CNBC - Diana Olick - 15 December 2016
Call it the Trump rally in homebuilding — not the stocks, but the sentiment of the builders themselves.
A monthly reading of homebuilder confidence spiked 7 points in December, its first measure done after the presidential election.
The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) rose to 70, the highest level since July 2005. Fifty is the line between positive and negative sentiment. The index has not jumped by this much in one month in 20 years. It stood at 60 one year ago.
"This notable rise in builder sentiment is largely attributable to a postelection bounce, as builders are hopeful that President-elect Trump will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability," said NAHB Chairman Ed Brady, a homebuilder and developer from Bloomington, Illinois.
"This is particularly important, given that a recent NAHB study shows that regulatory costs for homebuilding have increased 29 percent in the past five years," added Brady, whose name has come up as a possible head of the Federal Housing Administration in the Trump administration.
Of the index's three components, current sales conditions increased 7 points to 76, sales expectations in the next six months rose 9 points to 78 and buyer traffic rose 6 points to 53. This is the first time buyer traffic has been in the positive since October 2005.
"Though this significant increase in builder confidence could be considered an outlier, the fact remains that the economic fundamentals continue to look good for housing," said NAHB Chief Economist Robert Dietz. "The rise in the HMI is consistent with recent gains for the stock market and consumer confidence. At the same time, builders remain sensitive to rising mortgage rates and continue to deal with shortages of lots and labor."
Mortgage rates have been on the upswing since the election, with the average rate on the 30-year fixed moving higher again Wednesday, after the Federal Reserve announced its expected quarter-point hike in the Federal Funds rate and that it would likely raise rates three times next year.
Despite rising rates, stocks of the big public builders rose along with the rest of the market. They did drop pretty sharply after Trump's Treasury secretary-designate, Steve Mnuchin, suggested capping the mortgage interest deduction, a tax benefit that is highly popular with homebuyers. The stocks then recovered after that.
Homebuilder sentiment used to correlate closely with housing starts, but the two have diverged widely since 2012, when home prices hit bottom after an epic crash. Homebuilder sentiment has risen relatively swiftly, but actual home construction is still well below historical norms. Part of this may be due to the fact that the survey mostly covers smaller custom builders and not the public high-production builders, who have taken over considerable market share.
A similar survey by John Burns Real Estate Consulting is weighted more toward high-production builders and toward current sales. It found no change in sentiment after the election.
"Builders told us that sales and expected sales are better than average, and traffic is slightly worse than average. Since the builder responses were virtually identical to the responses last month and last year, and this survey is weighted 59 percent to actual sales rather than sales expectations and buyer traffic, I am surprised by the sharp increase in the [NAHB] index," said Burns.
Burns is not surprised, however, that builders were less phased by rising interest rates.
"A strong economy is more important than interest rates," he added.