Builder Confidence Gains in March 2011

Real Estate

The National Association of Home Builders' latest survey produced a slightly better Housing Market Index (HMI) for March 2011. Still, the result in absolute terms continues to reflect poorly for housing. That said, I think the makeup of the survey itself serves to skew the reading, and dampens an important message.

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Builder Confidence Gains in March 2011

The HMI gained a point, to a reading of 17, showing slightly improved builder confidence in March 2011. The subtle improvement reflects the best absolute position for the index since May of 2010, when the market was still benefiting from the First-Time Homebuyer Tax Credit. Like many other economic surveys, the HMI measures current conditions and future expectations, and all of this month's overall improvement was driven by hope for a better tomorrow.

The component index gauging expectations for the forward six month span gained 2 points, rising to a mark of 27. Prospective buyer traffic was reported about the same, and still scarce, with that component index sitting at a reading of 12. The index measuring current sales conditions stuck at 17. Considering that the threshold for a positive market is a reading of 50, not one of the measures reflects anywhere near a positive situation in absolute terms. That said, the stock market rewards change and increase to the rate of change, so the improvement is still important to a degree.

Also, in recent months, I advised that the Housing Market Index is skewed by the small builder inclusive makeup of the National Association of Home Builders, which is important for an accurate accounting, but misleads stock investors. Again the survey included an interview of one such smaller builder, who pointed out ongoing difficulties with attaining credit. If a small builder cannot attain credit, he is significantly less likely to build homes. The larger companies and especially the publicly traded builders in the market have wider access to capital that reaches beyond bank borrowing. I have talked about how this will help publicly traded players take market share in the early stages of housing recovery.

So, with smaller builders feeling the heat more acutely than the larger ones, and with their heavy inclusion in this index, the HMI has a natural bias to the negative end. Over recent months, much of the chatter from the executives who run the large publicly traded builders has offered news of better ordering trends than is reflected by the HMI.

Indeed, the weight of lender-owned shadow inventory and the ongoing effects of distressed properties on pricing and on the supply/demand equation are important, but population aging and graduation into the buyer pool, and population growth, also help to raise demand. As the economy improves, and employment with it, we must accept that at some point housing will grow and housing stocks will profit.

Most of the major forecasters of the real estate market are forecasting growth (from tough bottoms) this year. Just as the bubble was built by euphoria, negative sentiment seems to me overdone now. For these reasons, I am looking for homebuilder shares to record a good year for 2011. Today the industry is mostly higher, with Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV) and Pulte (NYSE: PHM) up fractionally; DHI (NYSE: DHI) up 1.2% and K.B. Home (NYSE: KBH) down fractionally.



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