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Housing confidence up among builders, but is it a fluke?

SHARE Housing confidence up among builders, but is it a fluke?
Housing leads us into a recession and housing leads us out of a recession. – David Crowe

SALT LAKE CITY — Utah home builders are "cautiously optimistic" about a national report showing builder confidence at a seven-year high.

The Housing Market Index, released Monday by the National Association of Home Builders and Wells Fargo, reached a high of 52, the first time since 2006 that numbers have been above the index midpoint of 50. It is also an eight-point jump from May, the biggest one-month jump since August-September 2002.

"Housing leads us into a recession and housing leads us out of a recession," David Crowe, chief economist and senior vice president of the National Association of Home Builders, said.

The index measures three areas: current sales conditions, builders' expectations for future sales and traffic from potential buyers, all of which saw gains.

The improved numbers suggest builders are beginning to trust that the improving housing market is here to stay, Crowe said.

Confidence levels above 50 on the index are encouraging, Mark Vitner, managing director and senior economist at Wells Fargo, said, but he cautioned that this month's numbers might not be a true reflection of builder optimism. This is mainly because the number of respondents for the June confidence report was 255, he said, the lowest since 2004. An average month sees around 400 builders respond to the survey.

Once confidence levels are higher than 50 for at least three months, "that would be a sure sign that the housing recession and the broader economic recovery have ratcheted up a notch," Vitner said.

High confidence levels bode well not only for the housing market but for the economy as a whole. The National Association of Homebuilders estimates that three jobs are created for every home built.

Economic indicators

The index is only one marker of the uptick in the housing market, Crowe said.

"We're seeing more employment increasing, consumer confidence increasing and a lot of pent-up demand," he said, speaking of those who have put off buying a home while the economy was down and are now in a position to buy.

The market is also looking up for specialty homes, according to Steven Dailey, owner of Steven Dailey Construction. His customers differ from the general market in that most are in a position to pay cash for their homes.

The custom home market didn't crash quite as hard as the rest of the home building market, he said, but it was still impacted.

"The lows don't go quite as low and the highs don't go quite as high," he said.

Their biggest hurdles are getting appraisals to match what it costs to build a home and the expectation that some homebuyers have of buying homes at the lower costs they saw during the recession.

The confidence index is proof that things are looking up for housing, according to Chris Gamvroulas, president of Ivory Development, a subsidiary of Ivory Homes.

For instance, Ivory Development saw 79 sales in May 2012. One year later, sales had climbed to 110 in May. And in addition to a growing demand, interest rates are rising to between 3 percent and 4 percent, rates he calls "shockingly low" and which motivate homebuyers to make a move now before they go higher.

"We've predicted that we would see an increase in sales when interest rates started to creep up because it causes buyers to have a sense of urgency," he said.

Home building is the "greatest manufacturing industry in America," Gamvroulas said, because the product is built in the United States and stays here.

He said he is optimistic because of the growth the housing market has seen over the past year but acknowledges that builders still face "a lot of headwinds."

"We see positive signs and we're cautiously optimistic. It's nice to say the word optimism again," Gamvroulas said.

Growth inhibitors

Some factors may impede this growth, he said, such as high interest rates. Also, builder motivation may soften if the cost of building a home increases but home prices do not.

Home prices are rising 12 percent from year to year, but fewer people own a home today than did one year ago.

In 2012 there was in increase in home construction in Utah, according to James Wood with the David Eccles School of Business. The market is split into the detached single family home, which the NAHB report measures, and multifamily homes such as apartments and condos. Although single family homes are seeing a recovery, the multifamily sector has been slow to respond to changes in the economy. Even the single family market has not seen the gains he anticipated, he said.

Projections indicate 15,000 units will be built in Utah this year, he said. This is up from the 11,000 built last year, but less than half of the 28,000 units built in 2005.

Building permits issued for single-family homes in Utah were up 2 percent so far this year, he said, which is not far above last year's numbers. In 2012, building permits were up by 40 percent statewide. This is according to data cities and counties provided to the Bureau of Economic and Business Research. Projections indicate a 10 percent to 15 percent increase by the end of the year.

"We're moving in the right direction, but we're not quite as strong as I thought we would be," Wood said.

Monday's report accurately reflects what Paul Peterson said he has seen in the Utah housing market. As executive officer of the Salt Lake Home Builders Association, he said he has heard positive feedback from builders. Their main concerns have dealt with keeping up with the demand for new homes, including having enough workers and available land.

At some point demand will level out, he said, and the market should see steady growth in home building.

"The road is heading up," Peterson said.

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