Some measures of the U.S. home construction market suggest things have radically improved, but does the data support that?

The Housing Market Index, the chief measure of homebuilder confidence for the single-family home construction marketplace, fell five points in October, settling at a reading of 54, according to the latest release from the NAHB; with the reading over 50, that means that more builders see market conditions as good than bad.

It was the first decline in four months for the index, and it got us wondering – given how spectacularly builder confidence has increased the last couple years, is that confidence consistent with the actual level of construction in the single-family home market?

To find out, we compared the last three years of HMI levels with the rate of single-family home construction, and what we found surprised us:

It all leads to a sensical question – why would confidence for single-family homebuilding be so high, when actual construction has not improved? Our view is that it’s a matter of proportions.

As we’ve reported on repeated occasions, the housing recovery thus far has been driven by more affluent consumers/investors, and new construction has responded to that source of demand, with the average square footage and average price of new homes reaching all-time highs as builders concentrate their offerings to a wealthier clientele.

In other words, for those builders – the ones who have catered their homebuilding to the groups that have recovered markedly since 2008 – times are quite good, while for the other homebuilders responsible for the rest of the marketplace, things have been moving sideways; after all, though an index of 54 is encouraging, it still means that nearly half of builders see market conditions as poor.

So what can we gather from this? The same thing that we gather from any housing data nowadays – things are definitely improving, but we still have quite a bit of work to do.