A Case of Cognitive Dissonance?

Home builders are feeling as perky as they have in nearly a decade. Indeed, the National Home Builders Sentiment Index posted at 59 this month. That's a number last seen in 2005 when the housing market was in full-bore mode.

Of course, real estate markets are local markets, and some home builders are feeling more perky than others. Home builders in the South, Mid-West, and West are more optimistic than the national 59 reading would lead you to believe, while builders in the Northeast are feeling less optimistic, if not dour. (The Northeast reading posted at 44.)

Home builders when aggregated are obviously anticipating a brighter future, even if the immediate past offers scant reason to break out the bubbly.

Housing starts drooped 14.4% in August to an annualized rate of 956, 000 units. The consensus estimate was for 1.03 million units. The mitigating takeaway was that most of the droop was seen in the volatile multifamily component, which fell 31.7% month over month. The more important single-family component was down a more modest 2.4%, which follows an 11.1% surge in July.

When we step back to view the big picture, we see housing starts are up 8% year over year. And if we step back even further and remove volatility by looking at the five-month moving average, we see a strong uptrend and significant improvement over the past five years.

The long-term trend in housing starts is good news for the economy in full. So many ancillary businesses are dependent on starts – home improvement companies, finance providers, commodity producers, retail merchants, and on and on. The uptrend in starts is nothing but a positive that is worth highlighting because of its importance to overall economic health.

Now, we'd like to see an uptrend established in mortgage purchase activity.

CoreLogic reports that cash sales have dropped to 33% of total home sales, down from 36.3% a year ago. To be sure, a large percentage of the drop is the result of fewer REO sales and short sales – many of which were cash transactions. Prior to the bursting of the housing bubble, 25% of sales were cash transactions. So, we expect a further reduction in cash transactions in the future. Therefore, to keep sales volume growing, mortgage financing will need to play a bigger role.

On that front, the Mortgage Bankers Association purchase index rose 5% last week. Could this be the beginning of a positive financing trend? We hope so, but we're not holding our breath. We've been disappointed too many times in the past to do that.

Information provided by Jessica Regan.

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