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Home Builder Confidence Plummets in Just Two Months: NAHB, Wells Fargo

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Builder confidence dropped again in July and a monthly index conducted by the National Association of Home Builders (NAHB) and Wells Fargo (WFC) is at its lowest level since April 2009, down from a three-year high just two months ago. The housing market index was 14 for the month of July, down two points from its revised reading of 16 in June. The current index reading compares with a reading of 17 in July 2009. The index is derived from a survey of builders' perceptions of current single-family home sales and sales expectations for the next six months, categorizing them as “good,” “fair” or “poor.” In addition, the survey asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” The scores for each component are used to calculate the index. A reading more than 50 indicates that more builders view conditions as good than poor. In May, the index reached a three-year high. The chart below tracks the NAHB index in comparison to the US Census Bureau reports on housing starts: "We continue to see a lull in home buying activity following the expiration of the federal home buyer tax credit program, as many of the sales that would have occurred this summer were likely pulled forward to meet that program's deadline," said NAHB chairman Bob Jones, a homebuilder in Bloomfield Hills, Mich., in a press statement. "In addition, builders are reporting continuing consumer hesitancy regarding home purchases due to uncertainty in the overall economy and job markets." Paul Dales, a US economist at the Toronto-based Capitol Economics concurred that the tax credit's expiration is impacting the housing market. "It is becoming increasing clear that without the government's artificial support, the US housing market is struggling to stand on its own two feet," Dales wrote in commentary Monday. " The fall in the NAHB housing index…shows that demand for new homes has weakened further." "That is not a surprise — activity was always going to drop as the tax credit meant that demand had been brought forward into the spring from the summer," Dales added. "But the fall in the index from the peak of 22 in May to a 15-month low is striking." Specific factors contributing to the negative view include hesitation on the part of homebuyers, tight consumer credit and continuing competition from foreclosed and distressed properties, according to NAHB chief economist David Crowe. "The pause in sales following expiration of the home buyer tax credits is turning out to be longer than anticipated due to the sluggish pace of improvement in the rest of the economy," Crowe said. "We do believe that favorable factors such as low mortgage rates, affordable prices, and demographic trends will help revive consumer demand for new homes this year, and that new home sales will improve by 10% in 2010 from 2009." In addition to the overall index value, the index for current sales conditions was down two points to 15, and the index of sales expectations was down one point to 21. Perception of prospective traffic declined three points to an index value of 10. In addition to the drop from May's three-year high to the low last seen in April 2009, the future sales index has declined from 27 to 11 and the traffic of prospective buyers index has dropped from 16 to 10. "The latter has only ever been lower in the four months after the collapse of Lehman Brothers in September 2009," Dales wrote. "In other words, very few people are ever bothering to have a look at new homes." Regionally, the Northeast region index was up seven points to 23, but NAHB said that region is smaller than others and the index is more volatile there than other areas. In the Midwest, the index increased one point to 15. The South and West each posted five-point declines to 14 and 9, respectively. The Census Bureau is expected to release its monthly residential construction report Tuesday morning, which tracks housing starts, permits issued and housing completions for the month of June. Also, on Monday, the real estate brokerage chain ReMax reported on existing home sales for 54 select housing markets. The National Association of Realtors (NAR) will issue its national sampling of existing sales on Thursday. "Overall, this survey is the first in a number of housing-related releases due this week that we expect to provide even more evidence that the housing market is now enduring a double-dip in activity and eventually prices too," Dales said. Write to Austin Kilgore.

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