Confidence among single-family detached home builders dropped in May as measured by the HBA’s Kansas City Housing Market Index. The main index reading of 70 marked a six-point decline from April. Yet despite the overall index decline, the survey suggests builders remain optimistic about current and expected market conditions.

Among the three components that comprise the HMI, the traffic reading saw the largest month-to-month decline, falling 10 points to 54. Even following the sharp decline, the traffic index was the third-highest recorded since the HBA began tracking builder confidence last June.

The current conditions component, the most heavily weighted component of the index, fell seven points to 74, also third-highest reading and a solid showing considering the number shot up from 58 in February to 77 in March followed by a high of 81 in April. The current conditions rating correlates strongly with permit data, suggesting permit numbers were likely strong in May but may be off from the records posted in March and April.

The closely watched expectations component fell two points to 79, a reading that indicates strong confidence in the market going forward remains intact. Readings of 50 for the HMI are considered neutral, higher numbers represent strengthening confidence.
The 79 reading for expected conditions was the lowest reading since last December. For many months the expected conditions component has been running well ahead of current conditions. Recently the numbers have begun to converge. Last month both readings were 81 and this month the two were separated by only five points.

The convergence of these numbers might suggest that builders believe the market may be at a peak or about to peak. Certainly, the recent rise in interest rates as well as the extended rise in home values could be indicative of a market that may be set to flatten out after a steady multi-year rise.

For the first time since last July, builder confidence in the single-family attached home market measured higher than the detached market. The HMI reading for attached homes came in at 73, two points above April’s reading and a high.

The current conditions and expected conditions components both came in at 80, seven points above the 73 readings for each in April. Both of those readings also represent new highs. Clearly, builders are confident that changing demographics as well as changing lifestyle needs will drive more buyers to the attached market.