Builder Confidence Will Prove Fleeting

by: Markos Kaminis

Earlier this week, the National Association of Home Builders (NAHB) reported that its Housing Market Index indicated builder confidence was significantly improved in July. It was still deeply depressed, but improved nonetheless. Well, as the week progressed and the data flow continued, we couldn't help but wonder if this new-found builder confidence might prove fleeting.

Home builders like PulteGroup (NYSE:PHM) and K.B. Homes (NYSE:KBH), along with many more smaller builders, indicated newfound joy in a Housing Market Index (HMI) six-point surge to a mark of 35. It was the most important monthly increase in almost a decade, placing the index at its highest point since March 2007. You remember those days, when the Fed chief was saying the crisis would be contained to real estate.

Each component index of the HMI rose, but the scent of hope, perhaps not well-founded, certainly skewed the news. The component index measuring current sales conditions improved six points to a mark of 37, still 13 points below so-so market conditions. A mark of 50 delineates where the majority of builders' views would be positive vs. negative. Thus, on all measures, they are still depressed. Continuing, the index measuring the traffic of prospective buyers gained six points to reach a mark of 29, still 21 points short of break-even. Finally, the index indicating hope, where builders provide their view for the next six months, saw confidence swing 11 points higher, to 44 (still six points under). So as you can see, the good news would still make most people cry.

Regionally speaking, each segment of the national market reflected some sort of improvement. The greatest gain and market view was found in sunny California. The Western part of the nation had builders raising their confidence view 12 points, to 44. The next best real estate market was the good old Northeast, where the market is dense and mature. The Northeast gained eight points to a mark of 36. The Midwest rose three points to 34, while the South increased five points to 32.

The chairman of the NAHB, Barry Rutenberg, was clearly enthused, as he noted the benefits of home ownership at such affordable mortgage rates -- record low, in fact. The chief economist of the NAHB, David Crowe, might have to eat some soon. He said that "…this report adds to the growing acknowledgement that housing -- though still in a fragile stage of recovery -- is returning to its more traditional role of leading the economy out of recession." I say there will be no leading of anybody anywhere, but falling back into the pit of despair as the economy deteriorates under the weight of still vulnerable labor conditions, Europe, and weakening global trade.

As the week progressed, the housing market news got a lot less cheery. The U.S. Department of Housing and Urban Development snapped some to their senses when it reported housing starts for June. Starts improved 6.9% above May's accounting, to an annual pace of 760,000, yes. But permitting for housing starts, the forward-looking indicator here, fell 3.7% in June, to 755,00. Single-family project permitting only increased fractionally, while single-family starts rose 4.7%, to 539,000.

Thursday, existing-home sales -- granted, not the realm of home builders -- fell 5.4% to an annual pace of 4.37 million in June. That sent the shares of the SPDR S&P Homebuilders (NYSEARCA:XHB) and individual builders including Toll Brothers (NYSE:TOL), D.R. Horton (DH), and Beazer (NYSE:BZH) lower immediately after the report was released at 10:00 a.m. ET. However, the group had recovered by the close of trading.

Chart forSPDR S&P Homebuilders

While these two relatively pessimistic data points, in my view, are not overwhelmingly so, they are indicative of the weight of nascent economic strife upon the important housing sector. Thus, even as housing gets some benefit from the lowest cost of home ownership in a long while, on home price decline and mortgage affordability, the weight of the broader economy is coming down on the market now.

I've been noting that the fate of all builders is not necessarily the same, with the future of smaller builders bleak against the large publicly traded group, including the likes of Hovnanian (NYSE:HOV), Lennar (NYSE:LEN), and Ryland Group (NYSE:RYL). They're gaining market share from the poorly capitalized and suddenly struck smaller players, but the condition of the broader environment weighs on them as well. Still, I think if large builders were asked in isolation how they felt about the housing market, the HMI reading might sit above 50 today. That's not the case, though, and is all the more reason to believe the hopeful view of the home builders generally will likely prove fleeting in the months ahead.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.