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Why is Builder Confidence Going Up?

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Why is Builder Confidence Going Up?

If there's an industry that was affected the most by the housing market's collapse in recent years it was home construction. With fewer Americans buying new homes, the demand for newly-built homes plummeted. So, many home construction companies had to downsize because they no longer had work for their builders. But in recent months, we’ve heard more and more that “builder confidence” is going up. In fact, according to the National Association of Home Builders/Wells Fargo Home Market Index that was released last week, builder confidence in the market for newly built single-family homes sits at its highest level since April 2006.

But why? Why are builders starting to feel better now?
The simple answer is that builders are once again making money. Sageworks Inc. recently conducted a study that examined the financial well-being of privately held companies in various industries. Their study showed that private residential construction companies saw an average sales increase of 3.6% from December 2011 to December 2012. While that may not seem like a big increase, it's a huge boost for an industry that has struggled since the housing market’s collapse back in 2007.

Even though the study revealed that the home construction business is among the slowest-growing over the last 12 months, builders prefer to focus on the good news – specifically, that a turnaround is starting to occur. Their industry fell into the abyss in 2008 and 2009 and only posted moderate sales increases in 2010 and 2011, so any growth at all is considered a step in the right direction.

Along with the study, Sageworks’ financial analysts included their interpretations of the numbers and their expectations for the year to come. “After the massive swing from 2009 to 2010, residential construction has continued to show signs of life,” said Sageworks analyst Tim McPeak. “The 3.6 percent growth recently continues the trend of mild but meaningful sales growth in the past three years.” Couple that analysis with some better-than-expected numbers on housing starts, and the home construction business could be well on its way to a full recovery.

For example, just last week, the U.S. Census Bureau and Department of Housing and Urban Development reported that single-family home starts posted double-digit increases in month-to-month and year-to-year comparisons. Simply put, an increase in new home starts means builders are back to having steady work. And steady work means steady income! While no one is arguing that increased sales are bad for the home building industry, there are differing levels of optimism among experts.

Analysts at Sageworks say only time will tell if the increase in home starts in December will translate to better 2013 sales figures, but leaders at the National Association of Home Builders (NAHB) disagree. They say 2013 is going to be a great year for their industry. The organization's chairman, Barry Rutenberg, said in a statement that accompanied the NAHB's report, “With inventories of new homes at razor thin levels, builders are moving prudently to break ground on new construction ahead of the spring buying season to meet increasing demand.” So, don't be surprised if you see more home construction sites popping up in your hometown in the weeks and months to come!

 


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