On January 18th the National Association of Home Builders (NAHB) issued the first release of the NAHB/Wells Fargo Housing Market Index (HMI). The index showed a 4-point increase over last month. This was the fourth consecutive monthly increase, and marks the highest point in builder confidence since July of 2007. The results are an indication of both builder and consumer housing market confidence.
An increase of four points may not appear to be much, but coming off September lows of 14, the index value of 25 represents great gains in the housing market index. The index, which has been compiled on a monthly basis for the last 20 years, ranks the perceptions of builders and buyers on their outlook of the housing market. Different areas will grow and contract at different rates, so combining the scores of various builders and potential buyers from across the country will lead to a very accurate score on what the housing market looks like. Builders rate their perception of sales in the next six month as “good,” “fair,” or “poor,” while ranking their potential buyer activity as “high to very high,” “average,” or “low to very low.” The combination of these scores helps lead to an index ranking of 0 to 100. A rank of 50 or higher would mean that the majority of builders have a good outlook on the market.
Higher index numbers mean more people feel good about the economy. The psychological effect on consumers when they see a better outlook leads them to feel better about making the decision to buy a home. More home sales means more jobs for construction crews and other workers in the skilled trades. An increase in home sales will also lead to more sales in the retail sector for hard goods (furniture, appliances, etc.). Overall the housing market will help to spur on movement in the rest of the economy. A better index means more confidence. More confidence means more decisions to buy.
The HMI consists of the average of three sectors. This month current sales ranked 25, while expectations of future sales came in at 29 and traffic of prospective buyers was 25 bringing the average of the three sectors to 25. For those who like to view the actual charts, you can find the reference charts here.
Many investors see the HMI as an indicator of the overall health of the economy. Investors view the HMI as an indicator of how the market will do. The markets continued their climb after the release at 10am on optimism that the housing sector will continue to improve. As we saw in the January 11th release of the beige book the overall economy is moving at a slow paced recovery. But the beige book also showed that real estate is lagging behind other sectors. This week’s HMI shows that although lagging, real estate is moving in a positive direction. The slow and steady recovery may be frustrating, but at least it is moving in a positive direction rather than a negative direction.