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The numbers: Home builders have kicked off 2020 in fairly good spirits.
The National Association of Home Builders’ monthly confidence index dropped one point to 75 in January from 76 the month prior, the trade group said Thursday. The previous month’s figure represented the highest index reading since June 1999.
Index readings above 50 indicate that confidence is improving, while a figure below that threshold would signal the opposite.
What happened: Home builders’ confidence increased throughout 2019. At this time a year ago, the confidence index was far lower at 58.
The indicator of expectations for future sales over the next six months stayed the same at 79 points. The gauge of current single-family home sales dropped three points to 81, while the index that measures sentiment regarding prospective buyer traffic ticked up one point to 58.
Regionally, home-builder sentiment improved on a monthly basis across the West (up four points) and Northeast (up three points), but stayed the same in the South and worsened in the Midwest (down seven points).
Big picture: The NAHB’s index functions as an indicator of potential future home-building activity. In line with improving confidence among home builders, new-home construction has ramped up in recent months on the heels of low mortgage rates and high buyer demand.
Home builders’ past inactivity could end up buoying the confidence index for some time to come. In the 2010s, builders started construction on only 6.8 million new homes, a reflection of the hit the industry took during the Great Recession, according to data from the National Association of Home Builders. That’s far fewer than in previous decades. Comparatively, in the 2000s, single-family housing starts totaled 12.3 million, while in the 1990s builders constructed 11 million new homes.
The lack of new construction in recent years has contributed to a significant housing shortage across most of the country, which has boosted home prices and made home-buying unattainable for many Americans.
While the shortage of homes presents an opportunity for home builders, there are headwinds. Land costs have risen, as has the cost of lumber and labor. As a result, margins have tightened for builders, and many have responded by constructing higher-end homes rather than the entry-level properties that are most in demand.
The signing of the U.S.-Mexico-Canada Agreement on trade could ease some of these cost issues for builders though, the NAHB said, because many of the supplies they use are imported from Canada and Mexico.
Also see: How a Trump win in 2020 could reshape housing markets across America
What they’re saying: “The housing market has firmed, which is atypical in a later-cycle world,” said BMO Capital Markets’ senior economist Robert Kavcic and economist Carl Campus in a research note.
Market reaction: D.R. Horton Inc. DHI, -0.09% , Lennar Corp. LEN, -0.33% and Pulte Group PHM, +0.29% were all up in morning trading ahead of the data release.
The Dow Jones Industrial Average DJIA, +0.56% and the S&P 500 SPX, +0.52% were also both up Thursday morning, a reflection of investor optimism following the signing of the first phase of the U.S.-China trade deal.
