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Homebuilders haven’t felt this good about their business in a decade and continue to proclaim their excitement about the new home market a lot these days, but if they don’t start building a lot more houses soon, shareholders may not be so happy!

The National Association of Home Builders reported last week that its housing-market index showed optimism among builders reached its highest level this month since October 2005. Sentiment jumped 3 points in October to a level of 64 on the National Association of Home Builders/Wells Fargo Housing Market Index. Anything above 50 is considered positive sentiment. The index stood at 54 last October.

National Association of Home Builders Market Index

Of the index’s three components, two saw gains in October.

Sales expectations in the next six months rose 7 points to 75, while current sales conditions rose 3 points to 70. Buyer traffic, however, didn’t move, sitting at 47— the only component still in negative territory. Regionally, on a three-month moving average, the West registered a 5-point gain to 69, and the Northeast, Midwest and South each rose 1 point to 47, 60 and 65, respectively.

Oddly, when you measure home builder optimism against those disastrous days of the housing bubble or pre-bubble times, builders aren’t doing nearly as much work.

The Commerce Department’s report on building activity showed construction was started on 740,000 single-family homes in September, at a seasonally adjusted, annual rate. That was up from 661,0000 a year earlier, but well below October 2005’s pace of 1.74 million. The median level of single-family starts since 1959 has been about one million.

One reason builder optimism is high despite the low level of starts comes down to survivorship. There aren’t as many firms in business now as during the bubble, so while the pie is smaller, it is getting cut into fewer slices.

Builder Enthusiasum

Another reason home builders are so happy is that their homes have been fetching high prices and, until, recently, costs have been contained. In the 12 months ended August, the median price for a new home averaged $290,300, according to the Commerce Department, 35 percent higher than the average median price for an existing home over the same period.

Since construction wages were so soft after the recession, those higher selling prices have been falling to the bottom line, but some analyst believe that’s about to change and some builders have lowered their earnings forecast. Competition for labor has “resulted in increased costs and longer construction times.

Hiring more workers without stepping up pay is probably a nonstarter. And given the high price of new homes in comparison with existing homes, builders can’t easily pass rising labor costs on to customers. So margins across the industry could be in for a squeeze.

The way out for builders may be to step up construction and boost sales volume. But this is more complicated than throwing a switch. They have to know that demand will be there, and that will entail a further improvement in mortgage lending. Plus, the process of securing land, and preparing it, takes time and money.

Home-building stocks have been doing well this year, handily outperforming the broader market, but margin pressure could turn many into fixer-uppers.


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