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Builder Confidence Sinks to 5-Month Low Despite Tighter Inventory

Builder confidence slipped in March to 44, the lowest level since October, the ""National Association of Home Builders"":http://www.nahb.org/news_details.aspx?newsID=15829 (NAHB) reported Monday. Economists had expected the Housing Market Index, the measure of confidence, to improve to 47 from February's reading of 46.

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It was the second straight monthly decline in the index and the third straight month the index failed to increase (it was flat from December to January).

Tighter inventories had been expected to improve confidence, but builder attitudes have also been weighed down by prices of new single-family homes.

The median price of a new single family home, according to the Census Bureau and HUD, has fallen for three of the last four months and in January (""the latest monthly report"":http://dsnews.comarticles/new-home-sales-soar-to-4-1-2-yr-high-2013-02-26) dropped $23,400, the steepest month-over-month decline since October 2010. The median price of a new home in January was up just 2.1 percent year-over-year, the slowest annual change since prices showed a 3.2 percent decline from June 2011 to June 2012.

The reading of the current market for single family homes stumbled to 47 in March from 51 in February, the largest one-month drop since April 2012. The index of prospective sales (six months out) rose one point to 51, the second straight monthly gain, and the index measuring traffic of prospective home buyers rose three points in March--after falling four points in February--to 35.

The last government report on new home sales showed the inventory of new homes for sale had dropped to a 4.1 month supply, the lowest level since March 2005. However, the report also showed builders completed 565,000 homes in January, 128,000 more than they sold.

Builder confidence rose in only one of the four Census regions--up five points in the Midwest to 50.

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Confidence fell two points in each of the other regions, dropping to 57 in the West, 42 in the South, and 39 in the Northeast.

The drop in the South followed a seven point skid in February, the steepest in the region since August 2006. The index in the South is at its lowest level since last October.

The index, built based on surveys conducted jointly by the NAHB and Wells Fargo, gauges builder perceptions of current single-family home sales and sales expectations for the next six months as ""good,"" ""fair"" or ""poor."" The survey also asks builders to rate traffic of prospective buyers as ""high to very high,"" ""average"" or ""low to very low."" Scores from 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.

With the March report, the total index remained below 50--the tipping point between a positive and negative market assessment--for the 83rd straight month. The last time the HMI was above 50 was April 2006, when the reading was 51 as the index was falling. NAHB began in the Index in 1985, and it peaked at 78 in December 1998.

The dip in the current sales should be reflected in the government's new homes sales report, to be issued March 26.

According to NAHB chief economist David Crowe, declines in the housing sector infrastructure brought confidence down.

""In addition to tight credit and below-price appraisals, home building is beginning to suffer growth pains as the infrastructure that supports it tries to re-establish itself,"" Crowe suggested. ""During the Great Recession, the industry lost home building firms, building material production capacity, workers who retreated to other sectors and the pipeline of developed lots. The road to a housing recovery will be a bumpy one until these issues are addressed, but in the meantime, builders are much more optimistic today than they were at this time last year.""

Even with jobs increasing, economic uncertainty remains, particularly in an aging population likely to create more home sellers than buyers. At the same time, household formation rates remain below historic norms, and would-be homebuyers are already saddled with student loan debt.

The HMI could be reflected in permits and starts data reported for February. That report from the Census Bureau will be issued Tuesday.

_Hear Mark Lieberman every Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:40 a.m. and again at 9:40 a.m. EST._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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