The NAHB Wells Fargo Home Builder’s Index Is Sinking Spectacularly – Mish Talk

May 24, 2022

I created the above chart from a data download courtesy of the National Association of Home Builders and Wells Fargo,

The NAHB/Wells Fargo Housing Market Index (HMI) is based on a monthly survey of NAHB members designed to take the pulse of the single-family housing market. The survey asks respondents to rate market conditions for the sale of new homes at the present time and in the next six months as well as the traffic of prospective buyers of new homes.

Methodology

The NAHB/Wells Fargo HMI is a weighted average of three separate component indices: Present Single-Family Sales, Single-Family Sales for the Next Six Months, and Traffic of Prospective Buyers. Each month, a panel of builders rates the first two on a scale of “good,” “fair” or “poor” and the last on a scale of “high to very high,” “average” or “low to very low”.
Each resulting index is first seasonally adjusted, then weighted to produce the HMI. The weights are .5920 for Present Sales, .1358 for Sales for the Next Six Months, and .2722 for Traffic. The weights were chosen to maximize the correlation with starts through the following six months.

My chart uses displays the three components from the download with a calculation that matched the stand alone NAHB index table.

NAHB Wells Fargo Housing Market Long-Term Index

NAHB data, chart by Mish

Chart Comments

The long-term chart shows just how wild present conditions became. The present conditions index peak was 96 in November of 2020 in the wake of a Covid rebound.
Conditions remained very strong for a year, easily exceeding the housing bubble peaks.
Each component is now sinking rapidly, especially traffic.

Home Builder Look-Ahead Sentiment

NAHB data, chart and calculation by Mish

Unprecedented Look-Ahead Sentiment

Homebuilder sentiment as measured by the difference between current conditions and expected conditions six months ahead is at record lows.

Normally builders are an optimistic group. Note the overwhelming percentage of times sentiment is better than current conditions, even in three of the last four recessions.

Current sentiment is at unprecedented levels. Don’t expect builders to build a lot of homes on spec hoping to sell them.

New Homes for Sale

New home sales data from commerce department, chart by Mish

On April 26, I noted New Home Sales Take a Big Dive From Upward Revisions

Let’s put a spotlight on new homes for sale.

New Homes by Stage of Construction

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New home sales data from commerce department, chart by Mish

With sentiment this low, most of those 110,000 homes for sale that have not yet been started will not be started.

For Sale Construction Details

406,000 New Homes For Sale
Only 36,000 Actually Built
110,000 Not Started
259,000 are Under Construction

Yet, those homes count towards inventory.

On April 26, I made this comment:

Realistically, there are 295,000 homes for sale not 406,000. The 110,000 not started yet is a new record that tops the housing bubble years.

When buyers dry up, and it’s happening now, who knows if and when those not started yet actually get started.

Q&A on Started Homes

Q: Will builders be in a rush to finish homes that have started but not sold?

A: For multi-family homes, yes. Builders need to finish. The rest depend on how close to finish the builder is. If the “start” is little more than a hole in the ground, don’t expect those homes to finish anytime soon.