December. For informational purposes, the index measuring current sales conditions improved 2 points to a still dreadful mark of 22. The index gauging traffic of prospective buyers improved three points. While that’s the highest level of the traffic measure since May of 2008, it is still horrible, in my view.
Over recent months, we’ve warned that this index tends to be biased to the negative end due to a great number of smaller builders included in the survey. Smaller builders would tend to have less access to capital than the larger public construction firms, like KB Homes (KBH), D.R. Horton (DHI) and Toll Brothers (TOL). Indeed, capital accessibility continues to be a constraint to operations based on the notation of the NAHB within this report.
That said, I suspect that recent life in the shares of firms like Hovnanian (HOV), Pulte Homes (PHM), Lennar (LEN) and Beazer (BZH), among others, driven by the latest economic data, will prove short-lived. I was a proponent for housing stocks earlier this year, but the macroeconomic deterioration and global contagion developing should quickly quell all hope. On that expectation, I correctly foresaw the newest dip in home prices after recent stabilization. I likewise expect homebuilder sentiment improvement seen here will find letdown in the near future. The real estate market faces another leg lower in the medium term, but home prices might later find strength driven by inflation I see developing over the long-term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.