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Home Builder Optimism Edges Down Further In September

September 19, 2005

WASHINGTON -- Home builder optimism in the market for new single-family homes remains in a positive zone this month, albeit with some further erosion from the cyclical high in June, according to the National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today.

"Many builders appear to be taking on a more cautious attitude because of uncertainties in the economy and this post-Katrina environment, particularly with regard to sales expectations in the near term," observed Dave Wilson, NAHB president and a custom home builder from Ketchum, Idaho.

The overall HMI declined two points in September to a score of 65, which is the lowest it has been since July of 2003 when it also hit 65. This was the third consecutive month of declines since June's 72 reading.

"As expected, the housing market is beginning to show signs of cooling and builders are reacting to that," agreed NAHB Chief Economist David Seiders. "While the HMI survey was taken immediately following Hurricane Katrina in early September, a combination of factors are likely in play, and Katrina impacts are only one part of the equation. In fact, the current HMI does not include responses from Katrina-hit areas, which typically account for about 2 percent of survey responses."

"In general, concerns about rising interest rates down the line, some buyer resistance to the strong house-price appreciation we've seen for several years, higher gas prices - which not only drive up the cost of doing business but also cause some people to rethink their decision to live in further-out communities - and other factors such as lot shortages and high impact fees for development, are all contributing to take a bite out of builder optimism looking forward," Seiders said.

Derived from a monthly survey that NAHB has been conducting for approximately 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations for the next six months as either "good," "fair" or "poor." The survey also asks builders to rate traffic of prospective buyers as either "high to very high," "average" or "low to very low." Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view sales conditions as good than poor.

The September HMI's component indexes gauging current sales and traffic of prospective buyers registered marginal declines of one and three points (to 72 and 47, respectively). However, the component gauging sales expectations for the next six months declined by a more substantial eight points, to 69. Additionally, builder confidence measures were down by an equal margin of three points in each of the four major regions.

"Keep in mind that builder confidence is still well above the break-even point of 50 on the HMI, and more respondents are reporting good conditions than bad in their markets," noted Seiders. "Even so, today's results show that builders are cognizant of the anticipated signs of slowing housing activity in certain areas."

Source: The NAHB/Wells Fargo Housing Market Index

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