The housing market has been surging for years, but with talks of an economic downturn ahead, is builder confidence finally starting to dip? Let’s take a look at some of the more interesting numbers, breaking it down between builder confidence and the remodeling market.
NAHB (National Assn. of Home Builders) conducts the NAHB/Wells Fargo HMI (Housing Market Index) monthly and it also releases the NAHB/Westlake Royal RMI (Remodeling Market Index) quarterly—both of which have declined in July.
Developed from a monthly survey that NAHB has been conducting for more than 35 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair,” or “poor.”
Meanwhile, the NAHB/Westlake Royal RMI is a quarterly survey that was redesigned in 2020 to ease respondent burden and improve its ability to interpret and track industry trends.
Housing Market Index in July
Overall builder confidence fell in July of this year, as inflation and interest rates continued to rise. This all came alongside dramatically slowing sales and buyer traffic. The numbers tell an interesting story.
Builder confidence in the market for newly built single-family homes saw its seventh straight monthly decline in July, falling 12 points to 55. This marks the lowest HMI reading since May 2020 and the largest single-month drop in the history of the HMI, except for the 42-point drop in April 2020.
Here’s how it works. The survey asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.
Sitting at 55 means more builders view conditions as good rather than view the market as poor, but if you really look at the significant drop you see there is a very telling story for a potential downturn in the future.
All three HMI components posted declines in July: Current sales conditions dropped 12 points to 64, sales expectations in the next six months declined 11 points to 50, and traffic of prospective buyers fell 11 points to 37.
From a regional perspective, the Northeast dropped six points to 65, the Midwest fell four points to 52, the South declined eight points to 70, and the West posted a 12-point decline to 62.
Remodeling Market Index in July
The quarterly RMI is showing similar signs of a slump, with a second quarter reading of 77, which is a 10% decline compared to the second quarter of 2021.
Here’s how this one works. The NAHB/Westlake Royal RMI survey asks remodelers to rate five components of the remodeling market as “good,” “fair,” or “poor.” Each question is measured on a scale from 0 to 100, where an index number above 50 indicates that a higher share view conditions as good than poor.
The Current Conditions Index is an average of three components: the current market for large remodeling projects, moderately sized projects, and small projects. The Future Indicators Index is an average of two components: the current rate at which leads and inquiries are coming in and the current backlog of remodeling projects. The overall RMI is calculated by averaging the Current Conditions Index and the Future Indicators Index. Any number over 50 indicates that more remodelers view remodeling market conditions as good than poor.
The Current Conditions Index averaged 83, dropping eight points compared the second quarter of 2021. All three components declined as well: the component measuring large remodeling projects ($50,000 or more) fell 11 points to 79, the component measuring moderately sized remodeling projects (at least $20,000 but less than $50,000) dropped seven points to 84, and the component measuring small remodeling projects (under $20,000) declined by six points to 86.
The Future Indicators Index dropped 11 points to 72 compared to the second quarter of 2021. The component measuring the current rate at which leads and inquiries are coming in fell 13 points to 68, and the component measuring the backlog of remodeling jobs decreased by 10 points to 76.
To track quarterly trends, the redesigned RMI survey asks remodelers to compare market conditions to three months earlier, using a “better,” “about the same,” “worse” scale.
Roughly 21% of remodelers said the market had gotten worse in the second quarter of 2022, compared to only 11% who said it had gotten better. This is the first time the “worse” has exceeded the “better” percentage since the first quarter of 2020 (the quarter of the onset of the pandemic).
Future Thoughts
Interestingly, many of the readings remain above 50, which indicates more builders view conditions as holding its own. But the rapid decline in numbers is telling, suggesting the market is weakening, and builders should prepare for a potentially slower market in the months ahead.
If you continue to forecast what this means, builders should shore up business processes, consider using technology to eliminate wasted time and money, and hunker down with a tight and efficient operation.
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