The Mortgage Corner

The National Association of Home Builders just announced that home builder confidence soared to the highest level since 2006, the height of the housing bubble.  This can only mean more new-home construction to fill the pent up demand for housing after 4 years of housing depression.

Builder confidence in the market for newly built, single-family homes rose six points to 57 on the Association of Home Builders/Wells Fargo Housing Market Index (HMI) for July, released today. This is the index’s third consecutive monthly gain and its strongest reading since January of 2006.

“Builders are seeing more motivated buyers coming through their doors as the inventory of existing homes for sale continues to tighten,” noted NAHB Chief Economist David Crowe. “Meanwhile, as the infrastructure that supplies home building returns, some previously skyrocketing building material costs have begun to soften.”

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Graph: Calculated Risk

That brings up the subject of inflation, as building material prices are bound to rise with the increase in demand for new homes. And the Consumer Price Index is rising, but it also means housing prices are rising, a good thing. Housing prices tend to rise with inflation—in fact, are a sign of rising inflation—as do interest rates. So it will be a race for homeowners to get in on any bargains left with Bernanke’s Federal Reserve determined to slow down QE3 purchases this year.

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Graph: Calculated Risk

Year-on-year, overall CPI inflation jumped to 1.8 percent from 1.4 percent in May (seasonally adjusted). The core rate posted at 1.6 percent, compared to 1.7 percent. By major components outside the core, most of the rise was in energy, up 3.4 percent. Gasoline surged 6.3 after no change in May. Advances for shelter, medical care, and apparel accounted for most of the rise in the core measure, with increases in the indexes for new vehicles and household furnishings and operations also contributing.

A major reason for the surge in builder confidence is also the lean inventory of existing home sales. The home resale market is surging, up 4.2 percent to an annual sales rate of 5.18 million which is the highest since the home stimulus credits of late 2009. The gain is centered in the key single-family home category which is up 5.0 percent in the May report.

This is while the median price is up 8.4 percent in May alone, to a recovery best $208,000. The average price, at $255,300, is up 5.6 percent in the month. Year-on-year gains are 15.4 percent for the median price and 11.2 percent for the average.

Lack of supply is a key factor behind the price surge, as we said, and the reason for so much builder optimism. More supply did come into the market in May, totaling 2.22 million homes for sales vs 2.15 million in April, but declined relative to the surging sales rate. Supply measured against sales is at 5.1 months vs 5.2 months in April in a reading that points to further price strength for housing construction and new home sales, as well.

Harlan Green © 2013

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