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Homebuilder sentiment falls 1 point in July; still seeing 'scattered softness': NAHB

Builder confidence misses

U.S. homebuilders lost a little faith in their market in July, as foot traffic of potential buyers thinned and construction constraints continued.

A monthly reading of builder confidence from the National Association of Home Builders dropped a point to 59. Anything above 50 is considered positive sentiment, but the index has been stuck in a very narrow range since January and is down 1 point from last July.

"We are still hearing reports from our members of scattered softness in some markets, due largely to regulatory constraints and shortages of lots and labor," said association Chairman Ed Brady, a homebuilder and developer from Bloomington, Illinois.

Builders have been facing increasing regulatory constraints, especially in some of the tighter housing markets, like San Francisco, Seattle and Denver. That keeps them from being able to develop as much land and build as many homes as they might like.

A worker attaches roofing to a house under construction at the KB Home Magnolia at Patterson Ranch community in Fremont, California.
David Paul Morris | Bloomberg | Getty Images

TRI Pointe homes, which operates in these and other Western markets, has been able to increase production and sales solidly because its owns and controls thousands of lots, with an especially large capacity in California. That, said CEO Doug Bauer, gives the company an advantage in the market. Labor, however, is another story.

"The reason labor has been a constraint is in some of our markets, for example, in Phoenix a year ago building permits went up 15-20 percent. As building permits go up, labor doesn't go up with building permits, so there's kind of a lag effect," said Bauer. "I think housing in general is going to be in a very elongated cycle, because if you look at the demand variables, jobs and household formations — especially millennials that are forming households later — are going to be a huge demand driver, but one of the supply constraints has been land and labor."

All three components of the NAHB confidence index fell in July. Current sales expectations and buyer traffic each fell 1 point to 63 and 45, respectively. Sales expectations in the next six months dropped 3 points to 66.

Low mortgage rates are helping some buyers, but uncertainty in the economy is weighing on the other side. Given that a home is generally a person's single largest investment, confidence is key, and with both global economic factors weighing and the U.S. presidential election looming, there is considerable uncertainty among consumers.

Regionally, on a three-month moving average, homebuilder confidence was unchanged in the Northeast, Midwest and South at 39, 57 and 61, respectively. Confidence in the West rose 1 point to 69.