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New construction sales stoke builder confidence

NAHB: Builders cautiously optimistic going into 2014

house construction

The National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index shows cautious optimism going into 2014, with the association’s index rising four points to 58 for December as new construction shows signs of sustained demand.

NAHB's index focuses on the market for new single-family home construction sales, and is calculated looking at three indicators – current sales conditions, sales expectations, and prospective buyer traffic.

"This is definitely an encouraging sign," said NAHB Chairman Rick Judson. "The HMI is up 11 points since December of 2012 and has been above 50 for the past seven months. This indicates that an increasing number of builders have a positive view on where the industry is going."

The rise in builder confidence is shared by outside financial analysts.

Keefe, Bruyette & Woods (KBW), a full-service, boutique investment bank and broker-dealer that specializes in the financial services sector, states in its 2014 real estate forecast that analysts expect continued recovery in the housing market, including purchase volume growth of 5%.

"We believe home prices could rise by approximately 6.5% for the full year and by 2-4% from current levels driven by price increases that to date have yet to show up in closings, modest inventory levels in favorable markets, and investor demand for distressed real estate," the KBW analysts said. "We believe new home sales could increase by 10-15%, though still totaling less than the 10% historical share of home sales."

Builder confidence is growing despite rising interest rates and the recent turmoil caused by the government shutdown, NAHB Chief Economist David Crowe said.

"Following a two-month pause in the index, this uptick is due in part to release of the pent-up demand caused by the uncertainty generated by the October government shutdown," he said. "We continue to look for a gradual improvement in the housing recovery in the year ahead."

Breaking the HMI down, there was growth in confidence in all three measures. The index gauging current sales conditions jumped six points to 64, while the index gauging expectations for future sales rose two points to 62. The index gauging traffic of prospective buyers gained three points to 44.

KBW analysts say this is evidence that demand growth is stable.

"For homebuilders, we expect continued recovery in the housing market, including purchase volume growth of 5%. We believe home prices could rise by approximately 6.5% for the full year and by 2-4% from current levels driven by price increases that to date have yet to show up in closings, modest inventory levels in favorable markets, and investor demand for distressed real estate," they said.

"We believe new home sales could increase by 10-15%, though still totaling less than the 10% historical share of home sales."

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