by Calculated Risk on 11/18/2014 06:25:00 PM

I used to post a graph of the NAHB homebuilder confidence index and single family housing starts. However I stopped posting the graph when I realized that many readers misunderstood the graph.

First, here is the graph through the November builder confidence report released this morning and housing starts for September (October starts will be released tomorrow).

Click on graph for larger image.

This graph compares the NAHB HMI (left scale) with single family housing starts (right scale).

This chart shows that confidence and single family starts generally move in the same direction, but the graph doesn't tell us anything about the expected level of single family starts.

From the NAHB:

[T]he NAHB/Wells Fargo Housing Market Index 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 conditions as good than poor.

How builders respond to this survey is dependent on the recent past. After a few years of sales around 450 thousand, annual sales of 600+ thousand seem "fair" or "good" to many builders - and the NAHB index increased significantly.

But, as a counter example, in 1995 many builders thought single family sales of 1 million were "poor" (the index fell to 40). But that decline in confidence was because sales were declining from a recent peak of 1.3 million.

It should be no surprise that confidence is currently at 58 with single family starts currently at 650 thousand, but that confidence in 1995 was at 40 with single family starts at 1 million! Confidence is relative to the recent past!

With confidence at 58 for November, no one should expect a specific level of starts (or look at the gap between the two lines), however we can probably expect starts to increase some from recent levels. At that is why I used to post this graph (Several times I cautioned not to expect starts to increase in step with confidence, but some readers missed that warning).