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Why is Builder Confidence So Out of Touch with Reality?

by Peter Thomas Ricci

Builder confidence is far above the rate of new construction; what gives?

builder-confidence-single-family-home-construction-affluence-price

Creative Commons 2.0: Tony Alter, http://commons.wikimedia.org/wiki/File:Construction_Worker_(8098562099).jpg

Here’s an interesting nuance to the housing recovery: the Housing Market Index, which tracks builder confidence, dropped a couple points from January to February, finishing at 55; even with that decrease, though, builder confidence remains disproportionately higher than the actual rate of single-family home construction, the measurement it purports to follow.

How much higher? Try 170 percent. That is not a typo.

See our graph below, which tracks the last few years of builder confidence and construction, for an idea of the divide:

This is a fair time to ask a simple question – “What gives?” Why on earth would a measurement of confidence in single-family home construction be so much higher than actual construction?

Here are several things to consider:

•First, keep in mind that a builder confidence score of 55 still means that 45 percent of homebuilders are dissatisfied with the current state of new construction; so although a 55-score does show that a majority of builders are confident, we can’t forget that a hefty share of builders still lack that confidence.

So why is that 55-percent of builders so confident? In short, they’ve adapted with the marketplace. New construction (like the rest of the housing market) has shifted towards affluence, and higher-priced listings have surged in stunning fashion – not only is the median sales price for new homes rising 28.3 percent from 10 years ago, but also, in 2014, there were more new home sales priced $400,000 and above than $200,000 and below.

•Why? Simply, with incomes stagnant and savings low, some builders have shifted their production to big homes, aka towards the only consumers who can purchase homes nowadays – the affluent classes. So for the builders who made that shift, times are great and confidence is high; for those who didn’t, times are still a bit difficult and confidence is lagging.

•Finally, consider the following statistic – from Jan. 2002 to Jan. 2015, the share of multifamily construction has risen from 17.2 percent of the marketplace to 35.1 percent, meaning that not only is multifamily booming, but that single-family construction remains in the dumps, relative to historical averages; so those builders who shifted to a more expensive product were, in a time of rising lumber costs, seeking to squeeze every bit of profit out of the few single-family developments around.

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