Real Estate Insights from Homebuilders and Us in August

The National Association of Home Builders (NAHB) reported its Housing Market Index for August. This is a measure of homebuilder sentiment, and as you might expect, it has reflected a miserable mood for an extended period. However, this month’s report offered some insight from the mouths of builders and inspired some theorizing on our part as well.

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Real Estate Insights from Homebuilders and Us in August

The NAHB Housing Market Index held at a miniscule mark of 15 in August, reflecting the ongoing misery of homebuilders. In the past, we’ve noted that this measure should lag other metrics tied to Real Estate, and it has generally missed the recent slight rebound seen in other measures. We see the reason for this as two-pronged. One big reason is that the new home market should lag existing home sales recovery, simply due to the degree of distressed property and related value available in the overall market as a result. Secondly, the index surveys a broad range of home builders, including a significant number of smaller distressed operators, who may never enjoy recovery. As we’ve mentioned previously, this creates opportunity for larger well-capitalized and often publicly traded builders to gain market share. But any enthusiasm seen in those larger builders will be watered down by the many smaller builders expressing their negative views in this survey.

Before we get to the insight we’ve garnered from the latest report, let’s review the data details. First of all, a reading of 50 would reflect a positive mood, so at 15 the index really does portray the pure misery of construction. On a regional basis, a better mood was seen in the Northeast segment index (+4 to 19) and West (+1 to 15), while the South held steady at 17 and the Midwest fell 2 points to 10.

The weakness actually reflects improved current conditions being offset by reduced expectations for the future. Home builders saw better traffic in August, with that component index gaining a point to 13. They also rated current sales conditions better, with that component index gaining a point to 16. As one might expect, and as seen across several consumer sentiment measures, the component index measuring builder expectations for sales conditions six months down the road deteriorated two points to 19. We can mostly blame Washington for this, with some attribution going to S&P and European economic issues, in my view.

One intriguing insight offered by the HMI was that 41% of respondents indicated that they had lost sales contracts due to buyers’ inability to sell their current home. This speaks to the bifurcation of our economy, between the employed and underemployed. So, this is an example of the unemployed impact on the broader marketplace, where it impedes the fluid economic progression of the employed, or the healthy market participants. But, where an old home must be sold cheaper than preferable, a new home is also acquired at better value, so I’m not sure the argument here is not limited to the psychological.

This does not speak to another factor holding up the employed from buying homes, and that is uncertainty. The employed remain worried about their own job security, which they see tied to overall U.S. economic health. This drives concern about the purchase of a home, because if the employed man or woman’s own independent situation changes they could be left without means to maintain their progressive or newly extended lifestyle. Another important concern of the employed and capital unconstrained is their worry about the future of the real estate market, specifically the risk of losing value post closing. Nobody wants an underwater mortgage or to lose value, despite its being tied to a tangible asset with utility.

I heard a real estate player on Bloomberg radio suggest that if our government or private organizations could alleviate that concern, suppose by insuring against the risk of real estate value decline, then that might lead an important number of prospective buyers off the fence and give traction to the real estate market. But this does not play to the capitalist tune; instead the government should find ways to normalize market conditions by alleviating uncertainty where it can manage it. Given that the U.S. government is now capital constrained, creative ideas like the aforementioned may be impossible anyhow.

If record low interest rates and deeply discounted home prices from their peak cannot bring buyers to the floor in a more significant way, perhaps only time will, as market factors like lending and employment heal. In other words, the housing market might not be capable of healing in a meaningful way until the economy does, and so the effects of direct stimulus are limited. Still, the disruptive relics of the real estate bubble, including the inventory overhang, must be cleared to allow economic improvement to more effectively flow through to real estate.

Editor's Note: Article should interest investors in Investors Title (Nasdaq: ITIC), Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO), Simon Property Group (NYSE: SPG).

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