There is a strong correlation between builder sentiment, as measured each month by the NAHB/Wells Fargo Housing Market Index, and housing starts (see chart). So, when the Index fell from 46 to 44 this month, the hand-wringing started.
But let’s put the 2-point drop in perspective. Even at 44, the Index is about 20 points higher than it was a year ago. Two other important year-over-year metrics are also encouraging. Compared to a year ago, housing starts were up almost 30% in January and February, and housing permits were up almost 35%. That, I think, trumps a small decline in the Index.
And take a closer look at the chart. You’ll see that in the past, when the Index was at 44, the annual rate of single-family housing starts was usually around 900,000 units. Single-family starts are only running at an annual rate of about 600,000 currently, suggesting that housing has considerable long-term upside.
