Why Today's Disappointing Housing Report Was Actually Good News

Business Insider

This morning, we saw that the homebuilder sentiment index unexpectedly fell to 46 in January from 47 in December.

This disappointing report might actually be more good than bad.

You see, home construction has been hot, and this has been reflected by surging homebuilder optimism.

But new home sales have been lagging. December new home sales fell 7.3 percent on the month in January to an annual rate of 369,000.

This divergence had led to concerns that new home supply would pile up potentially delivering a blow to the housing recovery.  This is because declining inventory has been one of the key factors that helped boost home prices and drive the U.S. housing recovery.

Today's decline in homebuilder sentiment could be evidence that there isn't a bubble-mentality among the builders.

Still, sentiment is high.

But in a January note, Bank of America's Michelle Meyer explained that she sees three reasons not to worry about optimistic homebuilders that will overbuild. 

  1. "There are capacity constraints in the market with many homebuilders exiting the market during the crisis."
  2. Small homebuilders have had a hard time obtaining financing for new projects.
  3. Large homebuilders had downsized during the crisis and it will take time for projects to pick up again.

Meyer has previously warned that (overall) inventory tends to build up in the first quarter when the weather is better and before school begins.

"Sellers therefore tend to put their home on the market in anticipation of the spring selling season," she said in an email interview. "This means inventory rises at the beginning of the year and falls through the spring/summer as sales are completed."



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