Confidence among homebuilders improved substantially from June to July, offering an indication that the housing market could possess some underlying strength.
Builder confidence sagged earlier this year, thanks primarily to winter weather conditions that hindered construction projects and hurt sales across the Midwest and Northeast. Even with purchase rates slumping again to begin the third quarter, the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) eclipsed a rather noteworthy benchmark by climbing to a reading of 53 for July. Scores greater than 50 signal that there are more industry members expressing optimism about the current conditions than there are who are down on the market.
July represented the first month since January that the HMI registered a score of better than 50, and given the index's traditional reliability as a barometer for near-future market activity, the latest returns are promising. For much of 2014, inflated costs for building materials and permits, along with tight inventory in many areas of the U.S., have dampened the outlooks of builders regarding the housing industry as a whole. But the late spring and early summer have seen the job market continue to make progress, with the latest Employment Situation Summary for June revealing that the national unemployment rate fell to 6.1 percent - the lowest level in nearly six years.
"An improving job market goes hand in hand with a rise in builder confidence," said David Crowe, chief economist for the NAHB. "As employment increases and those with jobs feel more secure about their own economic situation, they are more likely to feel comfortable about buying a home."
Improving market conditions mean opportunities abound
Americans applied for fewer mortgages to begin July, according to a survey from the Mortgage Bankers Association, but prospective shoppers may be pleased to find that every component of the HMI was improved for July. Builders responded that sales conditions were better, while the index for future sales expectations was up, as well. The gauge of prospective buyer traffic was the only index component lagging behind, but there's a hope that with the labor market improvements, consumer sentiment will also be improved.
"This is the first time that builder confidence has been above 50 since January and an important sign that it is strengthening as pent-up demand brings more buyers into the marketplace," said Kevin Kelly, chairman of the NAHB.
The next step, of course, is for that demand to manifest itself in the form of more buying activity.