Home builders are expressing optimism for better days ahead. They are partly right. But their recent roaring confidence could be a bit misleading.
The home builder confidence index reached its second highest monthly reading in nine years. The latest index of 58 in October was an improvement from 54 in the prior month. Such a high reading should be implying all is going well in the home building industry. That is not the case.
Nearly all home builders work on single-family homes and not apartments. And the actual construction of single-family homes is still pretty much down and out. The recent months’ construction pace of around 650,000 is only about half the normal rate. Multifamily construction, by contrast, is essentially back to normal. This trend reflects the strong rise of a 4 million net new rental population and one million fewer homeowners in the population since 2010.
It is unclear, but one possible explanation for the divergence between home builder confidence and low housing starts could be due to the fact that many small mom-and-pop builders have gone out of business and therefore are not expressing their view in the surveys. Extreme difficulties of obtaining construction loans have hinder smaller-sized local builders. The larger regional and national home builders (like D.R. Horton, Pulte, and Toll Brothers for example) do not need construction loans and tap capital via Wall Street. Therefore the large builders have been gaining market share and they are the ones who would be feeling much more confident about the industry.
Directionally at least, housing starts are likely to increase in the upcoming months because of improvements in the home builder confidence. The total housing starts in 2015 are likely to be 1.25 million, up from 1.0 million this year. Single-family starts are likely to get bumped to 840,000 in 2015 from 640,000 or so this year. The increase in new home construction will help relieve housing inventory shortages in many markets ahead of the spring buying season.
Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.