Builder sentiment hits decade high, at 60

The nation's single-family home builders are feeling a lot better about their business, even as mortgage rates move higher. A monthly sentiment index hit the highest level in July since November of 2005, matching June's revised level.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) came in at 60; 50 is the line between positive and negative sentiment. The index was at 53 in July of 2014. June's reading was revised higher from 59 to 60.

"This month's reading is in line with recent data showing stronger sales in both the new and existing home markets as well as continued job growth," said NAHB Chief Economist David Crowe. "However, builders still face a number of challenges, including shortages of lots and labor."

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That sentiment was echoed in the latest survey of economic conditions by the Federal Reserve, known as the Beige Book:

"Firms from several districts continued to describe shortages for particular types of skilled labor, predominantly in the construction industry."

New townhouses are under construction in Northeast Washington, DC.
Getty Images
New townhouses are under construction in Northeast Washington, DC.

Builders have benefited from a tight supply of existing homes for sale, which has given them significant pricing power, but some builders are reporting more pushback from buyers lately. Of the three HMI sentiment index components, current sales conditions rose one point to 66, expectations of sales in the next six months rose two points to 71, but buyer traffic dropped one point to 43, still mired in negative territory.

Another monthly reading released Thursday showed a one percent increase month-to-month in mortgage applications to purchase new homes in June. That report from the Mortgage Bankers Association (MBA) does not include seasonal adjustments.

"Application activity in June was slightly higher compared to the past two years, leading us to estimate that new homes sales increased 8 percent from May on a seasonally adjusted annual basis," said Lynn Fisher, MBA's vice president of research and economics.

While home construction has been increasing steadily, it is nowhere near historical norms, nor is it even close to demand levels. Builders are still very cautious, perhaps too cautious, according to investors in the sector.

"There's not a ton of building going on, leverage in the system is reasonable and we still think this economic cycle has a bit of a ways to go," said Jonathan Gray, global head of real estate at Blackstone at the Delivering Alpha conference presented by CNBC and Institutional Investor. "That's why we're optimistic."

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Regionally, on a three-month running average, builder confidence in the West and Northeast each rose three points to 60 and 47, respectively. The South and Midwest posted respective one-point gains to 61 and 55.