The National Association of Homebuilders HMI index struggles to gain any lasting positive momentum. Traffic from potential buyers is abysmal.
Understanding the Index
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 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”. An index is calculated for each series by applying the formula “(good – poor + 100)/2” or, for Traffic, “(high/very high – low/very low + 100)/2”.
Each resulting index is first seasonally adjusted, then weighted to produce the HMI.
HMI Index Weights
- Present Sales: 0.5920
- Sales for the Next Six Months: 0.1358
- Traffic: 0.2722
- The weights were chosen to maximize the correlation with housing starts through the following six months.
Six Month Expectations
What homebuilders expect 6 months out is extremely correlated to present conditions making it all but useless.
I removed the outlook from the index and did a recalculation leaving the combined weight still add up to 100.
My calculation did not change the index much, dropping the index from 43 to 42, from 45 to 44, from 51 to 50, from 51 to 49, and from 48 to 46 in the last five months, most recent first. This is due to the small weight the NAHB assigns to homebuilder expectations.
NAHB Housing Market Index vs Mortgage Rate
Generally speaking, and as expected, traffic picks up as mortgage rates decline and slows when mortgage rates rise.
The yellow highlights are a couple of minor instances where the expectation did not hold true.
NAHB Wells Fargo Housing Market Index Since 1985
The long-term chart shows traffic readings under 30 are infrequent with readings under 20 very infrequent.
Except during the Great Recession, traffic readings under 20 have been contrary indicators. We are not there yet.
Housing Starts Rise 5.7 Percent Following Negative 2.6 Percent Revision
The latest New residential construction report was in May, for the month of April.
I reported Housing Starts Rise 5.7 Percent Following Negative 2.6 Percent Revision
The word of the day is revision. The Census Department revised housing starts and permits all the way back to 2017.
The NAHB says “The weights were chosen to maximize the correlation with housing starts through the following six months.”
Good luck with that given volatility, high margins of error, and revisions in the residential construction reports.
The NAHB has a link that discusses the correlation, but it’s broken. I notified the NAHB of that today.
I suspect the NAHB traffic measure in isolation is a better measure of what’s on consumers’ minds than attempts to subjectively measure three components trying to match a report that itself is questionable.
Existing-Home Sales Mostly Stagnant for 17 Months
On May 22, I reported Existing-Home Sales Decline 1.9 Percent, Sales Mostly Stagnant for 17 Months
Existing-home sales fell 1.9 percent in April and are also down 1.9 percent from a year ago. Sales have not gone anywhere for 17 months.
New Home Sales Sink 4.7 Percent on Top of Huge Negative Revisions
For discussion, please see New Home Sales Sink 4.7 Percent on Top of Huge Negative Revisions
New Home Sales plunged. And the Census Department completely revised away last month’s fictional 8.8 percent rise.
Housing Short Summation
Housing is broken and the Fed is largely to blame.
As noted in February, The Fed’s Big Problem, There Are Two Economies But Only One Interest Rate
I need to update that post, but nothing much has changed.
The HMI, starts, new home sales, and existing-home sales have been floundering for two years.
In 1992 Traffic and Index were glued together. In 1995 they were separated.
Between 2006 and 2012 they were glued together. In the 2020 quicky and in
2022/2024 there was a space between them.
Option #1 : test the top, before completing an A-B-C down.
Option #2 : stay up separated until the end of the decade.
Option #3 : cont down in unison.
1992 & 2011 triggers : Traffic & Index are glued together, accelerating up, racing each other, before separation. Signs of troubles : glued together, accelerating down together, racing each other on the way down.
Higher rates for longer are impacting housing as they are designed to do.
Those who want to trade up can not carry the additional costs of a larger principle plus higher cost of finance.
Those who want to trade down find that why live smaller for the same money as what they have now.
Only real estate holding up is located in low crime areas with adequate municipal infrastructure pre-existing which puts a cap on property tax increases.
Areas which offer Peace and tranquility are big selling features and are getting premium treatment.
Starter housing will not get built as it is no longer feasible to build it.
Sweat equity is the only path forward for those first time buyers who are willing to commit themselves.
I would add Fed is not going to cut until something breaks.
Trading risk aversion remains the best macro assessment.
NAHB index : (Good – Poor + 100)/2. In recessions good is low and poor is high, therefore the index is low.
In 2024 good is still too good and poor isn’t poor enough.
Can poor be so poor, above 100. Can the index become negative ??
Can the index test 2021 high (96) ??
When NAHB enter the yellow zone the housing market is in troubles. It might be in accumulation not in recession. In the 90’s we had two. 1995 was a test (26) of 1992 low (16). 1995 jumped.
In the last 4 years we had two yellow zones. 2022/2024 might be a test of 2020 (13), but 2022/2024 isn’t sharp. The index is in mid level. It might get worse, an A-B-C down. There is no blood in the streets as it was during the 1990’s, when 6000 banks collapsed, and during the six years between 2006 and 2012. 2022/2024 might be #2 out of 3 or several pulses that will come later. We might get multi yellow zones. We are either in accumulation or in distribution. The index, the dotted line, is too high. There is space between traffic and index. They are separated. The index might cont lower. We don’t know. This chart has to be studied again.
It all reeks of bubblenomics by the FedGov. Very reminiscent of the early warning signs of the RE bubble in 2006. What percentage of loans during covid were based on income due to covid.
It wasn’t printed money. It was your money.
A consequence of borrowed money, printed money, and low interest rates is the bringing forward of economic activity at the expense of future activity. To me, this post suggests we are into a slowdown partially due to the hangover from all the stimulus
A reasonable conclusion.
So many normies think that the covid era lies in the past, but I think the hangover has simply been postponed and postponed again, but almost certainly not cancelled.
My interpretation of these charts is that more sales are moving to “pocket listings”. Homes are now like trading cards for the wealthy.
Last chart, yellow : new homes for sale are above the 2022 high, under 2006/07 highs. It’s not a good time to buy a house, or to invest in the housing market for retirement 20Y/30Y from today. New homes for sale rose from 150 in 2012 to 480. That’s the highest uptrend on the chart. Since 2005 NAHB WFC traffic (green) collapsed from 55 to 8. Since 2021 from 77 to 20. When traffic is comatose 5% commission times zero is zero.
“It’s not a good time to buy a house”
A phrase I have heard every year for the last 5 decades.
Some folks have been waiting those 5 decades for house prices to come back down to 20k. And for the S&P 500 to get back down to 1000.
Some of us nabbed a home and backed up the truck to the S&P at 666 in 2009 after selling at a multi year high in 2007.
The last chart seems to imply that when the two lines kiss, the economy is already halfway in a recession.
I had it at stall speed in May based on CFNAI-MA3.