Saturday, September 22, 2012

Pent up demand for new homes is bringing home-builders back to life

One major survey in the US that is showing some promising signs is the National Association of Home Builders Market Index. Here is the definition:
Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as 'good,' 'fair' or 'poor.' The survey also asks builders to rate traffic of prospective buyers as 'high to very high,' 'average' or 'low to very low.' Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
The index is clearly well below the pre-recession levels, but the trend is quite encouraging.

National Association of Home Builders Market Index SA

What is making the US home-builders more optimistic all of a sudden? The Fed's new monetary expansion? Unlikely. It certainly didn't make them jump for joy in 2010/11 (as the chart above shows).

The answer is quite simple actually. Home construction in the US has been stagnant for so long that the inventory is beginning to dwindle. Over the past four years housing starts in the US have been at the lowest levels in over half a century.

US New Privately Owned Housing Units Started by Structure 1 Unit SAAR
(U.S. Census Bureau/Bloomberg)

And now the number of new single family homes for sale is also the lowest in half a century (at least since 1963 when this data was first recorded). Over that same period the US population has increased by over 62% (over 120 mm) - and continues to grow (see discussion).

US New One Family Houses Total For Sale
(unit=thousand; U.S. Census Bureau/Bloomberg; click to enlarge)

With cheap existing houses for sale becoming less readily available (particularly if buyers are looking for homes that haven't been trashed), some buyers turn to new homes as an option. The reduced inventory is now driving the NAHB index higher. Home-builders are finally beginning to see more demand.
JPMorgan: - We think that new home sales continued to drift higher in August. Our expected pace of sales for August would be the highest since the home buyer tax credit in 2010, but it would still be quite low by historical standards.
The confirmation of this rising demand for new homes is now visible in the stock market, as the S&P Homebuilders Index touches a post-recession high.

S&P Homebuilders Select Industry TR Index (Bloomberg)
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