Home Builders are Upbeat

Many sectors of the economy are worrying analysts. Energy is sitting in bust territory after enjoying a boom; the export sector has been faltering due to the value of the dollar; and concerns about the effect of flat wages on consumers in the months ahead. However, one of the sectors bucking that trend is housing.

The latest survey of new home builders shows a 10-year high with a reading of 64. The expectation had been for a gain to about 63 at best after readings in August and September of 61. The index is built along the same lines as the Purchasing Managers’ Index and the Credit Managers’ Index—anything over 50 is expansion. These are readings that are definitely more than respectable.

The big question is why the builders are so enthusiastic given all the economic headwinds that have been appearing of late. It seems the optimism is fueled by three factors. The first is home prices are coming up a little in most markets and that provides a bit more profit for the builders without affecting demand all that much. Mortgage rates are still relatively low, and there are still plenty of potential buyers. The second motivator is that builders are starting to see the Millennial buyer hit the market. This generation has been very slow to leave the multifamily option to buy a single-family home and that has been a drag on the builder. And finally, there has been a reaction to cheaper inputs as everything from lumber to textiles to appliances has been falling in price.

The enthusiasm could reverse in a hurry if home buying is not as expected; but for now, the sector is upbeat. It has helped that many builders have left the scene—unable to keep pace. This has left bigger market shares for the companies that have survived and has provided more resilience in the sector as a whole. There are many hot markets these days, and most of the damage from the sector collapse at the start of the recession has been dealt with. There is even less competition from existing home sellers than was the case a year ago.

-- Chris Kuehl, NACM economist

To read more of Chris Kuehl’s commentaries, visit FCIB’s Knowledge and Resource Center.

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