Real Estate

Homebuilder sentiment stalls at 60 in January

U.S. homebuilders may be reconsidering their bullish projections for a stronger housing recovery. A monthly survey of builder sentiment held steady in January, from a downwardly revised December reading.

The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) stands at 60, still in positive territory, but off its recent high of 65 in October. Fifty is the line between positive and negative.

"After eight months hovering in the low 60s, builder sentiment is reflecting that many markets continue to show a gradual improvement, which should bode well for future home sales in the year ahead," said NAHB Chairman Tom Woods, a homebuilder from Blue Springs, Missouri.

A worker walks into the garage of a home under construction in Larkspur, California.
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Just one of the index's three components improved. Current sales condition rose 2 points to 67 in January. The index measuring sales expectations in the next six months fell 3 points to 63, and the index measuring buyer traffic dropped 2 points to 44. Buyer traffic has yet to break out of negative territory.

"January's HMI reading is right in line with our forecast of modest growth for housing," said NAHB Chief Economist David Crowe. "The economic outlook remains promising, as consumers regain confidence and home values increase, which will help the housing market move forward."

While confidence among homebuilders stalled, confidence among investors in homebuilding stocks has slipped more decidedly since the start of the year. The stocks may just be following weakness in the broader markets, but some say they are defying positive fundamentals.

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"The XHB homebuilders ETF index dropped 9 percent from December 31, 2015 to January 8, 2016, the largest one-week decline since 2011. Such pessimism over homebuilders surprised us. After all, the December employment report released on January 8, 2016 registered the largest upside surprise in job growth since January 2012. By our estimates, homebuilder equity prices are currently trading below what recent macro data flow suggests," Goldman Sachs analysts wrote in a recent report.

Not only is employment improving, mortgage rates, which were expected to move higher, fell last week to levels not seen since April 2015. While newly built homes sell at a significant premium to existing homes, the tight supply of existing homes for sale should benefit builders, and the lower mortgage rates are the icing on the cake.

Regionally, based on a three-month moving average, homebuilder confidence fell across the nation. The Northeast, Midwest and West each posted a 1-point decline to 49, 57 and 75, respectively, while the South fell 2 points to 61.