Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Homebuilder Confidence Increases As Recovery Gains Traction

Written by Than Merrill

Approximately one year ago, the housing market appeared to have gained significant traction. Both sales and prices were on an upward trajectory for the first time in years. For all intents and purposes, confidence in the housing sector was legitimate. However, after an encouraging summer, home sales stalled and prevented the market from making any progress. Fast-forward one year later, and the market appears destined to alleviate the stagnation that ushered in 2014.  Homebuilder confidence, in particular, looks poised to get the housing sector back on track.

Current sales, the outlook of future purchases, prospective buyer traffic and a strengthening job market have all promoted an increased confidence among homebuilders. According to the National Association of Home Builders (NAHB), confidence on a sentiment gauge climbed to 49 this month from 45 in May. Anything over 50 represents good market conditions. The increase also indicates the largest gain in confidence since July 2013.

As it stands, sales within the housing market are down about 7 percent from where they were at this time last year. While there are several variables that account for the decline, there is one in particular that economists are focusing their attention on. A big part of why the housing market remains so stunted is that there are more than 2 million missing households in the United States. In other words, fewer people can purchase a home. Those that are looking have found inventory levels to be less than accommodating.

Instead of joining the renter pool or acquiring property, a large number of Americans in their 20s are living with family or tripling up with roommates. Those familiar with the current market attribute the lack of homebuyers to the recent recession, as it has become increasingly difficult to save up enough money for a down payment.

According to several economists, millennials that have decided to live with parents or roommates represent pent-up demand. However, in theory, these individuals should move out and actively participate in the housing industry with the money they have managed to save. Their return to the market will ultimately stimulate job growth and improve the economy as a whole. The only problem with this scenario: The market remains void of first-time homebuyers.

According to David Crowe, the chief economist for the NAHB, “the first-time homebuyer is really absent from the market.”

Crowe acknowledged that first-time buyers make up just 16 percent of new-home sales. That is about half of what we have come to expect in the past. Furthermore, we are only halfway back to where we want to be in terms of new home starts.

Fortunately, the market is heading in the right direction. Confidence among homebuilders rose in June by the most it has seen in about a year. The increase in confidence serves as an encouraging sign that the residential real estate market is stabilizing.

It is estimated that 100 percent of the nearly eight million people who lost their jobs have reentered the labor force. Housing prices have increased dramatically, as fewer homeowners are currently underwater. These indicators, and several more just like them, suggest that the rebound is finally gaining traction. Furthermore, a study conducted by the NAHB supports the notion of a return to normalcy. Of the approximately 350 metro markets nationwide, 56 returned to or exceeded their last normal levels of economic and housing activity. All of these factors have instilled confidence in homebuilders.

An increase in the labor force should release some of the pent-up demand, but new-home starts will need to keep up. It appears, for the time being, that homebuilders look to increase their workload. The group’s gauge of prospective buyer traffic rose to 36 from 33 the prior month, while the index of current single-family home sales increased to 54 from 48. The measure of the six-month sales outlook improved to 59 in June from 56. All three sub-indexes were the highest since January. These numbers favor homebuilder outlooks and should encourage them to keep up with demand.

While the industry has certainly seen dramatic improvements, it is still well off of what would be considered average. However, an upward trend in homebuilder confidence will continue to support the recovery. Prospective homeowners will finally be able to participate in the housing market.