Are the Good Times Gone?

If the question were put to home builders, the answer might be a resounding “yes.”

We take our supposition from the latest NAHB/Wells Fargo Home Builder Index , which gauges home builder sentiment. The index plunged 10 points in February, to post a 46 reading – essentially erasing 12 months of improving optimism.

Weather has been fingered as the catalyst for the sudden change of heart, especially in the South, Northeast, and Midwest. These regions were plagued with unusually cold weather. Because of the weather, starts in January stalled. Month over month, starts fell 16% to an 880,000 annual unit rate. Given the cold weather we've had in February, we expect another monthly decline in the data to be released next month.

Our concern really isn't the weather, though. After all, weather is always unpredictable and usually volatile in one part of the country or another. Home builders surely understand that weather can impede immediate plans. So weather alone wouldn't lead to a rash of pessimism.

Our concern is more fundamental. The trend in permits is telling. Permits are less affected by weather, and they, too, also declined, falling 5.4% to a 937,000 annual unit rate in January. Somewhat encouraging, the single-family component showed relative strength, down only 1.3%. Overall, though, activity appears to be abating.

It's no secret that housing – both new and existing – has stumbled over the past few months, and not solely because of weather. Other factors are weighing on the market, including high prices, low supply, and sluggish job growth (which is possibly the most leaden of the factors). Rising mortgage rates, particularly in the latter quarter of 2013, have impacted sales, to be sure. But in the grand scheme of things, the slow rate of job creation trumps everything.

When population is factored in, you can appreciate just how much potential is on the table. In 1970, there were roughly 205 million Americans ; today, there are roughly 317 million , yet starts remain far below 1970 levels. This suggests to us that there is huge pent-up demand for new household formation.

Of course, household formation is predicated on job formation, which is why without fail we continually highlight the importance of job growth.

We're eager to get to March, where we hope we'll see warmer weather, more sales activity, and rising builder sentiment. We'll be keenly interested in the employment numbers for February (to be released the first full-week in March). As employment goes, so, too, goes housing.

 Courtesy of Jessica Regan.

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