Homebuilders are feeling increasingly pessimistic about their industry, more evidence that the economic recovery is slowing.
The National Association of Home Builders said Monday that its monthly reading of builders’ sentiment about the housing market sank to 14 — the lowest level since March 2009. Readings below 50 indicate negative sentiment about the market.
The weak job market and an increasing number of foreclosed properties have prompted builders to limit construction of new homes. A modest revival in sales over the past year ended in May after federal tax credits expired at the end of April.
Conditions are not likely to improve soon. Reports this week on new home construction and previously owned home sales in June are expected to show the housing market remains deeply hobbled. An update on the Obama administration’s effort to help those in danger of losing their homes is also expected Tuesday.
While the overall economy appears unlikely to fall back into recession, many analysts expect housing to struggle for some time.
“With growth slumping again, and unemployment hovering near the double digits, we simply don’t have the necessary ingredients for a sustainable recovery in housing,” said Mike Larson, real estate and interest rate analyst at Weiss Research.
Builders have sharply scaled back construction in the face of a severe housing market bust. The number of new homes up for sale in May fell to 213,000, the lowest level in nearly 40 years. And, at the current sales rate, it would take 8.5 months to exhaust that supply. In a healthy economy, new home inventory takes about six months to exhaust.
Five years ago, at the peak of the housing boom, there were about 460,000 unsold homes on the market. And because of the frenzied pace of sales, it would have taken a little more than four months to exhaust that supply.
In some ways, it could be good news that builders are scaling back. It means they won’t add to the supply of homes on the market and that could create more demand for the current stock.
But it won’t help the job market. Each new home built creates, on average, the equivalent of three jobs for a year and generates about $90,000 in taxes paid to local and federal authorities, according to the builders’ trade group. The impact appears in multiple industries, from makers of faucets and kitchen appliances to lumber yards.
New home sales in May dropped 33 percent to the slowest pace in the 47 years records have been kept. The number of buyers who signed contracts to purchase previously occupied homes tumbled 30 percent in May. The drop-off came immediately after the tax incentives to sign a contract on a home ended on April 30.
Still, the trade group’s latest survey of 502 residential builders nationwide suggests the market will remain sluggish for the rest of the year. The index is broken into three separate readings. Its index measuring expectations for the next six months fell one point to 21. Current sales conditions fell two points to 15 and foot traffic from prospective buyers sank to 10.
Even if homebuilders keep construction to a minimum, it could be three years before the supply of housing comes into balance with demand, said Paul Dales, U.S. economist for Capital Economics.
“The supply of housing remains very high and could rise even further,” Dales said. “It’s going to be a very long time before all the excess supply is worked off.”