Builders Optimistic about the Current Market

The majority of homebuilders believe market conditions are currently good as opposed to poor for the sixth consecutive month, according to the industry’s trade group.

For November, the NAHB/Wells Fargo Housing Market Index is at 54, unchanged from October. The component that measures current sales conditions remains at 58. Expectations for future sales are down one point to 60 and the one which measures the traffic of prospective buyers is down one point to 42. Any score over 50 means more builders said things are good versus poor.

Rates are remaining relatively low, even as they have risen in recent weeks, and the inventory of homes for sale is still tight, plus there is a pent-up demand to own a home, all of which is good news for homebuilders, says Dottie Herman, president and CEO of real estate company Douglas Elliman.

From NAHB’s point of view, consumers are holding back because of the inaction of Congress on the budget, taxes and government spending, its chairman Rick Judson said in a press release.

However, homes nationwide are undervalued by 4%, even though there are pockets where prices have increased rapidly, leaving some to claim the markets are starting to get frothy, Herman says. During the boom, most of the nation was overvalued by 39%. There is a limited supply of homes today versus an oversupply during the bubble. Plus it is tougher today for consumers to get financing and when they can get a loan, borrowers need to come in with more of their own equity, she says, which is also different compared with the bubble.

The higher-equity environment means people are less likely to walk away from their property if the market turns again.

So there is no bubble developing right now, Herman says.

Rising interest rates are also a sign that the economy is getting healthier and that the government has met the target for reducing unemployment, Herman points out.

Still there is some uncertainty in the market, including debates on the future of the 30-year fixed-rate mortgage, which has been the staple of the home finance market since after the Great Depression. Some of the builders are worried that the 30-year FRM will no longer be available and that Federal Housing Administration financing is also getting difficult to obtain, she says.