The best way to gauge the builders' collective pulse is to watch the National Association of Home Builders' (NAHB) housing market index. This month, it dropped 2 points below the previous sky-is-falling level of 30. The monthly survey has a scale of 100 points, with 50 marking the line between happy and sad.
A score of 28 tells us that the management teams at such builders as Pulte (NYSE: PHM), Ryland (NYSE: RYL), KB Home (NYSE: KBH), and Hovnanian (NYSE: HOV) -- along with all manner of smaller private builders -- view prospects for housing for the coming six months as somewhat less than bleak. Indeed, that 28 was the lowest number since February 1991.
I also believe that the builders' sentiments are far more telling for housing than the monthly start and permit numbers, which were also released on Tuesday. The May rate of total starts was 2.1% lower than April and down 24.2% from last May. Permits, on the other hand, increased 3% in May, but -- more importantly -- single-family permits fell 1.8%, while multi-family permits climbed by 16.5%, thereby serving as another confirmation of builders' lack of confidence in the owner-occupant market.
When the builders' sentiment figure was released, David Seiders, the NAHB's chief economist, said he expects new-home sales to continue to slide for several months and that he doesn't expect a real improvement in the overall market until 2008. Clearly, lingering subprime mortgage difficulties, along with a recent rise in interest rates of about half a point, will not serve to stimulate the market.
Each month, we pay rapt attention to the release of housing starts and permit numbers. For my money, however, the builders' sentiments are far more telling about housing's direction than questionable stats. With those sentiments continuing to weaken, I continue to believe that there will ultimately be money to be made from investments in the stronger builders. Nevertheless, Fools should be cognizant that the anticipated time frame for a meaningful housing turnaround continues to stretch.
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Fool contributor David Lee Smith does not own shares in any of the companies mentioned in this piece. He does welcome your questions or comments. The Motley Fool has a disclosure policy.
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