Measure Of Industry Sentiment Reaches Highest Level Since July 2005

Republished from The Wall Street Journal December 15th, 2016. Written by Eric Morath.

WASHINGTON—Home builders are confident President-elect Donald Trump’s policies will deliver a boost to their industry.

The National Association of Home Builders’ sentiment measure, released Thursday, rose in December to the highest level since July 2005, near the peak of the housing bubble.

The reading itself doesn’t suggest home building will surge back to precrisis levels, when construction started on about 80% more homes than the pace recorded in recent months. But the report does indicate that builders expect a Trump administration to lend more support to the industry, through reduced regulation and taxes.

“The general consensus is everyone is feeling more positive about” 2017, said Lance Wright,partner at Texas home builder CastleRock Communities. “If there’s tax-based and general growth” clients are “excited about it.”

What is less clear, however, is how a Trump administration will affect builders’ regulatory costs, which are largely controlled at the local level.

“I agree with Trump that there are hundreds of millions of dollars wasted on regulatory red tape,” he said. “Whether or not that trickles down to the local level is unlikely.”

Even before the election, low unemployment and rising wages have helped create stronger demand for housing. Purchases of existing homes touched a postrecession high in October and home prices are rising. That should provide builders with many customers heading into next year.

Builders’ confidence rose seven points this month to a reading of 70 in the first survey conducted entirely after the election. Readings above 50 indicate more builders view conditions as good than poor. Current market conditions and expectations for the next six months both significantly improved. The component measuring traffic of prospective buyers moved into positive territory for the first time in more than a decade.

“It’s a sign that builders believe they will have a friend in the Oval Office,” said Ralph McLaughlin, economist at real estate site Trulia. “Whether that’s a rational response is a different question.” Mr. Trump’s immigration and trade policies could limit the supply of skilled labor while increasing the cost of raw materials, he said.

Builders are hopeful that Mr. Trump “will follow through on his pledge to cut burdensome regulations that are harming small businesses and housing affordability,” said Ed Brady, chairman of the home builder trade group, and a builder and developer from Bloomington, Ill.

Movement in the builder-sentiment figure doesn’t always translate into near-term changes in home construction. And December’s increase was unusually large, matching the biggest one-month gain since 2002.

“This significant increase in builder confidence could be considered an outlier,” saidRobert Dietz, the home builder trade group’s chief economist. But the rise “is consistent with recent gains for the stock market and consumer confidence.”

He said builders do remain concerned about mortgage rates and labor shortages.

“Builders are rallying on Trump’s promise to lower regulations,” said Nela Richardson, chief economist for real estate site Redfin. But “with nearly 1 in 4 construction workers from other countries and labor shortages a significant headwind, closed-door immigration policies could bulldoze builder confidence.”

Mortgage rates have been historically low this year, but have risen around three-quarters of a percentage point since the election. Home-loan rates could face additional upward pressure with the Federal Reserve signally further increases to the central bank’s benchmark rate next year, after announcing a move Wednesday.

Ara Hovnanian, chairman and chief executive of national home builder Hovnanian Enterprises Inc., said in a conference call last week that he expects buyer demand to remain strong despite rising mortgage rates.

Overall affordability is “still at very, very good levels compared to historical norms,” he said. “I think rates would have to go up quite a bit and quite rapidly to really cause any concerns in the marketplace.”

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