20 October 2009

Anticipated End To Government Credits Causes Lapse In Homebuilder Confidence


Confidence among U.S. homebuilders unexpectedly fell in October on mounting concern sales will retrench once government credits expire.

The National Association of Home Builders/Wells Fargo confidence index declined to 18 from a reading of 19 in September that was the highest in more than a year, the Washington-based association said today. Figures less than 50 mean most respondents view conditions as poor.

Builders are fretting as time runs out for purchasers to take advantage of the Obama administration’s $8,000 tax credit for first-time buyers, which expires at the end of November. All three components of the index, including measures of current and future sales and buyer traffic, dropped, signaling the market may take a step back after advancing for five consecutive months.

“Clearly, builders are experiencing the effects of the expiring tax credit on their sales activity, since it would be virtually impossible at this point to complete a new home sale in time to take advantage of that buyer incentive,” David Crowe, the NAHB’s chief economist, said in a statement. Crowe said 85 percent of the members polled thought an extension of the credit would boost sales.

The builder confidence index was forecast to rise to 20 this month, according to the median of 44 estimates of economists surveyed by Bloomberg News. Projections ranged from 18 to 21. The gauge, which was first published in January 1985, averaged 16 last year.

Survey Components

Builder shares fell for a third consecutive day. The Standard & Poor’s homebuilder supercomposite index closed down 1.4 percent at 265.7 in New York. The broader market rallied, sending the S&P 500 Index up 0.9 percent to 1,097.91, a one- year high, on better- than-anticipated earnings.

“I would regard today’s numbers as a temporary blip,” said Michelle Meyer, an economist at Barclays Capital Inc. in New York. “Once we smooth through that volatility, home sales will continue to improve. The tax credit isn’t the only thing that’s helping sales.” The drop in prices, which has made buying more affordable, and a general improvement in the economy are among the factors that will contribute to a rebound, she said.

The builder survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. The survey also asks participants to gauge the outlook for the next six months.

Broad Decline

All three measures dropped for the first time since November. The builders group’s index of current single-family home sales fell to 17 this month from 18 in September. The gauge of buyer traffic dropped to 14 from 17, and a measure of sales expectations for the next six months decreased to 27 from 29.

Confidence decreased in three of four regions, led by a four-point slump in the West. The Northeast was the only region to register a gain.

The Mortgage Bankers Association, National Association of Home Builders and the National Association of Realtors today sent a letter to Treasury Secretary Tim Geithner, White House economic adviser Lawrence Summers and Housing and Urban Development Secretary Shaun Donovan requesting an extension of the credit for at least a year after it expires on Nov. 30.

The three groups urged Congress to expand the initiative to include all, not just first-time, buyers of primary residences, increase the amount of the credit and make the funds available for closing. The Realtors’ association estimated the program generated about 355,000 more home sales than would have been the case.

Sales Gains

Sales of new homes dropped to a four-decade-low 329,000 annual pace in January. Purchases climbed in six of the next seven months, reaching a 429,000 pace in August. Commerce Department figures on September sales are due next week.

If Congress extends the credit and credit begins to flow again “we can turn this thing around by the middle of next year,” NAHB President Jerry Howard, said in an interview on Bloomberg Television. If lawmakers don’t act quickly, “then the housing industry is in jeopardy.

The group projects an extension for another year will create 350,000 jobs, generate $28.2 billion in wages and business income and $11.6 billion in additional tax revenue.

Preparing for Rebound

D.R. Horton Inc., the largest U.S. homebuilder by revenue, is among companies projecting the recent improvement will be sustained. The Fort Worth, Texas-based company said last month it is buying finished lots, rather than building on undeveloped land it already owns, to boost its construction pipeline in anticipation of a housing revival.

“There have been some small encouraging signs in our sales and our average sales prices,” Bill W. Wheat, D.R. Horton’s chief financial officer, said on a Sept. 30 call with investors.

Stabilization in residential construction is among the reasons economists project the U.S. began to grow again last quarter. The world’s largest economy probably expanded at a 3.2 percent annual pace from July through September, according to the median estimate of economists surveyed earlier this month.

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