By Jacob Passy
The numbers: The National Association of Home Builders’ monthly confidence index increased one point to 68 in September, matching the highest reading in a year, the trade group said Tuesday.
The trade group also revised its August figure up by one point to 67.
Readings over 50 are a sign that confidence is improving, while a figure below that threshold would signal deteriorating sentiment among builders.
What happened: Home-builder confidence has steadily improved throughout 2019, particularly as the mortgage-rate environment has improved.
The gauge of current single-family home sales increased two points to 75, the highest reading in a year. However, the indicator of expectations for future sales dropped one point to 70. The gauge of sentiment regarding buyer traffic remained even at 50.
Regionally, home-builder sentiment improved markedly in the Northeast, South and West and remained even in the Midwest.
Big picture: The NAHB’s index can be an indicator of future home-building activity. Put simply: Builders who are confident in the health of the real-estate market are more inclined to start construction of new homes. This can have ripple effects throughout the rest of the economy, thanks to a boost in employment.
The real-estate market’s struggles of late have largely been tied to affordability, and depressed home-building activity is a major contributor to those hurdles. There are very few homes up for sale relative to long-term historical averages, and building activity has yet to fully rebound from the last recession.
“The housing story remains primarily one of imbalance between demand and supply,” Doug Duncan, Fannie Mae’s (OTC:FNMA) chief economist, said in a research note Tuesday. This imbalance has driven home prices higher, forcing many would-be buyers to the sidelines.
Low mortgage rates have helped the situation some, but increased building activity at the affordable end of the market could help even more. “Refreshingly, in the absence of existing stock, home builders appear to be increasingly focused on entry-level homes, as the median square footage of new single-family construction fell 4.3% in the second quarter,” Duncan said.
What they’re saying: “Builders saw a continuation of the improvement in business from late 2018, but metrics softened slightly from a very strong July, and pricing power appears to have weakened,” BTIG Research homebuilding analyst Carl Reichardt, Jr. and REIT (TSE:CA:REIT) analyst Ryan Gilbert wrote in a research note based on a survey of small- and medium-sized home builders released Monday.
As the market shifts into a lower gear as summer draws to a close, home builders’ pricing has softened as expected. But the BTIG analysts noted that some builders see the market’s “recent strength as a ‘flash in the pan’ caused by the sudden rate drop.”
Market reaction: Shares of publicly-traded home builders are up significantly in 2019 as the housing market’s outlook has grown rosier throughout the year.
Shares of LGI Homes Inc. (NAS:LGIH) have increased more than 78% for the year to date, while shares of D.R. Horton Inc. (NYS:DHI) are up 42%. Comparatively, the Dow Jones Industrial Average (DOW:DJIA) is up by nearly 16% over that same period, while the S&P 500 (S&P:SPX) is up almost 20%.