A Job Might Help

by Doug Love

“Confidence among U.S. homebuilders rose this month to its highest level in six and a half years – driven by strong demand for newly built homes and growing optimism that the housing recovery will strengthen next year.”

The confidence and optimism cited above comes from the National Association of Home Builders (NAHB). The question came up: “How is such confidence and optimism measured, anyway?” and “Compared to what?”

It turns out there is a measurement called the “NAHB Builder Sentiment Index.” The NAHB has been conducting a survey of builders and contractors monthly for 25 years, asking questions to gauge builders’ perceptions of house construction and sales in the next six months as “good,” “fair,” or “poor.” They are also asked to rate buyer traffic as “low to very low,” “average,” or “high to very high.”

Scores are then used to calculate the index, where any number over 50 indicates more builders view conditions as good than poor. The index published this week by the NAHB puts the number at 46, up from 41 last month. That’s the highest reading since May 2006, “Just before the housing bubble burst.” The index has been on the rise for the last seven months in a row.

In October 2011, the index was at 17. The all-time low was January 2008, at 8.

Forty-six does sound good compared to 17 or 8, but it still means that less than half are seeing rosy conditions ahead.

True, says NAHB Chief economist David Crowe, “Our confidence gauge has yet to breach the 50 mark, and we have certainly made substantial progress since this time last year, when the index was 17,” he said, “but difficult appraisals and tight lending conditions for builders and buyers remain limiting factors for the burgeoning housing recovery, along with a shortage of buildable lots.

But the good news keeps coming, says NAHB Chairman Barry Rutenberg. “Builders are reporting increasing demand for new homes, as inventories of foreclosed and distressed properties begin to shrink in markets across the country,” he said. “In view of the tightening supply and other improving conditions, many buyers who were on the fence are now motivated to move forward with a purchase in order to take advantage of today’s favorable prices and interest rates.”

Confidence is a good thing; optimism, too- but jobs are better.