Homebuilders today are feeling more confident than they have in more than five years. Recent earnings reports from the big public builders have shown spikes in new orders for single family homes, and competition from foreclosures has eased as banks try to modify more troubled loans.
Homebuilder sentiment jumped six points in July on a monthly index from the National Association of Home Builders. It now stands at 35. Fifty is the line between positive and negative sentiment, but this is the largest monthly gain recorded in more than a decade, and the highest level since March 2007.
“Combined with the upward movement we’ve seen in other key housing indicators over the past six months, 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 ,” wrote NAHB chief economist David Crowe in a press release. “This is particularly encouraging at a time when other parts of the economy have begun to show softness.”
It is that softness, particularly in consumer spending and consumer sentiment, that puts the homebuilder sentiment number in a precarious position. Builders saw gains this past spring although those gains came off of record low volumes. The gains were also due to a sharp drop in the supply of foreclosures, particularly in the hardest hit markets like Phoenix and parts of southern California.
This drop is due to heavy investor demand and a slowing in the processing of foreclosures, as banks seek to comply with a $25 billion mortgage servicing settlement over so-called “robo-signing.” Banks are required to offer principal reduction to thousands of delinquent borrowers in new mortgage modifications.
While sentiment improved nationwide, that drop in competition from distressed homes can be seen distinctly out West, where homebuilder sentiment jumped the highest, up 12 points to 44. Of the three components making up the index, current sales and buyer traffic both gained six points, but sales expectations over the next six months rose 11 points to 44, approaching that break-even line to positive.
It is this optimism throughout the sector that has boosted the stocks of the big public home builders. They are now up more than 52 percent year-to-date on the S&P Homebuilder Index and up nearly 50 percent from a year ago.
Some analysts have noted a drop in buyer traffic heading into the summer months and the number of homes entering the foreclosure process jumped 9 percent in the second quarter of this year from the previous quarter, according to RealtyTrac. The national foreclosure inventory remains near its all-time high, with 5.6 million U.S. mortgages either delinquent or in the foreclosure process.