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Tuesday, October 18, 2011

Housing: A comment on Builder Confidence

by Calculated Risk on 10/18/2011 03:55:00 PM

A few comments ... We have to remember that the increase in October builder confidence, released this morning by the NAHB, is just one month of survey responses and could be noise.

Also, a reading of 18 is still very low. Before the current housing bust, the record low for the builder confidence survey was 20 in 1991 - and that was considered very depressed.

But we also to have remember that housing will not be depressed forever. As the excess supply of vacant housing units is absorbed, the home builders will start building more homes. The excess vacant supply isn't spread evenly geographically. Some areas have a large supply; other areas are probably getting close to exhausting the local excess supply.

Earlier this year, economist Tom Lawler estimated the national excess vacant supply was "in the 1.6 to 1.7 million range" as of April 1, 2010 (using the Census 2010 data). I came up with a similar estimate on a state by state basis: The Excess Vacant Housing Supply (see post for table).

These estimates were for April 1, 2010; about 18 months ago. The population is still growing and the economy is adding jobs (slowly), and the U.S. is adding households. At the same time, the builders delivered a record low number of housing units last year - and will probably break that record again this year. With more households, and few units being added, the excess supply is probably declining fairly rapidly.

Unfortunately there is no timely estimate of household formation. Note: the Freddie Mac chief economist put out an esimtate yesterday for household formation, but that was based on the HVS - and that is not an accurate survey for household formation.

So at some point we'd expect pockets of improvement. As I noted, the increase in October might just be noise, but it also might indicate some areas are improving slightly. If the latter, the survey should show further increases - and housing starts should begin to pick up too (the builder survey was for October, so we will have to wait until the October housing starts are released to see if there is any related increase in starts, seasonally adjusted).

Finally, it is important to distinguish between the large number of houses with seriously delinquent mortgages and the excess vacant housing supply. Some people might assume that new home sales will not pick up until the number of delinquent mortgages declines to normal. That is not correct. Most of the houses with seriously delinquent mortgages are occupied, and the units that are vacant are included in the above estimates of the excess supply. The large number of delinquent loans - and loans in the foreclosure process - will keep pressure on house prices for some time, but that is a different issue. Building will pick up as the excess supply is exhausted in each area.

So maybe the increase in confidence indicates the excess supply has been absorbed in a few areas - or maybe it was just noise. We will have to watch and see.