The most recent Housing Market Index, released Feb. 18 by the National Association of Home Builders and Wells Fargo, won't help ease concerns that the industry's expansion may be stuck in neutral.
In suffering the largest one-month dip in its history, the index will certainly prompt questions from those who are concerned the latest wave of poor economic data is the result of more than just adverse weather conditions. The HMI fell 10 points to a reading of 46 for February, according to the trade group's release. Severe winter conditions, but also concerns about the cost and availability of labor and lots contributed to the low index reading, which serves to gauge confidence in the national market by surveying builders and economists. Any reading below 50 indicates that more respondents feel pessimistic about the state of the industry – a threshold it hadn't fallen below since May of last year.
With inventory shortages still the primary issue needing to be addressed throughout national housing markets, builders remain worried about their access to the permits and supplies necessary for new projects. Rapid rates of price appreciation in many metro markets have led to a dynamic where supply levels are greatly exceeded by demand, an issue that is most effectively remedied through new construction. Coupled with suddenly stagnant consumer sentiment, which has served to reduce the number of prospective buyers entering the marketplace, the ability to meet demand is the top priority for builders across the country.
"Significant weather conditions across most of the country led to a decline in buyer traffic last month," said Kevin Kelly, NAHB chairman and a builder and developer located in Wilmington, Del. "Builders also have additional concerns about meeting ongoing and future demand due to shortage of lots and labor."
A housing issue or an economic one?
According to David Crowe, the NAHB's chief economist, survey respondents may have also been spooked by the weak returns seen in terms of labor growth and in consumer spending to begin 2014. The survey asks builders to rate traffic from prospective buyers as "high to very high," "average" or "low to very low." Weather conditions undoubtedly discouraged spending on a variety of levels throughout December and January, and given that the winter historically serves as something of an offseason for the housing market anyway, it remains possible that the HMI returns are simply part of an extended seasonal aberration.
"Clearly, constraints on the supply chain for building materials, developed lots and skilled workers are making builders worry," Crowe acknowledged in the group's release. "The weather also hurt retail and auto sales and this had a contributing effects on demand for new homes."
Each of the three major survey components experienced a decline to begin February, with current sales conditions falling 11 points to a rating of 51. The sales expectations component for the next six months dropped from 60 to 54, while the reading designed to measure buyer traffic dipped from a reading of 40 to 31. In terms of individual regions, the index for the West, where the weather's effect were considerably lesser, was unchanged at a reading of 63. The Midwest experienced a one-point reading decline, from 58 to 57, while the South registered a three-point decline to 53 and the Northeast index fell by four points to 38.
The concerns that economic data was being adversely affected by more than just the weather began when a second consecutive jobs report offered disappointing returns in January. Those worries have only been compounded as consumer spending returns to begin the year have been down, while the Federal Reserve proceeds at full steam with its plans for tapering the pace of economic stimulus. Although the Fed's reduced rate of bond buying signals, in theory, that the economy is in a position to sustain itself, the trend toward slowed hiring and scaled back manufacturing is not quelling those apprehensions.
A Reuters report revealed that the New York Federal Reserve Bank's Empire State general business conditions index dipped significantly to 4.48, from a 12-month high reading of 12.51 in January. The index, which surveys manufacturing plants throughout New York State, is considered a reliable early barometer of U.S. factory conditions.
In the wake of the two separate index releases, the Dow Jones index of housing stocks fell 0.7 percent, and all three builders in the S&P 500 index moved approximately 1 percent lower.
Of course, the fact that the housing market is being affected at a time of reduced asset purchasing by the Fed should not necessarily come as a surprise. The notion that the industry might cool as the Fed commenced with tapering has been accepted for the better part of the past year, as borrowing costs and interest rates figure to rise with the reduced level of stimulus. The hope is that with better weather and signs of improvement from the labor market, that stagnation will be relatively short-lived.