DESPITE FORECASTS FOR A SLOWER housing market in 2005, builders are still expressing optimism about their industry, according to the NAHB's Housing Market Index (HMI). In fact, the index rose gradually through 2004 and in January 2005 stood at 70, just one point lower than its 2004 high of 71, registered in December.

“The key to builder confidence is that the market is strong,” says Gopal Ahluwalia, the NAHB's assistant staff vice president for research. “They're selling homes. There's good traffic. Interest rates are still good. The economy is adding jobs.”

Those factors contribute to the strong positive measures of the HMI's components, which consist of present sales, anticipated sales for the next six months, and prospective buyer traffic. Any reading greater than 50 indicates that a majority of builders views sales conditions as favorable. In January, the present sales component stood at 77, the anticipated sales component at 78, and buyer traffic at 50.

In December, the NAHB took the index a step further, breaking the data into four regions. The difference between the regions in December and January was significant. Builder optimism in the Midwest trailed the other regions substantially. That made sense, Ahluwalia says. “The Midwest had the biggest economic problems.”

Consumers follow a similar pattern, says Richard Curtin, director of the University of Michigan's Surveys of Consumers. Midwest home values and prices haven't increased at the same pace as in other parts of the country, leading fewer people to consider buying homes for investment potential, he says.

Still, in December, Curtin's index of consumer sentiment jumped to its highest point since January 2004, a change he partially attributes to the end of the election cycle. “Consumers were constantly being bombarded with the message that the economy was very weak,” he says. Respondents' views of the economy improved gradually through autumn.

The Consumer Confidence Index, issued by the Conference Board, also rebounded in December. But Ken Goldstein, an economist at the Board, disagrees that the increase was related to the election. “It's more about the job market,” he asserts. But the consumer price index (CPI), which measures inflation, is the indicator to watch, he says. The CPI has hovered in recent months around 0.2. “If it stays at 0.2, it's not that good for business, and it doesn't give comfort to consumers,” he says. “But if prices do go up, business can turn to more hiring.”