TheMReport

58 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T ANALYTICS THE LATEST Builder Confidence Rises to Six-Month High Job creation, low rates, and high demand play a big role. B uilder confidence for newly constructed single- family homes in June increased to its highest level since January after hold - ing steady for four consecutive months, according to a recent Na- tional Association of Home Build- ers (NAHB)/Wells Fargo Housing Market Index (HMI). The NAHB/Wells Fargo HMI gauges builder perceptions of cur - rent 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." Any number over 50 indicates that more builders view conditions as good than poor. Builder confidence rose to 60 in June after holding at 58 for four straight months and is at its high - est level since posting a reading of 61 in January. The HMI is now seven points lower than its recent peak of 65 in October, but the in- dex is still well above the tipping point of 50. All three components of the HMI increased over-the-month in June, according to NAHB. Current sales conditions ticked up by a point from 63 to 64; the component that measures sales expectations for the next six months increased from 65 to 70; and the component of the index that measures buyer traffic jumped from 44 to 47. The sales expectations com - ponent has risen by eight points in the last two months; June's five-point spike followed a three- point increase from April to May, according to NAHB. "The fact that future sales expectations rose slightly this month shows that builders are confident that the market will continue to strengthen," NAHB Chief Economist Robert Dietz said in May. "Job creation, low mortgage interest rates and pent- up demand will also spur growth in the single-family housing sector moving forward." What Happened to Housing Formation Estimates? New Fannie Mae report delves into huge drop in housing formation growth. T here was a lot of optimism surrounding household formation just two years ago. In 2014, the U.S. Census Bureau's fourth-quarter Housing Vacancy Survey (HVS) found that annual household formation jumped to nearly 2 million, leading analysts to believe that household forma- tions—a fundamental economic driver that generates demand for as many as three out of every four new housing units—was finally out of its recession-era trouble. But no. Over the last two quarters, the HVS has shown household growth estimates plummeting to only about half a million per year, which is not that much better than the worst read- ings from the recession. Troubled by the new esti- mates, Fannie Mae studied the underlying factors for the volatility in its latest Housing Insights re- port. According to that report, a historically large increase in the HVS housing unit occupancy rate during late 2014 and a divergence during the last two years between the survey's housing stock growth estimates and independent data on new housing construction have contributed to the recent swings in the survey's household forma - tion estimates. Part of the excitement two years ago was that Q 4 2014 was the largest spike in housing formation ever, surging from 736,000 to nearly 2 million. The late-2014 spike in the HVS household formation estimate was credited to pent-up millen - nial housing demand finally being released, and pretty much every- one expected that housing market recovery was shifting into fifth gear, according to Fannie Mae. But HVS estimates of occupancy rates flattened at around 87 percent after the Q 4 2014 surge. According to Fannie Mae, key housing stock estimates used in the HVS have not increased much either. "Since Q 3 2014, growth in the housing stock has flattened at about 770,000 units per year," the report states. At the same time, new housing production (i.e., single- family and multifamily housing unit completions and manufactured home shipments) has continued to accelerate from 900,000 units per year to more than 1 million units. "Because the HVS housing oc - cupancy rate has stagnated over the past year, and because the independent housing stock estimates aren't increasing very rapidly," the report states, "HVS-based estimates of household growth have dropped substantially in recent quarters." Nevertheless, Fannie Mae's alternative household growth es - timates see household growth on a gradual path of recovery from the severe downturn of the Great Recession, not as a rollercoaster. "The alternative series indicates that about one million households were added during the most recent year, a level of growth con - sistent with estimates produced by other researchers using different methodologies," the report states. "These alternative household growth estimates should temper some of the late-2014 exuberance and allay some of the more recent concerns over the trajectory of household formation. They suggest that recent trends in household growth are consistent with a gradual, albeit frustratingly plod - ding, housing market recovery."

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