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Economy in Brief

Home Builders Index Takes A Step Back
by Robert Brusca August 17, 2010

The home builders index took a step back in August as all components of the index fell, except traffic that held steady.

Across regions the indices also fell with the Midwest being stable month-to-month and the Northeast taking the largest plunge.

The components of the main index are all in the lower 10% of their long-term range or lower. The regional indices show higher percentile readings because the regional indices only go back to 2004. But even with that shortened perspective the regional weakness is still clear. Home builders still have a large stock of unsold homes that hold them back and the weak economic environment does not help them.

How else do we explain such weakness with home affordability so good? The affordability index as of JUNE stood in the upper 5th percentile of all index values since mid 1982. This shows extremely good affordability (low costs). In this environment we would expect housing to do well. Why doesn't it?

National Association of Home Builders Index
Traffic North
South* West*
Aug-10 13 14 18 10 18 15 13 8
Jul-10 14 15 21 10 23 15 14 9
Jun-10 16 17 22 13 16 14 19 14
May-10 22 23 27 16 35 17 22 19
Apr-10 19 20 25 13 21 15 21 13
Mar-10 15 15 24 10 22 10 17 15
3-M 14.3 15.3 20.3 11.0 19.3 14.7 15.3 10.3
6-M 16.5 17.3 22.8 12.0 22.7 14.3 17.7 13.0
12-M 16.7 17.0 24.9 12.7 22.2 14.3 17.7 14.7
Ranges and Percentiles Since 1985;  Except regional Indices
Percentile 7.1% 10.0% 4.4% 5.5% 35.7% 64.3% 14.3% 16.7%
Max 78 86 83 62 36 20 31 28
Min 8 6 15 7 8 6 10 4
Red indicates drop from previous period.  All ranges Since Jan 1985 unless noted * Since Dec 2004

The reasons range from a bloated stock of homes for sales to a mispriced stock (homes built for conditions when bankers lent more generously) and weaker economic conditions or at least poor confidence. Home prices still are soft and buyers don't like to buy if they think prices are still falling.

It may also be that LOW RATES PER SE are bad for housing. How could that be?

Why low rates could be bad for housing sales - Low rates make housing more affordable that is IF you can get a loan. That may be the problem. Low rates may make banks less eager to lend. Banks have been acting for some time as if this is the case. The current spreads look good but that may not be enough. Bankers take a long time to approve loans and it's not because they are better at their due diligence. The longer they take to approve loans, the fewer loans get made. Many banks act as though they do not want fixed rate mortgage assets at these low rates on their books. If this is true it would explain this lagging lending behavior. Also banks are much more aggressive about holding applicants to credit score results to qualify buyers for the best rates. That could be keeping buyers at bay. Perhaps if the mortgage rates were higher, banks would not be as fussy? As for variable rates, bankers undoubtedly look at those as a potential problem. Rates are so low now even if you qualify a buyer on the formula rate (instead of an incentive-reduced 'teaser rate') he is likely to see big jumps in the interest costs over the life of the loan. So those loans are looked at as more risky. On balance if bankers view rates as low ( too low) and run from even good credits at fixed rates and fear the credit risk on variable rates it creates a situation where mortgage lending could be the culprit for weak home sales more than weak demand. Already banks have been 'fooled' as a weak economy has brought rates down to even lower levels. Bankers claim they are not tightening standards but the real question is how are they acting? They are not writing mortgages aggressively that's for sure. Home buyers are being rationed these low rates and great affordability is being wasted.

Why isn't Housing starting to stir?
  30Y ARM H.Affordability
10-Aug N/A N/A N/A
Jul-10 4.56 3.73 N/A
Jun-10 4.74 3.86 158.90
May-10 4.89 4.01 166.50
Last 3Mo 4.73 3.87 164.57
Last 12Mo 4.94 4.26 167.91
Last 24M 5.20 4.62 164.03
5-Yr 5.80 5.08 134.18
10-yr 6.10 4.90 131.09
Since 7/82 8.37 N/A 119.67
Rank% 94.60%
10-Y Rank 120 113 18
Percentile 0.0% 5.8% 85.0%
Median 6.095 4.915 127.4
% of Median 74.8% 75.9% 124.7%
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