Builder Confidence Down While Home Construction Rises

There still aren't any signals of a jump in the housing market. In June, home construction rose 2.3 percent while building permit activity sank to the lowest rate in 10 years. The new building permits are an indicator of future construction plans.

The building permits decreased by 7.5 percent in June to 1.406 million units. This was barely above the 1.402 million unit rate of June 1997 and slightly lower than the 1.48 million unit rate that economists had predicted.

The confidence of home construction companies is at low ebb down from the highs of just a few years ago. Their new inventory is selling slowly and the lenders are tightening their lending practices.

The recent National Association of Home Builders/Wells Fargo Housing Market Index (HMI) dropped to 28 points in June by far the lowest level in more than 15 years. A level on the HMI below 50 points reflects builder sentiment of poor market conditions.

This is in stark contrast to the upward trend that began in the fourth quarter of 2006, The HMI showed an increase in two points from December 2006 to 35 in January 2007, the highest level since July of 2006. This increased builder confidence reflected renewed buyer interest at the latter part of 2006 and beginning of 2007.

Also, rising mortgage rates since the beginning of the year and tightening mortgage lending practices have caused further erosion in demand for an already abundant supply of new homes.

The foreclosure of properties, stricter mortgage lending guidelines, and the subprime mortgage scare have had negative repercussions for many in the economy. Today mortgage real estate investment trusts (REIT) shares fell on the news that two subprime mortgage hedge funds of Bears Stearns are now rubbish.

The Bear Stearns' High-Grade Structured Credit Enhanced Leveraged Fund, valued at about $638 million this March has no value. Its larger cousin, the High-Grade Structured Credit Fund, worth about at $925 million in March has retained only 9 percent of its value. This news is not surprising; it seems that ripples have turned into shockwaves that have permeated to markets outside the general housing arena.

Builder Confidence Down While Home Construction Rises