Home Builder Confidence Surges

The month of October was a time of contrasting, and therefore conflicting, economic news that can be unsettling at times. The month started with a report from the Institute of Supply Management, indicating its manufacturing index fell to 47.8 in September, the lowest level since June 2009, from 49.1 the prior month. Readings below 50 indicate contraction, while those above signify expansion. The August result marked the first drop in three years.

U.S. stock indexes fell after release of the data, with another round of see-sawing index levels, first down precipitously, then up strongly again several days later when other good news about thawing U.S.-China trade and tariff disputes was widely reported, and stocks shot back up.

But most economists were not so sure the data amounted to much of an indicator of the true condition of the economy, noting that the U.S. economic outlook remained good. This was because consumer spending and the labor market both remain very strong, two indicators I have been touting for many years now.

In fact, a separate survey of U.S. manufacturing activity from data firm IHS Markit showed factory activity increased in September, though the reading also indicated the July-September period marked the worst quarterly performance for the sector since the same period in 2009. IHS Markit said its September manufacturing index rose to 51.1 from 50.3 in August.

Housing Market Index. But then later in October, I read with great interest that yet another indicator we watch closely at our firm called the Housing Market Index, issued jointly every month by the National Association of Home Builders and Wells Fargo, delivered news of a different nature. In stark contrast to the manufacturing reports expressing doom and gloom just two weeks before, builder confidence in the market for newly-built, single-family homes rose three points to 71 in October.

Those sentiment levels are at their highest point since February 2018, and have risen 13 points since the start of 2019. Derived from a monthly survey that NAHB has been conducting for 30 years, the index gauges builder perceptions of current single-family home sales – and sales expectations – for the next six months based on a variety of measures. And the results reported are striking: all the indices posted gains in October. The index gauging current sales conditions increased three points to 78, the component measuring sales expectations in the next six months jumped six points to 76, and the measure charting traffic of prospective buyers rose four points to 54.

The report goes on to state that the housing rebound that began in the spring continues, supported by low mortgage rates, solid job growth and a reduction in new home inventory. The second half of 2019 has seen steady gains in single-family construction, and this is mirrored by the gradual uptick in builder sentiment over the past few months. However, builders continue to remain cautious due to ongoing supply side constraints.

Another caution. But homebuilders also expressed another caution, which is a concern about reports of a slowing economy. Understand they don’t see this in their business, because demand is there – they express these concerns because of what they hear, often unfounded and purely anecdotal. Based on their own business activity, a slowing economy is nowhere to be found in their industry.

As I make presentations to various trade groups around the country, I repeat myself often: there is no recession on the horizon. Many economists believe the worst that happens in a slowdown of GDP to between 1.1% and 1.9%, and probably only after the 2020 elections.

Such a slowdown means the economy remains steady, and slow and steady always wins the race. A breather beats a recession, and after the next breather, get ready for another robust round of growth in United States GDP in general, and construction in particular.

PGV headshot 2016Pierre G. Villere serves as president and senior managing partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry that specializes in mergers and acquisitions. He has a career spanning almost five decades, and volunteers his time to educate the industry as a regular columnist in publications and through presentations at numerous industry events. Contact Pierre via email at This email address is being protected from spambots. You need JavaScript enabled to view it.. Follow him on Twitter @allenvillere.