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Builders: A Vote of No Confidence

AP

FDIC Chairman Sheila Bair said it herself: It has been an “uphill battle” to restore confidence among investors and regular folks who stash their paychecks in their local banks.

She may as well have added home builders to that mix.

The turmoil with Fannie and Freddie certainly didn’t help the big public home builders, who rely on conforming loans to sell their overabundance of low to mid-priced homes. I don’t even want to talk about their stock prices.

Today the National Association of Home Builders reported the lowest reading of home builder confidence ever. What struck me about the numbers is that they have really been hovering over the last few months, up a point, down a point; for three months, from February through April, the main confidence index didn’t move, as if the builders weren’t firmly convinced, but expected the market to turn around.

Not so this month. Builder sentiment dropped two full and decisive points to a new record low, after dropping one point last month. All three components of the index fell to record lows: Present sales, prospective sales over the next six months and buyer traffic.

Present sales actually only dropped one point, while the other two fell four points each. That clearly doesn’t bode well for the future. And how could it?

The crisis of confidence in the banking system and the crisis of confidence in the nation's two largest mortgage buyers, Fannie and Freddie, basically says to the average buyer, rightly or wrongly so, that now is not the time to move money anywhere. The mortgage market continues to grind on, with conforming loans still at relatively low rates, historically at least.

Yes, you need to put money down and yes you need to have good credit, but prices for new homes are way way down and the builders are likely ready to give you whatever you want in the way of free upgrades just to get you to sign on the dotted line. So buyers should be at least looking, but they're not.

Again, it’s confidence. As the builders advertise price drops of up to 50 percent, buyers have to ask how much lower will they go? When is the time to jump? And America’s economy and banking system are faltering, is now the time to invest in the American dream? I wish I had an answer or two.

Prices are leveling out in many markets, but not in the boom markets, where the builders overbuilt and where even brand new homes, never lived in, are going into foreclosure. That may benefit the smaller, local builders, who don’t build on spec, but for the big guys, restoring confidence now may be like propping up a house of cards in a hurricane.

Questions? Comments? RealtyCheck@cnbc.com

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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