Are Builders Too Confident?

December 16, 2014

Builder confidence in the market for new single-family homes fell slightly in December, but more builders continue to view conditions as "good" rather than "poor," according to the latest National Association of Home Builders/Wells Fargo Housing Market Index, which reflects responses from about 400 builders. 

Builder confidence was at 57 on the index in December; a level above 50 indicates more builders view conditions as favorable. The index each month gauges builder perceptions of single-family home sales and sales expectations for the next six months. Builders are optimistic: Current sales conditions dropped one point in December but are at 61 on the index, while expectations for future sales are at 65. Builders rated traffic of prospective buyers at 45, which is holding steady from previous months.

"After a sluggish start to 2014, the [index] has stabilized in the mid- to high-50s level for the past six months, which is consistent with our assessment that we are in a slow march back to normal," says NAHB Chief Economist David Crowe. "As we head into 2015, the housing market should continue to recover at a steady, gradual pace."

But a recent Wall Street Journal article asks: Are builders overconfident? "Home builders are smiling like it is the 2005 boom. They are building like it is the 2008 bust," the article notes. 

This fall, builder sentiment on the NAHB index hit its highest level since late 2005, which was the peak of the housing boom. However, single-family starts have remained sluggish and are yet to reach levels seen even in 2008, the early years of the recession, the Journal reports.

"The little light at the end of the tunnel looks brighter than it actually is," Crowe told the Journal. But he says he believes housing starts will pick up and converge with builders' higher confidence in a year or two.

Source: National Association of Home Builders and “Home-Builder Sentiment Diverges From Reality,” The Wall Street Journal (Dec. 14, 2014)