Are Home Builders Too Optimistic About The Housing Market?

Builder confidence may need to drop before affordability and inventory issues begin to ease

July 8, 2016

Housing starts have jumped a lot since the lows of the Great Recession, but home builder confidence has outpaced starts as it climbed to its highest level of the year in June.

Builder confidence is gauged via a survey from the National Association of Home Builders based on how its members rate single-family home sales now and in the next six months, and the high level of confidence right not suggests building activity is ready to jump and ease the strain of tight inventory and the affordability crunch.

However, according to Capital Economics’ Matthew Pointon and his team, builder confidence may need to drop first,Business Insider reports. They believe that while starts will increase towards confidence, confidence will also fall back toward starts. The team cites other instances where confidence rose well above starts, in the mid-1990s and early 2000s, and in both cases it was a fall in confidence that restored the relationship, not a rise in housing starts.

Using the current level of builder confidence as an indicator for housing starts would most likely lead to overshooting, however, there are already some signs that home building is on the rise, including a drop in the median price of new single-family homes on a six-month rolling-average basis.

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